Dozier, James M., Jr.

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Louisiana Law ReviewVolume 14 | Number 3April 1954Constitutional Law - Commerce Clause - Validityof State Tax on the "Taking of Gas"James M. Dozier Jr.This Note is brought to you for free and open access by the Law Reviews and Journals at LSU Law Digital Commons. It has been accepted for inclusionin Louisiana Law Review by an authorized editor of LSU Law Digital Commons. For more information, please contact kreed25@lsu.edu.Repository CitationJames M. Dozier Jr., Constitutional Law - Commerce Clause - Validity of State Tax on the "Taking of Gas", 14 La. L. Rev. (1954)Available at: https://digitalcommons.law.lsu.edu/lalrev/vol14/iss3/171954] NOTESCONSTITUTIONAL LAW-COMMERCE CLAUSE-VALIDITYOF STATE TAX ON THE "TAKING OF GAS"A Texas statute' placed an occupational tax on gas gathering,defined as "the first taking or the first retaining of possession ofsuch gas for other processing or transmission. 2 Appellants, theMichigan-Wisconsin Company, bought their entire supply of gasfrom a Texas producer. The gas was processed, then was takeninto the company's line, and was compressed so that it would flowthrough the interstate pipes. The tax was upheld by Texas courtsin a suit to test its validity.3 On appeal the United States SupremeCourt held the taking to be an inseparable part of interstatecommerce, the gas being in continuous flow from well to pipesand that the tax, as applied to appellants, was invalid. Michigan-Wisconsin Pipe Line Co. v. Calvert, 74 Sup. Ct. 396 (1954).Since Louisiana has a statute4 almost identical to that ofTexas, the decision will be of considerable importance to thisstate. The problem facing the Court in this case was whether ornot the tax, under the broad definition of gas gathering in thestatute, was delayed until the gas became a part of interstatecommerce itself.5 The rules of state taxation of interstate com-merce are highly complicated, confusing and seemingly contra-dictory. No attempt, however, is made here to present a complete1. Tex. Laws 1951, c. 402, § 23(2): "In addition to all other licenses andtaxes levied and assessed in the State of Texas, there is hereby levied uponevery person engaged in gathering gas produced in this State, an occupationtax for the privilege of engaging in such business, at the rate of 9/20 of onecent per thousand (1000) cubic feet of gas gathered."2. Tex. Laws 1951, c. 402, § 23(1) (c) : ". . . the term 'gathering gas' meansthe first taking or the first retaining of possession of such gas for otherprocessing or transmission whether through a pipeline . . .or otherwise aftersuch gas has passed through the outlet of such [original processing] plant."3. Calvert v. Michigan-Wisconsin Pipe Line Co., 255 S.W.2d 535 (Tex. Civ.App. 1953).4. LA. R.S. § 47:671 (1950): "In addition to all other licenses and taxeslevied and assessed in the State of Louisiana, there is hereby levied uponevery person engaged in gathering gas produced in this state, an excise,license or privilege tax, for the privilege of engaging in such business, at therate of one cent (1¢) per thousand (1,000) cubic feet .. .of gas gathered."According to LA. R.S. § 47:673 (1950), gathering gas means "the firsttaking or the first retaining of possession of gas produced in Louisiana fortransmission through a pipe line, after the severance of such gas, and afterthe passage of such gas through any separator, drip, trap or meter that maybe located at or near the well. In the case of gas containing gasoline orliquid hydrocarbons that are removed or extracted in commercial quantitiesat a plant by scrubbing, absorption, compression, or any similar process, theterm 'gathering gas' means the first taking or the first retaining of possessionof such gas for transmission through a pipe line after such gas has passedthrough the outlet of such plant .. "5. Michigan-Wisconsin Pipe Line Co. v. Calvert, 74 Sup. Ct. 896, 401 (1954).LOUISIANA LAW REVIEWanalysis of this topic., A brief outline of the basic developmentswill be sufficient to locate the position of the instant case withinthe overall framework. Indeed, the problem of state taxation isbut a part of the entire subject of residual powers of the stateswith regard to the Commerce Clause and other powers delegatedto the federal government.The United States Supreme Court has announced certainstandards which a state tax affecting interstate commerce mustmeet before it will be sustained. First, the tax cannot dis-criminate against interstate commerce.7 In the instant case, thelevy was not discriminatory, for it was laid