Case Name: Hope Natural Gas Company v. Grant P. Hall, State Tax Commissioner of West Virginia et al.
Court: Supreme Court of Appeals of West Virginia
Jurisdiction: West Virginia
Decision Date: 1926-09-21
Citations: 102 W. Va. 272
Docket Number: No. 5735
Parties: Hope Natural Gas Company v. Grant P. Hall, State Tax Commissioner of West Virginia et al.
Judges: 
Reporter: West Virginia Supreme Court
Volume: 102
Pages: 272–290

Head Matter:
CHARLESTON.
Hope Natural Gas Company v. Grant P. Hall, State Tax Commissioner of West Virginia et al.
(No. 5735)
Submitted September 2, 1926.
Decided September 21, 1926.
Howard B. Lee, Attorney General, B. Dennis Steed and B. A. Blessing, Assistant Attorneys General, John T. Simms, Counsel for State Tax Commissioner, T. C. Townsend and Fred 0. Blue, for appellants.
H. D. Bu/nvmel, Charles Powell, Kemble White, Anthony F. McCue, S. E. W. Burnside, Edward M. Borger and Arthur E. Young, for appellee.

Opinion:
Hatcher, Judge:
The Bill in this ease was filed in the Common Pleas Court of Kanawha County in October, 1925. That court, sustaining the contention of plaintiff in part, held that Section 2a of Chapter 1, of the Acts of the Legislature of West Virginia, passed at the Extraordinary Session, 1925, "when tested by its practical operation and effect, substantially burdens and interferes with interstate commerce", and accordingly enjoined defendants from enforcing the said Act against the plaintiff, as to the gas sold by it in other states.
The judgment of that court was upheld by the circuit court of' Kanawha County, and the case is here on the appeal of defendants.
Prom an agreed statement of facts, it appears that plaintiff is the owner of leases on 860,750 acres of oil and gas territory situated in twenty-five counties in the state of West .Virginia; that on this territory it now has 3178 producing gas wells from which it secured 23,194,711,000 cu. ft. of gas for the year ending June 1,1925; that it purchased from other producers of gas in the state of West Virginia during that period 25,456,947,000 cu. ft. of gas, making a total of 48,651,-658,000 cu. ft. of gas produced and purchased by it during that year; that it owns and operates several thousand miles of gathering lines of pipe which range from 2 to 6 ins. in diameter, and approximately 1300 miles of marketing or trunk lines ranging from 8 to 20 ins. in diameter; that the gas is kept continuously moving through plaintiff's pipe lines by means of 42 compressing stations; that more than 80% of the gas it produces and purchases is transported through its pipe line system to the states of Ohio and Pennsylvania; that the gas, in the language of the Stipulation, ' ' continues to flow in an uninterrupted and unbroken stream from the time it leaves the wells of the plaintiff or reaches its gathering lines from the wells or lines of the producers from' whom it purchases such gas, until it is delivered to the final point of consumption either upon plaintiff's lines or the lines connected with its system"; that for the year 1925 the plaintiff paid taxes as follows: property tax $670,718.62, corporation tax (on capital stock year ending June 30, 1925) $5,440.00, public service commission assessment $5,062.50, gross sales tax to June 30, 1925, $22,513.27, corporation license tax, Parkers-burg, $10.50, franchise tax, Parkersburg, $7,542.77, and total of $711,287.66; that the rate of levy for state purposes in the year 1925 was 14c on the $100.00 valuation, and that of the $670,718.62 property tax, the sum of $51,187.50 was collected for exclusive State purposes; that the average price paid by plaintiff for the gas purchased by it during the period beginning January 1, 1925 and ending October 1, 1925, was approximately 17c per 1000 cu. ft.; that the average price received by it for the gas which it sold within the state of West Virginia during that period approximated 30c per 1000 cu. ft.; and that the average price which it was -receiving for gas in the states of Ohio and Pennsylvania at the time this suit was instituted was approximately 36c per 1000 cu. ft.
