Rocky Mountain Oil & Gas Ass'n v. Conrad, 11287

• Citation: 405 N.W.2d 279
• Decision Date: 29 April 1987
• Docket Number: No. 11287,11287
• Court: United States State Supreme Court of North Dakota
• Parties: ROCKY MOUNTAIN OIL & GAS ASSOCIATION, a nonprofit organization; North Dakota Petroleum Council, a nonprofit organization; Western Gas Processors, Ltd.; Phillips Petroleum Company, Plaintiffs and Appellants, v. Kent CONRAD, Tax Commissioner of the State of North Dakota, Defendant and Appellee. Civ.

Page 279

405 N.W.2d 279

ROCKY MOUNTAIN OIL & GAS ASSOCIATION, a nonprofit organization; North Dakota Petroleum Council, a nonprofit organization; Western Gas Processors, Ltd.; Phillips Petroleum Company, Plaintiffs and Appellants, v. Kent CONRAD, Tax Commissioner of the State of North Dakota Defendant and Appellee.

Civ. No. 11287.

Supreme Court of North Dakota.

April 29, 1987.

Fleck, Mather, Strutz & Mayer, Bismarck, for plaintiffs and appellants; argued by R. Russell Mather.

Robert W. Wirtz, Asst. Atty. Gen., Bismarck, for defendant and appellee.

LEVINE, Justice.

In this appeal we consider the authority of the State Tax Commissioner to assess sales or use taxes upon plant fuel used by gas processing plants in North Dakota. We hold that the assessment of the sales or use taxes in this case is authorized. We, therefore, affirm.

Appellants Rocky Mountain Oil & Gas Association and the North Dakota Petroleum Council are nonprofit trade organizations servicing and representing the oil and gas industry in North Dakota. Appellants Western Gas Processors, Ltd. and Phillips Petroleum Company own and operate natural gas processing facilities located in North Dakota. For ease of reference, we refer to the appellants collectively as the taxpayers.

The taxpayers commenced a declaratory judgment proceeding to enjoin the North Dakota State Tax Commissioner from assessing North Dakota sales tax ¹ upon "plant fuel" consumed in the operation of certain natural gas processing facilities located in North Dakota. The taxpayers claim that the Commissioner is without statutory authority to levy sales or use taxes and that a contrary interpretation of the statutes renders those statutes violative of the commerce clause of the federal Constitution.

The case was presented to the district court on stipulated facts as well as the testimony of Walter M. Stack, Director of Sales and Special Taxes for the Tax Commissioner. The district court dismissed the action and the taxpayers appealed.

While the facts are undisputed, we believe it helpful to outline the steps involved in gas processing. Raw gas is collected from various lease sites into the processing facilities' gathering systems. The raw gas is separated into its component parts and certain chemical contaminants are removed. The gas remaining after raw gas is processed is called residue gas. Most of the residue gas exits the plant tailgate and is sold to Montana-Dakota Utilities. However, a portion of the residue gas, called "plant fuel," is withdrawn from the residue gas stream for use by the processing facilities. The "plant fuel" is used to run hot oil furnaces, compression/refrigeration units, flares, sulfur plant facilities, and booster stations along the pipeline system. All plant fuel at issue is residue gas that was processed in the taxpayers' processing facilities.

The issues framed by the taxpayers are:

(1) Whether the North Dakota State Tax Commissioner has the statutory authority to assess sales or use taxes upon the "plant fuel" used by the taxpayers in their gas processing facilities?

(2) Whether the assessment of sales or use taxes with respect to the "plant fuel" used in the processing facilities violates the commerce clause of the federal Constitution?

Our standard of review of a judgment declaratory in nature is the same as in any other case. NDCC Sec. 32-23-07; American Hardware Mutual Ins. Co. v. Dairyland Ins. Co., 304 N.W.2d 687, 689 (N.D.1981). The interpretation of a statute is a question of law, fully reviewable by this Court. Ladish Malting Co. v. Stutsman County, 351 N.W.2d 712, 718 (N.D.1984). In determining the meaning of statutes, the primary objective is to ascertain the intent of the Legislature. Ladish Malting Co., supra. The legislative intent must first be sought from the language of the statute; however, if a tax statute is ambiguous so that the legislative intention with respect to the meaning of the statute is doubtful, the doubt must be resolved in favor of the taxpayer. Ladish Malting Co., supra.

