EXXON CORP. v. EAGERTON
Legal provision: Equal Protection
ORAL ARGUMENT OF RAE M. CROWE, ESQ. ON BEHALF OF THE APPELLANTS
Chief Justice Burger: We will hear arguments first this morning in Exxon Corporation against Eagerton and the consolidated case.
Mr. Crowe, I think you may proceed whenever you are ready.
Mr. Crowe: Mr. Chief Justice, and may it please the Court:
This piece of legislation, passed in Alabama in 1979, involves several constitutional questions which have been raised by producers or servers of natural gas and crude oil within the state.
It was introduced in 1979 by Representative Hines of Escambia County, one of the state's largest producing counties insofar as oil and gas production is concerned.
It initially was introduced to increase the tax two percent state-wide.
Representative Hines, according to the record, had failed to pass this legislation in three previous occasions.
Unidentified Justice: Is he able to pass legislation all by himself or does the legislature pass it?
Mr. Crowe: He can pass legislature under local courtesy if it affects only his county, he being the only representative from the county, from that district, in the State of Alabama.
Unidentified Justice: But, is it actually... Is the bill actually enacted, at least in form, by the whole legislature?
Mr. Crowe: Yes.
When he encountered the difficulty with the Speaker of the House, by his own testimony, in the Governor's office, in the House Ways and Means Committee, he submitted a very important amendment, we submit, as a matter of legislative history.
This tax was four percent.
It was increased to two percent.
At the foot of the taxing paragraph, he entered a so-called depth proviso which provided, in effect, that provided, however, that the increase shall be limited to well producing in a smackover formation at the depth of 15/15.8.
His county was, according to the record, the only county in the state, then and now, producing hydrocarbons in this geological interval at this depth.
He represented to the committees and on the floor that his amendment had made the bill local, applied to his own county.
He was quoted in the newspapers as having said this.
And, the bill passed with no nays essentially.
Accordingly, the bill received local courtesy.
The Chairman of the Ways and Means Committee so testified.
The legislative journal entries show that the bill was carried on the journal as an uncontested local bill along with--
Unidentified Justice: Excuse me, Counsel, I am a little uncertain why... If the enactment passed the legislature, what difference does it make how it got there?
Mr. Crowe: --It makes a difference in this respect: Our clients are non-Escambia County producers which were not expected to have been taxed under the legislation.
Once the bill had been passed, the Commissioner of Revenue, the Appellee here, construed it legally to be a state-wide measure.
Refund suits were filed by the producers, the non-Escambia County producers; uncontested legislative history in the form of journal entries, physical notes, limiting the revenues only to Escambia County.
There was no contrary legislative history.
The Circuit Court of Montgomery County reads that the act, under the legislative history, was clearly and without any question a local act applying only to one county out of 67.
Unidentified Justice: What federal claim do you make out of all these facts?
I mean, doesn't the Supreme Court of Alabama have the final say as to whether or not--
Mr. Crowe: I realize that this Court does not, Justice Rehnquist, involved generally in statutory construction of state statutes.
But, when the Supreme Court of Alabama ruled that they would not look at the legislative history, we contend we were not given a fair hearing as a matter of due process when they totally ignored the uncontroverted legislative history, including statements from the sole sponsor of the local bill.
Unidentified Justice: --Aren't we bound by what the Alabama Supreme Court rules?
Mr. Crowe: I think we cite in our brief two cases that indicate... One is a Missouri case, the Brinkerhoff case, where this Court held that actions of the Missouri Supreme Court deprived the litigants there of due process.
Unidentified Justice: Well, the Alabama Supreme Court, I take it, heard your argument on legislative history.
They just didn't highlight the legislative history.
Mr. Crowe: They said they could not stray into the mazes of conjecture.
Unidentified Justice: Well, there are lots of opinions from this Court that say the same thing, aren't there?
Mr. Crowe: Under circumstances, however, where there is uncontroverted testimony from the sponsor himself, the sole and only sponsor, that it was his intention to tax his own county to address a revenue shortfall in his own county.
Unidentified Justice: I speak only for myself, but I hope you have a better federal claim than that one.
Mr. Crowe, on a slightly different subject, as I understand it, the Commissioner now takes the position that the act in question does not prohibit producers, working producers, from passing through the increase in severance taxes just so long as they don't do it as taxes.
Now, if that position is correct, how have your clients suffered any injury?
Mr. Crowe: Well, first, during the currency of this act, they were prohibited from passing through the severance taxes.
Unidentified Justice: As taxes.
Mr. Crowe: As a tax.
Unidentified Justice: And... So, I am curious how you establish your injury if the Commissioner's present position is correct.
Mr. Crowe: All right.
Justice O'Connor, the contracts fix a price.
They fix a definite price.
The National Gas Policy Act for various categories of natural gas fix a price.
And, either by virtue of the maximum statutory ceiling price and/or by virtue of the contract provisions themselves, we could only charge the price either permitted by law or agreed to by contract, but were permitted to pass on taxes under the express wording of the contract.
Unidentified Justice: Do we have the proof in front of us that would clearly establish that your clients could not have increased the price to take care of this--
Mr. Crowe: The contracts are in the record.
And, of course, the law is that--
Unidentified Justice: --And they allow escalation of prices.
Mr. Crowe: --The contracts?
Unidentified Justice: Uh-huh.
Mr. Crowe: I am not certain whether... The price escalation was not involved here.
I am not sure whether they... Some of them may have and some of them may have not depending upon--
Unidentified Justice: In other words, we don't really know whether your clients suffered any injury.
Would we have to remand to determine that?
Mr. Crowe: --I think you do know, Justice O'Connor, that the clients who could not pass through the severance statutes as agreed upon and had to swallow that tax suffered the loss of the amount of tax that they could not pass through.
