Cotton Petroleum v. State
| Decision Date | 17 September 1987 |
| Docket Number | No. 9268,9268 |
| Citation | 1987 NMCA 121,106 N.M. 517,745 P.2d 1170 |
| Parties | COTTON PETROLEUM, et al., Plaintiffs-Appellants, v. STATE of New Mexico, et al., Defendants-Appellees. |
| Court | Court of Appeals of New Mexico |
This appeal presents the question of whether certain oil and gas taxes imposed by the state against a non-Indian producer whose operations are located on an Indian Reservation constitute an impermissible burden on interstate commerce. We hold they do not and affirm the district court.
Cotton Petroleum and its sister corporation, United Crude Company (Cotton), produce and market oil and gas on approximately 15,000 acres of tribal trust land located on the Jicarilla Indian Reservation (Reservation) under five oil and gas leases issued by the Jicarilla Apache Tribe (Tribe). Cotton pays a royalty to the Tribe of 12 1/2% plus rent of $125 per acre, and an overriding royalty of an additional 12 1/2% to the assigners of the leases. In addition, Cotton pays to the Tribe two oil and gas related taxes that equal approximately 6% of its production.
Cotton also pays to the state five oil and gas production taxes equal to approximately 8% of its production.1 It challenges only the two most substantial taxes: the severance tax, Sections 7-29-1 to -22; and the oil and gas emergency school tax, Sections 7-31-1 to -25. Because of the overlapping tribal and state taxes, Cotton's overall oil and gas tax burden is approximately 14% of value compared to off-the-Reservation producers who pay only 8% of value in production taxes. Contending it should not have to pay both tribal and state oil and gas taxes, Cotton sought relief.
Cotton brought two actions in district court. The first sought a refund of taxes paid under protest. See Secs. 7-29-12 and 7-31-15 (). In addition to seeking a refund, Cotton also asked for declaratory and injunctive relief. The second, a mandamus action, sought refund for taxes "erroneously paid" from March 1981 to April 1982, a time when no protests were filed. See Secs. 7-29-11 and 7-31-14. These actions were consolidated and the district court granted the Tribe's motion to become an amicus curiae. After rendering a decision containing its findings of fact and conclusions of law, the district court entered a judgment denying Cotton the relief requested. From that judgment Cotton appeals. In addition to the primary issue framed at the outset, Cotton argues that mandamus is an appropriate remedy to obtain relief for taxes paid without protest. Because we uphold the constitutionality of the taxes paid, we do not reach that issue.
This appeal is unique in that the primary parties differ sharply as to the proper legal approach to apply. The state argues for the traditional preemption analysis under Indian law as applied in cases such as Ramah Navajo School Board, Inc. v. Bureau of Revenue, 458 U.S. 832, 102 S.Ct. 3394, 73 L.Ed.2d 1174 (1982), and White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 100 S.Ct. 2578, 65 L.Ed.2d 665 (1980). See also Crow Tribe of Indians v. Montana, 819 F.2d 895 (9th Cir.1987). In the alternative, the state contends the challenged taxes survive scrutiny under standard Commerce Clause tests announced in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977) and applied in Commonwealth Edison Co. v. Montana, 453 U.S. 609, 101 S.Ct. 2946, 69 L.Ed.2d 884 (1981).
While agreeing with the state that the preemption analysis should be applied, the Tribe argues the state taxes will not survive that analysis. The Tribe, in its amicus brief, urges us to examine the state taxes "in terms of federal preemption of state law or unlawful infringement by state law on the right of reservation Indians to make their own laws."
Cotton, on the other hand, contends that this case is not a preemption case because the economic impact on the Tribe is minimal and is not a primary consideration.2 Cotton urges this court to use preemption only as a backdrop to focus on the issue of multiple taxation. It asks us to adopt a new analysis to apply to non-Indian producers who enter into lease agreements with tribes for on-the-reservation operations.
