Tennessee Gas Pipeline Co. v. Urbach, 96 N.Y.2d 124 (2001)
A state tax on imported natural gas violates the Commerce Clause if it lacks a credit for taxes assessed on the purchase of gas out-of-state, creating a risk of double taxation.
Summary
Tennessee Gas Pipeline Co. challenged New York’s Natural Gas Import Tax (Tax Law § 189) as unconstitutional under the Commerce Clause. The tax was imposed on natural gas imported into New York for the importer’s own use. Tennessee, a pipeline company using compressor fuel drawn from its pipeline, argued the tax discriminated against interstate commerce. The Court of Appeals held that the import tax was facially discriminatory because it lacked a credit for taxes paid on the gas in other states, thus creating a risk of double taxation and violating the internal consistency test under the Commerce Clause, rendering the statute unconstitutional.
Facts
Tennessee Gas Pipeline Co. transports natural gas via pipeline originating in Texas and Louisiana, running through New York into New England. Tennessee operates compressor facilities in New York, powered by natural gas drawn from the pipeline. Under its FERC tariff, Tennessee takes ownership of the compressor fuel outside New York, making it a “gas importer” under New York Tax Law § 189. Tennessee did not pay the § 189 tax on this compressor fuel. The State Tax Department audited Tennessee’s FERC filings and assessed approximately $1.6 million in taxes, interest, and penalties. Tennessee then filed a declaratory judgment action arguing it was not a gas importer and that the statute was unconstitutional.
Procedural History
Tennessee Gas Pipeline Co. filed a declaratory judgment action in Supreme Court, challenging the Natural Gas Import Tax. The Supreme Court dismissed the complaint, citing failure to exhaust administrative remedies. The Appellate Division affirmed the Supreme Court decision. Tennessee appealed to the New York Court of Appeals. The New York Court of Appeals reversed the lower courts, declaring Tax Law §§ 189, 189-a, and 189-b unconstitutional.
Issue(s)
Whether New York’s Natural Gas Import Tax (Tax Law § 189) violates the Commerce Clause of the United States Constitution.
Holding
Yes, because the Natural Gas Import Tax lacks an appropriate credit for taxes imposed by other jurisdictions on the sale of gas, thus violating the internal consistency test under the Commerce Clause.
Court’s Reasoning
The court reasoned that the import tax discriminated against interstate commerce because it taxed out-of-state gas purchases while not taxing in-state purchases, triggering scrutiny under the Commerce Clause. The State argued that the tax was a valid compensatory tax, designed to equalize the tax burden on all gas consumers. To be valid, a compensatory tax must identify an intrastate tax burden for which it compensates, roughly approximate the intrastate tax, and be imposed on substantially equivalent events. The Court found that while the tax rates were similar, the import tax failed the internal consistency test. The internal consistency test is preserved when the imposition of a tax identical to the one in question by every other State would add no burden to interstate commerce that intrastate commerce would not also bear. The court found that, “If consumers buy gas in a State with a provision identical to Tax Law § 186, they would pay a pass-through tax even though they exported the gas to New York and consumed it here.” Because the import tax contained no credit for taxes assessed on the purchase of gas out-of-State, a double tax occurs, violating the Commerce Clause. Although the Legislature included a savings provision to provide a credit in such cases, the Court found it invalid as it required the Court to define the parameters of the credit, violating separation of powers principles. The Court cannot rewrite the statute and create quasi-judicial tax regulations.