Unidentified Justice: But, we don't know, if I may pursue it further, whether they could have passed it on in some other form?
Mr. Crowe: I think they could not have because the NGPA mandates the maximum price in both intra and interstate commerce and the contracts, some of which predated the NGPA, specified what that price would be.
Turning for a moment to the equal protection arguments that we have advanced to the Court with respect to the Royalty Owners Exemption, the Act in question exempted the royalty owners from the two percent increase, but apparently left the royalty owners subject to the four percent portion of the tax.
The record shows that we had both leases as well as the contracts, to which Justice O'Connor referred, which specifically provided in the case of the leases that the lessee and the lessor will share and bear the severance tax pro rata.
So, we are contending that we have... that the Royalty Owner Exemption should be held unconstitutional.
The class, we submit to the Court, is one of ownership.
There is a mineral fee, if the Court will, a producing mineral estate.
The royalty owner owns a share in it as a joint tenant.
The lessee owns a share in it as a joint tenant.
This Court has held in Barwise v. Sheppard that an oil and gas lease constitutes nothing more or less than a common or joint adventure with the profits to be shared pro rata in accordance with the terms and provisions of the lease.
Thus, we submit that a lessor is a royalty owner and the... is a land owner, and the lessee is likewise a land owner under the jurisprudence of Alabama and most oil producing states.
There are three reasons for this.
The Alabama Code specifically provides that the tax will be levied in proportion to ownership.
The Alabama Code specifically provides that producers shall include a royalty owner.
The Alabama Code specifically says that the tax is levied on the full stream of the well including that known as the royalty interest.
Furthermore, the Code provides... and this is not in any of the briefs and perhaps it should have been... The Code provides that the severance taxes in lieu of ad valorem taxes and ad valorem taxes, of course, being a tax on real estate and we say that the only reasonable, logical, fair classification is that of ownership of the production from the mineral fee and that there is no reasonable classification that can be... where it says four percent of the tax will be borne equally, but two percent will be borne unequally and disproportionate to the ownership.
We submit to the Court that there is another reason that makes the tax regressive.
Royalty percentage is very widening.
This record shows some royalties up to over 50 %.
Unidentified Justice: What is constitutionally in front of us about a regressive tax?
Mr. Crowe: Well, I think it is a question of classification and equal protection within the price.
Unidentified Justice: Well, I suppose I agree with you, but you said you are arguing now that the tax is regressive and a regressive tax isn't an unconstitutional tax.
Mr. Crowe: Well, it does not apply equally even between lessees.
Unidentified Justice: Well, no taxes apply equally.
Some people are taxed and some are not.
Mr. Crowe: Well, what I am saying, I think, is, Justice Rehnquist, that the tax does not apply equally between either royalty owners or working interest owners or land owners.
And, if that... the land owner should be the criteria for making a distinction between one molecule of gas and another molecule of gas; that the royalties' gas should be the same share of production as the working interest.
In fact, the largest royalty owner in Mobile County is one of the major oil companies.
One of the major paper companies is probably the... owning a lot of land... is probably second.
So there is no societal distinction between the royalty-interest side and the working-interest side.
It simply is that some people prefer to invest on the royalty side and others invest on the working-interest side.
In the Barwise case which I previously referred to, it was a Texas tax involved which was equally imposed on the full production of the well both on the lessor and the lessee.
And this Court held that it was a reasonable classification as to both the lessor as it was to the lessee.
Our authority for the proposition we are submitting to the Court is a 1937 decision of this Court in Barwise v. Sheppard.
ORAL ARGUMENT OF C. B. ARENDALL, JR., ESQ. ON BEHALF OF THE APPELLANT
Mr. Arendall: Mr. Chief Justice, and may it please the Court:
Before Act 434 was adopted by the legislature of Alabama, the state had a very simple and understandable tax scheme for the severance taxation of oil and gas production.
The tax was imposed on all of the oil and gas produced.
There was a definition of who were the producers of that gas or oil.
It included both the royalty owner and the working-interest owner, each of whom bore the ultimate incidence of the tax in accordance with his or its ratable ownership of oil or gas produced.
When Act 434 was passed, however, we find a drastic change in the Alabama scheme.
Because the legislature comes along and for the first time with respect to the two percent increase that was provided by that statute exempts the royalty owner... the royalty owner's share of production... from any portion of the tax increase.
The language of the statute was
"any person who is a royalty owner shall be exempt from the payment of any increase in taxes herein levied and shall not be liable therefore. "
To make doubly clear the intent of the legislature, they then proceeded with what is called in the briefing in this case the Pass-Through Prohibition in which they say,
"the privilege tax herein levied shall be absorbed and paid by those persons engaged in the business of producing or severing oil or gas only. "
"And the producer shall not pass on the cost of such tax payments either directly or indirectly to the consumer. "
"It being the express intent of this Act that the tax herein levied shall be borne exclusively by the producer or severer of oil or gas. "
Unidentified Justice: That means the working interest, I think.
Mr. Arendall: That--
Unidentified Justice: Normally.
Mr. Arendall: --As construed by the state, that is what it means.
But that construction, if Your Honor please, comes in a background of a statutory scheme where the statutory definition of producers unchanged by Act 434 covers both the royalty owner and the working-interest owner.
And so any--
Unidentified Justice: The two percent specifically excluded the royalty owner... the amendment?
Mr. Arendall: --Well, it depends, if the Court please, on whether they have by implication repealed the definition of producer which we do not think that they have because, among other things, the statute continues to say that the tax shall be imposed on all of the production including the share of the royalty owner.
Now this comes in a posture where the evidence showed my clients, for example, had leases where the land owner would expressly agree to pay his proportionate share of severance taxes.
We had gas sales contracts where the purchaser would expressly agree to pay any increase in severance taxes.
And, because of the existence of those contracts, our first contention is that there has been an unconstitutional impairment of contracts.