No party disputes the Tribe's right to tax the mineral companies that do business on the Reservation. What Cotton challenges is the additional imposition of state taxes on such companies. In so challenging the taxes, Cotton contends that the traditional Commerce Clause analysis of Commonwealth should not apply. Rather than requiring the amount of tax to be fairly related to services provided by the state, Cotton contends that the amount of tax should equal the benefits conferred. Cotton asks us to apportion the state taxes in relation to services provided. Where there is no economic impact on the Tribe, but there are multiple taxes imposed by the Tribe and the state, Cotton urges us to strike the state taxes currently imposed as an impermissible burden on interstate commerce.
In its judgment, the district court focused on the preemption analysis and determined that, because there was no impact on the Tribe, Cotton could not be relieved of the payment of state taxes. The district court also concluded that there was no legal requirment that expenditures equal revenues collected. Cotton contends that the state can impose the severance tax and emergency school tax only when the state shows such taxes are required to support state services to the activity subject to state taxation. Because the Tribe imposes its own taxes, which are primary, Cotton views the state taxes as imposing an impermissible multiple taxation burden on it.
Cotton bases its contentions upon footnote 26 of Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 158-59, 102 S.Ct. 894, 912-13, 71 L.Ed.2d 21 (1982):
[W]hen the activity taxed by the Tribe occurs entirely on tribal lands, the multiple taxation issue would arise only if a State attempted to levy a tax on the same activity, which is more than the State's contact with the activity would justify. In such a circumstance, any challenge asserting that tribal and state taxes create a multiple burden on interstate commerce should be directed at the state tax, which, in the absence of congressional ratification, might be invalidated under the Commerce Clause.
Cotton claims the state's taxes are not justified in relation to the services provided to the Reservation by the state, and that the "focus of the 'particularized inquiry' [into federal, state and tribal interests] mandated by the United States Supreme Court is the balance or imbalance in state revenues generated off the Jicarilla Reservation when considered in light of State services and infrastructure provided the Reservation." Cotton provides extensive discussion and figures of the alleged disparity in taxes collected and benefits conferred. For example, Cotton points to evidence showing that for the tax years in question, 1981-1985, New Mexico provided services to Cotton's operations of only $89,384, while receiving in taxes for the same period $2,293,953. It also compares state services to the Reservation as a whole of $10,704,748 for years 1981-1985 with oil and gas revenues from all producers on the Reservation of $47,483,306. Thus, says Cotton, with a ratio of 5 to 1, New Mexico enjoys an "unlawful windfall." Cotton asserts that the state may "only impose its tax 'in return for the governmental functions it provides to those who must bear the burden of paying this tax.' " Ramah Navajo School Bd., Inc. v. Bureau of Revenue. Because the state has not provided many services, Cotton contends the taxes must fail.
Whether the state may tax a non-Indian oil and gas producer, in addition to taxes imposed by the Tribe has not been squarely decided by the United States Supreme Court. The footnote in Merrion, upon which Cotton relies, does not, as Cotton asserts, create a "Supreme Court mandate" or a "specific cause of action" to be used against the state. The footnote is dictum; indeed, the Court stated "no opinion on the possibility of such a challenge." Merrion v. Jicarilla Apache Tribe, 455 U.S. at 159 n. 26, 102 S.Ct. at 913 n. 26. The Court intimated only that a state tax "might" be invalidated under the Commerce Clause if the state failed to justify it.
Using Merrion, Cotton attempts to carve an exception to the traditional Commonwealth test. Cotton states that state severance taxes "are, as a matter of law, primary and hence not subject to a commerce clause claim;" likewise, tribal taxes are primary and hence not subject to a Commerce Clause claim. Moreover, it concedes that had its operations been off the Reservation, "Cotton could not challenge the New Mexico taxes under Commonwealth." Therefore, as we understand Cotton's argument, a traditional Commerce Clause analysis does not apply, and we must devise a new test comparing costs and benefits.
Cotton's position conflicts with established tax principles. There is no requirement that benefits conferred must equal taxes extracted. Ramah Navajo School Bd., Inc. v. Bureau of Revenue; Commonwealth Edison Co. v. Montana. Where taxes overlap, as here with both tribal and state taxes imposed on the same activity, the proper test, we believe, is the one set out in Commonwealth....
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