Prevost, Nicolette

bepress Legal Repository

Maryland v. Louisiana Compared with Commonwealth Edison v. Montana or How to Tax Energy Production

University of Baltimore School of Law

University of Baltimore Law ForumVolume 12Number 1 Fall 1981 Article 71981Maryland v. Louisiana Compared withCommonwealth Edison v. Montana or How to TaxEnergy ProductionNicolette PrevostFollow this and additional works at: http://scholarworks.law.ubalt.edu/lfPart of the Law CommonsThis Article is brought to you for free and open access by ScholarWorks@University of Baltimore School of Law. It has been accepted for inclusion inUniversity of Baltimore Law Forum by an authorized administrator of ScholarWorks@University of Baltimore School of Law. For more information,please contact snolan@ubalt.edu.Recommended CitationPrevost, Nicolette (1981) "Maryland v. Louisiana Compared with Commonwealth Edison v. Montana or How to Tax EnergyProduction," University of Baltimore Law Forum: Vol. 12: No. 1, Article 7.Available at: http://scholarworks.law.ubalt.edu/lf/vol12/iss1/7FORUMMaryland v. Louisiana Compared withCommonwealth Edison v. MontanaorHow to Tax Energy Productionby Nicolette PrevostDuring the summer of 1081, theUnited States Supreme Court consi-dered two cases involving apparentlysimilar facts and reached an oppositeresult in each. Both cases involvedstate taxation of energy obtained from"federally controlled lands" with the bur-den of the tax falling on consumers inother states. In each instance, the taxwas challenged as a violation of theSupremacy Clause' and of the Com-merce Clause.2 In Maryland v. Louisi-ana,3 the Court struck down Louisia-na's First Use Tax 4 because it violatedboth clauses. In Commonwealth Edison v.Montana,5 the Court upheld Monta-na's Severance Tax. This article is anattempt to reconcile these apparentlyopposing decisions.In Maryland v. Louisiana, the Courtfirst considered as a threshold issue,and rejected, a motion to dismissbecause the case was not an approp-riate one for the exercise of originaljurisdiction.On the merits, the Court foundthat the plaintiffs were entitled tojudgment on the pleadings, first of all,since 1303 C of the Louisiana FirstUse Tax was found to be invalidunder the Supremacy Clause, i.e.,preempted by federal legislation. TheFirst Use Tax was imposed on the"first use" of any gas imported intoLouisiana which was not previouslysubjected to taxation by another stateor the United States. The tax is pre-cisely equal to the severance tax thestate imposes on Louisiana gas pro-ducers. A taxable "use" was defined asthe sale, the transportation in thestate to the point of delivery at theinlet of any processing plant, or thetransportation in the state of unpro-cessed natural gas to the point ofdelivery.6 The primary effect was onthe owners of gas produced in theouter continental shelf (land outsidethe three-mile off-shore limit) in whichthe U.S. possesses a paramount in-terest. Section 1303 C of the tax pro-hibited recovery. of the costs asso-ciated with the tax from anyone otherthan a purchaser of the gas. Since theNatural Gas Act 7 grants the FederalEnergy Regulatory Commission (FERC)the authority to regulate the wholesalepricing of natural gas and to allocatethe costs associated with its produc-tion, the Court held that the effect of1303 C was to interfere with theFERC's authority to regulate the deter-mination of the allocation of costsassociated with the sale of natural gasto consumers. The Tax was held to beunconsitutional because it was incon-sistent with the federal scheme.The plaintiffs also pressed, as aSupremacy Clause issue, the incon-sistency of the First Use Tax with theOuter Shelf Lands Act which declaresthat the subsoil and seabed of theouter Continental Shelf appertain tothe United States and are subject toits jurisdiction, control and power ofdisposition as provided in this sub-chapter.8 The court acknowledgedthat this provision expressly declaredthat "[s]tate taxation laws shall notapply to the outer Continental Shelf."9The First Use Tax was also heldunconstitutional because it violatedthe Commerce Clause which, by neg-ative implication, limits state powerover interstate and foreign commerce.In Maryland and Montana, the Courtemployed the test set forth in CompleteAuto Transit, Inc. v. Brady,10 to deter-mine compliance with the CommerceClause. The Brady test states that nostate tax may be sustained unless thetax: (1) has a substantial nexus withthe State; (2) is fairly apportioned; (3)does not discriminate against inter-state commerce, and (4) is fairly relatedto the services provided by the State.1The tax was held to discriminateagainst interstate commerce becauseof exemption provisions within theact and provisions for tax credits inother state statutes for intrastateowners, effectively causing the burdenof the tax to fall on consumers out-side the state.The First Use Tax failed to survivescrutiny as a compensatory tax, withdiscriminatory effects. In Henneford v.Silas Mason Co.,11 a use tax was held tocomplement a sales tax. Here Louisi-ana's argument that the First Use Taxcomplemented its severance tax onLouisiana producers was rejected. Itwas held that the tax was not com-pensatory since "Louisiana has nosovereign interest in being compen-sated for the severance of resourcesfrom the federally-owned OCS (outercontinental shelf) land." 12In Commonwealth Edison v. Montana,1 3the state of Montana, under a 1921act, imposed a severance tax on coalmined in the state, including thatmined on federal land. A group ofMontana coal producers and theirout-of-state utility customers soughtrefunds of taxes paid under a taxschedule enacted in 1979. 