Opinion ID: 1630649
Heading Depth: 1
Heading Rank: 5

Heading: Does the Louisiana Ad Valorem Tax Scheme Place an Undue Burden on Interstate Commerce?

Text: We now turn to whether the Louisiana ad valorem tax scheme burdens interstate commerce as it is applied. While the Louisiana ad valorem tax scheme does not discriminate against interstate commerce on its face, when determining the tax scheme's possible burden on interstate commerce, the practical effect of the rule's classifications cannot be ignored. In determining the constitutionality of a state tax scheme, [the] state tax must be assessed in light of its actual effect considered in conjunction with other provisions of the State's tax scheme. `In each case it is [the court's] duty to determine whether the statute under attack ... will in its practical operation work discrimination against interstate commerce.' Maryland v. Louisiana, 451 U.S. at 756, 101 S.Ct. at 2135 (quoting Best & Co. v. Maxwell, 311 U.S. 454, 455-456, 61 S.Ct. 334, 335, 85 L.Ed. 275 (1940)). Under the Federal Natural Gas Act, [11] all interstate natural gas pipeline companies are rate-regulated by the Federal Energy Regulatory Commission, making all interstate companies pipeline companies, and thus public service properties. According to Louisiana law, in particular La. R.S. 30:551(A), the only intrastate companies that are subject to rate-regulation by the LPSC and qualify as pipeline companies, and thus public service property, are the companies that sell to local distributing systems. All other intrastate natural gas pipeline companies are considered other property. Therefore, while only some intrastate natural gas pipeline companies are considered public service property, all interstate natural gas pipeline companies are considered public service property. The scheme places some, but not all, competing intrastate companies into the pipeline company and thus public service property classification along with the interstate companies, all of which are assessed centrally by the LTC based on 25 percent (25%) of their fair market value. The remaining intrastate companies who do not sell gas to local distributing systems but still compete with interstate companies in certain markets are considered other property and are assessed at the parish level using a 15 percent (15%) assessment of their fair market value. At first glance, it would seem the Louisiana ad valorem tax scheme places a higher overall tax burden on interstate companies by taxing all interstate companies and only some intrastate companies at 25 percent (25%) of their property's fair market value, while taxing the remaining intrastate companies at 15 percent (15%) of their property's fair market value. If this were all the statutes provided for, our inquiry would seem to be at an end, and this tax classification scheme would appear to burden interstate commerce. However, the tax scheme provides for other differences in treatment of the two classes of properties as well. In addressing the entities and methods used to determine the above mentioned fair market values, La. Const. art. 7 § 18(D) also states, Each [parish] assessor shall determine the fair market value of all property subject to taxation within his respective parish or district except public service properties, which shall be valued at fair market value by the Louisiana Tax Commission or its successor. The interstate and intrastate companies that are assessed at 25 percent (25%) of their fair market value, public service properties, are statutorily required to be assessed centrally by the Louisiana Tax Commission. See La. R.S. 47:1853. The Louisiana Legislature saw fit to require that public service properties due to their nature as public service properties should be appraised according to a certain method by the LTC. When appraising public service property, the LTC utilizes a combination of all three of the nationally recognized techniques of appraisal as listed in La. R.S. 47:1853(B). [12] For pipelines, the LTC has adopted the unit method, in which the entire operating property is valued as a unit without functional or geographic division of the whole, considering the income the property produces. The record reflects that the method adopted by the LTC in valuing public service property is a method typically used in approximately 35 other states. The benefit of such an operation is that an appraiser is viewing the entire operation considering all of the parts, and not just individual contributions of some parts of the whole. Using this approach, an appraiser looks to the value of the business itself or the going concern of the company, and not just the hard assets of the company. The record also reflects that this method is a proper assessment method for rate-regulated entities that qualify as public service property, which includes interstate companies and intrastate companies who sell to local distributing systems, as it only makes sense to appraise the property in this manner, because they report to and are rate-regulated as an entire unit by the FERC or the LPSC respectively. The remaining intrastate companies, which are assessed at 15 percent (15%) of their fair market value, are assessed by the various parish assessors in each parish in which their property is located using a different method than the LTC, the cost approach. [13] The parish assessors use the depreciated replacement cost of the property located within their parish to determine its fair market value, utilizing guidelines promulgated by the LTC. This method looks at what it would cost to replace the assessed property new less depreciation. The record reflects that this method used by the parish assessors, replacement cost new less depreciation, is more appropriate for non rate-regulated entities. In contrast, the unit method used by the LTC, utilizes as part of its calculation the original replacement cost, and not the replacement cost new, due to the nature of rate-regulated common carriers that it is meant to assess. Considering the practical effects of the Louisiana ad valorem tax scheme, to prove an undue burden on interstate commerce, the plaintiffs would need to show they are paying more taxes than are their intrastate competitors. The plaintiffs would need to show that 15 percent (15%) of the fair market value of property valued using the depreciated replacement cost approach is in fact less than 25 percent (25%) of the fair market value of property valued using the unit method. Absent this showing, there can be no conclusion that intrastate companies are benefitting from the