The plaintiff's main contentions are, that this Act purports to tax interstate commerce and violates Art. 1, Sec. 8 of the Federal Constitution; that the Act denied to plaintiff the equal protection of the law and violates the Fourteenth Amendment of the Federal Constitution, and that the taxes sought to be imposed by the Act are not equal and uniform, and are in violation of Art. 10, Sec. 1, of the Constitution of West Virginia.
Section 2a of the Act is as follows:
"Upon every person engaging .or continuing within this state in the business of mining and producing for sale, profit, or use, any coal, oil, natural gas, limestone, sand or other mineral product, or felling and producing timber for sale, profit or use, the amounts of such tax to be equal to the value of the articles produced as shown by the gross proceeds derived from the sale thereof by the producer (except as-hereinafter provided), multiplied by the respective rates as follows: Coal, forty-two one-hundreths of one per cent; oil, one per cent; natural gas, one and seventeen-twentieths of one per cent; limestone, sand or other mineral product, nine-twentieths of one per cent; timber, nine-twentieths of one per cent. The measure of this tax is the value of the entire production in this state, regardless of the place of sale or the fact that deliveries may be made to points outside the state. ' '
1
By the terms of the statute the tax is to be calculated on the value of the article produced, and that value is to be shown by the gross proceeds of its sale. Art. 1, Sec. 8, of the Federal Constitution as interpreted by Federal decisions, de-, nies to a state the right to impose a direct tax on the gross proceeds of interstate commerce, except as hereinafter noted. A large per cent of the commodities named in the statute is sold in other states. The plaintiff contends that as the Act contains no exception it indicates a plain intention to tax the gross proceeds of sales in interstate commerce. There is a presumption, however, that the Legislature did not intend to violate any provision of the Federal Constitution. Pipe Line Co. v. Hallanan, 87 W. Va. 396; St. Louis S. W. Ry. Co. v. Arkansas, 235 U. S. 350. In fact it has been declared our duty to "restrain the operation of a statute within narrower limits than its words import", when satisfied that a literal interpretation will include cases not intended by the Legislature. Ry. Co. v. Conley, 67 W. Va. 129 (pt. 28 syl.). Consequently, we are warranted in presuming that the Legislature did not mean to include, as an element of value, so much of the gross proceeds of the sale of an article in interstate commerce, 'as is represented by the cost of transportation, and we restrain the operation of the statute accordingly. This presumption and this limitation are strengthened by the concluding sentence of the statute, whereby the measure of the tax is declared to be the value of the product in this state, regardless .of place of sale or delivery outside of state. If the sale of a commodity produced in this state imposes on the seller delivery in another state, then the sale price necessarily includes the cost of the delivery. Such sale price would not reflect the worth of the commodity in the state, but the worth within the state plus the cost of transportation. If the taxation value of the products named in the statute be limited to their value in the state, and before they enter interstate com- meree, the statute does not manifest a purpose to violate Art. 1 of the Federal Constitution, and we so hold. Am. Mfg. Co. v. St. Louis, 250 U. S. 459.
.2
In Bell's Gap Rr. Co. v. Penn., 134 U. S. 232, the same contention that plaintiff now advances here was made.against the validity of a Pennsylvania taxation Act, But the Supreme Court held: "The provision in the XIV Amendment, that no state shall deny to any person within its jurisdiction the equal protection of the laws, was not intended to prevent a State from adjusting its system of taxation in all proper and reasonable ways. It may impose different specific taxes upon different trades and professions, and may vary the rates of excise upon various products, it may tax real estate and personal property in a different manner; it may tax visible property only, and not tax securities for payment of money; it may allow deductions for indebtedness, or' not allow them. All such regulations, and those of like character, so long as they proceed within reasonable limits and general usage, are within the discretion of the State Legislature, or the people of the state in framing their Constitution. We think that we are safe in saying that the XIV Amendment was not intended to compel the states to adopt an iron rule of equal taxation." This doctrine has been repeatedly affirmed. Express Co. v. Seibert, 142 U. S. 339; Clark v. Titusville, 184 U. S. 329; Armour Packing Co. v. Lacy, 200 U. S. 226; Citizens Tel. Co. v. Fuller, 229 U. S. 322; Mich. Cent. Ry. Co. v. Powers, 201 U. S. 245; Heisler v. Thomas Col. Co., 260 U. S. 245. "The selection of all who are engaged within the state in mining ore or producing ores on their own account, as the subjects of an occupation tax is permissible". Oliver Iron Co. v. Lord, 262 U. S. 245.
