Waterford Energy, Inc. v. Oklahoma Tax Com'n
| Decision Date | 31 March 1992 |
| Docket Number | No. 1,No. 77168,77168,1 |
| Citation | 845 P.2d 198 |
| Parties | 1992 OK CIV APP 38, Util. L. Rep. P 26,224 WATERFORD ENERGY, INC., Appellant, v. OKLAHOMA TAX COMMISSION, Appellee. Court of Appeals of Oklahoma, Division |
| Court | United States State Court of Criminal Appeals of Oklahoma. Court of Civil Appeals of Oklahoma |
Appeal from an order of the Oklahoma Tax Commission.
AFFIRMED IN PART, REVERSED IN PART AND REMANDED WITH INSTRUCTIONS.
James M. Peters and Steven K. McKinney, Monnet, Hayes, Bullis, Thompson & Edwards, Oklahoma City, for appellant.
David Hudson and Kathryn Bass, Oklahoma Tax Com'n, Oklahoma City, for appellee.
Waterford Energy appeals an order of the Oklahoma Tax Commission (the Commission) denying its protest of sales taxes assessed. 1 Two types of transactions are involved. In the first, Waterford transferred its rights in a gas-gathering pipeline as part of a larger transaction involving the sale of oil and gas wells, rights of way and easements, equipment, and machinery. Over Waterford's protest, the Commission assessed sales tax on the sale of the pipeline.
In the second type of transaction, Waterford, as operator of several oil and gas wells in which it owned an interest, transferred equipment and material from a well site to Waterford's yard or to another well site which Waterford operated. The Commission treated these material transfers as sales and assessed sales tax. Although we agree the Commission properly assessed sales tax for the sale of the pipeline, the Commission's order assessing sales tax against Waterford for the material transfers was unauthorized by law and must be reversed.
The Commission argues tax was properly imposed on the sale of the gas gathering pipeline because the pipeline was tangible personal property. Waterford claims the pipeline was a buried fixture appurtenant to the realty as described in 60 O.S.1981 § 7, and was therefore exempt from sales tax.
Whether a structure has become a fixture and therefore part of the realty or is chattel subject to sales tax is determined by a three part test:
1. The actual or constructive annexation of the item to realty or to something appurtenent [sic] to realty;
2. The appropriateness of the particular article's use to the purpose or actual use of the realty;
3. The intention of the party placing the article on the realty to make the article a permanent and integral part of that realty.
In re K & A Servicing, Inc., 47 B.R. 807 (Bankr.N.D.Texas 1985) (applying Oklahoma law); Accord, United Benefit Life Ins. Co. v. Norman Lumber Co., 484 P.2d 527 (Okla.1971); Hartford Fire Ins. Co. v. Balch, 350 P.2d 514 (Okla.1960).
Waterford satisfied the first part of this test by demonstrating the pipeline was annexed to the right of way, which was an interest in realty. Waterford did not satisfy the second part of the test because, as in Cherokee Pipe Line Co. v. Newman, 593 P.2d 90 (Okla.1979), the pipeline benefited the company owning the right of way, not the surface owner. The pipeline was appropriate to the use of the right of way and enhanced its value, but was not connected with the general use of the surface as farmland. However, the intent of the party affixing the item to the land is the controlling consideration and chief test. Kay County Gas Co. v. Bryant, 135 Okl. 135, 276 P. 218 (1928).
In most cases, the lessee's right to remove fixtures tends to negative the test's third part. However, trade fixtures, if left attached to realty and abandoned by a lessee, may be part of the realty of a lessor. Gutierrez v. Davis, 618 F.2d 700 (10th Cir.1980). But Gutierrez is distinguishable because abandonment is not presented on this record. No presumption of intent to make an item affixed to realty a permanent addition is created when the one making the addition had an estate limited in time or use. In re K & A Servicing, Inc., 47 B.R. at 812. Further, trade fixtures, as a class, though affixed to the realty, may be removed within a reasonable time by a lessee. Luttrell v. Parker Drilling Company, 341 P.2d 244 (Okla.1959). In the absence of facts or circumstances to the contrary, it is assumed trade fixtures may be removed even without an express agreement. Kay County Gas Co. v. Bryant, 276 P. at 222.
The pipeline, a trade fixture capable of removal, was tangible personal property placed upon real estate and remained personal property. Magnolia Petroleum Company v. Oklahoma Tax Commission, 326 P.2d 821 (Okla.1958). This conclusion is consistent with the treatment of pipelines for ad valorem taxation. For over fifty years, "[a]ll oil, gas, water or other pipe lines" have been defined as personal property for purposes of ad valorem taxation. See Title 68, Laws 1941, p. 311, § 4 (Twelfth) (b), (now at 68 O.S.1981 § 2420, referring to "pipelines"). Nothing in this record distinguishes this pipeline from the type defined as personal property for ad valorem purposes, and Waterford did not satisfy, as a matter of law, all of the criteria for determining property to be a fixture
rather than personal property. The record supports the Commission's finding that the pipeline was tangible personal property subject to sales taxation, and that determination is affirmed.
Waterford claims the Commission erroneously assessed sales tax for certain material transfers occurring between March, 1984 and December, 1988. As operator, Waterford transferred materials from some well sites in which Waterford owned an interest to one of its yards, and from some well sites to other well sites operated by Waterford in which Waterford also owned an interest. When material was removed from a site, Waterford credited the joint owners with a proportionate share of the material's value.
The record reflects taxes assessed against Waterford were attributable to the joint owner's proportion of the materials transferred to Waterford. The Commission treated the proportion attributable to the joint owners as a sale to Waterford. Waterford claims the transactions are not subject to sales tax, citing Oklahoma Tax Commission v. Texas Co., 182 Okl. 91, 76 P.2d 389. The Texas Co. case is not dispositive because its holding rested, at least in part, upon the fact casual sales were not subject to sales taxation as they are now. It is clear a transfer from Waterford to itself and the joint interest owners is exempted from sales tax by 68 O.S.1981 § 1360(B). See also Oklahoma Sales Tax Rules, Regulation 13-50 (effective ...
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