Opinion

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-02-00029-CV

Tennessee Gas Pipeline Company, Appellant

v.

Carole Keeton Rylander, Comptroller of Public Accounts of the State of Texas; and John

Cornyn, Attorney General of the State of Texas, Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 126TH JUDICIAL DISTRICT

NO. 98-09521, HONORABLE DARLENE BYRNE, JUDGE PRESIDING

This appeal involves a claim for tax exemptions related to aircraft operated by a

common carrier pipeline. See Tex. Tax Code Ann. § 151.328 (West 2002). Tennessee Gas Pipeline

Company ("Tennessee Gas") filed a claim for a refund of sales and use taxes paid in association with

the maintenance and repair of its aircraft. When its refund claim was denied, Tennessee Gas filed

suit against Carole Keeton Rylander, Comptroller of Public Accounts of the State of Texas, and John

Cornyn, Attorney General of the State of Texas (collectively the "Comptroller"). After the parties

filed competing motions for summary judgment, the district court affirmed the Comptroller's denial

of the refund claim by granting summary judgment in favor the Comptroller. We will affirm the

district court's judgment.

THE CONTROVERSY

The tax code provides that sales tax will be imposed on the sale of all taxable items.

Tex. Tax Code Ann. § 151.051 (West 2002). The tax code further provides that a use tax will be

imposed on the storage, use, or other consumption in this state of a taxable item purchased from a

retailer for storage, use, or other consumption within this state. Id . § 151.101. But the tax code also

creates certain exemptions to the imposition of sales and use taxes, including exemptions for persons

using aircraft as a certificated or licensed carrier of persons or property. The section of the tax code

relevant to Tennessee Gas's claim provides, in relevant part, as follows:

Aircraft are exempted from the taxes imposed by this chapter if:

sold to a person using the aircraft as a certificated and licensed carrier of

persons or property

* * *

Repair, remodeling, and maintenance to aircraft, including an engine or other

component part of the aircraft, operated by a person described by Subsection

(a)(1) or (a)(2) are exempted from the taxes imposed by this chapter.

Id. § 151.328. Tennessee Gas is authorized by the Federal Energy Regulatory Commission

("FERC") to operate a common carrier pipeline. In conjunction with its operation as a common

carrier pipeline, Tennessee Gas owns and operates two aircraft that it uses to transport employees

and executives for business purposes and to inspect pipelines and rights-of-way. Between January

1, 1994 and May 31, 1996, Tennessee Gas either paid or accrued and remitted $83,472.57 in Texas

sales and use taxes on purchases of parts and repair and maintenance services for its aircraft.

Tennessee Gas filed a claim for a refund on those taxes with the Comptroller, claiming an exemption

pursuant to section 151.328 of the tax code.

The outcome of Tennessee Gas's claim for an exemption is not determined solely

by the tax code. A rule promulgated by the Comptroller interpreting the section's exemptions is also

relevant to Tennessee Gas's appeal. See 34 Tex. Admin. Code § 3.297 (2001) ("Rule 3.297"). In

applying for its refund, Tennessee Gas attempted to rely on Rule 3.297, which defines "licensed and

certificated carrier" to include, among others, a pipeline operator authorized to operate as a common

carrier by the appropriate state or federal agency. See id. § 3.297(a)(1) . As a common carrier

pipeline authorized by FERC, Tennessee Gas argued it was a licensed and certificated carrier under

section (a)(1) of Rule 3.297. As such, Tennessee Gas claimed that it was qualified under section

(d)(2) of the Rule--the section interpreting and applying the exemptions for aircraft repair and

maintenance created by section 151.328 of the tax code. See id. § 3.297(d)(2) .

In ruling on Tennessee Gas's claim for a refund, the Comptroller rejected Tennessee

Gas's conclusion that the exemptions under Rule 3.297(d) are available to all licensed and

certificated carriers identified by Rule 3.297(a)(1). The Comptroller interpreted the exemptions in

tax code section 151.328 and Rule 3.297(d) to be limited to air common carriers certificated by the

Federal Aviation Administration ("FAA"). The Comptroller found that Tennessee Gas does not use

its aircraft as common-carrier devices to transport persons or property for hire and is not licensed or

certificated as an air common carrier by the FAA. Therefore, the Comptroller denied the refund

claim. Tennessee Gas filed suit in district court to contest the Comptroller's decision.