Our second contention is that there has been a denial of the equal protection of the law.
Unidentified Justice: Do you have a position on the question of the position now taken by the Commissioner that the tax in effect could be passed on if you call it something else and just raise the price?
Mr. Arendall: --Yes, I do, Justice O'Connor, and I recall your question to Mr. Crowe on that subject.
As we endeavor to point out in our reply brief, the Commissioner is engaged in an absolutely impermissible attempt to rewrite the clear language of the statute.
When you say, as the language that I just said, does say that the tax has got to be absorbed by the producer, and that he cannot pass it on to anybody else, how can the Commissioner say to the contrary?
Unidentified Justice: You think that Alabama Supreme Court opinion was equivocal on that point?
Mr. Arendall: I do not understand the language of the--
Unidentified Justice: The language, at least, does not make it crystal clear, and I wonder whether that is not a question for the state law courts rather than a question for us?
Mr. Arendall: --I do not understand what the Supreme Court has said.
I see what the Commissioner has said, and I can read very clearly what counsel for the Commissioner said at an earlier date.
If Your Honor will look at page 40 of the Joint Appendix, you will find a quotation from Exhibit 19... Plaintiff's Exhibit 19... in which counsel for the Commissioner construed the Act and expressly said that it prohibited and pass-through to anybody.
Unidentified Justice: Mr. Arendall, you mentioned two questions that you saw in this case.
I must... I have this case confused with some other case on the calendar.
I had been under the impression that at least one question was whether this area... this Alabama statute... had been preempted by federal law?
Mr. Arendall: Well, that is certainly an additional--
Unidentified Justice: I have not heard the word preemption from anyone yet.
Mr. Arendall: --That is certainly an additional question if Your Honor please.
And, it is one, of course, that we addressed in our brief that the government... as Amigee has addressed.
We do say that it has been preempted, and it is interesting in this regard and in connection with Justice O'Connor's question that in the state's initial brief they urged this complete misreading of the statute claiming that we could pass-through as long as we fraudulently represented that we were doing something else.
Unidentified Justice: Well, are you going to discuss the preemption issue in your argument?
Mr. Arendall: Yes, I expect to, and I--
Unidentified Justice: Well how else can you win this case except on a federal constitutional ground such as preemption?
Mr. Arendall: --Well, it seems to be that we have three questions.
We have got the supremacy question as the preemption question.
We have the impairment of contracts.
We have got the equal protection question.
And those are the only grounds we assert on behalf of my clients.
Unidentified Justice: And, did you present all of those to the Alabama Supreme Court?
Mr. Arendall: We presented all of those to the Alabama Supreme Court, yes.
Unidentified Justice: On both acts did you present the preemption question?
Mr. Arendall: I beg, sir.
Unidentified Justice: Did you present the preemption question on both Acts?
Mr. Arendall: No, we did not.
We presented the preemption question solely on the NGPA.
Unidentified Justice: Well, then what right do you have to do it on the other Act here if you did not present--
Mr. Arendall: We have not, sir.
My clients have not.
The reason... a reason being, first that we think it is clear that the statutory prohibition and its conflict with the NGPA is not a severable item.
The legislature of Alabama never intended to say you cannot pass-through as to gas but you can as to oil.
So that if it is bad under the NGPA, it is bad.
And, it gets stricken.
And, we think that is the easy, clear argument.
In the second place, two of my clients are engaged in the Tully litigation.
It is their belief that the EPAA issues are properly addressed in the federal courts, the federal court system at Topeka.
If we were asked to express an opinion, and if this Court cares to pass on an EPAA thing, we certainly agree with the position taken by Amigee in its brief on that question.
But, we did not argue that in our brief.
What this act has done, is not only, you see, to tax the producer, the working interest owner, on his own share of production, but has required that he pick up the tax and pay it on the royalty owners' interest share of production.
Completely contrary to the definition of who shall be producers... completely contrary, we believe, to this Court's opinion in Barwise v. Sheppard.
Now, it is interesting to see that when the state addresses the impairment question here, he makes no effort to try to meet the kinds of tests that the Court has laid down in Blazedale and his progeny insofar as the circumstances under which contracts may be impaired.
All he does in substance is to say that the legislature probably was trying to avoid being perceived as levying a consumer tax.
Now, that may be a good political reason for a member of the legislature, but it certainly in our judgment does not express the kind of broad public general societal purpose that is required if you are going to have a constitutional impairment.
And in this instance, our reasonable contractual expectations were certainly destroyed.
Even, Justice O'Connor, if the state were correct in rewriting the statute as they attempted to do, how do they take the part... what about the royalty owner?
What do they say about that?
Do they say that the royalty owner has to pay its tax?
Do they rewrite that too?
Unidentified Justice: --Are your clients royalty owners?
Mr. Arendall: Our clients are lessees and also royalty owners.
We are both working interest and royalty owners... and are royalty owners.
So we submit that as far as the impairment question is concerned, there is complete absence on the part of the state to really address the tests in Blazedale and his progeny.
When you get to the equal protection aspects of the matter, in addition to the statutory definition... Look, if the Court will, at the impact of what this does.
If you have got a royalty owner... if you have got a lease--
Unidentified Justice: Please, are you going to get--
Mr. Arendall: --Excuse me, sir?
Unidentified Justice: --Please, the preemption point?
Mr. Arendall: Preemption... On preemption the NGPA... and that is the only argument that we make in our brief, and I will address that only rather than the EPAA question.
The NGPA clearly says that to the maximum lawful price may be added severance taxes imposed by the state.
Flat language of the statute says that.
I submit to Your Honor, there is no way to read this statute... this Pass-Through Prohibition in this statute... without saying that the legislature of Alabama has directly sought to nullify that provision NGPA.
There is a clear and direct conflict.