on all gas gatheringwithin the state, regardless of whether the gatherer was engagedin interstate or intrastate commerce.8Until 1938, the Court would not allow a state tax to standif it constituted a direct burden on interstate commerce;'9 al-though it was valid if it only placed an indirect burden on it.'0However, this test seems unfair to the states. Interstate com-merce derives certain benefits from the states; it should beobliged to pay its own way, as is local commerce. Realizing this,Mr. Justice Stone formulated the multiple burden doctrine, whichcontrolled from 1938 until 1946.11 Under this rule a state couldnot lay a tax which could be duplicated by the other statesthrough which the articles of commerce flow. This rule seemsto be the more equitable one. It does not entirely relieve inter-state commerce from payment of its due share to the states, yetit prevents double taxation of the commerce. The multipleburden doctrine appears to be in line with Madison's opinion:"A very material object of this power [regulation of inter-6. For recent comprehensive analyses of the subject, see Barrett, StateTaxation of Interstate Commerce, 4 VAND. L. REV. 496 (1951); Note, StateTaxation and Interstate Commerce, 54 COL. L. REv. 261 (1954).7. Nippert v. Richmond, 327 U.S. 416 (1946); Best & Co. v. Maxwell, 311U.S. 454 (1940).8. 74 Sup. Ct. 396, 400 (1954).9. Minnesota v. Blasius, 290 U.S. 1 (1933). Accord: Pacific Tel. & Tel. Co.v. Tax Commission, 297 U.S. 403 (1936); Alpha Portland Cement Co. v. Massa-chusetts, 268 U.S. 203 (1925); Ozark Pipe Line Co. v. Monier, 266 U.S. 555(1925).10. Southern National Gas Corp. v. Alabama, 301 U.S. 148 (1937); AtlanticLumber Co. v. Commissioner of Corporations and Taxation, 298 U.S. 553(1936); Matson Navigation Co. v. State Board of Equalization, 297 U.S. 441(1936); Virginia v. Imperial Coal Sales Co., 293 U.S. 15 (1935); Hope NaturalGas Co. v. Hall, 274 U.S. 284 (1927); Postal Telegraph-Cable Co. v. Richmond,249 U.S. 252 (1919); Watters v. Michigan, 248 U.S. 65 (1918).11. Western Live Stock Bureau of Revenue, 303 U.S. 250 (1938). Accord:Memphis Natural Gas Co. v. Stone, 335 U.S. 80 (1948); McGoldrick v. Berwind-White Coal Mining Co., 809 U.S. 33 (1940); Southern Pacific Co. v. Gallagher,306 U.S. 167 (1939).VOL. XI.VNOTESstate commerce] was the relief of the States which importand export through other States from the improper contribu-tions levied on them by the latter. Were these at liberty toregulate the trade between State and State, it must be fore-seen that ways would be found out to load the articles ofimport and export during their passage through their juris-diction with duties .... -12 (Italics supplied.)Thus, it was a main purpose of the Commerce Clause to preventmultiple taxation by those states through which commerceflows.' s Conversely, it was not intended to make it immune to allstate taxation. 14 However, where the states have attempted to taxforeign corporations which are engaged merely in transportinggoods through the state (as, for example, a pipeline, 5 a branchoffice in the state,' 6 the loading and unloading of vessels,'! andmotor vehicles' 8 ), the taxes have been invalidated.Since gathering gas was defined as the first taking of the gasafter production,' and since there could be but one such instance,it would seem that the tax could not be duplicated by otherstates on gas produced in Texas. Furthermore, the statute alsorequired that the gas be produced within the state.2 0 Althoughother states might enact similar legislation, it would not seemto affect appellant's gas, regardless of how many times it wasgathered after leaving Texas. Nevertheless, the Court indicatesa fear that this would happen.2 1Since Freeman v. Hewit22 in 1946, the decisions of the Courthave not been in agreement as to which rule would be followed.28That case completely ignored the multiple burden doctrine andstruck down an Indiana tax on gross incomes on the sole basis12. THE FEDERALIST, No. 42 at 274 (Madison) (Mod. Lib. ed.).13. Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 258, 259 (1938).14. Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 258, 259, 260(1938); Postal Telegraph-Cable Co. v. Richmond, 249 U.S. 252, 259 (1919).15. Ozark Pipe Line Corp. v. Monier, 266 U.S. 555 (1925).16. Alpha Portland Cement Co. v. Massachusetts, 268 U.S. 203 (1925).17. Puget Sound Stevedoring Co. v. State Tax Commission, 302 U.S. 90(1937).18. McCarroll v. Dixie Greyhound Lines, 309 U.S. 176 (1940).19. Tex. Laws 1951, c. 402, § 23(1)(c). See note 2 supra for text.20. See note 1 supra for text.21. 74 Sup. Ct. 396, 403 (1954).22. 