Exceptions to Special Masters Report — Maryland v. Louisiana

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Supreme Court, U.S.

FILED

NOV 18 1980

I DAK, JR. CLERK

No. 83, Original

| Iu the Supreme Court of the Unit

OCTOBER TERM, 1980

STATE OF MARYLAND, ET AL., PLAINTIFFS

Vv.

STATE OF LOUISIANA

ON THE REPORT OF THE SPECIAL MASTER

OF SEPTEMBER 15, 1980

EXCEPTION OF THE UNITED STATES AND THE

FEDERAL ENERGY REGULATORY COMMISSION

AND BRIEF IN SUPPORT OF EXCEPTION

WADE H. MCCREE, JR.

Solicitor General

Stuart A. SMITH

Assistant to the Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 633-2217 |

ROBERT R. NORDHAUS

General Counsel

JEROME M. FEIT

Deputy Solicitor

J. PAUL DOUGLAS

Assistant Solicitor

Federal Energy Regulatory

Commission

Washington, D.C. 20426

Iu the Supreme Court of the United States

OCTOBER TERM, 1980

No. 88, Original

STATE OF MARYLAND, ET AL., PLAINTIFFS

Vv.

STATE OF LOUISIANA

ON THE REPORT OF THE SPECIAL MASTER

OF SEPTEMBER 15, 1980

EXCEPTION OF THE UNITED STATES AND THE

FEDERAL ENERGY REGULATORY COMMISSION

The United States and the Federal Energy Regulatory

Commission respectfully except to the Report of the Spe-

cial Master dated September 15, 1980, insofar as he rec-

ommends that the plaintiffs’ motion for judgment on the

pleadings be denied.

WADE H. MCCREE, Jr.

Solicitor General

Iu the Sayreme Court of the United States

OCTOBER TERM, 1980

No. 88, Original

STATE OF MARYLAND, ET AL., PLAINTIFFS *

STATE OF LOUISIANA, ET AL.

ON THE REPORT OF THE SPECIAL MASTER

OF SEPTEMBER 15, 1980

BRIEF FOR THE UNITED STATES AND THE

FEDERAL REGULATORY COMMISSION IN

SUPPORT OF EXCEPTION /

QUESTIONS PRESENTED

1. Whether the pleadings establish that the Louisiana

First Use Tax on Natural Gas is invalid under the

Supremacy Clause of the United States Constitution be-

cause it conflicts with the exclusive statutory jurisdiction

of the Federal Energy Regulatory Commission to regu-

late the sale and transportation of natural gas in inter-

state commerce, and to apportion costs among producers,

processors, and consumers.

* Plaintiffs are the States of Maryland, Illinois, Indiana, Michi-

gan, New York, Rhode Island, Wisconsin, and the Commonwealth

of Massachusetts. Plaintiffs sue “in their proprietary capacities as

substantial purchasers of natural gas” subject to the First Use Tax,

(I)

2. Whether the pleadings establish that the Louisiana

First Use Tax violates the Commerce Clause of the

United States Constitution.

and in their parens patriae capacities on behalf of their citizens who

will purchase such gas (Complaint 6-7 {/ III). Subsequent to the

Court’s granting of the plaintiffs’ Motion for Leave to File the

Complaint, New Jersey filed a motion for leave to intervene, to file

a complaint, and a brief in support thereof. Seventeen interstate

natural gas pipeline companies also sought leave to intervene. In

addition, a motion for leave to file a brief amicus curiae and the

brief were filed on behalf of Associated Gas Distributors.

On March 3, 1980, the Court appointed a Special Master to whom

all pending motions were referred. Thereafter, the United States

and the Federal Energy Regulatory Commission moved for leave

to intervene. On May 14, 1980, the Special Master recommended:

(1) that the motions of New Jersey for leave to intervene and file

its complaint be granted; (2) that the motion of the United States

and the Federal Energy Regulatory Commission to intervene as

plaintiffs be granted; (3) that the 17 pipelines be permitted to

intervene, reserving the final determination of the applicability of

the Eleventh Amendment until the final decision of the case; and

(4) that the motion of the Associated Gas Distributors for leave

to file a brief amicus curiae in support of the plaintiffs’ motion for _

judgment on the pleadings be granted. The parties have previously

filed exceptions and briefs with respect to the Report of the Special

Master on these motions for leave to intervene and to appear as

amicus curiae.

TABLE OF CONTENTS

ag SCT TIER IPE cl Si Oo CORD 1

Constitutional provisions and statutes involved ............ 1

Statement:

ERENT ISOC SOE IR

B. The nature of the Louisiana tax ........................ .

C. The proceedings before the Special Master ...... 8

Epareaguction and Summary ............2: 0.2.22... 11

Argument:

I. The plaintiffs are entitled to judgment without

further evidentiary proceedings because the

pleadings establish that the Louisiana First Use

Tax conflicts with the federal regulation of the

sale and exclusive transportation of natural gas

in interstate commerce and is therefore invalid

under the Supremacy Clause of the Constitu-

a apanswapwosmaies 15

A. The gas subject to the First Use Tax moves

in interstate commerce ......................-....-.----- 15

B. The taxable “uses” enumerated in the

Louisiana statute do not interrupt the

journey of the gas in interstate commerce.. 17

C. The Louisiana tax interferes with the fed-

eral regulation of the transportation and

sale of natural gas in interstate commerce.. 21

D. No evidentiary proceedings are necessary

to establish the invalidity of the First Use

Tax under the Supremacy Ciause ................ 26

II. The pleadings establish that the Louisiana First

Use Tax is invalid under the Commerce Clavse.. 34

A. The Louisiana tax is a transit levy on gas

moving in interstate commerce .................... 34

= (III)

TABLE OF CONTENTS—Continued

Page

B. The Louisiana tax is not fairly apportioned

and discriminates against interstate com-

STII Actieinahiciendiniintenaieescasaadiie see Natastat ahah oi a scales 37

RIN reno riceani cranes On es ea rae ee, 42

TABLE OF AUTHORITIES

Cases:

Area Rate Proceeding (Southern Louisiana Area),

40 F.P.C. 580, aff’d, 428 F.2d 407, cert. denied,

iced Te MPTNATEMIS REGTARE STITT Sct Ahk NEON ONS TEND 19, 25

Atlantic Coast R.R. v. Standard Oil Co., 275 U.S.

eS ER Ree are GE LIN RLS ia 20

Board of Trade of City of Chicago v. Olsen, 262

EE CRESS Ss Sees Span eee Ue | a0

Boston Stock Exchange v. State Tax Comm’n, 429

Ea, nitro 1 Ot ec ets RL PT 15, 34, 39, 42

California v. Lo-Vaca Gathering Co., 379 U.S.

REE A) AE DARN 0s ARE Pe oe oe ET 16, 21, 37

Canadian Superior Oil (U.S.) Ltd., Docket No.

