Shell Oil Co. v. New York State Tax Com'n

• Decision Date: 06 January 1983
• Docket Number: No. 2,No. 1,No. 3,1,2,3
• Citation: 91 A.D.2d 81,458 N.Y.S.2d 938
• Parties: SHELL OIL COMPANY, Appellant, v. NEW YORK STATE TAX COMMISSION et al., Respondents. (Action). SHELL OIL COMPANY, Appellant, v. NEW YORK STATE TAX COMMISSION et al., Respondents. (Action). MOBILE OIL CORPORATION, Appellant, v. James H. TULLY, Jr., et al., Constituting the New York State Tax Commission, et al., Respondents. (Action).
• Court: New York Supreme Court — Appellate Division

Page 938

458 N.Y.S.2d 938

91 A.D.2d 81

SHELL OIL COMPANY, Appellant, v. NEW YORK STATE TAX COMMISSION et al., Respondents. (Action No. 1.).

SHELL OIL COMPANY, Appellant, v. NEW YORK STATE TAX COMMISSION et al., Respondents. (Action No. 2.).

MOBILE OIL CORPORATION, Appellant, v. James H. TULLY, Jr., et al., Constituting the New York State

Tax Commission, et al., Respondents. (Action No. 3.).

Supreme Court, Appellate Division,

Third Department.

Jan. 6, 1983.

Miller & Chevalier, Washington, D.C., Rosenstock & Turner, Albany, J. Lloyd Kennedy, Houston, Tex. (John S. Nolan and James W. Midgley, Washington, D.C., John G. Turner, Jr., and Daniel J. Centi, Albany, of counsel), for Shell Oil Co., appellant.

Donovan, Leisure, Newton & Irvine, New York City, James P. Shaughnessy, Washington, D.C., Bond, Schoeneck & King, Albany, Anthony R. Corso, Valley Forge, Pa. (Thomas R. Trowbridge, III, and Maria T. Galeno, New York City, Richard L. Smith, Albany, of counsel), for Mobil Oil Corp., appellant.

Robert Abrams, Atty. Gen., Albany (Peter H. Schiff, Asst. Atty. Gen., Albany, of counsel), for respondents.

Before MAHONEY, P.J., and SWEENEY, KANE, CASEY and LEVINE, JJ.

OPINION FOR MODIFICATION

LEVINE, Justice.

These appeals, which we consider jointly for purposes of determination, concern various statutory and constitutional challenges to State enforcement of section 182 of the Tax Law as added by chapters 271 and 272 of the Laws of 1980 and amended by chapter 1043 of the Laws of 1981. In response to the "severe financial problem" facing New York's public transportation system, the State enacted chapters 271 and 272 of the Laws of 1980 ("the Act") to create a special fund, known as the "regional transportation operating and capital assistance fund" under a new section 72-a of the State Finance Law, from which allocations would be made to various regional transportation authorities. Under the Act, the fund is financed through a new section 182 of the Tax Law, which imposes an additional franchise tax on certain oil corporations in the amount of 2% of their New York gross receipts from the sale of all of their products, petroleum or otherwise. The Act became effective June 18, 1980, and provided that the tax shall be imposed for "taxable years ending on or after the date on which this act shall become a law" (L.1980, ch. 271, § 13, as renum. by L.1980, ch. 272, § 1).

The Act employs the phrase "oil company" to define the class of enterprises subject to the tax. Initially, the definition included all corporations engaged in operations producing, refining or selling petroleum, except that corporations solely engaged in selling petroleum who sold not more than 60 million gallons in New York during their immediately preceding taxable year were expressly excluded, and hence not subject to any tax on their New York gross receipts (former Tax Law, § 182, subd. 2, par. [a], as added by L.1980, ch. 271, § 4, as renum. by L.1980, ch. 272, § 1). However, responding to a Special Term determination that the foregoing classification violated equal protection by exempting companies engaged solely in selling petroleum in limited quantities from the tax but taxing the gross receipts of all sales "from 'dollar one' " by other companies (Merit Oil of N.Y. v. New York State Tax Comm., 111 Misc.2d 118, 443 N.Y.S.2d 604), the Legislature retroactively amended section 182 (subd. 2, par. [a] ) of the Tax Law to redefine "oil company". The new definition includes "every vertically integrated petroleum corporation", which in turn is defined as a corporation producing more than 100,000 average barrels of crude oil per day, having a refining capacity in excess of 175,000 average barrels of crude oil per day and which distributes for marketing gasoline, motor fuels and other similar products derived from such crude oil (L.1981, ch. 1043, § 68). Plaintiffs and 15 other major oil corporations presently fall within the definition.

