Maryland v. Louisiana

• Decision Date: 26 May 1981
• Docket Number: No. 83,O,83
• Citation: 101 S.Ct. 2114,451 U.S. 725,68 L.Ed.2d 576
• Parties: State of MARYLAND et al., Plaintiffs, v. State of LOUISIANA. rig
• Court: U.S. Supreme Court

451 U.S. 725

101 S.Ct. 2114

68 L.Ed.2d 576

State of MARYLAND et al., Plaintiffs,

v State of LOUISIANA.

No. 83, Orig.

Argued Jan. 19, 1981.

Decided May 26, 1981.

Syllabus

In this original action, several States, joined by the United States, the Federal Energy Regulatory Commission (FERC), and a number of pipeline companies, challenge the constitutionality of Louisiana's tax on the "first-use" of any natural gas brought into Louisiana which was not previously subjected to taxation by another State or the United States. The primary effect of the tax, which is imposed on pipeline companies, is on gas produced in the federal Outer Continental Shelf (OCS)and then piped to processing plants in Louisiana and, for the most part, eventually sold to out-of-state consumers. The first-use tax statute (Act), as well as provisions of other Louisiana statutes, provides a number of exemptions from and credits for the tax whereby Louisiana consumers of OCS gas for the most part are not burdened by the tax, but it uniformly applies to gas moving out of the State. Section 47:1303C of the Act declares that "the tax shall be deemed a cost associated with uses made by the owner in preparation of marketing of the natural gas," and prohibits any attempt to allocate the cost of the tax to any party except the ultimate consumer. A Special Master filed reports, including one recommending that Louisiana's motion to dismiss on jurisdictional grounds be denied, and that the plaintiff States' motion for judgment on the pleadings be denied and further evidentiary hearings be conducted. Exceptions were filed to the reports.

Held:

1. Louisiana's exceptions to the Special Master's recommendation that the motion to dismiss be denied are rejected. Pp. 735-745.

(a) Louisiana's First-Use Tax, while imposed on the pipelines, is passed on to the ultimate consumer. Thus the plaintiff States, as major purchasers of natural gas whose cost has increased as a direct result of imposition of the tax, are directly affected in a "substantial and real" way so as to justify the exercise of this Court's original jurisdiction under Art. III, § 2, cl. 2, of the Constitution, which provides for such jurisdiction over cases in which a "State shall be a Party," and 28 U.S.C. § 1251(a) (1976 ed., Supp. III), which provides that this Court shall have "original and exclusive jurisdiction of all controversies between two or more States." Jurisdiction is also supported by the plaintiff States' interests as parens patriae, acting to protect their citizens from substantial economic injury presented by imposition of the First-Use Tax. Pennsylvania v. West Virginia, 262 U.S. 553. Pp. 735-739.

(b) This case is an appropriate one for the exercise of this Court's exclusive jurisdiction under § 1251(a), even though state-court actions are pending in Louisiana in which the constitutional issues raised here are presented. Neither the plaintiff States, the United States, nor the FERC is a named party in any of the state actions, and they have not sought to intervene therein. Louisiana's tax, affecting millions of consumers in over 30 States implicates serious and important concerns of federalism fully in accord with the purposes and reach of this Court's original jurisdiction. The exercise of original jurisdiction is also justified because the tax affects the United States' interests in the administration of the OCS area and the case is therefore an appropriate one for the exercise of this Court's nonexclusive original jurisdiction, under 28 U.S.C. § 1251(b)(2) (1976 ed., Supp. III), of suits brought by the United States against a State. Arizona v. New Mexico, 425 U.S. 794, 96 S.Ct. 1845, 48 L.Ed.2d 376, distinguished. Pp. 739-745.

2. Plaintiffs' exceptions to the Special Master's recommendation that judgment on the pleadings be denied pending further evidentiary hearings, are sustained. Pp. 746-760.

(a) Section 47:1303C of the Louisiana Act violates the Supremacy Clause. Under the Natural Gas Act, determining pipeline and producer costs is the task of the FERC in the first instance, subject to judicial review. In exercising its authority to regulate the determination of the proper allocation of costs associated with the interstate sale of natural gas to consumers, the FERC normally allocates part of the processing costs between marketable hydrocarbons extracted in the course of processing and the "dried" gas, insisting that the owners of the hydrocarbons bear a fair share of the expense associated with processing rather than passing all of the costs on to the gas consumers. However, § 47:1303C provides that the amount of the Louisiana tax is a cost associated with uses made by the owner in preparation of marketing the natural gas and forecloses the owner from seeking reimbursement for payment of the tax from any third party other than a purchaser of the gas, even though the third party may be the owner of marketable hydrocarbons extracted from processing. Thus the Louisiana statute is inconsistent with the federal scheme and must give way. Cf. Northern Natural Gas Co. v. State Corporation Comm'n of Kansas, 372 U.S. 84, 83 S.Ct. 646, 9 L.Ed.2d 601. Pp. 746-752.