The taxpayers advance three arguments in support of their contention that the Tax Commissioner does not have the statutory authority to assess sales or use taxes upon plant fuel used by the processing facilities. First, the taxpayers argue that the transaction by which plant fuel is obtained is not a "retail sale" within the meaning of NDCC Sec. 57-39.2-02.1 ² because the plant fuel is not acquired by "sale." They contend that rather than purchasing the plant fuel from producers, the processors take possession of all the raw gas produced at the wellhead, process that gas, and sell the products of processing to third parties pursuant to the terms of their standard "gas purchase contracts." Under the contracts the producers receive a pro rata "pass-through" percentage of whatever price the processor receives for the plant products from the third-party purchaser. The producers are not paid a fixed price for the raw gas collected from their wells, nor do the processors receive a flat fee for their processing services. The contracts also provide that the processors are entitled to burn some of the raw gas in the course of plant operations. Because the contracts do not attempt to quantify the amount of plant fuel that may be used by the processors without charge, nor provide for a separate charge to the processors for the utilization of plant fuel, the taxpayers argue that the incidental use of plant fuel under these circumstances cannot constitute a "retail sale" as defined by NDCC Sec. 57-39.2-01(7). ³

We believe the transaction by which the processors obtain plant fuel constitutes a "sale." The term "sale" is broadly defined by NDCC Sec. 57-39.2-01(9) as "any transfer of title or possession, exchange or barter, conditional or otherwise, in any manner or by any means whatever, for a consideration." While a specific price is not allocated to the plant fuel used by the taxpayers, there can be no doubt that possession of natural gas passes from the producers to the taxpayers for a consideration. The taxpayers receive from the producers raw gas which is processed and, except for the plant fuel used by the processing facilities, resold to third parties. In return, the producers receive consideration in the form of a percentage of the proceeds from those sales. Further, the "sale" of plant fuel is a "retail sale" as defined by NDCC Sec. 57-39.2-01(7). As the district court explained:

"Here, the gas processor is the ultimate user or consumer. Although the payment to the producer is based on a percentage of the price ultimately received for the end products, the court has no doubt that there has been a sale.

"The plaintiffs' contracts with producers are set up as purchase contracts. The fact that all of the gas is processed does not change the reality that a portion of it is purchased ultimately for plant use." [Emphasis in original.]

A "retail sale" is the sale of tangible personal property to a consumer. NDCC Sec. 57-39.2-01(7). Because the taxpayers are the consumers of the plant fuel at issue, the transaction falls squarely within the definitions of "sale" and "retail sale" in NDCC Sec. 57-39.2-01.

The taxpayers' second argument is that because plant fuel is used in the processing operations, it is excluded from the definition of retail sale under the "for processing or for resale exclusion" found in NDCC Sec. 57-39.2-01(7). Retail sale is defined as "the sale, including the leasing or renting, to a consumer or to any person for any purpose, other than for processing or for resale, of tangible personal property...." NDCC Sec. 57-39.2-01(7). [Emphasis supplied.] Section 57-39.2-01(7) also defines the term "processing" as follows:

"By the term 'processing' is meant any tangible personal property including containers which it is intended, by means of fabrication, compounding, manufacturing, producing, or germination shall become an integral or an ingredient, or component part of other tangible personal property intended to be sold ultimately at retail." NDCC Sec. 57-39.2-01(7). [Emphasis supplied.]

The plant fuel used by the processors in their operations does not become an integral or an ingredient, or component part of other products intended to be sold ultimately at retail. The plant fuel is consumed by the processors and is never resold. Thus, the plant fuel used by the processing facilities is not personal property that is "processed" and so the exclusion "for processing or for resale" does not apply.

The taxpayers warn that such an interpretation retroactively converts the sale of raw gas "for processing or for resale" into a retail sale if and when such raw gas is used in the processing facilities. A similar argument was considered by the Supreme Court of Illinois in Mobil Oil Corporation v. Johnson, 93 Ill.2d 126, 66 Ill.Dec. 285, 442 N.E.2d 846 (1982).

In Mobil Oil, Mobil contested the assessment of Illinois use tax upon its use of three refinery fuels produced incidentally during the process of refining crude oil. Mobil Oil Corp., supra 66 Ill.Dec. at 287, 442 N.E.2d at 848. Mobil argued that it did not purchase crude oil "at retail" because its sole purpose in purchasing crude oil was to refine it, not to use it. Mobil Oil Corp., supra, 66 Ill.Dec. at 288, 442 N.E.2d at 849. The Illinois sales and use tax statutes are similar to North Dakota's sales and use tax statutes. Construing the Illinois statutes, the court held that because Mobil used the refinery fuels in its operations, it was subject to use tax. Mobil Oil Corp., supra, 66 Ill.Dec. at 289, 442 N.E.2d at 850. The court relied on its previous holding that a single sale is not an indivisible unit but taxability is determined by the uses to which the property is put. Mobil Oil Corp., supra, 66 Ill.Dec. at 290, 442 N.E.2d at 849. We agree with this principle and accordingly find that because plant fuel is consumed by the taxpayers in its processing operations, the...