Because of its overriding fear that the bare imposition of the tax would result in its being added to the price of petroleum products sold in the State and thereby fuel the inflationary spiral (see Statement of legislative findings; declaration of purpose, L.1980, ch. 271, § 1, as added by L.1980, ch. 272, § 1), the Legislature provided that the burden of the gross receipts tax was to be borne by the oil companies and not passed on to consumers. This intent was effectuated through enactment of an express prohibition against the passing on of the tax (the "anti-pass through" provision) contained in section 182 (subd. 11, par. [a] ) of the Tax Law, directing that the tax "shall be a liability of the oil company, shall be paid by such company and shall not be included, directly or indirectly, in the sales price of its products sold in this state." This provision also requires an oil company subject to the tax to file with its return a report certifying under oath that it has not included the tax in the sales price of its products sold in this State (id.).

Furthermore, because of the supervening importance in the entire statutory scheme of the anti-inflationary policy embodied in the anti-pass through provision and because of apprehension of a possible adverse result of litigation challenging its validity, the Legislature further enacted the so-called "self-destruct" provisions of the Act. Under those provisions, the tax ceases to be in force and effect upon a judicial or administrative agency determination preventing enforcement of the prohibition against pass through (L.1980, ch. 271, § 12, as amd. by L.1980, ch. 272, § 5).

The anticipated legal challenges to the legislation were soon forthcoming. Among them were, (1) a suit by plaintiff Mobil Oil Corporation ("Mobil") and other oil companies (plaintiff Shell Oil Company ["Shell"] not included) instituted in the United States District Court for the Northern District of New York challenging the anti-pass through provision, but not the tax itself; (2) an action in State Supreme Court by the Merit Oil Corporation, previously alluded to, addressed to the earlier definition of "oil company"; and (3) the instant actions, challenging both the anti-pass through provision and the statute as a whole. Mobil's action in the Federal court alleged that the statutory prohibition against passing through the tax was invalid under various provisions of the United States Constitution, including the supremacy clause (because of pre-emption by Federal petroleum price regulation), the commerce clause and the due process clause. The District Court denied defendant's motion to dismiss the action under the Federal Tax Injunction Act (U.S.Code, tit. 28, § 1341), which deprives the Federal courts of jurisdiction regarding challenges to State tax laws if an adequate remedy therefor exists in the State court system. The court held that the anti-pass through provision was enacted pursuant to the State's police power to regulate prices, was separate and distinct from the tax provisions of the Act and was, therefore, not insulated from a challenge to its validity in the Federal courts by the Tax Injunction Act (Mobil Oil Corp. v. Tully, 499 F.Supp. 888, 895). That determination was affirmed by the United States Court of Appeals for the Second Circuit (Mobil Oil Corp. v. Tully, 639 F.2d 912 (2nd Cir.1981), cert. den. 452 U.S. 967, 101 S.Ct. 3123, 69 L.Ed.2d 981). The District Court further concluded that the anti-pass through provision of the Act violated the supremacy clause, because it was pre-empted by the Federal Emergency Petroleum Allocation Act (U.S.Code, tit. 15, §§ 751-760h) and the Mandatory Petroleum Price Regulations (10 CFR Part 212). It, therefore, granted summary judgment to the plaintiffs, enjoining the State from enforcing the anti-pass through provision (Mobil Oil Corp. v. Tully, 499 F.Supp. 888, 909-910). The court did not reach the alternative constitutional challenges to that provision. The District Court's determination of invalidity based on preemption was affirmed by the United States Temporary Emergency Court of Appeals (Mobil Oil Corp. v. Tully, 653 F.2d 497, Em.App., 1981). On appeal to the United States Supreme Court, however, the judgment was vacated, and the case was remanded for reconsideration in light of the expiration of the Emergency Petroleum Allocation Act on September 30, 1981 (Tully v. Mobil Oil Corp., 455 U.S. 245, 102 S.Ct. 1047, 71 L.Ed.2d 120). Actually, the District Court's invalidation of the anti-pass through provision never took effect even before the action of the Supreme Court, since simultaneously with the granting of its judgment, the District Court stayed enforcement of the injunction and that stay continued during all appeals.

Preliminary to addressing the various challenges by plaintiffs to the State's enforcement of both the tax and the prohibition against its being passed on to consumers, and for the orderly presentation of our determination of issues thereby presented, we express our agreement with the decisions of the United States District Court and of the Court of Appeals for the Second Circuit (adopting Mobil's position before both courts) that the validity of the tax provisions of the Act may be considered separately and apart from that of the anti-pass through provision. From our reading of the Act, the latter provision is severable from the remainder of the statute, except insofar as the self-destruct section may apply. We, therefore, first take up the issues raised concerning the validity of the tax provisions of the Act, next those concerning the statutory prohibition against pass through and finally the effect of the self-destruct provisions in the event of a determination invalidating the prohibition against pass through.

I. The Constitutional Challenges to the Tax Provisions of the Act.

The major challenge to the tax provisions of the Act centers on the constitutionality of the current statutory definition of "oil company,"...