Opinion ID: 865214
Heading Depth: 2
Heading Rank: 1

Heading: whether the chancellor erred in holding

Text: THAT PURSUE’S USE OF ITS OWN GAS FOR ITS OPERATIONS IS SUBJECT TO THE USE TAX. ¶9. The chancellor held in his Findings of Fact and Conclusions of Law that the Commission’s decision was supported by substantial evidence, stating: Pursue does not dispute that it used the Residue Gas for Plant Fuel and Lease Fuel as part of its operations in the Thomasville Field. Further, Pursue does not dispute that Shell formerly paid sales tax on this same fuel when Pursue purchased the fuel from Shell. Pursue’s sole argument is that the Plant Fuel and Lease Fuel was neither sold, nor placed in the market for sale and, therefore, there is no transaction upon which to impose the use tax. Pursue’s argument disregards the plain language of the use tax statute, the elementary premise of use tax, and ignores its own treatment of the fuel in its accounting process. Mississippi Code Annotated § 27-67-1 et seq. is known as the Mississippi Use Tax Law. Section 27-67-5 provides: There is hereby levied, assessed and shall be collected from every person a tax for the privilege of using, storing or 7 consuming, within this state, any tangible personal property possession of which is acquired in any manner. The use tax is assessed and collected at the same rates as imposed under §2765-19, and computed on the value of the property. Id. § 27-67-5(a). A sales tax is a tax on a purchase, whereas “the use tax of the State of Mississippi is . . . a tax upon the ‘using, storing, or consuming’ of tangible personal property within the State.” Mavar Shrimp & Oyster Co. v. Stone, 73 So.2d 109, 111 (Miss. 1954). The use tax rate is set by Miss. Code Ann. § 27-65-19. The rate is 7% sales tax on the value of the natural gas, liquified petroleum gas or other fuel sold for non-industrial purposes, i.e., Lease Fuel, Id. § 27-65-19(1)(a), and 1.5% of the value of the natural gas, liquified petroleum gas or other fuel sold for industrial purposes, i.e., Plant Fuel. Essentially, it appears that Mississippi’s use tax is simply a statutory tax on the use of personal property in situations where there is no purchase from a third party that would generate a sales tax. That “use”, for all practical purposes, is taxed just like the “sale” it replaces. The only necessary requirement is a use or consumption of personal property in this State computed at the value of the object. Leading authorities on the subject of state taxation describe use taxes as follows: When a manufacturer uses property it produces in its own business, a number of states treat the use as taxable, as if the manufacturer had purchased the property for its own use. Failure to treat such uses as taxable provides an economic advantage to those who produce their own property over those who must purchase such property from third parties. Jerome R. Hellerstein & Walter Hellerstein, State and Local Taxation ¶ 16.07 (3d ed. 2005). ¶10. At the January 23, 2002, hearing, the full State Tax Commission found: 1. The use tax assessment arose following Pursue’s use of refined, processed gas for its plant and lease operations. 8 2. Prior to the audit, Pursue purchased the fuel from third parties and paid sales tax on those purchases. 3. Pursue’s withdrawal of the gas gives rise to Mississippi sales tax under Miss. Code Ann. § 27-65-3. 4. Pursue’s use of the processed gas for fuel gives rise to use tax at the same rates as contained in Mississippi sales tax law only to the extent sales tax was not paid on the plant and lease fuel. ... Pursuant to Mississippi law, that portion of the processed gas used to fuel plant operations is subject to use tax at a rate of 1.5%. Miss. Code Ann. § 27-6519(1)(b). That portion of the processed gas used to fuel lease operations is subject to use tax a [sic] rate of 7%. Id. § 27-65-19(1)(a). This is the precise manner in which the State Tax Commission assessed Pursue. This decision was upheld by the Commission’s Board of Review and by a full hearing of the entire Commission. No question exists that natural gas used as fuel is personal property subject to the use tax. In 1992, the Mississippi Supreme Court held that an interstate pipeline company was liable for Mississippi use tax on that portion of natural gas it removed from its pipeline stream to fuel its compressors located at equidistant intervals on the pipeline. Tennessee Gas Pipeline Co. v. Marx, 594 So. 2d 615 (Miss. 1992). The State Tax Commission assessed use tax on only that portion of natural gas used within Mississippi. The Mississippi Supreme Court upheld this assessment as a fundamental function of the Mississippi Use Tax Law. Tennessee Gas Pipeline demonstrates the uncomplicated role of use taxes within Mississippi’s taxing program. Identical to this case, there was no third party “sale” (i.e., exchange of natural gas for monetary consideration) of the natural gas used by Tennessee Gas Pipeline Company (“Tennessee Gas”). If there had been a sale, Tennessee Gas would be liable for sales tax on the value of fuel used for the compressors. Instead of a sale, Tennessee Gas used the natural gas, thereby realizing a valuable benefit. Mississippi Code Section 2767-5 clearly subjects that consumption to use tax (“which is acquired in any manner”). As a taxing authority, Mississippi taxes the value of the goods consumed. As an accounting procedure, Pursue classifies the removal of the Plant and Lease Fuel as a sale to itself, valuing the fuel as the average selling price of 9 processed gas sold. Pursue subsequently pays the royalty owners their portion of the “proceeds” from the fuel sold. Pursue turns around and takes a deduction of the same amount as part of its processing fee. Pursue then charges the royalty owners their portion of the processing charge. In the end, treatment of the fuel use is a financial wash as far as Pursue is concerned. However, at no point dues [sic] Purdue pay to the State of Mississippi use tax on the portion of fuel used. Pursue’s own testimony tells the whole story. Jeff Brasher, Pursue’s Revenue Accounting Manager, testified that Pursue treated the use of the Plant Fuel and Lease Fuel on its own books as a purchase. Q. So it is a sale to yourself; isn’t it? A. It’s a sale to our – it’s a part, yes, to ourselves and every other royalty owner, that’s correct. ... Mr. Brasher also testified to the relative ease in valuing the fuel gas and how it was treated for royalty owner purposes: Q. So it (fuel gas) is deducted from the clean gas in a volume basis?