(b) The First-Use Tax is unconstitutional under the Commerce Clause. The flow of gas from OCS wells, through processing plants in Louisiana, and through interstate pipelines to the ultimate consumers in over 30 States, constitutes interstate commerce and, even though "interrupted" by certain events in Louisiana, is a continual flow of gas in interstate commerce. The tax impermissibly discriminates against interstate commerce in favor of local interests as the necessary result of various tax credits and exclusions provided in the Act and other Louisiana statutes whereby Louisiana consumers of OCS gas are substantially protected against the impact of the tax, whereas OCS gas moving out of the State is burdened with the tax. Nor can the tax be justified as a "compensatory" tax, compensating for the effect of the State's severance tax on local production of natural gas, since Louisiana has no sovereign interest in being compensated for the severance of resources from the federally owned OCS land. Pp. 753-760.

Exceptions to Special Master's report sustained in part and overruled in part.

Stephen H. Sachs, Baltimore, Md., for plaintiff States.

Stuart A. Smith, Washington, D.C., for United States.

Frank J. Peragine, New Orleans, La., for intervenor Pipeline Companies.

Eugene Gressman, Washington, D.C. and Robert G. Pugh, Shreveport, La., for defendant.

Justice WHITE delivered the opinion of the Court.

In this original action, several States, joined by the United States and a number of pipeline companies, challenge the constitutionality of Louisiana's "First-Use Tax" imposed on certain uses of natural gas brought into Louisiana, principally from the Outer Continental Shelf (OCS), as violative of the Supremacy Clause and the Commerce Clause of the United States Constitution.

I

The lands beneath the Gulf of Mexico have large reserves of oil and natural gas. Initially, these reserves could not be developed due to technological difficulties associated with off-shore drilling. In 1938, the first drilling rig was constructed off the coast of Louisiana, and with the advent of new tech- nologies, offshore drilling has become commonplace.¹ Exploration and development of the OCS in the Gulf of Mexico have become large industries providing a substantial percentage of the natural gas used in this country.² Most of the gas being extracted from the lands underlying the Gulf is piped to refining plants located in coastal portions of Louisiana where the gas is "dried"—the liquefiable hydrocarbons gathered and removed—on its way to ultimate distribution to consumers in over 30 States. It is estimated that 98% of the OCS gas processed in Louisiana is eventually sold to out-of-state consumers with the 2% remainder consumed within Louisiana.³ The contractual arrangements between a producer of gas and the pipeline companies vary. Most often, the producer sells the gas to the pipeline companies at the wellhead, although the producer may retain an interest in any extractable components. Some producers, however, retain full ownership rights and simply pay a flat fee for the use of the pipeline companies' facilities.⁴

The ownership and control of these large reserves of natural gas have been much disputed. In United States v. Louisiana, 339 U.S. 699, 70 S.Ct. 914, 94 L.Ed. 1216 (1950), the Court applied the principle of its holding in United States v. California, 332 U.S. 19, 67 S.Ct. 1658, 91 L.Ed. 1889 (1947)—that the United States possesses paramount rights to lands beneath the Pacific Ocean seaward of California's low-water mark—to the offshore areas adjacent to Louisiana. In 1953, Congress passed the Submerged Lands Act, 43 U.S.C. §§ 1301-1315, ceding any federal interest in the lands within three miles of the coast, while confirming the Federal Government's interest in the area seaward of the 3-mile limit.⁵ See United States v. Louisiana, 363 U.S. 1, 80 S.Ct. 961, 4 L.Ed.2d 1025 (1960); United States v. Maine, 420 U.S. 515, 524-526, 95 S.Ct. 1155, 1160-1161, 43 L.Ed.2d 363 (1975). In the same year, Congress passed the Outer Continental Shelf Lands Act, 43 U.S.C. §§ 1331-1343 (OCS Act), which declared that the "subsoil and seabed of the outer Continental Shelf appertain to the United States and are subject to its jurisdiction, control, and power of disposition. . . ." § 1332. The OCS Act also established procedures for federal leasing of OCS land to develop mineral resources. While the passage of these Acts established the respective legal interests of the parties, there has been extensive litigation to establish the legal boundaries of the federal OCS domain. See generally United States v. Louisiana, 446 U.S. 253, 254-260, 100 S.Ct. 1618, 1620-1623, 64 L.Ed.2d 196 (1980) (detailing the history of the "long-continuing and...