In the Matter of Assessment of Personal Property Taxes against Missouri Gas Energy, 2008 OK 94 (Okla. 10/21/2008)

• Decision Date: 21 October 2008
• Docket Number: No. 103355,103355
• Citation: 2008 OK 94
• Parties: IN THE MATTER OF THE ASSESSMENT OF PERSONAL PROPERTY TAXES AGAINST MISSOURI GAS ENERGY, a DIVISION OF SOUTHERN UNION COMPANY, FOR TAX YEARS 1998, 1999, AND 2000.
• Court: Oklahoma Supreme Court

Page 1

2008 OK 94

IN THE MATTER OF THE ASSESSMENT OF PERSONAL PROPERTY TAXES AGAINST MISSOURI GAS ENERGY, a DIVISION OF SOUTHERN UNION COMPANY, FOR TAX YEARS 1998, 1999, AND 2000.

No. 103355

Supreme Court of Oklahoma

October 21, 2008.

ON APPEAL FROM THE DISTRICT COURT, WOODS COUNTY

¶0 The Woods County Assessor issued an omitted property tax assessment against Missouri Gas Energy, a local gas distribution company headquartered in Kansas City, Missouri, for Tax Years 1998, 1999, and 2000. The property assessed was natural gas held in an underground storage facility located in Woods County. Assessor rejected Missouri Gas Energy's informal protest of the tax and the Woods County Board of Equalization upheld Assessor's decision. Missouri Gas Energy then appealed to the Woods County District Court, Ray Dean Linder, trial judge, challenging the validity of the tax on state- and federal-law grounds. The trial court gave judgment to Missouri Gas Energy. Assessor brought this appeal, which stands retained for this court's disposition.

THE TRIAL COURT'S JUDGMENT IS REVERSED

Mart Tisdal and Luke Adams, Tisdal Law Firm, Clinton, OK and Hollis Thorp, Woods County Assistant District Attorney, Alva, OK, for Appellant.

William K. Elias and Linda Jo Blan-Byford, Elias, Books, Brown & Nelson, P.C., Oklahoma City, OK, for Appellee.

Julie L. Miller, Craig A. Crimmins, and Shelley A. Shelby, Oklahoma State School Boards Association, Oklahoma City, OK, for Amici Curiae, Oklahoma State School Boards Association and Cooperative Council for Oklahoma School Administration.¹

OPALA, J.

¶1 The dispositive issues tendered on appeal are: (1) Did Assessor prove that the assessed property had a tax situs in Woods County? (2) Did Assessor prove that Missouri Gas Energy owned the assessed property? (3) Is the assessed natural gas tangible personal property for purposes of ad valorem taxation? (4) Does the challenged tax violate the Commerce Clause of the United States Constitution? and (5) Does the challenged tax violate the Freeport Exemption of the Oklahoma Constitution? We answer the first three questions in the affirmative and the last two questions in the negative.

I THE ANATOMY OF LITIGATION

¶2 Missouri Gas Energy ("MGE" or "the Company") is a local gas distribution company whose principal place of business is in Kansas City, Missouri. It is regulated by the Missouri Public Service Commission. MGE purchases natural gas from suppliers in Texas, Kansas and Oklahoma and contracts with Panhandle Eastern Pipeline Company ("Panhandle"), an interstate common carrier of natural gas, for transportation of the gas to the state of Missouri. There the gas is sold to MGE's customers. MGE sells no gas in Oklahoma and maintains no facilities or employees in this state. In the process of being transported, some natural gas is removed from the pipeline and placed in storage facilities belonging to Panhandle. One such storage facility, North Hopeton, is located in Woods County.

¶3 Assessor learned in 2000 that Panhandle was storing natural gas at North Hopeton at the behest of shippers using Panhandle's pipeline for transportation of their gas to market. Assessor concluded that the gas being stored at North Hopeton was subject to ad valorem taxation in Woods County. She requested from Panhandle a list of shippers who had gas stored at North Hopeton as of 1 January 1998, 1999, and 2000 and the amount of gas held in storage for each. Panhandle did not generate this information in the ordinary course of business, but in response to Assessor's request, assembled a list of its shippers and allocated to each a portion of the gas stored at North Hopeton. Based on this information, Assessor levied the ad valorem tax at issue in this case.

¶4 MGE protested the assessment in an informal proceeding before Assessor. Assessor rejected the protest and MGE appealed to the Woods County Board of Equalization, which upheld Assessor's decision. MGE filed a petition in the Woods County District Court on 26 June 2002, initiating an appeal from the Board's decision by trial de novo pursuant to the provisions of 68 O.S. 2001 §2880.1.² MGE's appeal challenged the assessment on both state- and federal-law grounds.

