Enron Corp. v. Spring Independent School Dist., 94-1329

CourtSupreme Court of Texas
Citation922 S.W.2d 931
Docket NumberNo. 94-1329,94-1329
Parties39 Tex. Sup. Ct. J. 600 ENRON CORP., Enron Gas Marketing, Inc., Panhandle Gas Company and Houston Pipe Line Company, Petitioners, v. SPRING INDEPENDENT SCHOOL DISTRICT, Respondent.
Decision Date10 May 1996

Berry D. Bowen, Charles E. Cheek, Houston, Mark G. Yudof, Austin, for petitioners.

Robert Mott, Michael J. Darlow, Joseph T. Longoria, Houston, for respondent.

OWEN, Justice, delivered the opinion for a unanimous Court.

Spring Independent School District challenges the constitutionality of a Tax Code provision that allows the market value of inventory to be appraised as of September 1 of the preceding tax year or January 1 of the applicable tax year at the election of the taxpayer. The trial court upheld the statute, but the court of appeals reversed, finding the statute constitutionally infirm on several grounds. 889 S.W.2d 562. We reverse the judgment of the court of appeals.


The property at issue is natural gas stored in the Bammel Reservoir. The Enron petitioners and others periodically inject natural gas into this salt dome storage facility where it is held for ultimate sale to consumers. There is no dispute that this gas is "inventory" within the meaning of section 23.12(f) of the Tax Code, which provides:

(f) The owner of an inventory may elect to have the inventory appraised at its market value as of September 1 of the year preceding the tax year to which the appraisal applies by filing an application with the chief appraiser requesting that the inventory be appraised as of September 1.

Acts 1989, 71st Leg., R.S., ch. 796, § 16, 1989 Tex.Gen.Laws 3591, 3596 (amended 1993 and 1995) (current version at TEX.TAX CODE § 23.12(f)). 1 The dispute is when this gas may be valued for ad valorem tax purposes.

Each of the petitioners is a subsidiary or indirect subsidiary of the Enron Corporation. We consider the petitioners and their respective inventories collectively for purposes of this discussion. As of September 1, 1989, Enron entities owned approximately 85 billion cubic feet of natural gas in the Bammel Reservoir. The market price of this gas according to Spring Independent School District was $1.57 per thousand cubic feet on that date. By January 1, 1990, the volume of gas Enron had in storage in this facility had increased to approximately 88 billion cubic feet, and SISD offered evidence that the market price of the gas had risen to $1.765 per thousand cubic feet. The Enron companies had elected to have their gas appraised as of September 1 under section 23.12(f). 2 According to SISD, this resulted in a loss of tax revenue of just under $15 million.

SISD filed an administrative challenge to the tax rolls pursuant to section 41.04 of the Texas Tax Code. The Harris County Appraisal District denied relief. After exhausting administrative remedies, SISD brought suit in district court against the Enron companies and others. At the time of trial, the parties remaining were SISD and the Enron entities. SISD contended that section 23.12(f) and (g) 3 violate section 1(a) of article VIII of the Texas Constitution which requires taxation to be equal and uniform. SISD argued that the statute impermissibly classifies inventory separately from other property, resulting in unequal treatment of inventory and noninventory owners, and that it results in disparate treatment among inventory owners. SISD further alleged that the preferential treatment accorded to inventory owners violates the equal protection clause of the Fourteenth Amendment to the United States Constitution. Finally, SISD contended that the statute operates to exempt property from taxation, in violation of section 2 of article VIII of the Texas Constitution. The trial court rendered a judgment upholding the constitutionality of the statute.

SISD appealed, urging only its contentions under the Texas Constitution. The court of appeals reversed the trial court's judgment on several grounds. The court concluded that the statute violates the requirement in section 1(a) of article VIII of the Constitution that taxes be equal and uniform because the statute gives an unequal and non-uniform advantage to inventory owners vis-a-vis other property owners. 889 S.W.2d at 566. The court of appeals was of the view that the Legislature has the power to make classifications for purposes of ad valorem taxation, but that there is no rational basis for classifying inventory apart from other property. Id. The court also concluded that section 1(a) of article VIII was violated because the statute resulted in unconstitutional inequality and non-uniformity within the class of inventory owners. Id. at 566-67. The court of appeals further held that the use of two valuation dates violates the constitutional principle of taxation based on market value in section 1 of article VIII of our Constitution because there are two values for the same property. Id. at 568. Finally, the court of appeals concluded that the statute results in an unconstitutional exemption of property from taxation in violation section 2 of article VIII. Id.

The Enron petitioners seek review in this Court.


