Colonial Pipeline Co. v. Morgan, M2006-00591-SC-R11-CV.

Citation263 S.W.3d 827
Decision Date09 September 2008
Docket NumberNo. M2006-00591-SC-R11-CV.,M2006-00591-SC-R11-CV.
CourtSupreme Court of Tennessee
263 S.W.3d 827
John G. MORGAN et al.
No. M2006-00591-SC-R11-CV.
Supreme Court of Tennessee, at Nashville.
June 4, 2008 Session.
September 9, 2008.

[263 S.W.3d 832]

Ron L. Quigley, Davis, Matthews & Quigley, P.C., and Stephen H. Price, Stites & Harbison, PLLC, for the appellee, Colonial Pipeline Company.

Robert E. Cooper, Jr., Attorney General & Reporter; Michael E. Moore, Solicitor General; and Mary Ellen Knack, Senior Counsel, for the appellant, State of Tennessee.

GARY R. WADE, J., delivered the opinion of the court, in which WILLIAM M. BARKER, C.J., JANICE M. HOLDER, CORNELIA A. CLARK, JJ., and FRANK F. DROWOTA, III, Sp.J., joined.


Colonial Pipeline Company filed suit for declaratory judgment, challenging the constitutionality of specified portions of the state tax code and seeking an injunction as to the enforcement of those provisions. The Chancery Court dismissed the action, holding that the company had failed to exhaust its administrative remedies. The Court of Appeals reversed and remanded. We granted an application for permission to appeal and, after consideration of the issues, hold that (1) a party making a constitutional challenge to the facial validity of a statute need not exhaust its administrative remedies, and that (2) the doctrine of sovereign immunity does not bar a suit for declaratory judgment asking state officers to be enjoined from enforcing such a statute so long as the action does not seek money damages. We, therefore, affirm the judgment of the Court of Appeals.

Facts and Procedural History

On February 22, 2005, Colonial Pipeline Company ("Plaintiff"), a public utility that owns and operates a pipeline transportation system throughout thirteen states including Tennessee, filed suit for declaratory judgment, contending that any tax assessment in excess of 40% as to its real property and 30% as to its personal property violates provisions of the state and federal constitutions. The defendants in this action are John Morgan, the Comptroller of the Treasury for the State of Tennessee; the State Board of Equalization; Governor Phil Bredesen in his capacity as a member and Chairman of the State Board of Equalization; Secretary of State Riley Darnell in his capacity as a member and Vice-Chairman of the State Board of Equalization; Dale Sims, State Treasurer, in his capacity as a member of the State Board of Equalization; Loren Chumley, the Commissioner of Revenue in her capacity as a member of the State Board of Equalization; Doyle Arp, the Assessor of Property of the State of Tennessee, in his capacity as a member of the State Board of Equalization; and J.M. Bailey, a member of the State Board of Equalization (the "Defendants").

In order to place this litigation in proper context, background information, both factual and legal, is in order. The Plaintiff is an interstate common carrier and transporter of refined petroleum commodities, such as heating oil, diesel fuel, kerosene, jet fuel, and gasoline, which supplies its products to a variety of destinations within a thirteen state area of service extending from Texas to New Jersey. Its system has eleven origination points and delivers to eighty-five locations along the pipeline. In order to install its pipelines, the Plaintiff has acquired easements from landowners and installed steel-coated pipes, typically located thirty or more inches under the surface of the soil. ANR Pipeline Co. v. Tenn. Bd. of Equalization, No. M2001-01098-COA-R12-CV, 2002 WL 31840689 (Tenn.Ct.App. Dec.19, 2002). The term "pipelines" includes, among other things,

263 S.W.3d 833

pipes and fittings, cathodic protection equipment, valve operating mechanisms, and bypass assemblies. Id.

Our state government, of course, is empowered by the Tennessee Constitution to tax all real, personal, or mixed property, including that owned and operated by companies like the Plaintiff. Tenn. Const. art. II, § 28. Our constitution divides property into three classes: real property, tangible personal property, and intangible personal property. Id. Real property is further divided into four subclassifications, which are assessed at different rates:

(a) Public Utility Property, to be assessed at fifty-five (55%) percent of its value;

(b) Industrial and Commercial Property, to be assessed at forty (40%) percent of its value;

(c) Residential Property, to be assessed at twenty-five (25%) percent of its value, provided that residential property containing two (2) or more rental units is hereby defined as industrial and commercial property; and

(d) Farm Property, to be assessed at twenty-five (25%) percent of its value.