The charge that the statute imposes double taxation is also not well founded. "Double taxation in a legal sense does not exist unless the double tax is levied upon the same property within the same jurisdiction. Plaintiffs in error pay one tax with respect to property, another with respect to the privilege or occupation: hence the taxation is not double." Ohio Tax Gases, 232 U. S. 576 (593-4). The case of Dawson v. Ky. Dist. and Warehouse Co., 255 U. S. 288, relied on by plaintiff does not apply here. As distinguished by the Supreme Court in the- Oliver Miming Co. case, the tax in the Dawson case "was not laid on any business, but on the mere exertion by an owner of distilled spirits of his right to withdraw them from a bonded warehouse and had none of the ordinary incidents of an occupation tax. ' '
The foregoing decisions uphold the right of the legislature to classify the subjects of taxation. When the right to classify is conceded, it necessarily follows that the legislature has the right to select the differences upon which the classification will be based. Citizens Tel. Co. v. Fuller, supra. No proof is offered that the classification of the statute is unreasonable. The statute makes no discrimination in favor of one as against another of the same class. We therefore see no repugnance in the statute to the Fourteenth'Amendment.
3
Plaintiff's third proposition is based on the provision in the Act for a deduction of $10,000.00 from the values or from the gross income taxed. Statutory exemptions from taxation are generally upheld when they apply alike to all property of the same class, and are not unreasonable or arbitrary. No facts are presented to show that this exemption is unreasonable. In Pipe Line Co. v. Hallanan, supra, an exemption from taxation of pipe lines under ten miles was under consideration. The court stated that as such lines were owned by small producers and were not used to any considerable extent in the regular business of transporting oil, these facts offered a "reasonable basis for the classification thus made". May we not as well say here that the mine which does not do a gross business of more than $10,000.00 a year is owned by a small producer, that such mine is not engaged to any considerable extent in the-business of mining and that such facts furnish a reasonable basis for the exemption ? The right of a legislature to classify subjects for taxation "in terms of earnings instead of in terms of method and use" has also been directly recognized and approved by the Supreme Court. "The legislature, in the exercise of its power of regulating fares and freights, may classify the railroads according to the amount of the business which they have done or appear likely to do. Whether the classification shall be according to the amount of passengers and freight carried, or of gross or net earnings, during a previous year is a matter within the discretion of the legislature. If the same rule is applied to all railroads of the same class, there is no violation of the constitutional provision securing to all the equal protection of the laws." Dow v. Beidleman, 125 U. S. 680 (691). The immunity favoring gross incomes not exceeding $10,000.00 does not discriminate in favor of one, as against another of the same class, and therefore presents no arraignment of the right to classify. "If the law operates upon every person within the relation or circumstances provided for, it is sufficient as to uniformity." McAunich v. Rr. Co., 20 Iowa 338.
4
The defendant's main contention is that under the facts developed in this case, the state has the right under Sec. 2a to calculate the tax on the gross proceeds of the sale of the plaintiff's gas, sold without the state. Their brief contends "there is no tax on the sale or the transportation of the gas or on the proceeds from the sale thereof", but that the gross sales price is simply the taxable measure of the value of the commodity.
It is conceded as defendants assert, that mining (when considered apart from transportation) is not interstate commerce. It is immaterial, for the purpose of this discussion, whether plaintiff's pipe line system is a mere incident to its business, as defendants contend, or an integral part thereof, as plaintiff maintains. The important factor is that by means of this system, whether it be incidental or integral, plaintiff's gas becomes a subject of interstate commerce. "In order that property in transit may be exempt from local taxation as a subject of interstate commerce it is not essential that it be in charge of some common carrier engaged in that class of business." Oil and Gas Co. v. Ehrhardt, 244 Ill. 634. From the time the product of a mine commences its final movement for transportation, it is governed and protected by the national law. Coe v. Errol, 116 U. S. 517 (525). "Natural gas is a lawful article of commerce and its transmission from one state to another for sale and consumption in the latter is interstate commerce." Penn. v. W. Va., 262 U. S. 553. In U. S. Fuel Co. v. Hallanan, 257 U. S. 277, the transmission of gas to another state by a pipe line system similar in all respects to that of plaintiff was held to be interstate commerce.