Unidentified Justice: But, returning to Justice O'Connor's question of a while ago, if the Commissioner... the state Commissioner is correct that the law does not permit pass-throughs, as long as you do not say you are passing through the tax in so many words, do you think there is any necessary conflict with the federal law?
Mr. Arendall: Well, may I just go back again, if I may to that Page 40 on the Joint Appendix--
Unidentified Justice: I know that.
I just said if he is correct.
Now, let's just suppose... just suppose that the Supreme Court of Alabama had expressly said, this law does not forbid pass-throughs as long as you do not call what you are passing through a tax expressly.
Now suppose that the Alabama Supreme Court had said that.
Would you be here then?
Mr. Arendall: --I think, if Your Honor please, we still--
Unidentified Justice: You would still be making your Equal Protection Contract Clause arguments?
Mr. Arendall: --Yes.
Unidentified Justice: You would not be making your preemption arguments?
Mr. Arendall: If Your Honor please, to get to the preemption question which I think is the first one that Your Honor put to me... I think, yes, we would have a conflict with NGPA.
Unidentified Justice: Because they say you may pass-through the tax?
Mr. Arendall: The tax, right.
You may... and they do not say, for example... They set a maximum lawful price based on the factors of escalation and so on.
They do not say we can up that any two percent and then having done that just say we have had a price increase so we have met the Alabama statute as currently interpreted by the Commissioner.
Yes, I think we would clearly continue to have the preemption problem in the case.
As to whether we would continue to have any impairment or equal protection, I think Your Honor started asking me to just say that we are going to violate the law.
Unidentified Justice: Just say yes.
You would still be here on the other two questions?
Mr. Arendall: Right.
I would be here on the other two questions--
Unidentified Justice: Thank you.
Mr. Arendall: --And, we would indeed still... even the Commissioner's argument, of course, does not get to the Royalty Owner Exemption.
Even if he can rewrite the clear language of the statute like he claims to, there is no way for him to say that we had any right to go and deduct from the royalty owner... payments to the royalty owners taxed on his proportionate share of the production.
Unidentified Justice: Counsel, are you making claim for the taxes that you did not pass-through before this latest interpretation by the Alabama court?
Mr. Arendall: We have not... we are making a claim for the two percent that we have paid to the state under what we consider to be a nonseverable unconstitutional statute.
Unidentified Justice: This is money you have already paid out?
Mr. Arendall: We have paid the money to the state.
It is being held in escrow pending the resolution of the case.
Unidentified Justice: Are you saying that if the Court interpretation is correct, you still have claim for back taxes that you should not have had to pay?
Mr. Arendall: I am sorry.
I did not understand, Your Honor.
Unidentified Justice: Well, if you accept the new interpretation by the Commissioner that the tax can be passed through if you hide it enough, do you still have a claim assuming you accept his interpretation... for back taxes... the taxes you could not pass through.
Perhaps I do not understand it.
Mr. Arendall: Yes, I would say that we do because we have not, in fact, passed through the taxes, you see.
We have just paid the money to the state.
And, if the court were to now say, for example, that we are not going to declare the entire Act unconstitutional, we consider it severable, but we are going to nullify on preemption grounds and on equal protection and on impairment of contract, or whatever, these unconstitutional provisions, then presumably we would have some chance of going after the people with whom we had contracts.
But only those with whom we had contracts.
As, for example, if we sold crude oil on the spot market during the time that this Act was in effect, we got no contract to get no more money from those people.
We were prohibited by the state from adding the severance tax to the price.
We paid the tax on that sale.
But, we cannot go back and say to somebody, say there would be two percent more to you in those days if we had been able to pass it through.
So, yes we--
Unidentified Justice: May I ask you a question about what you actually put into escrow in the state?
You paid the two percent increase.
First of all, you had a four percent tax before.
I want... say you had an example where you had a 75 percent working interest and a 25 percent royalty.
Under the four percent you paid 75... four percent of 75 percent of the production, and under the two percent you pay 100 percent.
So, and you paid 100 percent regardless of the size of the working interest.
Is that correct?
And all that money is in escrow?
Mr. Arendall: --Right.
Unidentified Justice: The whole two percent?
Mr. Arendall: And the two percent, not the four percent, the two percent is paid under protest and is in escrow--
Unidentified Justice: I missed that.
Chief Justice Burger: Mr. Breckenridge, I am sure it must be apparent to you now that we are somewhat interested in the preemption question, and we want you to be sure to address that in your own time.
ORAL ARGUMENT OF JOHN J. BRECKENRIDGE, ESQ. ON BEHALF OF THE APPELLEES
Mr. Breckenridge: Mr. Chief Justice, and may it please the Court:
I was going to address the arguments that they raised as they raised them, but I sitting here, determined that this Court is highly interested in the preemption clause, and I better get to that first and not delay any longer.
It is the position of the Commissioner of Revenue that there is no conflict with the federal statute and thus, there is no preemption issue.
The NGPA, The Natural Gas Policy Act, the only federal statute that we are talking about here today... and let me say why I say that... The trial court did not say anything about the EPAA and neither did the Supreme Court of Alabama.
This Court has been asked to look at the decision of the Supreme Court of Alabama to see if it is correct or not.
There is nothing in the Supreme Court of Alabama's decision whatsoever about the EPAA.
So, I would like to address my preemption clause... preemption question solely to the Natural Gas Policy Act.
What the Natural Gas Policy Act says... the particular section of the Natural Gas Policy Act that is in dispute... what it says is that the first seller of the natural gas is allowed to raise the maximum lawful price to reflect recovery... and it uses the word recovery... of certain items... and they are listed A, B, C, D, and E.
And Item A is state severance taxes.
Item B is cost of transportation, et cetera, et cetera.
These are all deemed costs under the NGPA that allows a first seller, or producer... a working interest... a producer, first seller to recover his costs.