Q. But if you multiplied it times the price it would also have a value; wouldn’t it? A. Yes. Q. And you do – Pursue does multiply that times a value; doesn’t it? A. Yes, we do. Q. I mean it’s recorded on your income tax statement as an income and as an expense; isn’t it? Doesn’t it go on both columns? I’ll show you that in a minute. A. Okay. Q. But you also value it for royalty purposes; don’t you. A. Yes, we do. Q. Are you using the same value for MCF as you’re selling it? A. Selling what? Q. The residue gas. A. Oh, yes. 10 Q. So what you do is take your average sale price and you would – you would multiply the volume times that and pay the royalty on that basis, right? A. Yes. ... The Commission treated the fuel gas in the same manner as Pursue. It valued the gas on the same basis that the remaining Residue Gas was sold. That fuel consumed by Pursue is taxable under the Mississippi Use Tax Law. ¶11. Pursue first argues that there was never a sale; additionally, Pursue argues that it is a wholesaler pursuant to Miss. Code Ann. § 27-65-107(d) (Rev. 2005), which states that sales taxes shall not be levied on “[w]holesale sales of tangible personal property for resale under Section 27-65-19.” Thus, Pursue argues that it is exempt from paying use tax on the gas pursuant to Miss. Code Ann. § 27-67-7(b), which states that use taxes shall not be collected on “[o]n the use, storage or consumption of tangible personal property to the extent that sales of similar property in Mississippi are either excluded or specifically exempt from sales tax or are taxed at the wholesale rate.” ¶12. Pursue correctly states that it is a wholesaler, as Pursue sells most of its gas to other companies for resale. However, the gas used at the plant was never sold at wholesale for resale by another company. Instead, Pursue treated the transaction as a sale to itself and used the gas to fuel its own operations. Thus, Pursue cannot avail itself of the wholesaler exemption. ¶13. Pursue also argues that the use tax only applies to out-of-state purchases brought into Mississippi for use and directs us to a federal district court decision: 11 The sales tax is levied against the seller of tangible personal property whereas the use tax is levied against the purchaser or user of such tangible personal property. Accordingly, the Mississippi Sales Tax can be classified as a tax upon the gross receipts of goods which are sold within the State of Mississippi. On the other hand, the Mississippi Use Tax can be classified as a tax imposed upon the purchaser of goods which are bought outside of the State of Mississippi but are brought into the State of Mississippi by the purchaser thereof to be used, stored or consumed within the State of Mississippi. It should be noted that the rates of both the sales and use taxes imposed by the State of Mississippi are identical. Consequently, it is clear that the intention is for the sales taxes and the use taxes to be complementary and that all tangible personal property, whether bought in the State of Mississippi or purchased outside of the State of Mississippi and brought into the state for use, storage or consumption, is to be subject to the same rate of tax. United States v. Mississippi, 578 F. Supp. 348, 350-351 (D. Miss. 1984). ¶14. Accordingly, Pursue also argues that Tennessee Gas, on which the chancellor relied extensively, is not controlling in the case sub judice. In Tennessee Gas, the issue was whether use taxes were owed “upon the pipeline company’s use of natural gas taken from its interstate gas pipeline as fuel for compressor engines located along the pipeline.” Tennessee Gas, 594 So. 2d at 616 (emphasis added). The pipeline company argued that the imposition of Mississippi’s use tax was impermissible under the commerce and due process clauses of the United States Constitution. Id. ¶15. Pursue argues that in Tennessee Gas, this Court addressed only the interstate commerce issue. We disagree, as this Court also stated that “[b]oth interstate and intrastate taxpayers, if positioned as this pipeline company is, are required to pay a use tax on fuel consumed in Mississippi.” Id. at 618. Thus, we find Tennessee Gas to be directly on point, 12 as the companies are similarly situated in that both use their own fuel to power their plants. It is irrelevant whether Pursue’s gas came from within Mississippi’s borders or was brought into the state. We also find that United States v. Mississippi is inapplicable, as this Court is not bound by the federal district court’s language, and Tennessee Gas was decided by this Court some eight years after the federal district court’s decision in United States v. Mississippi. Accordingly, we find that the chancellor did not err in finding that Pursue owed the State of Mississippi a use tax; therefore, this issue is without merit.