CUTT BOE Tae. BE, DTG) io nscc ce ceecccosncecece-sce..--:.. 24

Carpenter v. Shaw, 280 U.S. 368 .......................... 35

Case of State Freight Tax, 82 U.S. (15 Wall.) 282.. 87, 38

Champlin Realty Co. v. Brattleboro, 260 U.S. 366.. 20

Chandeleur Pipe Line Co., 42 F.P.C. 20 .................. 16

Cities Service Gas Co. v. FPC, 155 F.2d 694, cert.

Om, RP FGM onsen in 23

City of Cleveland v. FPC, 525 F.2d 845 _.......... 30

City of Detroit v. FPC, 230 F.2d 810, cert. denied,

352 U.S. 829 peraenstsenitieriinetnotineseiieciniesanlioues-stanierentin 23

Colonial Pipeline Co. v. Triagle, 421 U.S. 100 ........ 37

Colorado Interstate Gas Co. v. FPC, 324 U.S. 581.. 23

Complete Auto Transit, Inc. v. Brady, 480 U.S.

RENEE SES Mirae ee Nae Na re ROD NT ae ote 34, 37

Continental Oil Co., 27 F.P.C. 96 ................... 24, 33

Continental Oil Co. v. FPC, 370 F.2d 57, cert. de-

I sca secrctesnetinccdcetrcanenevicececonsnses 16

Dean Milk Co. v. Madison, 340 U.S. 849 .............. 39

Deep South Oil Company of Texas, 14 F.P.C. 808.. 83

Cases—Continued Page

Deep South Oil Company of Texas v. FPC, 247

F.2d 882, cert. denied, 355 U.S. 930 ....16, 21, 24, 33, 37

Douglas v. Seacoast Products, Inc., 481 U.S. 265.... 21

East Ohio Gas Co. v. Tax Commission, 283 U.S.

465 . SEL AE a AU TN OMNI eA CO OO IRERN 16

Florida Lime & Avocado Growers, Inc. v. Paul,

Pe MAM I easement ee 27

FPPC v. Corporation Commission of Oklahoma, 362

F. Supp. 522, aff’d per curiam, 415 U.S. 961...... 22

FPC v. East Ohio Gas Co., 338 U.S. 464 16, 19

FPC v. United Gas Pipe Line Co., 386 U.S. 237... 24

Freeland v. Sun Oil Co., 184 F. Supp. 754, aff’d,

277 F.2d 154, cert. denied, 364 U.S. 826... 33

Freeman V. Hewit, 329 U.S. 249 34

Guy v. Baltimore, 100 U.S. 484 ..................-........... 38

Hagans v. Lavine, 415 U.S. 528 _..... 21

Halliburton Oil Well Co. v. Reily, 373 U.S. 64 ...... 38, 39

Henneford v. Silas Mason Co., 300 U.S. 577 ......... 41

High Island Offshore System, Docket Nos. CP75-

oy Oe Oe eee ee 24

Hines Vv. Davidowitz, 312 U.S. 52 ............... 28, 29

Hope Natural Gas Co. v. FPC, 184 F.2d 287, rev’d

on other grounds, 320 U.S. 591 _....... 23

Humble Pipe Line Co. v. Waggonner, 876 U.S.

hh ee OE TEER SOME NO NAIM ah AP CE 7

I. M. Darnell & Son v. Memphis, 208 U.S. 113 38

Illinois Natural Gas Co. v. Central Illinois Public

Service Co., 814 U.S. 498 ................................ 16, 18, 19

Interstate Natural Gas Co. v. FPC, 831 U.S. 682... 16, 21,

Jones V. Rath Packing Co., 430 U.S. 519... 27, 28

Kansas-Nebraska Natural Gas Company, 53 F.P.C.

1691, reh. denied, 54 F.P.C. 928 25

Lawrence v. State Tax Commission, 286 U.S. 276.. 35

Louisiana Public Service Commission v. FPC, 359

ET aT ae me = 16

Machinists v. Wisconsin Employment Relations

Commission, 427 U.S. 182 ..... ils wa 29

McLeod V. J.E. Dilworth Co., 322 U.S. 327... 84

Memphis Natural Gas Co. v. Stone, 885 U.S. 80 .... 37

Cases—Continued Page

Michelin Tire Corp. v. Wages, 423 U.S. 276 -......... 34

Michigan-Wisconsin Pipe Line Co. v. Calvert, 347

| 3 Raa 11, 14, 19, 20-21, 34, 35, 36, 37, 38

Mississippi River Fuel Corp. v. Cocreham, 382 F.2d

929, cert. denied, 390 U.S. 1014 -.........-.-2020.... 7

Missouri V. Kansas Natural Gas Co., 265 U.S. 298. 28

Mobil Oil Corp. v. FPC, 483 F.2d 1238 _.................. 23, 33

National Rates for Natural Gas, Docket No. RM

75-14, Opinion No. 770, 15 P.U.R. 4th 21, reh.

denied, Opinion 770-A, 17 P.U.R. 4th 317, aff’d

sub nom. American Public Gas Association Vv.

FPC, 567 F. 2d 1016, cert. denied, 485 U.S. 907.. 25

National Rates for Natural Gas, 54 F.P.C. 3090,

reh. denied, 15 P.U.R. 4th 1, aff’d in part and

rev'd in part on other grounds sub nom. Ten-

neco Oil Co. v. FERC, 571 F.2d 834 __...........-... 24-25

Nippert v. Richmond, 327 U.S. 416 .-............... ise Sbite 38

Norfolk & W. Ry. v. Tax Comm’n, 390 U.S. 317... 37

Northern Natural Gas Co., 28 F.P.C. 1155, aff’d

sub nom. Mid-American Pipeline Co. v. FPC,

Rea RECT RE SSA Ne 24, 25

Northern Natural Gas Co. v. Kansas Commission,

PP I I kincaid danas 11, 12, 18, 28, 29, 30, 21, 38, 34

Northwestern States Portland Cement Co. v. M»

a 38

Panhandle Eastern Pipe Line Co., 25 F.P.C. 787,

remanded sub nom. Panhandle Eastern Pipe

Line Co. v. FPC, 305 F.2d 768, cert. denied, 372

U.S. 916, aff’d on remand, 32 F.P.C. 636, aff’d

per curiam, 348 F.2d 340, cert. denied, 382 U.S.