Unidentified Justice: Now the language of this Alabama statute says that the producer cannot pass on the tax either directly or indirectly.
Mr. Breckenridge: --That is correct.
Unidentified Justice: Well, you are arguing he can do it indirectly, are you not?
Mr. Breckenridge: What I am saying is that the Alabama Supreme Court, when faced with this statute... First of all, they had certain rules of statutory construction to give the Appellants equal protection and due process that they have to follow.
And, what the Supreme Court of Alabama said is--
Unidentified Justice: You think the Supreme Court of Alabama really decided that question?
Mr. Breckenridge: --I believe so, yes ma'am.
And I... Let's go to the language they used.
"The two Acts were aimed",... this is the Supreme Court of Alabama speaking,...
"The two Acts were aimed at entirely different-- "
Unidentified Justice: Do you have the citation to the appendix to the petition?
Mr. Breckenridge: --Yes, Justice Rehnquist.
It is Page 12 of the Joint Appendix.
Unidentified Justice: Thank you.
Mr. Breckenridge: Page 12.
"are aimed at entirely different purposes. "
"In other words, although. "
--and this is the point I want to emphasize,...
"although it would be perfectly permissible for the oil and gas companies to raise the price for the first sale of natural gas, subject to the limitations of the Natural Gas Policy Act-- "
Unidentified Justice: I think it is 11A.
I am sorry.
I have the Jurisdictional Statement.
Mr. Breckenridge: --Let me emphasize the language I am speaking about.
"In other words, although it would be perfectly permissible for the oil and gas companies to raise the price for the first sale of natural gas, subject to the limitations of the Natural Gas Policy Act, all that Act 79-434 requires is that the increase in severance tax mandated by that Act be borne by the producer or severer of the oil or gas. "
"Thus the Pass-Through Prohibition contained in Act No. 79-434 does not conflict with the Natural Gas Policy Act of 1978, and the trial court's findings to that effect is due to be reversed. "
Now, what they said is that under the Alabama law and a reading of the NGPA it is perfectly permissible for the first seller of the natural gas to include in the maximum lawful price the increase in the tax, just so long as he does not tack it on as a tax.
Now, I take strong exception to something that Mr. Crowe said... I mean Mr. Arendall said... He said that the Natural Gas Policy Act requires clearly in its language that the tax be added to the maximum' lawful price as a tax.
Let's look at what the Act really says.
I do not have the Joint Appendix cite for this.
It is 15 U.S.C. Section 3320(a) 1.
"A price for the first sale of natural gas shall not be considered to exceed the maximum lawful price applicable to the first sale of such of such natural gas under this part if such for-sale price exceeds the maximum lawful price to the extent necessary to recover. "
And then it says subdivision one,
"state severance taxes attributable to production of such natural gas and borne by the seller. "
If you look on, it also allows the recovery of the cost of transportation, the additional increased cost of production--
Unidentified Justice: --But, Mr. Breckenridge, doesn't that mean that the only way the producer can get the increase under the federal statute is to identify it as the recovery of the severance tax?
And isn't that the one thing the state law prohibits?
Mr. Breckenridge: --I do not think so, Justice Stevens.
I think, sure he can give an itemized billing, but he cannot add a surcharge or surtax as--
Unidentified Justice: If you go over the ceiling by a certain percent, doesn't he have to make it perfectly clear for federal purposes that the extra amount being charged is to recover the state severance tax?
Mr. Breckenridge: --I would think so.
Unidentified Justice: And, is that permitted under state law?
Mr. Breckenridge: Yes sir, I would think so.
Unidentified Justice: Well, then what does the state law prohibit?
Mr. Breckenridge: The state law simply prohibits billing the consumer, when he gets the gasoline or the fuel oil or whatever it is used for, saying the price of this gasoline is $1.09 a gallon plus 3 cents increase severance charge.
Unidentified Justice: Which is put on to recover the severance tax.
That is prohibited by state law.
But that is what he must do under federal law to get the increase.
Mr. Breckenridge: But, the federal law does not prohibit... the federal law does not require that the tax be added to the maximum lawful price.
It says it shall be included in the maximum lawful price.
Unidentified Justice: It does say that you can raise your price by the amount of a severance tax if you have separately billed or charged the severance tax.
Mr. Breckenridge: That is correct.
And I think Justice Stevens says when you send somebody that bill where you have increased your maximum lawful price, you think it is okay for them to tell the buyer why the price is increased... that it is due in this instance to an increase in the state severance tax.
And I say, yes, I think it is permissible to tell the buyer that the increased maximum lawful price has been increased because of a two percent severance tax in Alabama.
Unidentified Justice: Let me give you two examples.
Suppose there is a charge made of a quoted price of a dollar and to that is added a two percent severance tax, so your bill is $1.02 per item.
Now, is that permissible under Alabama law?
Mr. Breckenridge: If you say the price is a dollar plus two percent tax... as we go into a... Can I draw an analogy real quick?
Unidentified Justice: Perhaps you could just answer that and then--
Mr. Breckenridge: I would say that you could not do it that way.
Unidentified Justice: --But, supposing you have... you bill the person $1.02 and say two cents of this is for--
Mr. Breckenridge: You could do it that way.
Unidentified Justice: --But, do you think you could recover... Do you think you could raise your price under the NGPA if you did it that way?
Mr. Breckenridge: Yes, I think you could.
And, to answer one of Justice O'Connor's questions, what injury have they suffered if they are allowed to pass along the tax?
How have they been harmed?
They are allowed to pass along the tax and I don't see what they say... how they have been injured.
Unidentified Justice: What is the state interest in requiring the billing procedure to follow a precise form, one form rather than another?
I can understand a state law that says you can't pass it on, but what is the purpose for a state law that says you can pass it on provided you do it in the following form.