application of the tax scheme. If intrastate companies are not benefitting by paying a lower tax than the interstate companies then there is no negative effect or burden on interstate commerce. Absent this showing, plaintiffs have not shown an undue burden on interstate commerce. There is no evidence in the record showing that the interstate companies are paying more ad valorem tax than are their unregulated intrastate competitors. To the contrary, there is some indication in the record that the cost approach, utilized by the parish assessors, regularly values property higher than property which has been valued on the unit method, depending on whether the value is adjusted for economic obsolescence. The record further reflects that parish assessors normally do not account for economic obsolescence absent extraordinary circumstances, as they are not required to consider that factor under § 1305(G) of the LTC guidelines. [14] The indication is that while the local assessors are obligated to follow the guideline charts for different sizes and types of pipes, they are allowed great discretion in determining other factors such as obsolescence, and normally do not even take that factor into consideration absent an extraordinary showing. Economic obsolescence is important to the unitary method of appraisal of rate-regulated companies by the LTC, because rate-regulated entities are capped in the amount of earning capability they can derive from a particular piece of property. There is some expert testimony indicating that if all factors, including economic obsolescence, are taken into account for both methods of appraisal, the values from the two different methods, at best should approach each other. The overall implication from the record, however, is that, typically, the method currently used by the parish assessors to assess the fair market value of pipes within their parishes comes out higher than the method used by the LTC, such that the plaintiffs' tax burden could likely increase if they were treated like their claimed favored competitors, the unregulated intrastate companies. [15] When specifically asked which method currently results in a higher tax burden, no expert could give a definitive answer. This may be an imperfect appraisal system, as appraisal is an imperfect science to begin with, but interstate commerce is simply not burdened if the interstate companies are actually paying less than they would if they were valued like their claimed favored intrastate competitors. Furthermore, it is not the appraisal system that is under attack in this case, it is the effect of the Louisiana ad valorem tax scheme on interstate commerce as it is currently being applied. The question is not how the tax scheme might work if the intrastate company appraisals were performed using another method, but if the tax scheme as it is being applied currently serves to burden interstate commerce. The plaintiffs have argued that fair market value is fair market value, and it has only one definition in Louisiana, found in La. R.S. 47:2321, which reads, the price for property which would be agreed upon between a willing and informed buyer and a willing and informed seller under usual and ordinary circumstances ... The plaintiffs suggest fair market value should be viewed as a constant, and that assessing interstate companies at 25% of fair market value and some intrastate companies at 15% of fair market value runs afoul of the Commerce Clause of the U.S. Constitution, as an undue burden on interstate commerce. If fair market value were perfectly attainable or if it were a constant, the plaintiffs may well be correct. However, this ignores the practical effect of Louisiana's ad valorem tax scheme as a whole. The scheme calls for different methods of appraisal to be used by the LTC and local parish assessors in determining fair market value, because in reality they are valuing different aspects of the properties. The parish assessors are only valuing portions of physical pipeline situated within their parish, and do not commonly look to the income of the business or any other factor not attributable to their parish. The LTC is valuing an entire pipeline operation as a whole considering all of the factors available to it, including economic obsolescence and overall income. In fact, La. R.S. 47:1853(D) [16] specifically prohibits the LTC from valuing the actual property rather than the company itself. There is only one definition of fair market value, but it applies to separate classifications differently. What a willing buyer would pay for a particular piece of pipe in one parish, and the apportioned value of a certain amount of pipe in a parish based on what a willing buyer would pay for an entire pipeline transportation business throughout the state might be quite different. Since the law calls for these different methods of assessments, it would not be proper to ignore the effect of the differing classifications of property and the methods by which the Louisiana Legislature has chosen to assess them in interpreting the tax scheme's overall effect on interstate commerce. Obviously, if the plaintiffs were granted a 15 percent (15%) assessment rate on fair market value as determined by the LTC, their tax liability would go down, which is precisely what they seek. However, the question here is not whether their tax obligation is too high, but if it is more than that of intrastate competitors. If 25 percent (25%) of the fair market value of property valued at the unit method is in fact more than 15 percent (15%) of the fair market value of property valued at the depreciated replacement cost, the scheme would burden interstate commerce, because the end costs of the excess tax would be born by out-of-state customers, while purely instate companies could charge a lower price benefitting customers in Louisiana. However, the record contains no definite evidence that determines which assessment methodologies would yield higher taxes or which classification is paying more ad valorem tax. As the plaintiffs allege the unconstitutionality of the statutes based on an undue burden on interstate commerce, it is their burden to introduce evidence demonstrating such a burden. They have failed to sustain their burden. In South Central Bell, supra, the U.S. Supreme Court had undisputed evidence that the average domestic corporation was paying one-fifth of the franchise tax it would have paid if treated as a foreign corporation. 