Source: https://supreme.justia.com/cases/federal/us/281/146/
Timestamp: 2019-04-21 04:58:17+00:00

Document:
"may be classified for the purpose of taxation and such taxes predicated upon either the quantity or the value of the product at the time and place where it was severed."
P. 281 U. S. 158.
2. The Fourteenth Amendment imposes no iron rule of equality prohibiting the flexibility and variety appropriate to schemes of state taxation. P. 281 U. S. 159.
3. A state may impose different specific taxes on different products, and, in so doing, is not required to make close distinctions or to maintain a precise, scientific uniformity with reference to composition, use, or value. It may classify broadly the subjects of taxation if it does so on a rational basis, avoiding classification that is palpably arbitrary. P. 281 U. S. 159.
as the basis of classification cannot be regarded as palpably arbitrary, it appearing that gravity, though not invariably accurate as a test, is generally regarded in the industry as indicative of gasoline content, and is used by the industry, including the complaining taxpayer, in fixing the prices of such oils. P. 281 U. S. 160.
5. A graduation of the tax on this basis, which treats all oils of the same gravity alike, is not repugnant to the equal protection clause of the Fourteenth Amendment merely because the tax falls more heavily upon some oils than upon others of equal gravity due to the fact that there are various gravity schedules of prices, and that some oils are sold at flat prices. P. 281 U. S. 160.
6. The statute in question, by graduating the tax per barrel in accordance with a classification of oils based on their Baume gravity, had the effect of including in the division of lowest tax a class of oils valuable chiefly as a source of lubricating oil, rather than of gasoline, which are tested in the industry by their viscosity and sulphur content, not by their Baume gravity, and are not sold on the latter basis. It resulted that the tax on these oils was lower in proportion to value than that imposed on other oils not so well suited for making lubricating oil. Held that the discrimination was not repugnant to the equal protection clause, since the oils especially suitable for making lubricating oil might lawfully have been classified apart for taxation, or not taxed at all, because of their distinct composition and utility (Hesler v. Colliery Co., 260 U. S. 245), and the statute was not made invalid by the failure to describe them scientifically. P. 281 U. S. 161.
7. The state is not prevented by the federal Constitution from putting the same specific severance tax on the same sort of oils, used in the same way, merely because particular producers of such oils obtain different prices for them. P. 281 U. S. 162.
Appeal from a decree of the district court of three judges which dismissed the Oil Company's bill seeking to enjoin the enforcement of a Louisiana tax. The case was here before on appeal from an order denying an interlocutory injunction, 279 U. S. 279 U.S. 813.
The Ohio Oil Company brought this suit in the district court to enjoin the enforcement of a statute of Louisiana (Act No. 5 of 1928) imposing a severance tax upon the production of oil. The statute, as applied to the complainant, was attacked as a violation both of the Constitution of Louisiana and of the equal protection clause of the Fourteenth Amendment of the federal Constitution. It was alleged that the laws of the state afforded no remedy for the recovery of taxes illegally exacted. On appeal from an order denying an interlocutory injunction, this Court decided that the questions presented could not be resolved satisfactorily upon the affidavits submitted, and directed that an injunction should be granted pendente lite on stated terms. 279 U. S. 279 U.S. 813. Trial was had before the district court, as specially constituted under the applicable statute, and a decree was entered dismissing the bill. 34 F.2d 47. The complaint appeals.
either the quantity or value of the product at the time and place where it is severed" (Const. Art. X, § 21.) [Footnote 1] By Act No. 140 of 1922, section 2, natural resources were divided into two classes, and taxes were levied on oil and gas at three percent of the gross market value of the total production, and on all other natural resources at two percent of the gross market value. The Supreme Court of Louisiana, sustaining this tax on oil and natural gas, held that it was not a property tax, but was an excise tax upon the privilege of severing, although it was measured by the value of the property severed. This decision was affirmed here. Gulf Refining Co. v. McFarland, 154 La.Ann. 251; 264 U.S. 573.
