WASHINGTON -- The Supreme Court yesterday let stand a Texas Supreme Court ruling that allows Nueces County, Tex., to tax imported crude oil while it is in transit to a refinery.
The Texas ruling could open the door to a potentially vast new revenue source for localities through which imported or exported goods are shipped, attorneys say.
Members of the Institute of PropertyTaxation, which seeks to improve state and local tax administration, "fear a forthcoming wave of new, onerous, and unconstitutional taxes on goods in transit," the institute told the court in a petition opposing the Nueces County tax.
The Supreme Court, as is traditional when it refuses to hear a case from a lower court, offered no explanation for its decision.
The case, Diamond Shamrock v. Nueces County Appraisal District, involves the Texas county's decision to levy ad valorem property taxes in 1988, 1989, and 1990 on imported crude oil that Diamond Shamrock Refining and Marketing Co. temporarily stored within county boundaries before shipping it to a refinery.
In a typical procedure, the oil was off-loaded from a tanker in the Gulf of Mexico and held in a storage facility before being shipped through pipelines owned by Diamond Shamrock and another carrier to Three Rivers, Tex., where Diamond Shamrock operates a refinery, the oil company said. Temporary storage was required; it said, because pipeline capacity was too limited to ship the oil all at once.
Diamond Shamrock argued that the county assessment violated the Constitution's import-export and commerce clauses. The import-export clause prohibits states from taxing imports or exports, except when needed to cover inspection costs, and the commerce clause prohibits states from erecting barriers to interstate commerce.
But the Texas high court, upholding the county, found that the taxes did not discriminate against either foreign or interstate commerce.
Nueces County argued that Diamond Shamrock has a "continuous presence" of crude oil in the county that requires "governmental services." There is a specific link to the county that justifies taxation under the commerce clause, and the import-export clause is not supposed to protect importers from bearing their fair share of the cost of government, the county told the high court.
Also, the oil is consumed within Texas rather than being merely in transit through the state, the county said. Even if the oil were destined for other states, the property taxes still represent a quid pro quo for benefits conferred by the county government, Nueces County said.
Diamond Shamrock said the property tax is the same as an import duty that relates to the mere presence of the oil within the county's jurisdiction. The high court has previously held that goods in transit are immune from state and local property taxation, and a "brightline rule" is needed to make this clear, the company said.
Diamond Shamrock and the Institute for Property Taxation said the United States imports more than $50 billion of oil a year, which makes up 10% of all imported goods. "While the means of transportation may differ for other goods, those goods are likewise subject to taxation at their ports of entry under the Texas Supreme Court's opinion," the institute said.
The Texas court's holding may lead to taxation of goods not only in transit between the United States and other countries but also among states, the institute said.
At least 40 states impose or authorize localities to impose personal property taxes, Diamond Shamrock said. While several states specifically prohibit imposing such levies on goods in transit, "most do not, and others appear to have ignored the Constitution's ban against such taxes," the company said in its petition for review.
Foreign trade is on the rise, and raw materials such as oil "are especially vulnerable to taxation at their ports of entry," Diamond Shamrock said. The Texas ruling will tempt other ports with "potentially vast and politically painless revenues to be derived from imposing import duties on foreign commerce," the company said.
The high court also refused to review two cases involving a major issue in the ongoing debate over litigation reform -- whether shareholders in a class action suit that is settled in state court can take individual challenges under federal securities law to federal courts.
The court in its 1993-94 term rejected a similar case, Ticor Title Insurance Co. v. Brown, because of a procedural problem. Yesterday, the court declined to hear arguments in similar cases that attorneys said did not have the procedural problem, Sandler Associates v. Bellsouth Corp. and Grimes and Holbrook v. Vitalink Communications Corp.
Under settlement provisions certified by a Delaware court and upheld by the U.S. Court of Appeals for the Third Circuit, shareholders in the class actions are precluded from going to federal court with lawsuits in connection with mergers and acquisitions involving the two companies named in the cases.
Shareholders C.L. Grimes and G.W. Holbrook said in their petition for review that Arthur Levitt, chairman of the Securities and Exchange Commission, has raised concerns about potential conflicts of interest between attorneys who negotiate settlements of class action suits for large fees that may not be in the best interest of shareholders.
In both cases, attorneys on behalf of certain shareholders received large fees for negotiating settlements for money damages with Bellsouth and Vitalink that prevent other individual shareholders from "opting out" and pursuing challenges to the corporate actions in question under federal securities law, Grimes and Holbrook said.
The high court yesterday also refused to hear a case, Tahoe Keys Property Owners Association v. California State Water Resources Control Board, that involves whether fees exacted by localities from developers to mitigate effects of construction are unconstitutional takings of property.