Mr. Breckenridge: In Alabama, we have certain rules, statutory construction, that the Commissioner of Revenue has to follow and even the Supreme Court follows these rules in Alabama and that is that you don't try to find out the motives of why the legislature--
Unidentified Justice: You don't really care whether there is a reason for it or not.
Mr. Breckenridge: --As long it is not palpably arbitrated erroneously.
Unidentified Justice: Why isn't it palpably arbitrated, say you must follow this form rather than another?
Mr. Breckenridge: I think they... I think the legislature has full discretion.
I think the Supreme Court of the United States has said over and over again that legislatures have wide discretion in where they want to levy the tax and who they want the tax to fall on.
Unidentified Justice: Even if you cannot identify a rational basis for doing it for that requirement?
Mr. Breckenridge: --I think a rational basis could be identified.
I assume that the--
Unidentified Justice: Tell me what it is.
Mr. Breckenridge: --I assume that the legislature--
Unidentified Justice: What is the rational basis for saying must bill in this particular way?
Mr. Breckenridge: --I assume that the legislature of Alabama decided that they did not want to be perceived as levying another consumer tax, but wanted the tax to be upon the producers and that is what--
Unidentified Justice: Well, if that is the purpose, I would think it would violate the prohibition of the Alabama law however you showed the severance tax on your bill.
If you put a footnote at the bottom and say, by the way, two cents of the above $1.02 charge is severance tax, I would think you are right in the teeth of the purpose of the Alabama law.
You are then telling the consumer, don't blame the Feds, blame the legislature.
Mr. Breckenridge: --Let's look at what the Alabama Supreme Court, some of the rules they were fared with when they saw this conflict.
The rules of Alabama and the rules of the Supreme Court are that when two statute... when a statute is before the court and there are two interpretations, one of which will require a holding that the statute is unconstitutional, and another interpretation that will save the statute, that the courts are duty bound to adopt the interpretation that will uphold the constitutionality of the statute.
The legislature is presumed to have acted reasonably and not to have passed unconstitutional law.
The Supreme Court of Alabama, in answering Justice O'Connor's questions about did they specifically say that the producers could do this, they said, look at both of the laws, we think it is perfectly permissible to raise the maximum law for price just so long as you don't pass it along as a consumer tax.
Unidentified Justice: That is where I have trouble, I guess, is the quotation you read from page 12 of the Joint Appendix where you have that thrust in there.
To me, that thrust doesn't follow at all.
You are hung with it because that is what you have to defend.
Mr. Breckenridge: That is the language that the Supreme Court of Alabama used and we assume... The Commissioner has to assume that they meant what they said.
Unidentified Justice: Mr. Breckenridge, does it come down to... You suggest that Alabama says tax can be "passed on" without saying so?
Mr. Breckenridge: No, Justice Marshall.
I would say what they say is maximum lawful price can be raised, but that the--
Unidentified Justice: Can it be raised the amount of the tax?
Mr. Breckenridge: --It can be raised... The statute says, and I believe Alabama Supreme Court says implicitly that it can be raised an amount to recover the cost of their paying the tax.
Now, one of the things about the bill is that the tax has to be borne by the seller.
Unidentified Justice: If you question and you say what was this two cent raise, you would say that was the amount of the tax.
What else could you say?
Mr. Breckenridge: That was the amount that was necessary... This is the amount I am allowed to recover from you for my paying the State of Alabama severance tax.
Unidentified Justice: But, it is not a tax?
Mr. Breckenridge: It is not a tax on you, no, sir.
It is a tax on me and I am allowed to pass it on--
Unidentified Justice: It is not a passed-on tax?
Mr. Breckenridge: --No, sir.
I am allowed to recover my costs.
Unidentified Justice: You want us to approve that?
Mr. Breckenridge: Sir?
Unidentified Justice: You want us to approve that?
Mr. Breckenridge: Yes, sir.
Unidentified Justice: Mr. Breckenridge, would it be fair to say that the Supreme Court of Alabama interpreted as narrowly as conceivable the anti pass-on provision where the legislature said you can't pass it on directly or indirectly?
I suppose maybe you might have read that requirement the same, that the only way to absorb it is after you declare a dividend to the stockholders you have to take the tax out of that dividend.
But, the Alabama Supreme Court came out at the other end of the spectrum and said that really all we are talking about is you can't add it to a quoted price.
Mr. Breckenridge: I would agree with that, Justice Rehnquist.
The Appellants have also raised certain issues about the contract clause and they have cited the Barwise case as we have cited the Barwise case.
I think the Barwise case, the United States Supreme Court case, Barwise v. Sheppard, is more in favor of the State of Alabama or the Commissioner of Revenue's interpretation than the Appellant oil company.
It is almost black-letter law in America that parties to a private contract cannot limit a state's ability to levy taxes or to select upon whom those taxes are to fall.
Clearly two individuals or two corporations can't get together and say, as between us, we are going to bind the State of Alabama or any other state and say that they can't levy additional, increased taxes on us.
I would like to point out, and I am sure that the Court realizes, that every tax of any kind to some extent affects a contract right.
Any tax that I can think of to some extent affects somebody's contract.
It is just inconceivable that the state's sovereign right to tax can be taken away by a contract between private corporations.
There is an implicit... The Commissioner submits that there is an implicit limitation on the right to contract that must recognize the sovereign right of a state to exercise its power of taxation.
As Justice Holmes has said in the Barwise case or was quoting the Barwise case,
"when these rights are subject to state restrictions cannot remove them from the power of the state by making a contract about them. "
I would like to go back for a moment about the Natural Gas Policy Act and raise an issue that we raised in our briefs and that is that the Alabama statute contains a Severability Clause.
The Alabama statute we are talking about is over four pages long and the main sentence we are talking about is simply that, one sentence.
