Mississippi River Transmission v. Weiss

• Decision Date: 07 February 2002
• Docket Number: No. 01-527.,01-527.
• Citation: Mississippi River Transmission v. Weiss, 65 S.W.3d 867, 347 Ark. 543 (Ark. 2002)
• Parties: MISSISSIPPI RIVER TRANSMISSION CORPORATION v. Richard A. WEISS, Director of the Department of Finance and Administration of the State of Arkansas.
• Court: Arkansas Supreme Court

65 S.W.3d 867

347 Ark. 543

MISSISSIPPI RIVER TRANSMISSION CORPORATION v. Richard A. WEISS, Director of the Department of Finance and Administration of the State of Arkansas.

No. 01-527.

Supreme Court of Arkansas.

February 7, 2002.

Horne, Hollingsworth & Parker, A Professional Association, by: Michael O. Parker, Little Rock, for appellant.

Michael J. Wehrle, Little Rock, for appellee.

ROBERT L. BROWN, Justice.

This is an illegal exaction case. The appellant is Mississippi River Transmission Corporation (MRT). The appellee is Richard A. Weiss, in his official capacity as the Director of the Arkansas Department of Finance and Administration (DFA). Both parties moved for summary judgment, and summary judgment was entered in favor of DFA. MRT appeals the trial court's grant of summary judgment to DFA on the issue of whether certain natural gas is taxable under the Arkansas use tax. MRT essentially raises two points on appeal: (1) whether an amendment to the statutory come-to-rest requirement is best left to the General Assembly; and (2) whether the come-to-rest requirement was complied with in this case. We agree with MRT on both points and reverse the order of summary judgment in favor of DFA. We further direct the trial court to enter summary judgment in favor of MRT.

The facts of this case are stipulated to by the parties. MRT is a natural gas pipeline company incorporated in Delaware with its principal place of business in St. Louis, Missouri. MRT owns and operates roughly 2,000 miles of natural gas pipeline and has four pipelines that pass through Arkansas, comprising approximately 300 miles of pipeline. Almost all of the gas transported by MRT's lines originates outside of Arkansas.

At eight points along MRT's Arkansas pipelines, compressor stations provide the force necessary to move the natural gas through the pipelines. These compressor stations consist of combustion engines, called compressor units, with various piping to facilitate the movement of the natural gas in and around the compressor units. The compressor units are fueled by natural gas diverted from the pipeline into the units. This gas is in constant motion until it reaches the combustion chamber of the compressor unit, where it is immediately ignited and fuels the engine. The compressor gas residue is discharged into the air as exhaust. The compressor unit pressurizes the natural gas not used to fuel the units and then sends the pressurized gas back into the pipeline.

Prior to November 1, 1993, MRT owned almost all of the natural gas that ran through its pipeline. However, pursuant to Federal Energy Regulatory Commission regulations, after November 1, 1993, MRT was prohibited from transporting its own natural gas through its pipelines. Instead, it contracted with its customers to provide gas-shipment services though its pipelines. These customers, in turn, provided the compressor gas in kind, the cost of which was deducted from their shipping contracts.

When MRT owned the natural gas, DFA taxed the gas used in the compressor units as a gross receipts or sales tax. This sales tax was predicated on MRT's ownership of the natural gas. See Ark.Code Ann. § 26-52-103(a)(4)(B)(i) (Supp.2001). This court upheld the levy of a comparable sales tax on compressor gas in Pledger v. Arkla, Inc., 309 Ark. 10, 827 S.W.2d 126 (1992), and concluded that the tax was not a burden on interstate commerce. After MRT ceased owning the gas, DFA decided it could no longer tax the gas used in the compressor units as a sales tax. DFA then began taxing the owners of the gas used in the compressor units as a use tax. In 1996, this court held that a use tax could not be levied against the gas owners, because the right to use the gas arose outside of Arkansas, and, thus, any taxable use occurred outside of the state. See Boral Gypsum, Inc. v. Leathers, 325 Ark. 272, 924 S.W.2d 805 (1996).

After the Boral Gypsum decision, DFA decided it could no longer hold MRT's customers responsible for the use tax, because they were out-of-state owners. Instead, DFA opted to hold MRT responsible for the use tax on the compressor gas as the pipeline owner. DFA conducted a use tax audit of MRT from January 1, 1992, through December 31, 1994, and the audit resulted in an assessment of taxes against MRT for a variety of items. One item in the proposed assessment was a use tax on the compressor fuel for the fourteen-month period from November 1, 1993, to December 31, 1994. DFA's final assessment for the use tax owing on the compressor gas for this period was $111,744.70 with $28,185.23 as added interest.