In the district court, the parties stipulated to the facts and filed competing motions

for summary judgment. The district court denied Tennessee Gas's motion, granted the Comptroller's

motion, and rendered judgment accordingly. Tennessee Gas filed a motion for a new trial that was

overruled by operation of law. Tennessee Gas now appeals.

In this appeal, Tennessee Gas complains that by granting the Comptroller's motion

for summary judgment, the trial court erred in affirming the Comptroller's decision to deny

Tennessee Gas's refund claim. Tennessee Gas argues that Rule 3.297 is unambiguous and that the

Comptroller's present interpretation conflicts with the way it has interpreted the rule in the past.

Furthermore, Tennessee Gas contends that the Comptroller's decision to interpret Rule 3.297 in a

manner that precludes Tennessee Gas from receiving an exemption improperly amended the Rule,

thus violating the rule-making requirements of the government code.

DISCUSSION

When the language of a statute is unambiguous, courts must seek the intention of

the Legislature as found in the plain meaning of the words used. Retama Dev. Corp. v. Texas

Workforce Comm'n , 971 S.W.2d 136, 139 (Tex. App.--Austin 1998, no pet.). But in construing a

statute, courts may consider, regardless of whether the statute is ambiguous, the administrative

construction of the statute. Tex. Gov ' t Code Ann. § 311.023(6) (West 2002). The Comptroller ' s

interpretation of a statute it is charged with enforcing is entitled to serious consideration, so long as

the construction is reasonable and does not contradict the plain meaning of the statute. See Tarrant

Appraisal Dist. v. Moore, 845 S.W.2d 820, 823 (Tex. 1993).

Administrative rules are ordinarily construed in the same way as statutes and an

agency's interpretation of its own rule is entitled to deference by the courts. Lewis v. Jacksonville

Bldg. & Loan Ass'n , 540 S.W.2d 307, 310 (Tex. 1976); Public Util. Comm'n v. Gulf States Utils.

Co. , 809 S.W.2d 201, 207 (Tex. 1991). Greater deference is given to an agency's interpretation that

is longstanding and applied uniformly. Amarillo Indep. Sch. Dist. v. Meno , 854 S.W.2d 950 , 954

n.6 (Tex. App.--Austin 1993, writ denied).

To succeed in its appeal, Tennessee Gas must overcome the heightened burden

placed on claimants of a tax exemption. Statutory exemptions from taxation are strictly construed

and the claimant bears the burden of clearly showing that it falls within the exemption. North Alamo

Water Supply Corp. v. Willacy County Appraisal Dist. , 804 S.W.2d 894, 899 (Tex. 1991). All

doubts as to the availability of an exemption must be resolved in favor of the taxing authority. State

v. Glass , 723 S.W.2d 325, 327 (Tex. App.--Austin 1987, writ ref'd n.r.e.) (citing Bullock v. National

Bancshares Corp. , 584 S.W.2d 268, 274 (Tex. 1979)).

Tennessee Gas first complains that the Comptroller improperly denied Tennessee

Gas's exemption claim because the Comptroller arbitrarily and capriciously disregarded the clear

and unambiguous language of Rule 3.297. In support of its argument, Tennessee Gas cites Public

Utility Commission v. Gulf States Utilities Co. for the proposition that if an agency fails to follow

the clear, unambiguous language of its own regulation, its action must be reversed as arbitrary and

capricious. Gulf States Utils. Co. , 809 S.W.2d at 207 . The Comptroller responds that its

construction of tax code section 151.328 is both reasonable and consistent with the language

contained in Rule 3.297. The Comptroller further argues that because its interpretation is consistent

with the statute and rule in question, this Court should accept its interpretation regardless of the

existence of other reasonable interpretations.

Rule 3.297 begins with the following language defining who qualifies as a licensed

and certificated carrier:

Carriers Generally

Licensed and certificated carrier--A person authorized by the appropriate

United States agency or by the appropriate state agency within the United

States to operate an aircraft, vessel, train, motor vehicle, or pipeline as a

common or contract carrier transporting persons or property for hire in the

regular course of business.

34 Tex. Admin. Code § 3.297 (a)(1) (2001). Tennessee Gas points to the specific inclusion of

pipelines among those common carriers who can qualify as licensed and certificated carriers. Given

its authorization by FERC to operate as a common carrier pipeline, Tennessee Gas argues that it is

a licensed and certificated carrier for purposes of section (a)(1) of the Rule. Tennessee Gas then

looks to a separate section of the Rule on exemptions for aircraft, which reads as follows:

Licensed and certificated carriers, flight schools, and flight school instructors

* * *

The following items or services used in the repair, remodeling, or

maintenance of aircraft or aircraft engines or component parts by or for a

person qualified under subsection (a)(1) or (c)(7) of this section are exempt

if purchased by the aircraft owner or operator, by the aircraft manufacturer,

or by a repair facility.

