AUSTIN – In a decision that will likely impact tax rolls in oil-patch districts, the Texas Supreme Court ruled Friday that nothing in the Texas Constitution binds the Legislature to set the tax valuation of business and personal property at full market value.
Specifically, the court upheld a statutory formula adopted in 2011 valuing leased compressors used to deliver natural gas into pipelines at a tiny fraction of their market worth.
The Galveston County Appraisal District argued that the formula – which uses rental income from a prior 12-month period, divided by 12 — violates the Texas Constitution’s requirement that property be taxed at fair value. The county traditionally taxed the compressors in its jurisdiction as business-personal property based on their full market value. For the purposes of taxation, the term “full market value” is an estimation of what the property would bring in an arms-length transaction between a willing buyer and a willing seller.
A group of school districts that collect significant property tax revenue from oil field equipment warned in an amicus brief that the industry taxpayers want a value equating to just 2 percent of the equipment’s market value, a result that could lead to closed schools or drastic cutbacks.
The challenged law is one of seven statutes that value certain classifications of property such as auto dealership inventory through a formula-based approach rather than on appraised value. Other than that difference, said Justice Jeff Brown, the county offered no additional arguments for why the tax scheme is otherwise unreasonable, arbitrary or capricious.
“But no one argues the legislature attempted to approximate market value, and we hold it is not constitutionally bound to do so,” said Brown. “The county’s complaint that the outcome is unfair – the compressors are taxed at a ‘minute fraction’ of their market value and the county has lost revenue – is a concern beyond our purview.”
Justice Eva Guzman did not participate in the case.
The decision was a win for Baker Botts, which has filed over 800 lawsuits on behalf of multiple taxpayers against more than 100 appraisal districts that had refused to recognize the statutory formula for oil field compressors held for lease. Evan Young and Renn Neilson represent the taxpayers, EXLP Leasing and EES Leasing, wholly owned subsidiaries of Exterran Holdings, which owns and leases out compressor stations.
Companies that own compressors for their own use and those that own them to lease are both compressor owners, the court said, but the Legislature placed them in different tax classes. The court also said that the Legislature intended to fix the taxing jurisdiction for taxing of dealer-held inventory at the location where the dealer maintains its inventory, rather than at the various locations where the equipment might otherwise be physically located. EXLP’s inventory is based in Washington County, the court said.
Neilson said the ruling is significant because it upholds the Legislature’s ability to reform state tax policy. He said Texas is one of only a handful of states that tax business inventories, which can be especially difficult when an item in a dealer’s inventory is moved from place to place, or in the case of a downturn in the oil economy, sitting idle.
“Friday’s decision was about more than just heavy equipment inventory. It was about whether the Texas Legislature has the constitutional authority to bring valuation into the modern era by developing new methods that result in better and more efficient valuations,” said Neilson, chair of the state tax section at Baker Botts in Houston.
The ruling reversed a decision by Houston’s 14th Court of Appeals, which in 2015 overturned a Galveston County trial court’s ruling that the tax provision was unconstitutional as applied. The court of appeals, however, had remanded the case for fact finding on the tax calculations.
The Supreme Court rendered judgment against Galveston County, which was represented by Anthony Brown of McLeod, Alexander, Powel & Apffel.
The decision settles a split among the courts of appeals. The 8th Court of Appeals in El Paso in 2015 upheld the tax law.