The business of the complainant in Louisiana is that of producing and selling oil, and not of refining it. The production of the complainant is in the following fields: Haynesville, in the parish of Claiborne; Cotton Valley, in the parish of Webster; Pine Island, in the parish of Caddo; Urania, in the parish of La Salle. All these fields are in North Louisiana. The bulk of the complainant's production is in the Haynesville, Cotton Valley, and Pine Island fields. Its production in these fields from January to June, 1928, inclusive, amounted to 723,192 barrels out of its total production in Louisiana of 762,139 barrels, and from August, 1928, to March, 1929, inclusive, to 690,397 barrels out of its total production of 705,301 barrels; the remainder was Urania production.
there are paraffine base, asphalt base, and mixed base crudes, the oils generally having paraffine base, while in South Louisiana the oil produced is mostly asphalt base.
The process of refining oil is distillation. The evidence is that paraffine base oil in that manner yields gasoline, kerosene, gas oil, some lubricating oil, and wax. Gasoline comes off first, and is the most valuable component of such oil. Asphalt base oil usually yields a very small amount of gasoline by distillation, the first product ordinarily being gas oil, then lubricating oil, and the residuum asphalt. The gas oil may be subjected to the cracking process, and gasoline may be obtained in that way. The value of asphalt base oil is largely for the manufacture of lubricating oil, and the value for this purpose is determined by viscosity and sulphur content, not by gravity. The coastal oils of South Louisiana are divided into "A" and "B" grades, "Grade A" being the oils that are useful in the production of lubricating oil, and the other oil being classed as "Grade B." While gravity is not the determining factor, it appears from the testimony that "Grade A" oils must be less than 25 degrees gravity.
Asphalt base oils are produced in North Louisiana in the fields of Pine Island, Urania, Hosston, and Bellevue. The last three named are suitable for making lubricating oil, but the Pine Island heavy oil does not have that value. The evidence is that the Urania, Hosston, and Bellevue oils, used for that purpose, are practically the same as the coastal "Grade A" oils.
which as between these oils, is largely determinative of price. Gravity in such cases is a rough and familiar method of approximating the gasoline content, and, in many fields, price quotations of crude oil above 28 degrees are graduated according to gravity.
Crude oil as it comes from the wells is run into tanks from which the purchaser sells to pipelines, the well recognized market prices being the prices posted by the pipeline companies buying the oil. The complainant states that the oil produced in its Haynesville field was from 33 to 36 degrees gravity; in its Cotton Valley field, one class was between 28 and 31 degrees gravity and another above 43 degrees gravity; in its Pipe Island field, its production was from 37 to 41 degrees gravity. The complainant purchased no crude oil except that, in the Haynesville field, it bought some of the royalty oil of the lessors under its leases. The complainant's cashier testified at the trial that complainant's "purchases and sales in each field in which it operates are made on a gravity basis."
This testimony is not understood to include the Urania field, in which the complainant was not operating at the time but had been operating until shortly before. The oil from the Urania field, which was about 20 degrees gravity, as well as that of the Bellevue and Hosston fields in North Louisiana and the "Grade A" coastal oils of South Louisiana, were sold at a flat price, and not by gravity. "Grade B" oil, it was testified, was usually sold on a gravity schedule.
In 1928, the production of oil in Louisiana was about 22,000,000 barrels, of which approximately two-thirds was produced in North Louisiana, and of this amount nearly two-thirds was sold on a gravity basis, and the remainder at a flat price. Of the production in South Louisiana, about one-half was sold on a gravity basis.
greater than those from South Louisiana; this fact, the respondent insists, accounts for the difference in the price of the oils at the wells.
The complainant's contention under the Constitution of Louisiana is that the tax is invalid because it was not levied according to either quantity or value. It manifestly is a specific tax at a rate per barrel of 42 gallons, and not strictly ad valorem. The graduation of the tax according to the gravity of the oil does not make it other than a tax according to quantity, that is, per barrel, as the oils of different classes are treated for the purpose of the tax as being in effect different commodities, each of which has its separate tax. We have not been referred to any decision of the state court upon the point and, until that court pronounces otherwise, we see no reason to hold that the tax is unauthorized by the state.