In determining the constitutionality of a statute, we begin with a presumption that it is constitutional. HL Farm Corp. v. Self, 877 S.W.2d 288, 290 (Tex.1994); Spring Branch Indep. Sch. Dist. v. Stamos, 695 S.W.2d 556, 558 (Tex.1985). Courts presume that the Legislature " 'understands and correctly appreciates the needs of its own people, that its laws are directed to problems made manifest by experience, and that its discriminations are based upon adequate grounds.' " Smith v. Davis, 426 S.W.2d 827, 831 (Tex.1968) (quoting Texas Nat'l Guard Armory Bd. v. McCraw, 126 S.W.2d 627, 634 (Tex.1939)). The wisdom or expediency of a law is for the Legislature to determine, not this Court. Smith, 426 S.W.2d at 831. Furthermore, the party challenging the constitutionality of a statute bears the burden of demonstrating that the enactment fails to meet constitutional requirements. Stamos, 695 S.W.2d at 558.

There are two provisions of our state Constitution at issue in this case, section 1 and section 2 of article VIII. We first consider the parties' contentions arising under section 1.

We have been called upon to apply section 1 in a number of contexts, but the question of the constitutionality of a statute of this nature is one of first impression. The starting point of our analysis is the requirement in section 1 that taxation shall be equal and uniform, and that ad valorem taxes on real and personal property must be in proportion to the value of the property:

§ 1. Equality and uniformity; tax in proportion to value; income tax; exemption of certain tangible personal property from ad valorem taxation

Sec. 1. (a) Taxation shall be equal and uniform.

(b) All real property and tangible personal property in this State, unless exempt as required or permitted by this Constitution, whether owned by natural persons or corporations, other than municipal, shall be taxed in proportion to its value, which shall be ascertained as may be provided by law.

TEX. CONST. art. VIII, § 1(a) and (b).

We have held that ad valorem tax rates must be uniform for all types of property in accordance with the directive in section 1 of article VIII. We found a scheme of taxation unconstitutional where intangible assets were taxed on 100% of their value while other property in the county was on the tax rolls at 66-2/3% of its value. Lively v. Missouri, K. & T. Ry., 120 S.W. 852, 856 (Tex.1909). We said in that case that taxation cannot be in the same proportion to the value of the property unless the value of all property is ascertained by the same standard. Id. See also City of Arlington v. Cannon, 271 S.W.2d 414, 417 (Tex.1954) (unlawful for board of equalization to assess some classes of property at a greater percentage than others). See also City of Houston v. Baker, 178 S.W. 820, 823 (Tex.Civ.App.--Galveston 1915, writ ref'd) (tax plan unconstitutional where land taxed at 70%, improvements at 25%, merchandise at 50%, and negotiable instruments and money exempted).

We have further held that section 1 of article VIII of our Constitution requires "value" for ad valorem tax purposes to be based on the reasonable market value of the property. Whelan v. State, 155 Tex. 14, 282 S.W.2d 378, 380 (1955). In Whelan, the taxing authority assessed non-producing oil and gas leases at a flat rate of $1.00 per acre, irrespective of market value, and assessed cattle at a flat rate of approximately $15 per head, again without regard to market value. We held this was clearly contrary to the constraints placed on the taxing authority by section 1. Id. See also State v. Whittenburg, 265 S.W.2d 569, 572 (Tex.1954) ("[o]ur courts have interpreted [section 1] to mean that assessed valuations shall be based on 'the reasonable cash market value' of property"); Atlantic Richfield Co. v. Warren Indep. Sch. Dist., 453 S.W.2d 190, 196 (Tex.Civ.App.--Beaumont 1970, writ ref'd n.r.e.) (tax plan arbitrary and illegal where one-fourth of all property on rolls not assessed at market value); Weatherly Indep. Sch. Dist. v. Hughes, 41 S.W.2d 445, 445 (Tex.Civ.App.--Amarillo 1931, no writ) (valuation plan in which assessed value not based on market value is discriminatory and violates uniformity requirement).

However, we have long recognized that exact uniformity and equality is unattainable. Whittenburg, 265 S.W.2d at 572. Other jurisdictions with similar constitutional provisions have also recognized this principle. See, e.g., Xerox Corp. v. Ada County Assessor, 101 Idaho 138, 609 P.2d 1129, 1133 (1980); State ex rel. Frizzell v. Dwyer, 204 Kan. 3, 460 P.2d 507, 511 (1969). See also 84 C.J.S. Taxation § 22; 1 COOLEY, TAXATION § 259. A reasonable discrepancy between the actual value of the property and the value at which it is assessed for taxes is permissible to allow for a difference in judgment....

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