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A natural gas distribution company located in Chicago purchased gas from various suppliers. A substantial amount of gas was located at a storage facility in Texas. The company had contractual rights to take delivery of the gas, but under federal law was not allowed to take physical possession of it. Possession and control over the gas remained with the pipeline. The company objected to taxation of the gas claiming that it only owned contractual rights, not the actual gas itself and also claiming that the gas was exempt from taxation because it was in the stream of interstate commerce. The court disagreed finding the company owned an allocable portion of the gas. However, it held that storage of the gas, which had previously entered the interstate transportation system, did not remove the gas from the stream of interstate commerce because the company had no control over storage decisions and because storage of gas was an integral function of interstate transportation of gas. The fact that storage allowed the company to take physical delivery of the gas at peak delivery times did not alter its interstate commerce character. Finally, the court held that the gas could not be taxed on a proportional basis because its owner had no offices or employees in Texas and had no physical control over the gas. It held that any local governmental services provided to the gas, such as police and fire protection, were adequately compensated by the property taxes paid by the pipeline company on the pipeline system’s assets.

Click here to review the underlying case of the Peoples Gas, Light and Coke Co. v. Harrison Central Appraisal District, No. 06-07-00103-CV (Tex. App.-Texarkana, September 24, 2008, no pet. h.). (to be published.)

John Brusniak, Jr.