The further argument is made that the classification of oils is unreasonable, and hence is not permitted by the state constitution. This is substantially the same question, from the standpoint of state authority, that is presented as a federal ground of attack under the Fourteenth Amendment.
The complainant contends that the statute of Louisiana imposing a tax according to gravity operates as an arbitrary discrimination -- that is, discriminates in a wholly unjustifiable manner between the oils of the North Louisiana and South Louisiana fields, and also between the fields producing asphalt base oils. The tax on its production in the Haynesville, Cotton Valley, and Pine Island fields is said to be at a rate from about 6 to 7 1/2 percent of its value, and on the production in the Urania field at about 5 1/3 percent of the value; while on the production in fields in South Louisiana, and in the Bellevue field, in North Louisiana, the tax is between 3 and 3 1/2 percent of the value.
The applicable principles are familiar. The states have a wide discretion in the imposition of taxes. When dealing with their proper domestic concerns, and not trenching upon the prerogatives of the national government or violating the guarantees of the federal Constitution, the states have the attribute of sovereign powers in devising their fiscal systems to insure revenue and foster their local interests. The states, in the exercise of their taxing power, as with respect to the exertion of other powers, are subject to the requirements of the due process and the equal protection clauses of the Fourteenth Amendment, but that Amendment imposes no iron rule of equality, prohibiting the flexibility and variety that are appropriate to schemes of taxation. The state may tax real and personal property in a different manner. It may grant exemptions. The state is not limited to ad valorem taxation. It may impose different specific taxes upon different trades and professions, and may vary the rates of excise upon various products. In levying such taxes, the state is not required to resort to close distinctions or to maintain a precise, scientific uniformity with reference to composition, use, or value. To hold otherwise would be to subject the essential taxing power of the state to an intolerable supervision, hostile to the basic principles of our government and wholly beyond the protection which the general clause of the Fourteenth Amendment was intended to assure. Bell's Gap Railroad Co. v. Pennsylvania, 134 U. S. 232, 134 U. S. 237; Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283, 170 U. S. 293; Southwestern Oil Co. v. Texas, 217 U. S. 114, 217 U. S. 121; Brown-Forman Co. v. Kentucky, 217 U. S. 563, 217 U. S. 573; Sunday Lake Iron Co. v. Wakefield, 247 U. S. 350, 247 U. S. 353; Heisler v. Thomas Colliery Co., 260 U. S. 245, 260 U. S. 255; Oliver Iron Mining Co. v. Lord, 262 U. S. 172, 262 U. S. 179; Stebbins v. Riley, 268 U. S. 137, 268 U. S. 142.
Royster Guano Co. v. Virginia, 253 U. S. 412, 253 U. S. 415; Louisville Gas Co. v. Coleman, 277 U. S. 32, 277 U. S. 37; Air-Way Corp. v. Day, 266 U. S. 71, 266 U. S. 85; Schlesinger v. Wisconsin, 270 U. S. 230, 270 U. S. 240.
question comes simply to that of the particular graduation of the tax. There are, it is true, various gravity schedules of prices, and the same fields may produce oils of different gravities, and oils broadly of the same sort may be sold at flat prices; but, if the state was at liberty to adopt a gravity scale for oils which in such large measure were sold on this basis, the state was not required to grade its tax with a nicety which would assign to every oil produced a grade absolutely corresponding to its actual value. That would mean that the state could tax only on a strictly ad valorem basis, a contention wholly inadmissible. In grading a tax, admittedly within its power to levy, the state had a large discretion, and there appears to be no ground for holding that there was such an abuse in this instance as to create constitutional invalidity. Clark v. Titusville, 184 U. S. 329, 184 U. S. 331. The graduation of the tax on these oils corresponded generally to the supposed increase of gasoline content, and all oils of the same gravity were treated alike.
