Ohio Oil Co v. Conway

Decision Date14 April 1930
Docket NumberNo. 440,440
Citation74 L.Ed. 775,281 U.S. 146,50 S.Ct. 310
PartiesOHIO OIL CO. v. CONWAY, Supervisor of Public Accounts
CourtU.S. Supreme Court

Mr. Sidney L. Herold, of Shreveport, La., for appellant.

[Argument of Counsel from pages 147-149 intentionally omitted] Messrs. W. H. Thompson, of New Orleans, La., Mr. R. L. Benoit, of Shreveport, La., and George S. Guion, of New Orleans, La., for appellee.

Mr. Chief Justice HUGHES delivered the opinion of the Court.

The Ohio Oil Company brought this suit in the District Court to enjoin the enforcement of a statute of Louisiana (Act No. 5 of 1928) imposing a severance tax upon the production of oil. The statute as applied to the complainant was attacked as a violation both of the constitution of Louisiana and of the equal protection clause of the Fourteenth Amendment of the Federal Constitution. It was alleged that the laws of the State afforded no remedy for the recovery of taxes illegally exacted. On appeal from an order denying an interlocutory injunction, this court decided that the questions presented could not be resolved satisfactorily upon the affidavits submitted, and directed that an injunction should be granted pendente lite on stated terms. 279 U. S. 813, 49 S. Ct. 256, 73 L. Ed. 972. Trial was had before the District Court, as specially constituted under the applicable statute, and a decree was entered dismissing the bill. 34 F.(2d) 47. The complaint appeals.

In the year 1921, the Constitution of Louisiana was amended so as to provide that natural resources severed from the soil or water might be classified for the purpose of taxation and that taxes might be 'predicated upon either the quantity or value of the product at the time and place where it is severed.' Const. art. 10, § 21.1 By Act No. 140 of 1922, § 2, natural resources were divided into two classes, and taxes were levied on oil and gas at 3 per cent. of the gross market value of the total production, and on all other natural resources at 2 per cent. of the gross market value. The Supreme Court of Louisiana, sustaining this tax on oil and natural gas, held that it was not a property tax but was an excise tax upon the privilege of severing, although it was measured by the value of the property severed. This decision was affirmed here. Gulf Refining Co. v. McFarland, 154 La. 251, 97 So. 433; Id., 264 U. S. 573, 44 S. Ct. 402, 68 L. Ed. 856.

In 1928, the Legislature of Louisiana enacted the statute now in question which amended the prior act so as to tax various natural resources on the basis of the quantity severed. Under this amendment taxes on oil were classified according to gravity and ran from 4 cents a barrel of 42 gallons on oil of 28 degrees gravity and below, to 11 cents a barrel on oil above 43 degrees gravity. Act 5 of 1928.2

The business of the complainant in Louisiana is that of producing and selling oil and not of refining it. The production of the complainant is in the following fields: Haynesville, in the parish of Claiborne; Cotton Valley, in the parish of Webster; Pine Island, in the parish of Caddo; Urania, in the parish of La Salle. All these fields are in North Louisiana. The bulk of the complainant's production is in the Haynesville, Cotton Valley, and Pine Island fields. Its production in these fields from January to June, 1928, inclusive, amounted to 723,192 barrels out of its total production in Louisiana of 762,139 barrels; and from August, 1928, to March, 1929, inclusive, to 690,397 barrels out of its total production of 705,301 barrels; the remainder was Urania production.

'Gravity' as used in the statute, and in oil price quotations, is not specific gravity, but what is called Baume gravity, under which the lighter the oil the higher the gravity. The record shows that, generally speaking, crude petroleums are divided into three classes-paraffine base, asphalt base, and mixed base, the last being a combination of paraffine and asphalt base. The higher gravity oils usually have a paraffine base, while the lower gravity oils usually have an asphalt base. All three of these classes are found in Louisiana. In North Louisiana there are paraffine base, asphalt base, and mixed base crudes, the oils generally having paraffine base, while in South Louisiana the oil produced is mostly asphalt base.