It may be admitted, as defendants contend, that the "incidental facility of transportation" increases the value of the gas before it enters the pipe lines. Such an admission, however, in no wise disturbs the fact that the average price received by plaintiff for gas sold without the state is approximately six cents-higher than the average (not the occasional or exceptional) price of gas sold by plaintiff within the state. Neither does the admission alter the fact that it necessarily costs plaintiff something to transmit the gas from the place of production or purchase to the state line, and that the cost of transmission is included in the sales price. ' ' The gas carried outside the state is sold for more than that used therein, but this naturally would be so; considering the additional pipe lines, compressors, and labor employed in the longer transmission." Penny. W. Va., supra.
In Wallace v. Hines, 253 U. S. 66 (69), the Supreme Court said: 1 ' The only reason for allowing a state to look beyond its borders when it taxes the property of foreign corporations is that it may get the true value of the things within it, when they are part of an organic system of wide extent, that gives them a value above what they otherwise would possess. The purpose is not to expose the heel of the system to a mortal dart — not, in other words to open to taxation what is not within the state." By parity of reasoning we can as well say that the only reason for permitting cpnsideration of the price plaintiff receives for delivering gas through its transmission system to another state, is to get the true value of the gas within the state before it enters interstate commerce, and that purpose is not to open to taxation interstate commerce itself. "Under no formula can a state tax things wholly beyond its jurisdiction." Union Tank Line Co. v. Wright, 249 U. S. 275.
Throughout a century of attempted municipal encroachment on Federal authority, the Supreme Court has trumpeted the inhibition that a state cannot lay a direct tax on the gross proceeds derived from interstate commerce, except where such tax is in lieu of all other taxes and amounts to no more than the ordinary tax on property. Postal Tel. Co. v. Adams, 155 U. S. 688; U. S. Express Co. v. Minn., 223 U. S. 335. Ir, is true that a modification of this rule is indicated in State Tax on Rr. Gross Receipts, 82 U. S. 284, Maine v. Grand Trunk Ry. Co., 142 U. S 217, and Ficklen v. Shelby Co., 145 U. S. 1. But the Tax Receipts decision was disapproved in Phila. and S. M. Co. v. Penn., 122 U. S. 326 (342), the Maine case was set apart as "the extreme case" in Galveston v. Texas, 210 U. S. 217, and in Crew Levick Co. v. Penn, 245 U. S. 298, the Ficklen decision was destroyed as a precedent by its characterization' as "exceptional". Crew Levick Co. v. Penn, supra, Fargo v. Mich., 121 U. S. 230, Phila. and S. M. Co. v. Penn, supra, Galveston v. Texas, supra, and other Federal decisions deny, in express terms, the right of the state to tax the gross proceeds derived from interstate commerce, when the property of the corporation is otherwise taxed, as it is in the present case. Commenting on Phila. and S. M. Co. v. Penn, the Supreme Court said, in the Galveston case: "We regard this decision as unshaken, and as stating established law." It is a tradition of our court to follow, not exceptional or extreme decisions, but those which are unshaken and which state established law.