by the complainant, and not so well suited for the making of lubricating oil. The state might have concluded not to tax the former at all, and, in that case, there would have been no constitutional ground of complaint, because a tax was laid on the different oils of the Haynesville, Cotton Valley, and Pine Island fields. In Heisler v. Thomas Colliery Co., supra, complaint was made of a statute of Pennsylvania because it levied a tax on anthracite coal, and not on bituminous coal. The contention was founded on the fact that both were fuels and that anthracite coal in steam sizes competed with bituminous coal and certain subgrades of the latter competed with certain subgrades of anthracite. The Court, accepting the fact of competition, nevertheless sustained the tax, holding that the differences between the two sorts of coal justified that classification. If the state had described the oils especially suitable for the manufacture of lubricating oil with respect to their composition or use, and had taxed them at four cents a barrel, it could not be said that the statute was beyond the power of the state to enact simply because it subjected the complainant to a different tax on its oils of a different character. The statute is not made invalid by reason of a failure to describe the oils scientifically.
distance of the fields from the common market and the consequent difference in transportation charges. Whether or not this is an adequate explanation, it cannot be said that the state, from the standpoint of the federal Constitution, could not put the same specific severance tax on the same sort of oils used in the same way merely because particular producers of such oils might obtain different prices. There may be many reasons why one owner obtains more in gross return for the same sort of commodities than another owner, and still other reasons why the net returns of the one may be more than those of the other. This Court recently decided that a tax imposed by Alabama on those selling cigars and cigarettes, which was based on the "wholesale sales price," was not repugnant to the Fourteenth Amendment because of an alleged difference in the wholesale prices paid by dealers who bought from the manufacturers and by those who did not. Exchange Drug Co. v. Long, post, p. 693. A classification of threatens for license fees according to prices of admission was held to be valid although some of the theaters charging the higher admission and paying the higher tax had the less revenue. Metropolis Theater Co. v. Chicago, 228 U. S. 61. We find no ground for holding that the tax in this instance violated the federal Constitution.
"Taxes may be levied on natural resources severed from the soil or water to be paid proportionately by the owners thereof at the time of severance. Such natural resources may be classified for the purpose of taxation and such taxes predicated upon either the quantity or value of the product at the time and place where it is severed. No severance tax shall be levied by any parish or other local subdivision of the state."
"No further or additional tax or license shall be levied or imposed upon oil or gas leases or rights, nor shall any additional value be added to the assessment of land by reason of the presence of oil or gas therein or their production therefrom."
"Taxes on natural resources severed from the soil or water . . . shall be predicated on the quantity severed, and shall be paid at the following rates:"
"(7) a. On oil of 28 gravity and below, four (4) cents per barrel of 42 gallons."
"b.(1) On oil above 28 gravity and not above 31 gravity, four and one-fourth (4 1/4) cents per barrel of 42 gallons."
"b. (2) On oil above 31 gravity and not above 32 gravity, five (5) cents per barrel of 42 gallons."
"c. On oil above 32 gravity and not above 36 gravity, eight (8) cents per barrel of 42 gallons."
"d. On oil above 36 gravity and not above 43 gravity, ten (10) cents per barrel of 42 gallons."
"e. On oil above 43 gravity, eleven(11) cents per barrel of 42 gallons."
"Homer, Haynesville, Caddo, El Dorado, De Soto and Crichton and Cotton Valley.**"
"* Shreveport-Eldorado's postings stop at above 40 gravity."
"** Below 36 gravity, the posting on Cotton Valley is 75 cents. From 36 to 52 and above, the regular gravity schedule is followed."
* Humble Oil & Refining Company's postings on Gulf Coast Light stop at 35 to 35.9. Its price on all crudes above 35 to $1.37 per barrel.
Magnolia Petroleum Company's postings stop at 31 to 31.9.
"(See numbered column labels at end of table)"
Col. 1 -- Okla, Kans., N.C., Tex.
Col. 3 -- Crane, Upton, Crockett, Winkler, Howard, Pecos, Texas crudes, and Lea, N. Mex.
Col. 4 -- Stephens, Ark.
Col. 8 -- Salt Creek, Wyo.

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