The process of refining oil is distillation. The evidence is that paraffine base oil in that manner yields gasoline, kerosene, gas oil, some lubricating oil, and wax. Gasoline comes off first and is the most valuable component of such oil. Asphalt base oil usually yields a very small amount of gasoline by distillation, the first product ordinarily being gas oil, then lubricating oil, and the residuum, asphalt. The gas oil may be subjected to the cracking process and gasoline may be obtained in that way. The value of asphalt base oil is largely for the manufacture of lubricating oil, and the value for this purpose is determined by viscosity and sulphur content, not by gravity. The coastal oils of South Louisiana are divided into 'A' and 'B' grades, 'Grade A' being the oils that are useful in the production of lubricating oil, and the other oil being classed as 'Grade B.' While gravity is not the determining factor, it appears from the testimony that 'Grade A' oils must be less than 25 degrees gravity.

Asphalt base oils are produced in North Louisiana in the fields of Pine Island, Urania, Hosston, and Bellevue. The last three named are suitable for making lubricating oil, but the Pine Island heavy oil does not have that value. The evidence is that the Urania, Hosston, and Bellevue oils, used for that purpose, are practically the same as the coastal 'Grade A' oils.

Gravity is said to be an index of relative value of oils only in the same pool or district, and oils of different gravity are produced in the same fields and from the same tracks of land and sometimes from the same sand. But it appears that, with respect to paraffine base oils, the higher the gravity, the greater is the gasoline content which as between these oils is largely determinative of price. Gravity in such cases is a rough and familiar method of approximating the gasoline content, and in many fields price quotations of crude oil above 28 degrees are graduated according to gravity.

Crude oil as it comes from the wells is run into tanks from which the purchaser sells to pipe lines, the well-recognized market prices being the prices posted by the pipe line companies buying the oil. The complainant states that the oil produced in its Haynesville field was from 33 to 36 degrees gravity; in its Cotton Valley field, one class was between 28 and 31 degrees gravity and another above 43 degrees gravity; in its Pipe Island field, its production was from 37 to 41 degrees gravity. The complainant purchased no crude oil except that, in the Haynesville field, it bought some of the royalty oil of the lessors under its leases. The complainant's cashier testified at the trial that complainant's 'purchases and sales in each field in which it operates are made on a gravity basis.'

This testimony is not understood to include the Urania field in which the complainant was not operating at the time but had been operating until shortly before. The oil from the Urania field, which was about 20 degrees gravity as well as that of the Bellevue and Hosston fields in North Louisiana, and the 'Grade A' coastal oils of South Louisiana, were sold at a flat price and not by gravity. 'Grade B' oil, it was testified, was usually sold on a gravity schedule.

In 1928, the production of oil in Louisiana was about 22,000,000 barrels, of which approximately two-thirds was produced in North Louisiana, and of this amount nearly two-thirds was sold on a gravity basis, and the remainder at a flat price. Of the production in South Louisiana, about one-half was sold on a gravity basis.

Price quotations, concededly accurate, for Louisiana crude oils, as well as for Mid-Continent, North and Cen- tral Texas, Gulf Coast, and other sections, are shown in the trade journals and were put in evidence. The quotations that are according to gravity have a rising scale of prices as gravity increases.3

In the case of the oils under 28 degrees gravity that were sold at a flat price, it appears that there was a considerable difference between the price of oils of the North and South Louisiana fields. With respect to oils suitable for making lubricating oil, the evidence is that in February, 1928, the price of the complainant's Urania oil was 75 cents a barrel, while that of the coastal 'Grade A' oils was $1.20 a barrel, and the Louisiana tax on each, the gravity being under 28 degrees, was four cents a barrel. The respondent states that the oils of these Louisiana fields are shipped to a common market, Port Arthur, Tex., and, by reason of the greater distance, the transportation charges for the oils of North Louisiana are greater than those from South Louisiana; this fact, the respondent insists, accounts for the difference in the price of the oils at the wells.

The complainant's contention under the Constitution of Louisiana is that the tax is invalid because it was not levied according to either quantity or value. It manifestly is a specific tax at a rate per barrel of 42 gallons, and not strictly ad valorem. The graduation of the tax according to the gravity of the oil does not make it other than a tax according to quantity, that is, per barrel, as the oils of different classes are treated for the purpose of the tax as being in effect different commodities, each of which has its separate tax. We have not been referred to any decision of the state court upon the point and, until that court pronounces otherwise, we see no reason to hold that the tax is unauthorized by the State.

The further argument is made that the classification of oils is unreasonable and hence is not permitted by the State Constitution. This is substantially the same question,...

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