There is a line of cases, including Home Ins. Co. v. N. Y. State 134 U. S. 594, Flint v. Stone Tracy Co., 22 U. S. 107, Peck v. Lowe, 247 U. S. 165, U. S. Glue Co. v. Oak Creek, 247 U. S. 321, and Hump Hairpin Co. v. Emerson, 258 U. S. 290, which has upheld the right of a -state to tax the net income of a corporation, derived from interstate commerce. The reasons supporting these decisions are that such tax is not imposed .directly upon the proceeds of interstate commerce, is not computed upon it, and that such assessment, so far as interstate commerce is concerned, is "incidental, remote, and unimportant, and is therefore constitutional". In Glue Co. v. Oak Creek, supra, the distinction between a direct tax and one which was an indirect burden upon interstate commerce, is sharply drawn. After referring to the case of Peck v. Lowe, supra, the court in the Glue Co. case said:
"The distinction between a direct and an indirect burden by way of tax or duty was developed, and it was shown that an income tax laid generally on net incomes, not on income from exportation because of its source or in the way of discrimination, but just as it was laid on other income, and affecting only the net receipts from exportation after all expenses were paid and losses adjusted and the recipient of the income was free to use it as he chose, was only an indirect burden. The difference in effect between a tax measured by gross receipts and one measured by net income, recognized by our decisions, is manifest and substantial, and it affords a convenient and workable basis of distinction between a direct and immediate burden upon the business affected and a charge that is only indirect and incidental. A tax upon gross receipts affects each transaction in proportion to its magnitude and irrespective of whether it is profitable or otherwise."
In determining whether a tax is a direct burden on interstate commerce, the Supreme Court has also repeatedly held that .it would regard the effect and operation of the exaction, and disregard the manner in which the taxing scheme was characterized. Western Union Tel. Co. v. Kansas, 216 U. S. 1; Galveston etc. Ry. Co. v. Texas, supra; Kansas City Ry. Co. v. Kansas, 240 U. S. 227 (281). The practical operation of the statute as contended for by defendants would be that the State of West Virginia would exact from the plaintiff $1.85 of every $100.00 it received from the sale of its gas in Ohio and Pennsylvania. This would be a direct burden on interstate commerce.
The cases of Oliver Mining Co. v. Lord, supra, and Am. Mfg. Co. v. St. Louis, supra, relied on so confidently by defendants, do not support their contention. In the Miming Co. case the statute under consideration limited the value of the ore for taxation to its worth "at the place where the same is brought to the surface", and even permitted the cost of mining the ore to be subtracted from that value. In the second case, a tax was upheld which measured the value of goods manufactured in a local factory, by sales made from warehouses without the state. The statute in that case was levied, against '4 each one thousand dollars, or fractional part thereof, of sales made by", etc. The measure of the value of the manufactured article was therefore its sales price and not the gross receipts from its sale. No mention is made in the opinion of freight paid, or of the gross proceeds of the sales. We are warranted in assuming that the city did not attempt to include for taxation as a part of the sales price, the freight on the merchandise to the foreign warehouse. The reason impelling the decision is: "In the outcome the tax is the same in amount as if it were measured by the sale value of the goods, but imposed upon the completion of their manufacture ' '. Consequently, the question of the validity of attempting to tax gross proceeds of the sales of articles delivered by the producer or manufacturer in a foreign state, did not arise and was not decided in either the Mining Co. or the Mfg. Co. case.
In Pipe Line Co. v. Hallanan, supra, the same argument now made by defendants here, was advanced and condemned as sophistical and amounting merely to a "confusion of terms ". " If it can be said that the legislature has the power to tax the privilege of engaging in a particular kind of intrastate commerce in the state, and then measure that tax by the amount of interstate commerce done, as well as by the amount of intrastate commerce, it would accomplish by indirection what, by the uniform holdings, it could not accomplish directly. It could under the guise of taxing the privilege of doing intrastate commerce take a part of the interstate commerce. It seems to us that the reasoning which seeks to justify the adoption of the measure of the tax sought to be applied in this case is sophistical and amounts to simply a confusion of terms, the result being exactly the same as if the tax had been laid upon the privilege of engaging in interstate commerce.. The courts do not look at the form which may be adopted to accomplish a particular purpose, but where it appears that the necessary effect of the procedure contended for is to produce a result which necessarily imposes a burden beyond the power of the legislature, the form will be disregarded."
We therefore hold, under the facts in this case, that the defendants may not treat the gross proceeds of plaintiff's sales outside the state as the worth of its gas within the state, but that they may enforce the Act upon the value thereof within the state, and before it enters interstate commerce. The injunction.herein will be accordingly so modified.
Affirmed in part; reversed in part.