14The Court held that the tax did notviolate the Commerce Clause. Underthe Brady test, it was conceded thatthe tax satisfied the first two prongsof the test. The fact that the onlynexus of the severance of the coal isestablished in Montana satisfies oneprong. "Because no other state cantax the severance of the coal, there isno question of apportionment or mul-tiple taxation and the second prong issatisfied." 15The tax was found not to be dis-criminatory even though 90% of thecoal was shipped to other states andthe tax burden was shifted to citizensof other states. This conclusion wasbased on the fact that the tax wascomputed at the same rate regardlessof its destination. A higher amount ofXII/1tax was paid because of the greateramount of gas consumed, rather thanan in-state/ out-of-state discrimina-tion.Ultimately, the discrimination issuewas based on a claim that the tax wasnot "fairly related to the services pro-vided by the state."16 After determin-ing that the tax was not a "user" feebut a general revenue, the Courtstated "there is no requirement thatthe amount of general revenue taxescollected from a particular activitymust be reasonably related to thevalue of the services provided to theactivity."17 Montana's tax on coal sur-vived scrutiny under the CommerceClause.The tax did not violate the Supre-macy Clause since it did not substan-tially frustrate the purposes of theMineral Lands Leasing Act of 1920.18The Court found that in §32 of theact, Congress expressly authorizedthe States to impose severance taxeson federal lessees without imposingany limits on the amount of suchtaxes and that if the tax was "other-wise lawful, the 1920 Act (MineralLands Leasing Act) does not forbidit." 19Finally, the Court considered theassertion that the tax was unconsti-tutional because it substantially frus-trates national energy policies reflectedin several federal statutes encourag-ing the production and use of coal.The Court examined the relevant sta-tutes including the Powerplant andIndustrial Fuel Use Act of 1978.20 Sec-tion 601(a)(2) of that act provides thatseverance taxes be "taken into account"when determining the need of a statefor federal financial assistance becauseof the adverse effects of increasedcoal or uranium mining. The Courtconcluded that there is evidence thatthe statute contemplates the con-tinued existence, not the pre-emptionof. state severance taxes on coal andother minerals.21In summary, the similarity of thetwo cases is only a surface one andthere are distinctions between them(the Court sought to distinguishMaryland in Montana.) The presence ofexemptions and credits for Louisianaproducers can be contrasted withYen44 J" YlbcelIestaurant a Carry Out1305 N. Charles StreetCall Ahead for Fast Service752-4498 727-8914We DeliverHoursMonday thru Friday - 6 a.m. - 11 p.m.Saturday 7 a.m. - 9 p.m.Sunday 8 a.m. - 6 p.m.Montana's tax rate which was con-sistent for all. Louisiana was taxingenergy obtained from lands outsideits borders while Montana's tax fellon resources from within its borders.It appears that severance taxes onenergy can be passed along to consu-mers even when the energy is obtainedfrom federal land, as long as there areno contrary federal statutory provi-sions and as long as the tax is com-puted at the same rate regardless ofits ultimate destination.Footnotes'The "Constitution and the Laws of the Uni-ted States. ... shall be the supreme Law ofthe Land ... " U.S. Const. art. VI,cl.2.2"Congress shall have the Power.. .to regu-late Commerce with foreign nations, andamong the several States and with theIndian Tribes .... U.S. Const. art. I,§8,cl.3.3101 S. Ct. 2114 (1981).447 La. Rev. Stat. S§1301-1315 (1980).5101 S. Ct. 2946 (1981).6101 S. Ct. 2114, 2121, n.8 (1981) (quoting47 La. Rev. Stat. §1302 (8) (1980) ).715 U.S.C. §§717a-717w (Gas Act) as amendedby the Gas Policy Act of 1978 (15 U.S.C.§3320 Supp. III 1979).8101 S. Ct. 2114, 2132, n.26 (1981) (quoting43 U.S.C. §1331-1336 (Supp. III 1979) ).9Id. at 2132, n.26.10430 U.S. 274 (1977).11300 U.S. 577 (1981).12101 S. Ct. 2114, 2135 (1981).13101 S. Ct. 2946 (1981).14Mont. Code §15-35-10 et seq. (1979).15101 S. Ct. 2946, 2954 (1981).161d. at 2955.171d. at 2956."Mineral Lands Leasing Act §1, 30 U.S.C.§§180-287 (1976).19101 S. Ct. 2946, 2961 (1981).2042 U.S.C. §8301 (b) (3) (Supp. III 1976).21101 S. Ct. 2946, 2963 (1981).

English

https://scholarworks.law.ubalt.edu/cgi/viewcontent.cgi?article=1247&amp;context=lf

Maryland v. Louisiana Compared with Commonwealth Edison v. Montana or How to Tax Energy Production

Abstract

Similar works

Full text

Available Versions

bepress Legal Repository

University of Baltimore School of Law