329 U.S. 249 (1946).23. The theory of Western Live Stock v. Bureau of Revenue is followedin: Interstate Oil Pipe Line Co. v. Stone, 337 U.S. 662 (1949); MemphisNatural Gas Co. v. Stone, 335 U.S. 80 (1948). The theory of Freemanv . Hewitis followed in: Joseph v. Carter & Weekes, 330 U.S. 422 (1947). See also thedissent in Interstate Oil Pipe Line Co. v. Stone, 337 U.S. 662, 669 (1949).1954]LOUISIANA LAW REVIEW VOL. XIVthat it was a direct imposition on interstate commerce,'2 4 a re-version to the pre-1938 doctrine. The next year, the Court inval-idated a gross receipts tax which could not be duplicated in itseffect by other states, because the occupation burdened, thoughcarried on entirely within the state, was essentially a part ofinterstate commerce itself.25 This is, then, another way of statingthe direct burden theory.In the instant case the Court states the principle that a taxon the "local activity related to interstate commerce is valid if,and only if, the local activity is not such an integral part of theinterstate process . . . that it cannot realistically be separatedfrom it. ' 2s This is the theory which has prevailed for over a hun-dred years.2 The Court decided that the first taking of the gas byappellants could not be separated from the interstate commercebecause the gas was already moving in interstate commerce,being in continuous flow from the well into the pipes. But ifcontinuity of flow is the basis for finding the gas to be anintegral part of interstate commerce, it would appear that itshould also be such from the time that it began its upwardmovement from the interior of the earth, and a state could not taxit at any point thereafter. Moreover, in Utah Power & Light Co. v.Pfost,28 the Court had held that an Idaho tax on all electricalenergy generated within the state was valid, even though abouteighty-five percent of the energy went to other states.24. Freeman v. Hewit, 329 U.S. 249, 256 (1946): A "State has variousmeans of obtaining legitimate contribution to the costs of its government,without imposing a direct tax on interstate sales. While these permittedtaxes may, in an ultimate sense, come out of Interstate commerce, they arenot, as would be a tax on gross receipts, a direct imposition on that veryfreedom of commercial flow which for more than a hundred and fifty yearshas been the ward of the Commerce Clause." (Italics supplied.)In a dissenting opinion to this case (id. at 285-86) Mr. Justice Douglassaid: "Any receipt of income in Indiana from out-of-state sources involves,of course, the use of interstate agencies of communication. That, alone,however, is no barrier to its taxation by Indiana. Western Live Stock v.Bureau of Revenue. . . . For a local activity which is separate and dis-tinct from interstate commerce may be taxed though interstate activity IsInduced or occasioned by it...."The present tax is not aimed at interstate commerce and does not dis-criminate against it. . . . The tax is on the proceeds of the sales less thebrokerage commissions and therefore does not reach the revenues from theonly interstate activities involved in these transactions ..."I would adhere to the philosophy of our recent cases [Western LiveStock v. Bureau of Revenue, 303 U.S. 250 (1938), and McGoldrick v. Berwind-White Coal Co., 309 U.S. 33 (1940)] and afflrm the judgment below."25. Joseph v. Carter & Weekes Stevedoring Co., 330 U.S. 422 (1947).26. 74 Sup. Ct. 396, 401 (1954).27. Cooley v. The Board of Wardens of the Port of Philadelphia, 12 How.299 (U.S. 1851).28. 286 U.S. 165 (1932).1954] NOTESIn the Pfost case it was found that "the generator and thetransmission lines perform different functions"; 29 thus, that taxfell only on a local aspect of the commerce.3" The object of thetax, then, could realistically be separated from the interstateprocess. But, in view of the fact that electricity travels almostinstantaneously, it would seem that the first taking of gas (whichwas its entrance into the Michigan-Wisconsin Company's pipesfrom the producer's pipes), as well as its compression, can beseparated as realistically as can the generation of electricity. Itmay be added that as the generator and lines perform differentfunctions, so do the compressor and pipes. Furthermore, theapparent impossibility of the tax being duplicated on appellantsby other states has already been brought out.21Moreover, in Coverdale v. Arkansas-Louisiana Pipe LineCo.,3 2 the Court upheld a privilege tax on the production of powerto run a compressor, used for the same purpose as the one in theprincipal case. The tax fell about the same place in transit