On May 26, 1999, MRT filed its complaint and alleged that the imposed use tax was contrary to the statute, Ark.Code Ann. § 26-53-106(b) (Repl.1997), because its compressor gas never came to rest in Arkansas within the meaning of the statute. Both parties then filed cross motions for summary judgment and entered into a stipulation of facts. The trial court held that the compressor gas was removed from commerce and sufficiently ended. The court, accordingly, entered summary judgment in favor of DFA.

MRT raises essentially the same issue under two of its points on appeal: is an amendment to the come-to-rest requirement under § 26-53-106(b) solely a matter for legislative action and not judicial interpretation?

The come-to-rest test grew out of a case handed down by the United States Supreme Court in 1929. See Helson v. Kentucky, 279 U.S. 245, 49 S.Ct. 279, 73 L.Ed. 683 (1929). In Helson, the Commonwealth of Kentucky sought to tax gasoline used to propel a ferryboat across the Ohio River between Kentucky and Illinois. The Court recited the basic principles of the interstate commerce clause as they relate to a state's power to tax or regulate interstate commerce:

Regulation of interstate and foreign commerce is a matter committed exclusively to the control of Congress, and the rule is settled by innumerable decisions of this court, unnecessary to be cited, that a state law which directly burdens such commerce by taxation or otherwise constitutes a regulation beyond the power of the state under the Constitution. It is likewise settled that transportation by ferry from one state to another is interstate commerce and immune from the interference of such state legislation. The power vested in Congress to regulate commerce embraces within its control all the instrumentalities by which that commerce may be carried on. A state cannot lay a tax on interstate commerce in any form, whether by way of duties laid on the transportation of the subjects of that commerce, or on the receipts derived from that transportation, or on the occupation or business of carrying it on. While a state has power to tax property having a situs within its limits, whether employed in interstate commerce or not, it cannot interfere with interstate commerce through the imposition of a tax which is, in effect, a tax for the privilege of transacting such commerce.

Helson, 279 U.S. at 248-49, 49 S.Ct. 279 (citations and quotations omitted). Without establishing a clear test, the Court went on to hold that Kentucky could not impose the tax on ferryboat gasoline, because the tax would discourage interstate transportation. Eight years later, the Court revisited the issue and developed the come-to-rest test. See Henneford v. Silas Mason Co., 300 U.S. 577, 57 S.Ct. 524, 81 L.Ed. 814 (1937). In the Silas Mason Co. case, Justice Cardozo wrote on behalf of the Court: "A tax upon the privilege of use or storage when the chattel used or stored has ceased to be in transit is now an impost so common that its validity has been withdrawn from the arena of debate.... The tax upon the use after the property is at rest is not so measured or conditioned as to hamper the transactions of interstate commerce or discriminate against them." Silas Mason Co., 300 U.S. at 583, 57 S.Ct. 524.

Arkansas enacted its first use tax statute in 1949. See "The Arkansas Compensation Tax Act of 1949," 1949 Ark. Acts 487. At the time, the Act conformed to the prevailing jurisprudence handed down by the United States Supreme Court regarding use taxes and the limitations put on states by the interstate commerce clause of the United States Constitution. See U.S. Const. Art. I, § 8, cl. 3; Henneford v. Silas Mason Co., supra; Helson v. Kentucky, supra. The Act required that any item of tangible personal property not subject to the Arkansas sales tax was subject to the Arkansas use tax, so long as "the transportation of such article has finally come to rest within this State or until such article has become commingled with the general mass of property of this State." Act 487, § 5(a), now codified as Ark.Code Ann. § 26-53-106(b) (Repl.1997) (emphasis added).

The come-to-rest principle prevailed for constitutional purposes until 1977, when the United States Supreme Court visited the issue once more. See Complete Auto Transit Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). The Complete Auto Transit Court quoted with approval the Mississippi Supreme Court's analysis of the tax at issue:

It will be noted that Taxpayer has a large operation in this State. It is dependent upon the State for police protection and other State services the same as other citizens. It should pay its fair share of taxes so long, but only so long, as the tax does not discriminate against interstate commerce, and there is no danger of interstate commerce being smothered by cumulative taxes of several states. There is no possibility of any other state duplicating the tax involved in this case.

Complete Auto Transit, 430 U.S. at 277, 97 S.Ct. 1076. The four factors set out by the Mississippi Supreme Court have become the prevailing constitutional test for whether a tax burdens interstate commerce: (1) whether the activity sought to be taxed has a substantial nexus to the taxing state; (2) whether the tax is fairly apportioned with taxes paid to other states (e.g.,...