526 U.S. at 169, 119 S.Ct. at 1186. This court is presented no such evidence on the relative tax burdens of interstate and intrastate companies in this case. In fact, the indication from the record is that the tax burden on the interstate companies might go up if they were treated like the unregulated intrastate companies of which they complain. Ultimately, it is unclear from the record which entities are taxed more, public service properties or unregulated intrastate pipelines, given not only the percentage of fair market value considered, but also the assessment method to determine the fair market value of the property at issue. When considering whether the Louisiana ad valorem tax scheme burdens interstate commerce, it must be clear intrastate companies are actually benefitting by ultimately paying a lower tax than the interstate companies. Otherwise, if the companies are paying equal amounts or if these intrastate companies who do not qualify as public service property are paying more tax, there is no negative effect on interstate commerce. The tax scheme does treat interstate companies differently than some intrastate companies; however, it does not follow that this is discrimination or a burden on interstate commerce unless the intrastate companies somehow benefit from the differential treatment. Due to the absence of evidence as to whether 25 percent (25%) of fair market value of property assessed by the LTC is more than 15 percent (15%) of fair market value of property assessed by the local parish assessors, this court simply cannot conclude the Louisiana ad valorem tax scheme discriminates against or burdens interstate commerce. The U.S. Supreme Court has recognized that the States have broad discretion to configure their systems of taxation as they deem appropriate. Oregon Waste Systems, 511 U.S. at 108, 114 S.Ct. at 1354-1355. Further, Legislative classifications in tax matters are presumptively valid, the burden being on the challenger to prove that such a classification does not rest upon a reasonable basis, and will not be disturbed by the judiciary in the absence of unreasonable, discriminatory, or arbitrary action. Bel Oil Corp. v. Roland, 242 La. 498, 137 So.2d 308, 314 (1962). The Louisiana Legislature has an interest in creating classifications for tax purposes along reasonable lines, this includes whether or not a business is rate-regulated by a government agency. This legitimate classification would indeed be unconstitutional if the classification and subsequent tax served to burden interstate commerce, however, in this case, the plaintiffs have not overcome the presumption of validity, as the plaintiffs failed to show the tax scheme in practical effect actually serves to place any burden whatsoever on interstate commerce. The United States Supreme Court, in General Motors Corp. v. Tracy , upheld an Ohio tax against a Commerce Clause challenge from out-of-state independent marketers of natural gas alleging that tax exemptions granted to local distribution companies (LDCs) and not to independent marketers violated the Commerce Clause. 519 U.S. 278, 117 S.Ct. 811, 136 L.Ed.2d 761 (1997). In General Motors, the Ohio tax exemption was granted to regulated public utilities that met the definition of natural gas company. The Ohio laws were interpreted such that local distribution companies met the definition of natural gas companies, but non-LDC gas companies and independent marketers did not. Id. at 283, 117 S.Ct. at 816. The practical effect of such classification was all LDCs, which were all located in Ohio, got the benefit of the tax credit, while all other companies did not, which included some intrastate and all out-of-state companies. Id. at 288, 117 S.Ct. at 819. Ultimately, the Court upheld the tax, because they found the LDCs and independent marketers did not actually compete in the same captive market. The Court recognized the possibility of competition in the non-captive market, however there was no evidence submitted on that issue. In reaching this conclusion, the Court recognized that the judiciary is ill-equipped to develop Commerce Clause doctrine on predictive judgments about possible real world economic effects. Id. at 309, 117 S.Ct. at 829. In finding the Ohio tax did not facially discriminate against interstate commerce, the Court also stated, we have never deemed a hypothetical possibility of favoritism to constitute discrimination that transgresses constitutional demands. Id. at 311, 117 S.Ct. at 830 (citing Associated Industries of Mo. v. Lohman, 511 U.S. 641, 654, 114 S.Ct. 1815, 1824, 128 L.Ed.2d 639 (1994)). While this case can be distinguished from the instant matter in that the Court in General Motors found the plaintiffs and the claimed favored entities did not compete significantly in the same market, the Court declined to consider the hypothetical arguments about the possible tax consequences on other markets in rendering their decision. As here, this Court cannot assume that discrimination is taking place based on the theoretical basis of fair market value and not its real world, real dollar application. Fair market value cannot be determined without an assessment, and the statutes provide a particular method and entity to perform that method of assessment for each classification. Public service property is assessed by the LTC using the unit method of assessment, and other property is assessed locally using the depreciated replacement cost. To observe the difference in percentages of fair market value, and ignore the difference in methodology to determine fair market value is to ignore the practical effect of the Louisiana ad valorem tax scheme. As the U.S. Supreme Court observed, a court must assess a state tax in light of its actual effect considered in conjunction with other provisions of the State's tax scheme. Maryland v. Louisiana, 451 U.S. at 756, 114 S.Ct. at 2134. Absent a showing that the differential treatment caused by the tax scheme's classifications somehow benefits intrastate companies at the expense of interstate companies, this Commerce Clause challenge cannot succeed. In order to show this, the plaintiffs must prove they would pay lower taxes on their property if they were treated in the same manner as the claimed favored intrastate companies, being assessed locally in each parish in which their property is located by the local parish assessors at a rate of 15 percent (15%) of fair market value. Only on this showing can the determination be made that there is sufficient evidence to show the Louisiana ad valorem tax scheme actually burdens interstate commerce. Plaintiffs have not met their burden of proving the Louisiana ad valorem tax scheme burdens interstate commerce.