Id. Tangible personal property has three subclassifications, which are also assessed at different rates:

(a) Public Utility Property, to be assessed at fifty-five (55%) percent of its value;

(b) Industrial and Commercial Property, to be assessed at thirty (30%) percent of its value; and

(c) All other Tangible Personal Property, to be assessed at five (5%) percent of its value; provided, however, that the Legislature shall exempt Seven Thousand Five Hundred ($7,500) Dollars worth of such Tangible Personal Property which shall cover personal household goods and furnishings, wearing apparel and other such tangible property in the hands of a taxpayer.

Id. The task of classifying intangible personal property has been expressly delegated to the General Assembly. Id. Our constitution requires both that the ratio of assessment to value of property should be "equal and uniform throughout the State," and that "the value and definition of property in each class or subclass to be ascertained in such manner as the Legislature shall direct." Id. Further, every taxing authority must "apply the same tax rate to all property within its jurisdiction." Id.

Local governments evaluate and assess most commercial and residential property in Tennessee. See Tenn. Const. art. II, § 29 ("The General Assembly shall have power to authorize the several counties and incorporated towns in this State, to impose taxes for County and Corporation purposes respectively, in such manner as shall be prescribed by law; and all property shall be taxed according to its value, upon the principles established in regard to State taxation."). Certain subcategories of property, however, are assessed by a centralized state agency—the Office of State Assessed Properties ("OSAP"). Tenn.Code Ann. § 67-5-1301 (2006 & Supp.2007). Taxpayers may challenge OSAP's assessments by filing an appeal with the Tennessee State Board of Equalization (the "Board" or "Board of Equalization"), the final administrative authority for the assessment of all centrally-assessed utilities. Tenn.Code Ann. § 67-5-1328 (2006). Because the Plaintiff is a public utility, OSAP assesses the value of its properties.

Until 1997, OSAP assessed the operating property of all taxable public utilities at the same value (55%). Following the settlement of a lawsuit brought by several airlines and railroads to equalize taxes of locally-assessed property and centrally-assessed

263 S.W.3d 834

property, the Board of Equalization directed OSAP to reduce the assessment value of personal property owned by centrally-assessed taxpayers.1 This order was filed on September 30, 1997. Shortly after this change in the tax law, the Plaintiff sought to classify its "operating pipeline" as personal property and, thereby, reduce its tax liability pursuant to the September 30 order. OSAP, however, recommended to the Board of Equalization that pipelines should be classified as real property. The Board consolidated the Plaintiff's application for relief with two similar cases. After an administrative law judge agreed with OSAP's recommendation, the Board declined to reclassify the pipeline as personal property. See Tenn.Code Ann. § 4-5-322(b)(1)(B)(iii); Tenn. R.App. P 12(h). On direct appeal, however, our Court of Appeals reversed, concluding that the statutory definitions and common law rules applicable to the trade fixtures warranted classification as personal property. ANR Pipeline Co., 2002 WL 31840689 at *2-4 (citing Tenn.Code Ann. § 67-5-501(9), (12)). This Court denied the application for permission to appeal. In consequence, the Plaintiffs were entitled to a lower assessed value for tax purposes.

On May 18, 2004, the General Assembly, by the enactment of chapter 719 of the 2004 Public Acts, amended Tennessee Code Annotated section 67-5-501, modifying the definition of real property to include

[m]ains, pipes, pipelines and tanks permitted or authorized to be built, laid or placed in, upon, or under any public or private street or place for conducting steam, heat, water, oil, electricity or any property, substance or product capable of transportation or conveyance therein or that is protected thereby, excluding propane tanks for residential use and above ground storage tanks that can be moved without disassembly and are not affixed to the land[.]

Tenn.Code Ann. § 67-5-501(9)(B)(iii). The passage of chapter 719 required, on a prospective basis, that the Plaintiff's pipeline be subjected to the higher real property assessment.

The Plaintiff challenged the propriety of the higher assessment by filing an exception. See Tenn.Code Ann. § 67-5-1327(b)-(c) (2005). On September 7, 2004, Tom Fleming, Assistant to the Comptroller for Assessments, sent the Plaintiffs a letter, which stated as follows:

The exception filed on behalf of [Colonial] raised issues regarding equalization and classification. In accordance with the statement read at the hearing on August 18, 2004, equalization is a function of the State Board of Equalization. The issue of classification is a matter of pending litigation.

Any further request for equalization must be filed with the State Board of Equalization (IN WRITING NO LATER

263 S.W.3d 835

THAN SEPTEMBER 27, 2004) to the attention of [Kelsie Jones, Executive Secretary].

Later, Fleming...

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