Exxon Corporation v. Eagerton Exchange Oil and Gas Corporation v. Eagerton

Citation76 L.Ed.2d 497,103 S.Ct. 2296,462 U.S. 176
Decision Date08 June 1983
Docket NumberNos. 81-1020,81-1268,s. 81-1020
PartiesEXXON CORPORATION, et al., Appellants, v. Ralph EAGERTON, Jr., Commissioner of Revenue of Alabama, et al. EXCHANGE OIL AND GAS CORPORATION, et al., Appellants, v. Ralph P. EAGERTON, Jr., Commissioner of Revenue of the State of Alabama
CourtUnited States Supreme Court
Syllabus

An Alabama statute imposes a severance tax on oil and gas extracted from wells located in the State. In 1979, a statute (Act 79-434) was enacted which increased the tax, exempted royalty owners from the increase, and prohibited producers from passing on the increase to consumers. Appellant producers were parties to pre-existing contracts that provided for allocation of severance taxes among themselves, the royalty owners, and any nonworking interests. The contracts also required the purchasers to reimburse appellants for severance taxes paid. After paying the increase in the severance tax under protest, appellants and other producers filed suit in an Alabama state court, seeking a declaratory judgment that Act 79-434 was unconstitutional and a refund of the taxes paid. Concluding that both the royalty-owner exemption and the pass-through prohibition violated the Equal Protection Clause of the Fourteenth Amendment and the Contract Clause, and that the pass-through prohibition was also pre-empted by the Natural Gas Policy Act of 1978 (NGPA), the trial court held Act 79-434 invalid in its entirety and ordered appellee Alabama Commissioner of Revenue to refund the taxes. The Alabama Supreme Court reversed.

Held:

1. The pass-through prohibition of Act 79-434 was pre-empted by federal law insofar as it applied to sales of gas in interstate commerce, but not insofar as it applied to sales of gas in intrastate commerce. Pp. 180-187.

(a) The Natural Gas Act, which was enacted in 1938, was intended to occupy the field of wholesale sales of natural gas in interstate commerce. Alabama's pass-through prohibition trespassed upon the authority of the Federal Energy Regulatory Commission (FERC) under that Act to regulate the wholesale prices of natural gas sold in interstate commerce, for the prohibition bars gas producers from increasing their prices to pass on a particular expense—the increase in the severance tax—to their purchasers. Whether or not producers should be per- mitted to recover this expense from their purchasers is a matter within the sphere of FERC's regulatory authority. Pp. 184-186.

(b) Although the NGPA extended federal authority to control natural gas prices to the intrastate market, Congress also provided that this extension did not deprive the States of the power to establish a price ceiling for intrastate sales at a level lower than the federal ceiling. Since a State may establish a lower price ceiling, it may also impose a severance tax and forbid sellers to pass it through to their customers. Pp.186-187

2. The royalty-owner exemption of Act 79-434 does not violate the Contract Clause, since it did not nullify any contractual obligation of which appellants were the beneficiaries. The exemption provides only that the incidence of the severance tax increase shall not fall on royalty owners and nowhere states that producers may not shift the burden of the increase to royalty owners. Pp. 187-189.

3. Nor does the pass-through prohibition of Act 79-434 violate the Contract Clause. While the prohibition affected contractual obligations of which appellants were the beneficiaries, it does not constitute a "Law impairing the Obligations of Contracts" within the meaning of the Contract Clause. The prohibition imposed a generally applicable rule of conduct, the main effect of which was to shield consumers from the burden of the tax increase. Its effect on existing contracts permitting producers to pass the increase through to consumers was only incidental. Cf. Producers Transportation Co. v. Railroad Comm'n of California, 251 U.S. 228, 40 S.Ct. 131, 64 L.Ed. 239. Pp. 189-194.

4. Neither the pass-through prohibition nor the royalty-owner exemption of Act 79-434 violates the Equal Protection Clause. Both measures pass muster under the standard of rationality applied in considering equal protection challenges to statutes regulating economic and commercial matters. The pass-through prohibition plainly bore a rational relationship to the State's legitimate purpose of protecting consumers from excessive prices. Similarly, the Alabama Legislature could have reasonably determined that the royalty-owner exemption would encourage investment in oil or gas production. Pp. 195-196.

404 So.2d 1 (Ala.1981), affirmed in part, reversed in part, and remanded.

Rae M. Crowe, Mobile, Ala., for appellants in No. 81-1268.

C.B. Arendall, Jr., Mobile, Ala., for appellants in No. 81-1020.