_ SRRSRSRARE ES eee ean Nee en ae tS 25

Panhandle Eastern Pipe Line Co. v. FPC, 324 U.S

REE SE DENN AN NaI De: 23

Panhandle Eastern Pipe Line Co. v. Public Service

Comeantesion, 62 U3. 607 19

Pennsylvania v. West Virginia, 262 U.S. 558 28

Peoples Natural Gas Co. v. Public Service Commis-

sion of Pennsylvania, 270 U.S. 550 16, 18

Phillips Petroleum Co., 10 F.P.C. 246, rev’d on

other grounds, 347 U.S. 672 00000 12, 33

VII

Cases—Continued

Pipeline Costs Allocable to the Transportation of

Liquids, Liquefiable Hydrocarbons, etc., For

Others, 47 F.P.C. 208, rev’d on other grounds

sub nom. Mobil Oil Corp. v. FPC, 483 F. 2d

BMT icticsissinchn seks tocecaslbcttih cite acadsc teh laSatie ne

Portland Pipe Line Corp. v. Environmental Im-

provement Commission, 307 A.2d 1 .........-..-.--..-

Public Service Commission of Kentucky v. FERC,

ae ra TI a oh ot 16,

Public Utilities Commission v. Attleboro Steam &

BO Si, Te rs in sacroceeiceitseeidces pice

Ray Vv. Atlantic Richfield Co., 485 U.S. 151 ............

Rice v. Santa Fe Elevator Corp., 381 U.S. 218 _....

San Diego Building Trades Council v. Garmon, 359

Wr cdi ten te ister es a rae am

Society for Savings v. Bowers, 349 U.S. 148 ..........

State of Louisiana First Use Tax in Pipeline Rate

Cases, Order No. 10, 43 Fed. Reg. 45538 (1978) ;

Order No. 10-A, 43 Fed. Reg. 60488 (1978);

Order No. 10-B, 44 Fed. Reg. 13460 (1979);

Order No. 10-C, 45 Fed. Reg. 29011 (1980), peti-

tions for review pending sub nom. Tennessee

Gas Pipeline Company v. FERC, No. 78-3816

EE. WE eee a

Tennessee Gas Transmission Co., 18 F.P.C. 428......

Tennessee Gas Pipeline Co., 38 F.P.C. 691 _...........

Tennessee Natural Gas Lines, Inc. v. FPC, 221

fe RRIF CaS ent ests eRe ree SRR VA

Texas Eastern Transmission Corporation, 11

eg RS TARE RSIS APRN |S SEE ae PIAL ALO Pe EW

Union Oil Company of California, Docket Nos.

C177-828, et al. (Apr. 12, 1978) .................00....

United Gas Pipe Line Co., 30 F.P.C. 560 _............

Wash. Rev. Dep’t v. Stevedoring Ass’n, 485 U.S.

A Nl en coc ote gee ea a 14, 35, 36,

Welton v. Missouri, 91 U.S. 275 ........0000

West v. Kansas Natural Gas Co., 221 U.S. 229....

Page

21, 37

27, 28

37, 38

Constitution and statutes: Page

United States Constitution:

Article I, Section 8, Clause 3 (Commerce

I i ee 1, 10, 28, 34, 36, 38

Article VI, Clause 2 (Supremacy Clause)........ passim

Department of Energy Organization Act, Section

402(b), 42 U.S.C. (Supp. II) 7172(b) -............. 23

Natural Gas Act of 1938, 15 U.S.C. 717 et seq.:

secten itm); 16 U.E.G. TIF) ................:...:. 16, 19

Section 1(c), 15 U.S.C. 717 {e) ooo. 16, 19

ge B.S SRR pS Onan mee 1, 22, 31

secon G, 16 UBC. TIFE qin. ccciccscccccccocee 1, 22, 31

ON He SPS FUE ooscn ccc cscscevecsecesccend: 1, 31

Natural Gas Policy Act of 1978, 15 U.S.C. (Supp.

II) 3301 et seq.:

Section 2(18), 15 U.S.C. (Supp. II) 3801

I a 1

Section 110, 15 U.S.C. (Supp. II) 3320 ........ 1-2, 31

Section 121(b), 15 U.S.C. (Supp. II) 3331

| cau RET RENESAS PUA ee Rela Ee Sean 1-2

Section 601, 15 U.S.C. (Supp. II) 3481 ........ 1-2

Outer Continental Shelf Lands Act, 48 U.S.C. 1831

et seq.:

Section 4(a) (2), 43 U.S.C. 1883(a) (2) ........ 7

Section 5(c), 48 U.S.C. 1884(¢) ....0002002.... 24

Water Quality Improvement Act of 1970, 33 U.S.C.

1151 et seq.:

ST ERy 1” IS een eae AER Re 29

I 29

72 Stat. 72, 19 U.S.C. 1202, Schedule 4, Part 10,

Eh PROOF eRe REC NRE ET oe SF AE 7

La. Rev. Stat. Ann. (West 1970 & Supp. 1980):

I ea a 1, 7, 41

| RRR SE LSI EI 7

§47:688.1 ................ ue oo an

Constitution, and statutes—Continued Page

FL RRP Rn Snir Ree PEL eae SIS ee eee Lye 1, 40

PERIOD cacscsctdes ccsntetiaceisisnenancariecwune 1,2

| SS EIEN eee cones eee 33

eM SI ois ssa dst datanvderen sensed 5, 17, 18, 19, 20, 26

FRI NMAC Retlrss Anes n Fey om 4

aa 8 ee 4

SOI I pi 6-515. a alacdicecteen awancamanseaenes 4, 6, 38, 40

SEMIS TIS 6c. cenchchisecspcassscnasaolbiaeak iglalcsdudscue eae 35, 38

A Dn onmepnenennt 5, 7, 9, 21, 22, 23, 26, 31, 32,

33, 34, 39, 41

OB NIN Lic coetnnce schvennevcnctsn ttaslalelalaansaaitia 5, 7, 14, 35

EE ico wkiecvts Gasnaieaen nunieas names 5

2, f._ ROPIGRNEIIAR APTI Serer arom rath a Te Sai A 1

1978 La. Sess. Law Serv. 482 (West), Act No.

OER Ne eae been tee Rai ae aie oe oe PETE 2

_; TERRORS ARR! CR Nn a NEE ott Tub Poets 2 Pee 5

SENG Hig AE OT OMAR SD NA MT ET A eS 5

FREER GE NAT. ats RON a8 5, 21

FN RC SE Ae ARMED ee RSET 40

ME SITE cit cchs ekccctaghbenlas ita toe oer 7,41

Miscellaneous:

Federal Power Commission National Gas Survey,

bE IRR MARNIE Peer 20

“1st-Use Tax Will Profit La. Even If Cash Is Re-

turned,” The Times Picayune/The States-Item,

SOI. Wg: UU choses ecnnanc anid led Ail Pea aa 3

Hearings on H.B. 768 Before the Committee on

Ways and Means of the Louisiana House of

Representatives (June 5 & 6, 1978) ................ 8,17, 41

Hearings on H.B. 768 Before the Revenue and

Fiscal Affairs Committee of the Louisiana Sen-

SG CG TI ID iinet Shetdntcsdicaccce 3, 7,17, 21

H.R. Rep. No. 95-539, 95th Cong., Ist Sess.

fs < GIORNO AE AUER CRORE EO Me RETENCRP S RN, RL LP CT Nad 23

JURISDICTION

The motion for leave to file a complaint invoking the

original jurisdiction of this Court was granted on June

18, 1979. The jurisdiction of this Court rests on the

Constitution of the United States, Article III, Section 2,

Clauses 1 and 2, and 28 U.S.C. 1251 (a) (1).