inboth instances-in fact, in the Coverdale case, it came after thetaking, for the tax was on the production of the power used inthe compression of the gas. Such power production would seemto be as much an integral part of interstate commerce as thetaking, for without the compression, the gas would not flowthrough the pipes.An interesting point about the instant decision is its un-animity. Mr. Justice Black has usually been hesitant to strikedown non-discriminatory state legislation alleged to be a regula-tion of interstate commerce, in the absence of congressionalaction to the contrary.33 He would uphold the state law, even ifthe tax might possibly be duplicated by other states.3 4 Moreover,29. Id. at 180.30. Id. at 181.31. See page 693 supra.32. 303 U.S. 604 (1938).33. For analyses of the position usually taken by Mr. Justice Black onthis subject, see Barnett, Mr. Justice Black and the Supreme Court, 8 U. opCHL L. REv. 20 (1940); FRANK, MR. JUSTICE BLACK 154-191 (1949).34. In the dissenting opinion in Gwinn, White & Prince, Inc. v. Henne-ford, 305 U.S. 434, 445 (1939), it was stated: "While there are strong logicalgrounds upon which this Court has based its invalidation of state laws actu-ally imposing unjust, unfair and discriminatory burdens against interstatecommerce as such, the same grounds do not support a judicial regulationdesigned to protect commerce from validly enacted non-discriminatory statetaxes which do not-but may sometime-prove burdensome .... So here, ifnational regulation to prevent 'multiple taxation' is within the constitutionalpower of this Court, it would seem to be time enough to consider it whenappellant or some other taxpayer Is actually subjected to 'multiple taxation.'"(Italics supplied.)LOUISIANA LAW REVIEWhe has expressed the view that it is for Congress, not the Court,to decide how far a state may go in regulating interstate com-merce if such regulation is not discriminatory.3 5 Has he relin-quished this view by his asquiescence in this decision?In conclusion, it is easy to formulate the proposition that astate tax on interstate commerce is valid if it is on a separable,local incident and invalid if on an inseparable, integral part ofthe commerce. The difficulty arises when this abstract propositionis applied to a concrete case, and one is called upon to decidewhether the object of the tax in question is separable or insepar-able, local or national in scope. Reasonable minds can well differas to when the object becomes inseparable from, and a direct partof, interstate commerce, for in making that determination it iseasy to point out distinctions where they apparently do not exist.James M. Dozier, Jr.CONSTITUTIONAL LAW-INTER-GOVERNMENTAL TAXATION-IMMUNITY FROM STATE SALES TAX OF CONTRACTORSUNDER "COST-PLUS-A-FIXED-FEE" CONTRACTSWITH THE UNITED STATESTwo tractors to be used in the construction of a governmentproject were purchased by private contractors as "purchasingagents for the Government."' An Arkansas "gross receipts" tax2was levied on the sale and paid by the contractor's vendor underprotest. The plaintiff vendor alleged that the tax was, in effect,a tax on the federal government and therefore invalid. TheArkansas Supreme Court upheld the'tax.8 On appeal to the35. Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434, 452 (1939):"Congress is the only department of our government-state or federal-vested with authority to determine whether 'multiple taxation' is injuriousto the national economy ......Id. at 455: "I would return to the rule that-except for state actsdesigned to impose discriminatory burdens on interstate commerce becauseit is interstate-Congress alone must 'determine how far [interstate com-merce] . . . shall be free and untrammelled, how far it shall be burdened byduties and imposts, and how far it shall be prohibited.' [Welton v. Missouri,91 U.S. 275, 280 (1875).]"1. Kern-Limerick, Inc. v. Scurlock, 74 Sup. Ct. 403, 409 (1954).2. Ark. Gross Receipts Tax Act of 1941, ARK. STAT. §§ 84-1901, 84-1902(e),84-1903, 84-1908 (1947).3. Parker v. Kern-Limerick, Inc., 254 S.W.2d 454 (Ark. 1953). TheArkansas Supreme Court relied on Alabama v. King & Boozer, 314 U.S. 1(1941), holding that the legal incidence of the tax fell on the private con-tractor. When the incitdence, which refers to the specific person or agencyVOL. XIV

Constitutional Law - Commerce Clause - Validity of State Tax on the  Taking of Gas

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Constitutional Law - Commerce Clause - Validity of State Tax on the Taking of Gas

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