John J. Breckenridge, Montgomery, Ala., for appellees in both cases.

Justice MARSHALL delivered the opinion of the Court.

This case concerns an Alabama statute which increased the severance tax on oil and gas extracted from Alabama wells, exempted royalty owners from the tax increase, and prohibited producers from passing on the increase to their purchasers. Appellants challenge the pass-through prohibition and the royalty-owner exemption under the Supremacy Clause, the Contract Clause, and the Equal Protection Clause.

I

Since 1945 Alabama has imposed a severance tax on oil and gas extracted from wells located in the State. Code of Ala. § 40-20-1 et seq. The tax "is levied upon the producers of such il or gas in the proportion of their ownership at the time of severance, but . . . shall be paid by the person in charge of the production operations." § 40-20-3(a).1 The person in charge of production operations is "authorized, empowered and required to deduct from any amount due to producers of such production at the time of severance the proportionate amount of the tax herein levied before making payments to such producers." § 40-20-3(a). The statute defines a "producer" as "[a]ny person engaging or continuing in the business of oil or gas production," including

"the owning, controlling, managing, or leasing of any oil or gas property or oil or gas well, and producing in any manner any oil or gas . . . and . . . receiving money or other valuable consideration as royalty or rental for oil or gas produced. . . ." § 40-20-1(8).

In 1979 the Alabama Legislature enacted Act 79-434, which increased the severance tax from 4% to 6% of the gross value of the oil and gas at the point of production. Whereas the severance tax had previously fallen on royalty owners in proportion to their interests in the oil or gas produced, the amendment specifically exempted royalty owners from the tax increase:

"Any person who is a royalty owner shall be exempt from the payment of any increase in taxes herein levied and shall not be liable therefor." Acts 1979, No. 79-434, p. 687, § 1, Ala.Code § 40-20-2(d), as amended.

The amendment also prohibited producers from passing the tax increase through to consumers:

"The privilege tax herein levied shall be absorbed and paid by those persons engaged in the business of producing or severing oil or gas only, and the producer shall not pass on the costs of such tax payments, either directly or indirectly to the consumer; it being the express intent of this act that the tax herein levied shall be borne exclusively by the producer or severer of oil or gas." Acts 1979, No. 79-434, p. 687, § 1.

The amendment became effective on September 1, 1979. The pass-through prohibition was repealed on May 28, 1980. Acts 1980, No. 80-708, p. 1438.

Appellants in both 81-1020 and 81-1268 have working interests in producing oil and gas wells located in Alabama.2 They drill and operate the wells and are responsible for selling the oil and gas extracted. Appellants are obli- gated to pay the landowners a percentage of the sale proceeds as royalties, the percentage depending upon the provisions of the applicable lease. Within any given production unit, there may be tracts of land which the owners of the land have leased to nonworking interests, who are also entitled to a share of the sale proceeds. Appellants were parties to contracts providing for the allocation of severance taxes among themselves, the royalty owners, and any non-working interests in proportion to each party's share of the sale proceeds. Appellants were also parties to sale contracts that required the purchasers to reimburse them for any and all severance taxes on the oil or gas sold.

After paying the 2% increase in the severance tax under protest, appellants and eight other oil and gas producers filed suit in the Circuit Court of Montgomery County, Alabama, seeking a declaratory judgment that Act 79-434 was unconstitutional and a refund of the taxes paid under protest. The Circuit Court ruled in favor of appellants, concluding that both the royalty-owner exemption and the pass-through prohibition violate the Equal Protection Clause and the Contract Clause, and that the pass-through prohibition is also preempted by the Natural Gas Policy Act of 1978 (NGPA), 15 U.S.C. § 3301 et seq. (Supp. IV). Although Act 79-434 contained a severability clause, the court held the entire Act invalid and ordered appellee, the Commissioner of Revenue of the state of Alabama, to refund the taxes paid under protest. The Supreme Court of Alabama reversed, holding Act 79-434 valid in its entirety. 404 So.2d 1 (Ala.1981).

Appellants appealed to this Court under 28 U.S.C. § 1257(2). We noted probable jurisdiction. 456 U.S. 970, 102 S.Ct. 2231, 72 L.Ed.2d 843 (1982). We now affirm in part, reverse in part, and remand for further proceedings consistent with this opinion.

II

We deal first with appellants' contention that the application of the pass-through prohibition to gas was preempted by federal law.3 The applicable principles of preemption were recently summarized in Pacific Gas & Electric Co. v. State Energy Resources Conservation &...

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