CONSTITUTIONAL PROVISIONS AND

STATUTES INVOLVED

Article I, Section 8, Clause 3 (“Commerce Clause’’),

and Article VI, Clause 2 (“Supremacy Clause’) of the

Constitution of the United States are set forth at page 4

of the Plaintiffs’ Brief in Support of Motion for Judg-

ment on the Pleadings, filed on September 18, 1979.

The First Use Tax on Natural Gas, La. Rev. Stat.

Ann. §§ 47:1301-47:1307 (West Supp. 1980), the First

Use Tax on Natural Gas—Severance Tax Credit, La.

Rev. Stat. Ann. § 47:647 (West Supp. 1980), the First

Use Tax Trust Fund, La. Rev. Stat. Ann. § 47:1351

(West Supp. 1980), and the Tax Credit to Operators of

Electric Generating Plants and Natural Gas Distribu-

tion Services, La. Rev. Stat. Ann. § 47:11 (West Supp.

1980), are set forth at pages la-20a in the Appendix

to Plaintiffs’ Brief in Support of Motion for Judgment on

the Pleadings, filed on September 18, 1979.

Sections 4, 5, and 7 of the Natural Gas Act of 1938,

15 U.S.C. 717c, 717d, and 717f, and Sections 2(18), 110,

121(b), and 601 of the Natural Gas Policy Act of 1978,

15 U.S.C. (Supp. II) 3301(18), 3320, 3831(b), and 3431,

are set forth at pages 1a-9a in the Appendix to the Brief

for the United States and the Federal Energy Regulatory

Commission as Amici Curiae, filed on November 20,

1979.

(1)

STATEMENT

A. Introduction

This litigation’ was initiated last year by the plaintiff

States to obtain a declaratory judgment that the Louisi-

ana First Use Tax on Natural Gas‘ is unconstitutional

and an order permanently restraining the collection of

the tax and compelling the refund of all revenues eol-

lected plus “all interest earned on such revenues” (Com-

plaint 6 J II).

In our brief amici curiae of June 1979 in support of

the plaintiffs’ motion for leave to file 2 complaint and our

brief amici curiae of November 1979 in support of the

plaintiffs’ motion for judgment on the pleadings, we ad-

vised the Court that both the United States and the Fed-

eral Energy Regulatory Commission have a substantial

and immediate interest in this case. Louisiana is pres-

ently collecting at least $225 million per year under its

First Use Tax on Natural Gas. As a consumer of natural

gas in the operation of military and civilian installations,

the United States, like the citizens of the plaintiff states,

is directly affected by the additional costs imposed by the

First Use Tax.

Moreover, the First Use Tax directly conflicts with the

authority of the Federal Energy Regulatory Commission

to regulate the interstate sale and transportation of nat-

ural gas. Although couched in terms of a tax on the

“use” of natural gas, the principal impact of the levy is

to increase the price of gas extracted from federal lands

(primarily submerged lands of the Outer Continental

1 Act No. 294, 1978 La. Sess. Law Serv. 482 (West), codified as

La. Rev. Stat. Ann. §§ 47:1301-47:1307 (West Supp. 1980). Herein-

after, the various provisions of the act will be referred to by the

section number used in the codification, and the act itself will be

referred to as the “First Use Tax” or the “Act.”

Shelf) or from federally-leased areas, when such gas is

shipped through Louisiana in interstate commerce. Since

Congress vested in the Federal Energy Regulatory Com-

mission the exclusive authority to set rates for the sale

and transportation of such natural gas in interstate

commerce, the Louisiana tax is incompatible with the

federal regulatory scheme.

Finally, as the Special Master correctly observed (Re-

port 31), if protracted proceedings in this case ensue,

“Louisiana stands to gain materially by continuing to

collect a quarter of a billion dollars a year which, under

its provisions for the refund of taxes paid under protest,

would be repaid with only 6% interest, whereas the cur-

rent value of this enormous fund would be far greater

than 6%. It is desirable, therefore, to reduce the delay

in deciding this case or to eliminate the profit to Louisi-

ana from the delay” (footnote omitted).2

There is indisputably a compelling need for a prompt

decision on the merits in this case. But, contrary to the

Special Master’s conclusion, we submit that the pleadings

contain all of the facts necessary for a determination of

the validity of the First Use Tax. The prospect for sub-

stantial unjust enrichment by Louisiana therefore calls

for addressing plaintiffs’ motion for judgment on the

2 Representative Tauzin, the sponsor of the First Use Tax, can-

didly explained Louisiana’s attempt to profit from an unconstitu-

tional tax as follows:

So that the total amount that we mizht be liable for in the

event that we should lose the litigation is available for refund

at 6% interest. We are likely to make more than 6% interest

on it in investments. We are actually going to probably come

out a little bit ahead on it.

Hearings on H.B. 768 Before the Revenue and Fiscal Affairs

Committee of the Louisiana Senate 6 (June 26, 1978). See also

“1st-Use Tax Will Profit La. Even If Cash Is Returned,” The

Times Picayune/The States-Item, Oct. 7, 1980, § 1, at 17.

pleadings without the delay inherent in the further fac-

tual hearings recommended by the Special Master.

To be sure, we share the Master’s concern that “the

chance of an erroneous decision can be materially reduced

by permitting the parties to present a factual record”

(Report 21-22). But, as we shall show, the facts of this

case, as set forth in the pleadings, are no different from

those of many other cases in which the Court has deter-

mined the constitutional validity of state es under

the Supremacy and Commerce Clauses. We therefore

respectfully except to the Special Master’s recommenda-

tion that further evidentiary hearings be held and submit

that the plaintiffs’ motion for judgment on the pleadings

be granted.

B. The Nature of the Louisiana Tax

The First Use Tax Act imposes a tax of seven cents

per thousand cubic feet (subject to certain exclusions)

upon the first “use” within Louisiana of any natural gas

that is not subject to any severance or production tax

levied by Louisiana or any other state or territory of the

United States, or is not subject to any import tax or

tariff levied by the United States on imports from foreign

countries. La. Rev. Stat. Ann. § 47:1303 A (West Supp.

1980) (Mot. App. 4a-5a) .*

The Act imposes the First Use Tax on the owner when

the gas is first subjected to a taxable use in Louisiana.