(A) Machinery, tools, supplies, and equipment used directly and

exclusively in the repair, remodeling, or maintenance. Included in the

exemption is equipment used to sustain or support safe and continuous

operations or to keep the aircraft in good working order by preventing

its decline, failure, lapse, or deterioration, such as battery chargers or

diagnostic equipment.

(B) Repair, remodeling, and maintenance services.

Id . § 3.297(d). Tennessee Gas emphasizes that section (d)(2) of the Rule extends to a person

qualified under section (a)(1) of the Rule. Tennessee Gas argues that it is plainly a licensed and

certificated carrier under section (a)(1) and that section (d)(2) plainly extends to anyone who is a

licensed and certificated carrier under section (a)(1) of the Rule. Thus, Tennessee Gas argues, it

qualifies for the exemption it seeks. The Comptroller responds by emphasizing that section (a)(1)

of the Rule requires that in order to be a licensed and certificated carrier, the common carrier must

be authorized by the appropriate agency. For purposes of the aircraft exemption, the Comptroller

continues, that agency is the FAA, not FERC. The Comptroller further contends that it has never

granted an aircraft exemption to a pipeline common carrier that is licensed by FERC.

In our interpretation of Rule 3.297, we need not determine whether Tennessee Gas's

interpretation of the Rule is reasonable; we need only determine whether the Rule can reasonably

be read in the manner the Comptroller has chosen to interpret it. See Hammerman & Gainer, Inc.

v. Bullock , 791 S.W.2d 330, 333 (Tex. App.--Austin 1990, no writ). In making that determination,

we cannot consider the above-cited sections of the Rule in isolation, but must consider how those

sections operate within the Rule as a whole and in relation to the section of the tax code to which

they pertain. See Sharp v. House of Lloyd , 815 S.W.2d 245, 249 (Tex. 1991) (in determining

meaning of statute, court must consider entire act, its nature, and its objects).

The Comptroller designed Rule 3.297 to apply to multiple sections of the tax code.

Rather than promulgating a separate rule to interpret each statute pertaining to common carriers and

sales and use taxes, the Comptroller drafted Rule 3.297 in a manner that allows the Rule to apply to

all sections of the tax code involving sales and use tax exemptions for common carriers. (1) Section

(a) of Rule 3.297 applies to carriers generally and establishes the criteria for qualifying as a licensed

and certificated carrier for different types of common or contract carriers of persons or property. See

34 Tex. Admin. Code § 3.297 (a) (2001). The remaining sections of the Rule pertain, for the most

part, to specific types of common carriers. Consistent with the Rule's structure, the Comptroller has

reasonably interpreted section (d), which involves exemptions for aircraft, as applying to a specific

type of carrier--namely, air carriers. See id . § 3.297(d).

The Comptroller's interpretation of Rule 3.297 does not deny effect to Tennessee

Gas's status as a licensed and certificated carrier because it can still qualify for exemptions in the

tax code intended to be available to common carrier pipelines or to licensed and certificated carriers

generally. As the Comptroller points out, by virtue of its status as a common carrier pipeline,

Tennessee Gas may qualify for an exemption under section 151.330(h) of the tax code, which

corresponds to section (a)(4) of Rule 3.297. See Tex. Tax Code Ann. § 151.330 (h) ; 34 Tex. Admin.

Code § 3.297 (a)(4). (2) After carefully considering the structure of the Rule as a whole and its function

as an application and interpretation of several provisions of the tax code, we find the Comptroller's

interpretation consistent with the language of the Rule and, thus, not an arbitrary and capricious

application of that Rule.

Tennessee Gas also endeavors to show that the Comptroller's present interpretation

of Rule 3.297 is inconsistent with the way it has interpreted the Rule in the past. However, all the

cases and decisions cited by Tennessee Gas involving Rule 3.297(d) involve parties seeking to claim

an exemption as or through a certificated air common carrier and thus do not support the inference

that the Rule was intended to extend the exemption to other types of common carriers. This Court

most recently considered a challenge to the interpretation of Rule 3.297 in Quorom Sales, Inc. v.