It is the position of the Commissioner of Revenue that should this Court decide that the pass-through prohibition is pre-empted under the Supremacy Clause by the NGPA; that because of... that contains a severability Clause which says that should any portion of this Act be deemed unconstitutional the remainder of the Act shall stand, shall survive; that the Court, as the very least, would have to send it back down to the State Supreme Court of Alabama to determine whether or not... what effect the Severability Clause has.
Now, it is a matter of record that less than ten months later the legislature of Alabama adopted the identical language of that 79-434 and they left out one sentence, the Pass-Through Prohibition, and they added on sentence that allowed unitization method of reporting.
We think this is highly persuasive that the Pass-Through Prohibition was not an essential part of the 79 Act so as to cause the whole Act to fall.
Unidentified Justice: This assumes you get by the other grounds that would invalidate the two cent tax, the two cent increase.
Mr. Breckenridge: I am not clear, Justice White, on what other grounds you are referring.
Unidentified Justice: I mean the equal protection and the contract.
Mr. Breckenridge: If the Court rules, for instance, that the Pass-Through Prohibition--
Unidentified Justice: The pre-emption ground wouldn't question the validity of the two cent increase?
Mr. Breckenridge: --Let's look at the contract clause.
What the oil companies are saying is that because of the Anti Pass-Through Prohibition their, contracts were invalidated because they can't pass along the tax.
Unidentified Justice: Well, you see, the reason I said... Suppose we thought that the Pass-Through Provisions were invalid under the NGPA--
Mr. Breckenridge: Yes, sir.
Unidentified Justice: --wouldn't we still... Would we still have to pass on the equal protection and the contract clause issues?
Mr. Breckenridge: I don't understand how you could pass on the contract clause.
That is what I was trying to say here.
If the Anti Pass-Through Provision, if you strike it down, if this Court strikes it down, it is out.
Where is the contract clause question then?
The contract clause also hinges on the Anti Pass-Through Prohibit.
Unidentified Justice: Well, how about the equal protection?
Mr. Breckenridge: I can address that now.
Unidentified Justice: Well, I know, but wouldn't we have to--
Mr. Breckenridge: The Court could--
Unidentified Justice: --Wouldn't we have to address it?
Mr. Breckenridge: --I don't think so.
I could suggest--
Unidentified Justice: If they are right on the equal protection, if that issue is properly here, and if they are right on it, it means that the two cent exclusion of the royalty owner is unconstitutional, right?
Mr. Breckenridge: --No, sir.
I will say why.
I think what the Court would do is if it decided to strike down the Pass-Through Prohibition and send it back down to the Alabama Supreme Court, usually this prudent Court waits until the State Supreme Court has ruled on that question before it will... The State Supreme Court may strike the whole statute down, it may not.
But, we would never get to the Equal Protection Clause.
The equal protection argument is... If I may go over what the equal protection argument is, they are saying, because the Supreme Court of Alabama refused to accept their version of the legislative history, things they call legislative history, that they were denied equal protection in the state court.
That is all that is.
It has got nothing to do with the language in the statute.
Unidentified Justice: That is their due process argument.
Their equal protection argument is the fact that there is an exemption for royalty for the non-working interest owners.
That is their equal protection argument.
Mr. Breckenridge: If the Court decides to address--
Unidentified Justice: We have to decide it.
Mr. Breckenridge: --Justice Stevens, I would sorely disagree with you because not only do they say due process, but they say we were denied equal protection because--
Unidentified Justice: You may be right about the label, but let's talk about the royalty owner problem for a minute.
How do you answer that one?
Let me ask you, in the legislation ten months later, did you change the statute in this respect?
Mr. Breckenridge: --With regard to the royalty owner exemption, no, sir.
Unidentified Justice: No, that is still there.
Mr. Breckenridge: Let me reiterate.
There were only two changes in the statute ten months later; one, the Anti Pass-Through Prohibition was deleted, and a method of reporting on the unitization method was added.
Unidentified Justice: How do you justify... Say you have one... Two producers, one has a 50 % working interest and the other has a 75 % working interest.
They both, say, pay the same tax, is that right?
Mr. Breckenridge: Yes, sir, same rate of tax.
Unidentified Justice: The same rate and the same dollar amount if they produce the same amount.
And, the exemption... Does not the exemption mean that the smaller working interest pays a higher rate on his actual earnings?
Mr. Breckenridge: I don't know, sir.
I don't think so.
I don't see it that way.
I think that a 50 % working-interest owner would still pay at the rate of two percent and a 75 % owner--
Unidentified Justice: If you have got 100 % of production.
You pay two percent on 100 % production even though his economic interest is only 50 %, isn't that right?
Isn't that their argument?
Maybe I don't understand their argument.
Mr. Breckenridge: --I don't understand that at all.
I don't understand what you are saying honestly.
Unidentified Justice: Do you understand they are making an equal protection argument based on the exemption for the royalty interest, because the economic effect of the exemption is to produce distortions in the rates paid by those who actually produce the gas?
Mr. Breckenridge: Well, with regard to that answer--
Unidentified Justice: The only exemption is for royalty interest, isn't it?
Mr. Breckenridge: --Yes, sir.
Unidentified Justice: Is there another standard royalty rate in Alabama?
Mr. Breckenridge: No, sir.
The oil companies for lessees... The testimony in the volumes of record go from anywhere from 1/8 to 1/16 to 1/32.
It is just whatever the market will bear.
Unidentified Justice: So, Justice Stevens has to be correct, doesn't he, that if the tax is paid by the working interest and the royalty interests are exempt, then this tax burdens some producers more than others.
Mr. Breckenridge: As the income tax burdens people with a higher income than people who make less.
The legislature has the discretion to set the rate of tax and they can decide... They have the clear--
Unidentified Justice: Well, again, what is the rational basis for charging one producer a higher rate simply because he has a different percentage interest in the lease?