La. Rev. Stat. Ann. §§ 47:1302(9), 47:13803 (West Supp.

1980) (Mot. App. 4a-6a).4 The term “use” is defined

broadly as “[1] the sale; [2] the transportation in [Loui-

siana] to the point of delivery at the inlet of any process-

3 “Mot. App.” refers to the Appendix to the Plaintiffs’ Motion for

Judgment on the Pleadings.

*La. Rev. Stat. Ann. § 47:1802(9) (West Supp. 1980) (Mot.

App. 4a) defines “owner” as “the person or person [sic] having title

to and the right to alienate the natural gas subject to the tax at the

time a use occurs in [Louisiana except] any person to whom tem-

porary possession or control has been transferred. In the event of

a sale the purchaser shall be deemed the owner.”

ing plant; [3] the transportation in [Louisiana] of un-

processed natural gas to the point of delivery at the inlet

of any measurement or storage facility; [4] transfer of

possession or relinquishment of control at a delivery

point in [Louisiana]; [5] processing for the extraction

of liquefiable component products or waste materials; [6]

use in manufacturing; [7] treatment; or [8] other as-

certainable action at a point within [Louisiana].” La.

Rev. Stat. Ann. § 47:1302(8) (West Supp. 1980) (Mot.

App. 4a).°

The First Use Tax Act recites that it is “a cost asso-

ciated with uses made by the owner in preparation of

[sic] marketing of the natural gas” (La. Rev. Stat. Ann.

§ 47:1303 C (West Supp. 1980)) and not a tax on the

natural gas itself.* It also expressly abrogates provisions

of existing contracts which underlie and form the basis

for certificates of public convenience and necessity issued

by the Federal Energy Regulatory Commission concern-

ing the apportionment of taxes among sellers, processors,

and purchasers of gas. In this connection, La. Rev. Stat.

Ann. § 47:1303 C (West Supp. 1980) (Mot. App. 5a)

provides:

5If any enumerated use “first occurring is determined not to be

a constitutionally taxable incident, the tax shall be imposed upon

the first occurring thereafter.” La. Rev. Stat. Ann. § 47:1303 F

(West Supp. 1980) (Mot. App. 6a). The Act provides that if the

section reciting that the tax is a cost associated with uses made by

the owner in preparation or marketing of the gas is held invalid,

the entire Act shall be void. Section 4(2), 1978 La. Sess. Law Serv.

486 (Mot. App. 8a). The remaining parts of the Act are severable.

Sections 2, 4, 1978 La. Sess. Law Serv. 485, 486 (Mot. App. 7a, 8a).

* The First Use Tax statute recites that it is not imposed “on the

production, severance, or ownership of natural gas produced out-

side of the boundaries of the State of Louisiana * * * [and] that

the incidence of this tax shall not be upon the natural gas nor upon

the property or rights from which it is produced, but rather shall

be only upon the privilege of performance or allowing the perform-

ance, by the owner of the enumerated actions comprising first use

within [Louisiana].” La. Rev. Stat. Ann. § 47:1303 E (West Supp.

1980) (Mot. App. 6a).

Any agreement or contract by which an owner of

natural gas at the time a taxable use first occurs

claims a right to reimbursement or refund of such

taxes from any other party in interest, other than

a purchaser of such natural gas, is hereby declared

to be against public policy and unenforceable to that

extent. Notwithstanding any such agreement or con-

tract, such an owner shali not have an enforceable

right to any reimbursement or refund on the basis

that this tax constitutes a cost incurred by such

owner by virtue of the separation or processing of

natural gas for extraction of liquid or liquefiable

hydrocarbons, or that this tax constitutes any other

grounds for reimbursement or refund under such

agreement or contract, unless there has been a final

and unappealable judicial determination that such

owner is entitled to such reimbursement or refund,

notwithstanding the public policy and purpose of this

part and the foregoing provisions of this Subsec-

tion C. In any legal action pursuant to this Subsec-

tion, the state shall be an indispensable party in

interest.

Thus, when the tax is imposed on a pipeline as an owner,

that pipeline may not pass the tax back to a producer

but must either bear the tax itse)f or pass it on to those

persons who purchase the gas from the pipeline.

The tax does not apply to all uses of natural gas in

Louisiana. Certain uses are exempt from the tax.? More-

over, the First Use Tax is not levied on gas subject to a

production or severance tax imposed by Louisiana or

any other state or any import tax imposed by the United

7 The tax does “not apply to natural gas otherwise subject thereto

* * * used or consumed in the drilling for or production of oil,

natural gas, sulphur, or in the processing of natural gas for liquids

extraction within [Louisiana]; [or] to gas shrinkage volumes at-

tributable to the extraction of ethane, propane, butanes, natural or

casinghead gasoline or other liquefied hydrocarbons * * * [; or]

to natural gas used or consumed in the manufacture of fertilizer

and anhydrous ammonia within [Louisiana].” La. Rev. Stat. Ann.

§ 47:1303 A (West Supp. 1980) (Mot. App. 4a-5a) (emphasis

added).

States. Almost every state, including Louisiana, has a

severance tax. As a result, the major impact of the First

Use Tax is on gas produced from the Outer Continental

Shelf (OCS), to which state severance taxes do not

apply.® Indeed, the Louisiana legislature intended that

the principal target of the tax would be OCS gas.”

What is more, the practical impact of the tax falls on

OCS gas that passes through the state because Louisiana

allows all electric generating utilities, gas distribution

companies, and other persons in Louisiana who purchase

natural gas directly from an interstate pipeline a credit

against their Louisiana state and local taxes for any

increases in the transportation and marketing costs for

OCS gas which they purchase." Because Louisiana has

characterized the First Use Tax as a cost of transporting

and marketing gas (La. Rev. Stat. Ann. §§ 47:1303 C, E

(West. Supp. 1980)), this credit allows Louisiana con-

sumers who consume OCS gas otherwise subject to the

First Use Tax to offset increased rates for natural gas

8 La. Rev. Stat. Ann. §§ 47 :631-47:646 (West 1970).

°E.g., Mississippi River Fuel Corp. v. Cocreham, 382 F.2d 929

(5th Cir. 1967), cert. denied, 390 U.S. 1014 (1968) ; accord, Humble

Pipe Line Co. v. Waggonner, 376 U.S. 369 (1964). See also Outer

Continental Shelf Lands Act, Section 4(a) (2), 48 U.S.C. 1833

(a) (2).

10 See, e.g., Hearings on H.B. 768 Before the Revenue and Fiscal

Affairs Committee of the Louisiana Senate 3 (June 26, 1978) (Rep.