¶5 MGE moved in the district court for summary judgment, which was denied. The trial court then bifurcated the proceedings for sequential bench trials. In the first trial, held on 10 August 2004, the trial judge heard testimony on whether the challenged assessments violated the Freeport Exemption of the Oklahoma Constitution, Article 10, §6A.³ After ruling that the Freeport Exemption was inapplicable, the trial court on 27 February 2006 heard testimony on the remaining state- and federal-law issues. On 19 April 2006, the trial court pronounced judgment in favor of MGE and ordered Woods County officials to refund to the Company any taxes paid under protest together with all accrued interest. Assessor appealed. The cause stands retained for this court's disposition. We now reverse the trial court's judgment.

II THE TRANSPORTATION AND STORAGE OF NATURAL GAS

¶6 Panhandle operates an interstate natural gas pipeline system, which is regulated by the Federal Energy Regulatory Commission ("FERC"). The Panhandle pipeline system begins in what is called the Field Zone⁴ in Texas and Oklahoma and consists of pipeline branches or legs connected at metered receipt points with the sources of gas supply located in those states. The branch traversing Texas has no physical connection with the branch traversing Oklahoma until they converge into a single pipeline at a compressor station located in Haven, Kansas.

¶7 Shippers purchase gas from suppliers in the Field Zone and contract with Panhandle for its transportation to market. Suppliers deliver the purchased natural gas into one of the branches or legs of the system at one of the metered receipt points. Multiple shippers use the pipeline simultaneously and all of their gas is commingled. Neither Panhandle nor the shippers attempt to trace gas belonging to individual shippers. Tracing of individual molecules of natural gas is physically impossible from the moment the gas enters the pipeline at the supplier's facility. A series of compressor stations along the pipeline create a pressure drop which causes the gas to physically move, eventually arriving at a metered delivery points in the Market Zone⁵ from which it is sold to consumers. Gas originating in Oklahoma travels through Woods County to get to the Haven convergence point.

¶8 In addition to transporting gas directly from the Field Zone to the Market Zone, Panhandle offers a storage service to its shippers, the terms of which are set out in storage contracts. Panhandle has two natural gas storage facilities in the Field Zone: the Borchers Storage Facility located in Kansas on the branch of the pipeline originating in Texas and the North Hopeton Storage Facility located in Woods County, Oklahoma, on the Oklahoma branch of the pipeline.

¶9 The transportation and storage of natural gas is subject to certain physical laws that govern its movement. Movement is caused by displacement of gas in the system, not by the actual movement of specific molecules from points of receipt to points of delivery. Gas in a pipeline moves in only one direction: from an area of higher pressure to one of lower pressure. In geographical terms, gas in Panhandle's pipeline moves only from the Field Zone toward the Market Zone and never in the opposite direction. Molecules of gas that have passed either of the Field Zone storage facilities cannot physically turn around and end up in storage, nor can gas molecules purchased from a supplier on one branch of the pipeline system end up in storage at the storage facility on the other branch.

¶10 The storage facilities operate on an injection-withdrawal cycle that matches the weather-related demand for natural gas. From April through November, when demand for natural gas is relatively low, gas is injected into the storage facilities. During the winter months, from November through March, gas is withdrawn. Just as in the pipeline itself, all gas in storage is commingled and incapable of being traced to a particular shipper.

¶11 Natural gas transactions are executed by means of a computerized scheduling system in which "nominations" are made. A supplier posts on the scheduling system that it will deliver a volume of gas for a shipper's account and the shipper posts on the scheduling system a confirmation that it will receive that quantity of gas from that supplier. At the same time, the shipper uses the scheduling system to arrange for transportation of the gas under a transportation contract and designates where that gas will be delivered. In commensurate, simultaneous transactions, Panhandle can receive into its pipeline the volume of gas purchased by a shipper and deliver a thermally equivalent volume of gas to the same shipper at a delivery point hundreds of miles away. The molecules of gas delivered by the pipeline to the shipper at the delivery point are clearly not the same molecules of gas that the supplier put into the system at the shipper's request.

¶12 Shippers also use the scheduling system to nominate gas into storage. In making storage nominations, shippers cannot specify which storage facility is to receive the gas nominated into storage. Although there is not always a direct correlation between nominations into storage and actual injections, the net effect of the process is that a volume of gas equivalent to that nominated is received into whichever storage facility Panhandle determines needs the injection based on a timely analysis of its system's needs. The molecules of gas that go into a storage facility upon a shipper's nomination are very unlikely to be the same molecules purchased by that shipper, but there is no way to know as neither the purchased nor the stored molecules are traceable. Operationally, the pipeline and...