Soto v. Hope Natural Gas Co.

Citation95 S.E.2d 769,142 W.Va. 373
Decision Date18 December 1956
Docket NumberNo. CC832,CC832
CourtSupreme Court of West Virginia
PartiesJoseph S. SOTO, Tax Com'r, v. HOPE NATURAL GAS CO.

Syllabus by the Court.

1. One of the essentials of res judicata is that the issue raised in the second action or suit must be identical with the issue raised and determined in the first action or suit.

2. The measure of the tax upon the privilege of producing for sale, profit, or commercial use, any natural resource product, imposed by Chapter 86, Acts of the Legislature, Regular Session, 1935, as amended by Chapter 165, Acts of the Legislature, Regular Session, 1955, is the value of the article produced at the point where production ends.

John G. Fox, Atty. Gen., Robert E. Magnuson, Asst. Atty. Gen., for plaintiff.

Jackson, Kelly, Holt & O'Farrell, Homer A. Holt, James F. Brown, Charleston, for defendant.

BROWNING, President.

The Tax Commissioner of the State of West Virginia instituted this motion for judgment proceeding against the Hope Natural Gas Company, hereinafter referred to as Hope, for the sum of $155,879.92, allegedly due as Business and Occupation Taxes under Chapter 11, Article 13, Sections 2a, 3a and 3b of the Code, hereinafter referred to as § 2a, as amended by Chapter 33, Acts of the Legislature, Extraordinary Session, 1933; Chapter 86, Acts of the Legislature, 1935; Chapter 108, Acts of the Legislature, Regular Session, 1937; Chapter 120, Acts of the Legislature, Regular Session, 1939; Chapter 95, Acts of the Legislature, Regular Session, 1943; and, subsequent to the institution of this proceeding, by Chapters 165 and 166, Acts of the Legislature, 1955. The notice alleges that: During the year 1953, Hope sold, used and delivered as free gas in its entire system 136,117,767 m. c. f. of natural gas of which it produced in West Virginia 35,649,721 m. c. f.; of the total amount, 90,012,528 m. c. f. was transported and sold in interstate commerce, and 46,105,239 m. c. f. was used by Hope in its own operations, sold in West Virginia to various purchasers, or delivered as free gas to lessors; and that the proportion of natural gas produced in West Virginia and used or sold within the State was 12,074,560 m. c. f. The notice alleges that Hope paid the taxes imposed under § 2a upon the entire 35,649,721 m. c. f. produced in West Virginia at the rate or value of 20cents per m. c. f. which is admitted to be the value of such gas, at the well, during 1953, and the Commissioner accepted such taxes as correct in regard to the proportion of such gas sold or transported in interstate commerce, but in respect to the 12,074,560 m. c. f. produced in West Virginia and sold, used or distributed within the State, asserted that such gas had an average value, at the place where delivered to others or used by Hope, of 38.39cents per m. c. f., and levied a deficiency assessment in the amount sought to be recovered.

Hope demurred to the notice and filed a special plea, to which plea the Commissioner demurred. The court overruled the demurrer of Hope, sustained the demurrer of the Commissioner, and certified the questions arising upon such demurrers to this Court.

The question so certified, briefly stated are: (1) Is the case of Hope Natural Gas Co. v. Hall, 102 W.Va. 272, 135 S.E. 582; Id., 274 U.S. 284, 47 S.Ct. 639, 71 L.Ed. 1049, res judicata in so far as Hope is concerned, and stare decisis generally that the proper basis for taxation in the instant case is the value of the gas at the well?; (2) Does the proper interpretation of Code, 11-13, as amended, require that the value at the well be made the measure of the tax imposed thereby?; and (3) If the proper measure of the tax be, as contended by the Commissioner, is the statute not then unconstitutional as violative of § 1, of the 14th Amendment to the Constitution of the United States, and § 1, Article X of the West Virginia Constitution?