Tauzin). The tax also applies to gas produced from federal en-

claves within Louisiana, including Barksdale Air Force Base. Fi-

nally, by its terms, the tax is also applicable to gas imported from

abroad because the United States does not levy any import taxes

upon gas from abroad. See 72 Stat. 72, 19 U.S.C. 1202, Schedule 4,

Part 10, Item 475.15. However, Louisiana claims (Brief in Response

to Brief for the United States and the Federal Energy Regulatory

Commission as Amici Curiae 11, 24) that it is not assessing the

First Use Tax on imported gas because the United States could

impose duties on such gas. See also Answer 19 {| LV.

11 See Act No. 599, Tax Credits to Operators of Electric Generat-

ing Plants and Natural Gas Distribution Services, 1978 La. Sess.

Law Serv. 1112, codified as La. Rev. Stat. Ann. § 47:11 (West

Supp. 1980).

attributable to that tax through reductions in other taxes

paid to Louisiana. Indeed, the legislative history shows

that the very purpose of the credit is to ensure that

Louisiana consumers do not bear any of the costs asso-

ciated with the First Use Tax.”

C. The Proceedings Before the Special Master

During the proceedings before the Special Master, three

issues emerged, which are addressed by the second pre-

liminary Report of September 15, 1980, now before the

Court."* The first is whether the complaint in this case

should be dismissed on the motion of Louisiana, filed

with the Court on October 22, 1979. Since the Master

recommended that the Court deny Louisiana’s motion on

this score (Report 10-20), we have no occasion to address

it at this stage. If (as we anticipate) Louisiana excepts

to the Master’s ruling, we shall of course respond.

The remaining issues relate to the plaintiffs’ motion

for judgment on the pleadings on the grounds that the

Louisiana First Use Tax is invalid under the Supremacy

and Commerce Clauses of the Constitution. These mo-

tions were first filed with the Court on September 18,

1979, and, in briefs amici curiae filed in June and No-

vember, 1979, the United States and the Federal Energy

Regulatory Commission supported the plaintiff States.

In the first of those briefs, we urged that the resolution

of the constitutional validity of the tax did not require

the appointment of a Special Master because there are no

12 Hearings on H.B. 768 Before the Committee on Ways and

Means of the Louisiana House of Representatives 4 (colloquy be-

tween Rep. Tauzin and unidentified speakers), 5 (colloquy between

Reps. Sour and Bagert), 6 (Rep. Labords) (June 5, 1978).

13 The Special Master’s first preliminary report, filed on May 14,

1980, contained his recommendations with respect to: (1) motions

to intervene by New Jersey, the United States and the Federal

Energy Regulatory Commission, and 17 pipelines; and (2) a motion

to appear as amicus curiae by the Associated Gas Distributors. See

pages I-II, note *, supra.

genuine issues as to any material facts. In the second

brief, we urged that the Court grant the plaintiffs’ mo-

tion for judgment on the pleadings and hold that the

Louisiana tax is unconstitutional. On March 38, 1980,

the Court appointed a Special Master and referred the

motions for judgment on the pleadings to him (Report

9). After hearing argument by the various parties and

amici curiae, the Special Master recommended that the

plaintiffs’ motion for judgment on the pleadings be de-

nied without prejudice to a reconsideration of the issues

raised on the basis of further proceedings (Report 38).

1. The Supremacy Clause. The Special Master con-

cluded that the facts disclosed in the pleadings do not,

without more, require that the Act be invalidated on the

basis of the Supremacy Clause. In so ruling, the Master

acknowledged that “the Louisiana first use tax may

in fact interfere with the federal regulatory proc-

ess * * *” (Report 21). But he further observed that

“the interference may be so indirect, so peripheral, so

subject to administrative adjustments, as to permit the

State and federal programs to coexist” (ibid.). In the

Master’s view, “[e]videntiary hearings are necessary to

reach a conclusion on these issues” (ibid.).

The Master recognized that the Natural Gas Act and

the Natural Gas Policy Act vest the Federal Energy

Regulatory Commission with exclusive authority to reg-

ulate the transportation and sale of natural gas in in-

terstate commerce and that any state law that interfered

with the Commission’s exclusive jurisdiction would violate

the Supremacy Clause. He further observed that the

Commission’s authority includes the power to allocate

costs of processing and transporting liquid and liquefiable

hydrocarbons between producers and pipelines (Report

22-23) and that § 47:1303 C of the First Use Tax Act

prohibits a pipeline from passing the First Use Tax

back to a producer (Report 26-29, 30). But the Master

concluded that evidentiary hearings are necessary to de-

termine whether the processing that occurs within Louis-

;

———

iana by which the hydrocarbons are extracted changes

the nature of the gas so as to justify passing on the

First Use Tax on to consumers.

In so holding, the Master rejected our argument that

under the decisions of this Court, the Commission has

the exclusive authority to allocate costs, and that Louisi-

ana interferes with the Commission’s function when it

seeks to allot the tax. In the Master’s view, “the conflict

[between] the Natural Gas Act [and the Louisiana tax]

is the type of issue which cannot suitably be resolved on

the papers or by reference to past decisions which were

not really focused on the issue” (Report 29). Moreover,

he concluded that “it may be that in the end FERC’s

orders can be adjusted so that the laws will mesh with-

out conflict” (ibid.). Accordingly, the Master recom-

mended that the Court not grant the plaintiffs’ motion

for judgment on the pleadings on the basis of the Su-

premacy Clause (Report 31).

2. The Commerce Clause. With respect to the Com-

merce Clause, the Special Master conceded that “a de

termination on the validity of the Louisiana tax could

be made on the pleadings, plus a generous application

of judicial notice” (Report 21). But he suggested that

“to reach a conclusion on the papers involves such an

application of judgment that it would be desirable to

withhold a conclusion until the issues can be tested against

facts developed in an evidentiary hearing” (ibid.).

In so holding, the Master recognized that the contin-

uous movement of the gas from the Outer Continental

Shelf across the state boundary and up to the processing

plant is interstate commerce during the entire journey

and that the tax would violate the Commerce Clause if

its result is to impede interstate commerce (Report 32-

33). He therefore rejected Louisiana’s argument that

the tax was levied on a local activity within the state.

Moreover, the Master agreed with the plaintiffs’ con-

tention that under the system of exclusions and credits

provided by the First Use Tax, “Louisiana customers of

local utilities and local consumers buying diree.y from

the pipelines are protected in whole or in part from the

incidence of the tax which is passed on to consumers out

of the State” (Report 34). But the Master neverthe-

less resisted the conclusion that the exclusions and credits

unconstitutionally discriminated against the out-of-state

consumer. While he acknowledged that such discrimina-

tion might be the case, the Master concluded that “it

is hard to tell from the pleadings what adjustments can

be made in the base prices, and what allowances can

be made between buyers and sellers which might re-

duce or eliminate any disadvantage of one over the other”

(Report 34-35).

Finally, the Special Master regarded the facts of this

Court’s decision in Michigan-Wisconsin Pipe Line Co. v.