Mr. Breckenridge: --I don't think a royalty owner is a producer under the increase.
I disagree with that assertion right away.
Unidentified Justice: That is a matter of statutory construction.
Mr. Breckenridge: That is correct.
Unidentified Justice: But, if you construe the statute your way, it does have the affect of charging different producers different rates for the same amount of gas being produced.
Mr. Breckenridge: If you construe it my way?
Unidentified Justice: Yes.
Mr. Breckenridge: I say the royalty owner for the two percent increase is not a producer so it would not--
Unidentified Justice: No, but the producer... If the producer has a smaller percentage interest in the lease and they all pay two percent on total production, the producer with the smaller percentage is paying a higher percentage on what he actually earns.
Mr. Breckenridge: --If they all pay two percent on their production and one producer produces more, is a larger producer than the others, I don't see how that is a denial of equal protection.
The smaller producer could produce more.
I could make $1 million and pay income on $1 million or I could... I don't see where that is denial of equal protection.
What we are doing here is so long as you treat every member of the class or subclass the same you are not denying them equal protection.
If you keep royalty owners, all of the royalty owners one way and all the producers another way, but so long as you treat them the same, you are not violating equal protection.
Unidentified Justice: Mr. Breckenridge, do your opponents say base their equal protection argument on the discrimination among producers or do they say that you may not exempt royalty owners?
Mr. Breckenridge: They say both.
Unidentified Justice: They say both?
Mr. Breckenridge: Yes, sir.
Unidentified Justice: Did they use both of those arguments in the Supreme Court of Alabama?
Mr. Breckenridge: I think they did.
Unidentified Justice: Is this discussion of the Supreme Court of Alabama where they cite the state case of Hayden against Watson at page 9 of the Appendix?
The Supreme Court of Alabama seems to simply talk in terms of the power of the legislature to establish classification.
Was that a response to a federal equal protection argument by the--
Mr. Breckenridge: Yes, I think it was, Justice Rehnquist.
Unidentified Justice: --Aren't there a lot of severance taxes that just hit the working interests around the country and exempt--
Mr. Breckenridge: Yes.
Unidentified Justice: --It is not unheard of--
Mr. Breckenridge: None come to mind.
Unidentified Justice: --It is not unheard of to exempt royalty owners from severance tax liability?
Mr. Breckenridge: That is correct.
The one that comes readily to mind in Alabama is the coal severance tax that is levied on producers.
Unidentified Justice: That may be true, but that doesn't answer the equal protection argument insofar that it is based on a discrimination among producers.
Mr. Breckenridge: As I understand Justice Stevens' example, what we... He says you seemed to be treating smaller producers at a different rate than the larger producers.
Unidentified Justice: Oh, no.
Mr. Breckenridge: But, then, they are different.
They are smaller producers.
We are not saying they are different.
Unidentified Justice: Two producers producing exactly the same amount of oil are going to pay different amounts of tax or they are going to pay the same amount of tax, but they have less economic interest in the oil that is produced, one of them does.
Mr. Breckenridge: I disagree, because--
Unidentified Justice: The tax is going to be more burdensome.
Mr. Breckenridge: --I disagree, because they can't... Neither one of them can pass a law on the increase to the royalty owner.
They are both going to bear 100 % of the tax.
Unidentified Justice: That may be... That may be so, but if I am delivering tax free to the royalty owner 50 % and still paying $100,000 severance tax, and my competitor is delivering only 25 % tax free.
Mr. Breckenridge: I think the Court... the statute does not say that at all.
The statute says the increase in the severance tax will be borne by the producer and shall not be passed along to the royalty owner.
So, the fact that he has got... The producer is going to pay 100 % of the severance tax on the amount of oil and gas that he severs and the fact that he has got a royalty owner and one of his competitors does not have to share his proceeds with a royalty owner does not mean that they are being denied equal protection.
Unidentified Justice: Well, I just suggest to you that two producers in the position that Justice Stevens posited to you one of them is going to end up... One of them is going to end up with less money in his pocket than the other.
Mr. Breckenridge: I don't believe by paying the severance tax will cause them to lose it.
At any rate, he is going to pay the same rate.
I believe that if I pay income tax that I am going to pay a different rate than somebody else and at the end of the year I will wind up with less money than someone else, but that doesn't mean that I am being denied equal protection by the income tax laws.
Unidentified Justice: The irony here is that the smaller your working interest the higher your tax.
Mr. Breckenridge: The Appellants Exchange and Getty and Union have raised up here again the question of whether the Alabama statute is a local law or a general law.
We feel like the State of Alabama has the ultimate competence to answer that question and we feel like the... the Commission feels like the Supreme Court of Alabama answered that question fully.
Before I finish, I would like to go back to the Severability Clause though.
If the Court decides to agree with Appellants with regard to the pre-emption question and the Anti Pass-Through Prohibition, it is the position of the Commissioner of Revenue that the case must be sent back down to Alabama to determine the effects of the state's Severability Clause.
And, we would also like to say that Appellant Exxon and Gulf and Louisiana Land and Exploration have drawn the analogy that the Royalty Owner Exemption and the Anti Pass-Through Prohibition are the same and they are not.
The Royalty Owner Exemption says that the producer is prohibited from passing the tax along to the royalty owner and it says that the royalty owner's interest is exempt from the tax is what it says.
The Anti Pass-Through Prohibition says that the producer cannot pass the tax along to the consumer.
The royalty owner is not the consumer of the gas.
What he is, he is a lessor usually or contributes in some manner, investing in the drilling of the well.
To say that the royalty owner is in the same position as the consumer is a gross distortion of the facts in the opinion of the Commissioner of Revenue.
Chief Justice Burger: Your time has expired, Mr. Breckenridge.
Thank you, gentlemen, the case is submitted.
We will hear arguments next in the Pennhurst State School against Halderman.