The present statute designated 'Business and Occupation Tax' was first enacted by the Legislature of this State at its regular session, 1921, Chapter 110, and termed the 'Gross Sales Act', and reenacted in 1925, Chapter 1, First Extraordinary Session, as the 'Business and Professional Tax.' The 1925 Act was in effect when Hope Natural Gas Co. v. Hall, supra, was decided by this Court and the Supreme Court of the United States. The provisions of § 2a of Article 13, Chapter 11, which is the controlling Section in controversy in this litigation, has not been significantly changed since the Acts of 1925. Section 2 of Article 13, in the first paragraph thereof, provides that: 'There is hereby levied and shall be collected annual privilege taxes against the persons, on account of the business and other activities, and in the amounts to be determined by the application of rates against values or gross income as set forth in sections two-a to two-j, inclusive, of this article.' § 2a, which is titled 'Production of Coal and Other Natural Resource Products', provides that: 'Upon every person engaging or continuing within this State in the business of producing for sale, profit or commercial use any natural resource products, the amount of such tax to be equal to the value of the articles produced as shown by the gross proceeds derived from the sale thereof by the producer, except as otherwise provided, multiplied by the respective rates as follows: Coal, one per cent; limestone or sandstone, quarried or mined, one and one half per cent; oil, three per cent; natural gas, in excess of the value of five thousand dollars, six per cent; blast furnace slag, three per cent; sand, gravel or other mineral product, not quarried or mined, three per cent; timber, one and one-half per cent; other natural resource products, two per cent. The measure of this tax is the value of the entire production in this State, regardless of the place of sale or the fact that the delivery may be made to points outside the State.'

In Cole v. Pond Fork Oil & Gas Co., 127 W.Va. 762, 35 S.E.2d 25, 32, 160 A.L.R. 970, this Court, in defining the tax that is levied upon those who extract natural products from the earth, stated that this is not a 'production' or 'severance' tax. In other words, there is no tax under the provisions of Chapter 11, or any other Chapter of the Code, that levies the tax upon each ton of coal, each barrel of oil, or each m. c. f. of gas that is 'produced'. In the opinion, it was said: '* * * We have no production tax. Our Legislature has studiously avoided imposing a production tax, and has resorted to the imposition of a privilege tax, whereby persons, firms and corporations are classified according to the business in which they are engaged, and a tax collected from the gross proceeds of their business, rather than upon any product which they may produce from the earth or manufacture or process. * * *'

With this brief history of the legislation and definition of the tax that it imposes, we come to a discussion of the first certified question. Hope Natural Gas Co. v. Hall, supra, came to this Court upon an appeal from a decision of the Common Pleas Court of Kanawha County, affirmed by the Circuit Court of that county, finding that the provisions of § 2a, 'in so far as it purports to impose a tax on the business of mining and producing for sale, profit or use of natural gas, is in every respect null and void as to the plaintiff, its property, franchises and business, and that so much of the said Section 2(a), as applies to the business of mining and producing natural gas is not divisible or severable; * * *', since it was in violation of Article I, Section 8 of the Constitution of the United States. An injunction was granted by the Court of Common Pleas restraining the Tax Commissioner and the Attorney General from enforcing the provisions of § 2a. This Court said in the opinion in Hope Natural Gas Co. v. Hall, supra: 'The defendant's main contention is that, under the facts developed in this case, the state has the right under section 2a to calculate the tax on the gross proceeds of the sale of the plaintiff's gas sold without the state. Their brief contends 'there is no tax on the sale or the transportation of the gas or on the proceeds from the sale thereof,' but that the gross sales price is simply the taxable measure of the value of the commodity.'

After quoting § 2a, the Court further stated: '* * * Article 1, § 8, of the federal Constitution, as interpreted by federal decisions, denies to a state the right to impose a direct tax on the gross proceeds of interstate commerce, except as hereinafter noted. A large per cent of the commodities named in the statute is sold in other states. The plaintiff contends that, as the act contains no exception, it indicates a plain intention to tax the gross proceeds of sales in interstate commerce. There is a presumption, however, that the Legislature did not intend to violate any provision of the federal Constitution. * * * Consequently, we are warranted in presuming that the Legislature did not mean to include, as an element of value, so much of the gross proceeds of the sale of an article in interstate commerce, as is represented by the cost of transportation, and we restrain the operation of the statute accordingly. * * *'

The last paragraph of the opinion states: 'We therefore hold, under the facts in this case, that the defendants may not treat the gross proceeds of plaintiff's sales outside the state as the worth of its gas within the state, but that they may enforce the act upon the value thereof within the state, and before it enters interstate commerce. The injunction herein will be accordingly so modified.'

The decision of this Court in Hope Natural Gas Co. v. Hall was affirmed by the Supreme Court of the United States in Hope Natural Gas Company v. Hall, supra. In the opinion by Mr. Justice McReynolds, is this quotation from the final order of this Court [274 U.S. 284, 47 S.Ct....

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