Calvert, 347 U.5. 157 (1954), to be “closest to this one”

so that, under the rule of that case, many of the uses

defined in the First Use Tax Act “would result in some

of the acts being too intimately connected with inter-

state transmission to survive” (Report 36). But in

light of the Louisiana statute’s severability clause, the

Master recommended that evidence should be heard as

to the legal effect of the term “processing” in the statute

to determine whether “processing” interrupts the inter-

state journey of the gas (Report 37).

INTRODUCTION AND SUMMARY

“(I]t was settled even before the passage of the Nat-

ural Gas Act, that direct regulation of the prices of whole-

sales of natural gas in interstate commerce is beyond the

constitutional power of the States—whether or not framed

to achieve ends, such as conservation, ordinarily within

the ambit of state power.” Northern Natural Gas Co. v.

Kansas Commission, 372 U.S. 84, 90 (1963) (emphasis

in original). In passing the Natural Gas Act in 1938 and

the Natural Gas Policy Act in 1978, Congress did some-

thing more. In the Court’s words, “[t]he Congress en-

acted a comprehensive scheme of federal regulation of ‘all

wholesales of natural gas in interstate commerce, whether

by a pipeline company or not and whether occurring be-

fore, during, or after transmission by an interstate pipe-

line company[,]’ Phillips Petroleum Co. v. Wisconsin,

(347 U.S. 672,] 682 [1954] * * *” (872 US. at 91;

footnote omitted).

The Louisiana First Use Tax conflicts with the federal

regulation of the sale and transportation of natural gas

in interstate commerce and is therefore invalid under

the Supremacy Clause of the Constitution. Although

couched in terms of a tax on the “use” of natural gas,

the principal impact of the levy is to increase the price

of gas extracted from federally-leased areas on the Outer

Continental Shelf and from federal enclaves and shipped

through Louisiana in interstate commerce. Since Con-

gress by the Natural Gas Act and the Natural Gas

Policy Act has vested in the Federal Energy Regulatory

Commission the exclusive authority to set rates for the

sale and transportation of such natural gas in interstate

commerce, the Louisiana tax is incompatible with the

federal regulatory scheme. It is therefore clear that the

Louisiana tax trenches upon “matters which directly affect

the ability of the [Commission] to regulate comprehen-

sively and effectively the transportation and sale of

natural gas, and to achieve the uniformity of regulation

which [is] an objective of the Natural Gas Act [and

the Natural Gas Policy Act].” Northern Natural Gas

Co. v. Kansas Commission, supra, 372 U.S. at 91-92.

Contrary to the assertion of Louisiana, the decisions of

this Court establish that the interstate journey of the

gas subject to tax is not interrupted by the occurrence

of any of the taxable “uses” enumerated in the Louisiana

statute unless the gas is sold for ultimate consumption in

Louisiana. Thus, whatever the extent of processing or

treatment that occurs within Louisiana, it is settled that

such processing does not break the interstate journey of

gas that is produced outside of Louisiana and is brought

into and/or through Louisiana for ultimate consumption

in other states. The Master therefore erred in concluding

that evidence must be taken with respect to the legal

effect of the processing of the gas.

Like the plaintiff States, we believe that the invalidity

of the Louisiana tax under the Supremacy Clause can

be demonstrated as a matter of law and that the Master

erred in recommending against granting the plaintiffs’

motion for judgment on the pleadings. It is undisputed

that the principal impact of the Louisiana tax is on gas

produced from fields located outside Louisiana on the

Outer Continental Shelf and on federal enclaves. More-

over, the decisions of this Court further demonstrate that

such gas moves in interstate commerce. Finally, it is

clear that Louisiana has outlawed contractual provisions

subject to regulation by the Federal Energy Regulatory

Commission. Given Congress’ intent to preempt the field

and to grant exclusive regulatory authority over such gas

to the Federal Energy Regulatory Commission, the in-

compatability of the Louisiana tax with that exclusive

jurisdiction is established as a matter of law. The Loui-

Siana tax is therefore invalid under the Supremacy

Clause.

The Master’s conclusion that evidentiary hearings are

necessary in order to determine the degree of conflict

between the Louisiana tax and the authority of the Fed-

eral Energy Regulatory Commission cannot be squared

with the Supremacy Clause decisions of this Court. Where,

as here, Congress determines to preempt the field of in-

terstate gas regulation as to which the states never had

any authority, any possible conflict between federal and

state authority voids the state statute under the Su-

premacy Clause. As this Court aptly observed in North-

ern Natural Gas Co. v. Kansas Commission, supra, 372

U.S. at 92, “although collision between the state and

federal regulation may not be an inevitable consequence,

there lurks such imminent possibility of collision * * *

that the [state] orders must be declared a nullity in

order to assure the effectuation of the comprehensive

federal regulation ordained by Congress.”

II.

The pleadings also establish that the Louisiana First

Use Tax is invalid under the Commerce Clause. The

Commerce Clause flatly prohibits state taxation of goods

that are merely in transit through the state when the tax

is assessed. The Master acknowledged that the facts of

Michigan-Wisconsin Pipe Line Co. v. Calvert, 347 U.S.

157 (1954), are “closest to this one” (Report 36). We

submit that Michigan-Wisconsin Pipe Line Co. controls

this case. There, the Court struck down a similar state

statute upon the entire volume of natural gas to be

shipped in interstate commerce. The Court held it to be

an unapportioned levy on the transportation of gas and

therefore invalid under the Commerce Clause.

While the Louisiana tax is characterized as “upon the

privilege of performance or allowing the performance by

the owner, of the enumerated actions comprising first

use within Louisiana” (La. Rev. Stat. Ann. § 47:1303 E

(West Supp. 1980) (Mot. App. 6a), the provisions of

the Act demonstrate that the tax falls on the transporta-

tion of the natural gas within Louisiana, not the privilege

of use. Stripped to its essentials, the Louisiana levy is

nothing more than an “unapportioned levy on the trans-

portation of the entire volume of gas.” Wash. Rev. Dep’t

v. Stevedoring Ass’n, 435 U.S. 734, 749 n.18 (1978).

There is accordingly no need to conduct a factual inquiry

into the nature of the processing of the gas, as the Mas-

ter has recommended.

Even if the Louisiana First Use Tax is not simply a

transit levy on gas moving in interstate commerce, it is

nevertheless invalid because it is not fairly apportioned

and because it discriminates against interstate commerce.

It is not related to either the value of identifiable activi-

ties occurring within the taxing state, the taxpayer’s

investment in facilities within the state, its gross income

from business or the percentage of business conducted

within the state, or the length of the facilities or distance

traveled within the state. The Master therefore erred in

concluding that the apportionment requirement is not

applicable to this case.