Sharp , where we deferred to the Comptroller's interpretation of the statutory language and affirmed

the Comptroller's ruling that the purchaser of an aircraft, rather than the aircraft itself, must be a

licensed and certificated carrier by the FAA in order for the sale to be exempt from sales tax.

Quorom Sales , 910 S.W.2d 59, 64 (Tex. App.--Austin 1995, writ denied). In support of its

argument that the Comptroller's interpretation of Rule 3.297 in this case differs from its standing

interpretation, Tennessee Gas points to our statement in Quorom Sales that "we therefore adopt the

Comptroller's administrative construction of section 151.328(a)(1) to provide sales tax exemptions

on aircraft only when the purchaser of an aircraft is a 'licensed and certificated carrier' as defined

by the Comptroller ." Id . (Emphasis added.) Tennessee Gas apparently argues that with this

language we were expressing the same understanding of Rule 3.297(d) that Tennessee Gas now

urges. But there is no discussion in Quorom Sales of any type of certificated carrier other than an

air common carrier certificated by the FAA. Tennessee Gas's conclusion that, by using the language

quoted above, this Court intended to say that the exemptions in section (d) are available to other

types of licensed and certificated carriers is unwarranted by the facts of Quorom Sales and

inconsistent with the analysis of Rule 3.297 contained above.

Tennessee Gas also does not provide a single administrative decision in which the

Comptroller has interpreted Rule 3.297(d) as extending its exemption to common carrier pipelines.

The one administrative decision appellant cites involving section 151.328 of the tax code and a

common carrier pipeline simply does not address the issue we consider today. In hearing No.

26,644, an aerial surveyor contracted with pipeline operators to patrol their lines and then sought an

exemption under section 151.328 of the tax code. See Tex. Comp. Pub. Accounts, Hearing No.

26,644, 1991 WL 166000 (Aug. 6, 1991). The administrative law judge who decided the case ruled

that the person operating the aircraft had to himself meet the Comptroller's requirements for a

licensed and certificated carrier; so the surveyor, who did not meet that requirement, could not

qualify for the exemption. Id. at 4 ; see also Tex. Comp. Pub. Accounts, Hearing No. 15,996, 1987

WL 52045 (Apr. 28, 1987) (petitioner not exempt because, while licensed by FAA, did not qualify

as common carrier); Tex. Comp. Pub. Accounts, Hearing No. 28,322, 1992 WL 249093 (Aug. 4,

1992) (to qualify for exemption for purchase of aircraft, purchaser himself must be licensed and

certificated carrier); Tex. Comp. Pub. Accounts, Hearing No. 31436, 1996 WL 32935 (Jan. 24, 1996)

(purchaser of aircraft must be licensed or certificated carrier which uses aircraft purchased in its

operations). If anything, the uniformity of these decisions with respect to their focus on certification

as an air common carrier by the FAA strengthens, rather than weakens, the Comptroller's position.

See Meno , 854 S.W.2d at 954 n.6 ( greater deference given to agency interpretation that is long

standing and applied uniformly).

Because Tennessee Gas has not established that the Comptroller's interpret ation of

Rule 3.297 in this case contradicts the clear and unambiguous language of that Rule, and because

Tennessee Gas cannot demonstrate that the Comptroller has interpreted the present Rule in a manner

inconsistent with the interpretation proffered here, Tennessee Gas cannot carry its burden as the

claimant of a tax exemption under section 151.328 of the tax code.

CONCLUSION

Because we find the Comptroller's interpretation of section 151.328 of the tax code

in this case consistent with the interpretation promulgated in Rule 3.297, we conclude that the

Comptroller's denial of Tennessee Gas's refund claim neither ignored nor amended Rule 3.297. The

trial court properly granted summary judgment for the Comptroller. We overrule Tennessee Gas's

points of error and affirm the judgment of the trial court.

Mack Kidd, Justice

Before Justices Kidd, Patterson and Puryear

Affirmed

Filed: June 13, 2002

Publish

1. Rule 3.297 applies to tax code section 151.328 (aircraft); section 151.329 (ships and other

vessels); section 151.330 (interstate shippers); and section 151.331 (trains).

2. Sales tax is not due on the sale of taxable items to a common carrier if such items are

shipped to a point outside this state using the purchasing carrier's facilities under a bill of lading, and

if such items are to be used by the purchasing carrier in the conduct of its business outside the State

of Texas. 34 Tex. Admin. Code § 3.297 (a)(4) (2001).