The Louisiana tax also discriminates against interstate

commerce in two distinct ways. First, while Louisiana

has prohibited the purchasers of gas subject to the tax

from shifting it to the producer, it does not prohibit pur-

chasers of gas subject to its severance tax from shifting

all or part of the tax to the producer. The practical

effect of prohibiting the shifting of the First Use Tax is

to impose a tax on Outer Continental Shelf and federal

enclave gas which is greater than the tax imposed on gas

produced within Louisiana.

Finally, the Louisiana First Use Tax discriminates

against interstate commerce by requiring out-of-state

consumers to bear the entire burden of the levy. This

discrimination is accomplished by a system of credits de-

signed to ensure that Louisiana consumers are relieved

of any First Use Tax liability. The Louisiana tax there-

fore “falls short of the substantially even-handed treat-

ment demanded by the Commerce Clause.” Boston Stock

Exchange v. State Tax Comm’n, 429 U.S. 318, 332

(1977).

ARGUMENT

I. THE PLAINTIFFS ARE ENTITLED TO JUDG-

MENT WITHOUT FURTHER EVIDENTIARY

PROCEEDINGS BECAUSE THE PLEADINGS

ESTABLISH THAT THE LOUISIANA FIRST USE

TAX CONFLICTS WITH THE FEDERAL REGU-

LATION OF THE SALE AND EXCLUSIVE TRANS-

PORTATION OF NATURAL GAS IN INTERSTATE

COMMERCE AND IS THEREFORE INVALID UN-

DER THE SUPREMACY CLAUSE OF THE CON-

STITUTION

A. The Gas Subject To The First Use Tax Moves In

Interstate Commerce

As we have already explained (supra, page 7), the

Louisiana First Use Tax applies to OCS gas and federal

enclave gas. Gas in each of these categories moves in

interstate commerce as that term is defined by the deci-

sions of this Court.

It has long been established that natural “gas which

crosses a state line at any stage of its movement from

wellhead to ultimate consumption[,]” or gas which is

commingled with gas so moving, is in interstate com-

merce during the entire journey. California v. Lo-Vaca

Gathering Co., 379 U.S. 366, 369 (1965).%* That journey

commences at the wellhead (California v. Lo-Vaca Gath-

ering Co., supra; East Ohio Gas Co. v. Tax Commission,

283 U.S. 455 (1931)). It ends after the pressure is re-

duced and the gas is delivered into local distribution sys-

tems for ultimate consumption (F'PC v. East Ohio Gas

Co., 338 U.S. 464, 472-473 (1950) ; Hast Ohio Gas Co. v.

Tax Commission, supra, 283 U.S. at 470), or after the

gas is delivered to an industrial user for consumption

(15 U.S.C. 717(b)), or to a distribution company, or

intrastate pipeline, which is subject to state or local regu-

lation, at the border of, or within, a state and the gas is

actually consumed within that state (15 U.S.C. 717(c)).

This standard applies to the two categories of gas in-

volved in this case.

a. OCS gas. OCS gas is produced from “‘field[s] * * *

located outside the borders of any state and any gas

taken will have to be transported across state lines for

sale within the United States.” Continental Oil Co. v.

FPC, 370 F.2d 57, 66 (5th Cir. 1966) (emphasis in

original), cert. denied, 388 U.S. 910 (1967). Thus, “the

onshore movement of gas produced in the Federal domain

offshore Louisiana constitutes interstate commerce within

the meaning of the Natural Gas Act * * *.” Chandeleur

Pipe Line Co., 42 F.P.C. 20, 25 (1969). See also United

14 See also FPC v. East Ohio Gas Co., 338 U.S. 464, 467, 469-472

(1950); Interstate Natural Gas Co. v. FPC, 331 U.S. 682, 687-689

(1947) ; Illinois Natural Gas Co. v. Central Illinois Public Service

Co., 314 U.S. 498, 503-506 (1942) ; East Ohio Gas Co. v. Tax Com-

mission of Ohio, 283 U.S. 465, 470 (1931); Peoples Natural Gas

Co. Vv. Public Service Commission of Pennsylvania, 270 U.S. 550,

554 (1926); Public Service Commission of Kentucky v. FERC,

610 F.2d 439, 444 (6th Cir. 1979); Louisiana Public Service Com-

mission V. FPC, 359 F.2d 525, 527-528 (5th Cir. 1966) ; Deep South

Oil Co. of Texas v. FPC, 247 F.2d 882, 887-889 (5th Cir. 1957),

cert. denied, 355 U.S. 980 (1958).

Gas Pipe Line Co., 30 F.P.C. 560, 563-564 (1963). Fur-

thermore, most of the OCS gas which enters Louisiana is

transported through that state for ultimate consumption

in other states.° This interstate movement is not inter-

rupted by any of the taxable uses described in La. Rev.

Stat. Ann. § 47:1302(8) (West Supp. 1980), unless the

gas is sold to a local distribution company, intrastate

pipeline, or user of gas within Louisiana, for ultimate

consumption there.

b. Federal enclave gas. Federal enclave gas from

Barksdale Air Force Base also moves in interstate com-

merce. That gas is processed near the field in plants

owned by Union Texas Petroleum Company and Arkansas

Louisiana Gas Company. The gas is then delivered to

Arkansas Louisiana Gas Company, Mississippi River

Transmission Corporation, Texas Gas Transmission Com-

pany, and United Gas Pipe Line Company. Some of this

gas is sold to distribution companies and directly to in-

dustrial and other users in Louisiana; the remainder is

transported to out-of-state consumers. The total volume

of gas from Barksdale Air Force Base either moves in

interstate commerce or is commingled with such gas.

Thus, such federal enclave gas moves in interstate com-

merce from the time it leaves the wellhead until it is

sold for ultimate consumption within Louisiana or other

states.

B. The Taxable “Uses” Enumerated In The Louisiana

Statute Do Not Interrupt The Journey Of The Gas

In Interstate Commerce

1. Louisiana does not dispute the fact that each of

the two categories of gas to which the First Use Tax

applies—OCS gas and federal enclave gas—moves in in-

15 Hearings on H.B. 768 Before the Committee on Ways and

Means of the Louisiana House of Representatives 7 (Rep. Tauzin)

(June 5, 1978) ; id. at 9 (Mr. Brooksher) (June 6, 1978) ; Hearings

on H.B. 768 Before the Revenue and Fiscal Affairs Committee of

the Louisiana Senate 4 (Rep. Tauzin) (June 26, 1978).

terstate commerce. Moreover, the Master likewise agreed

that the “natural gas is in interstate commerce during

the entire journey” (Report 32). Louisiana contends,

however, that extensive processing and treatment of the

gas occurs in Louisiana and that these activities interrupt

the journey of the gas in interstate commerce and thereby

justify imposition of the tax (see Motion to Dismiss

22-26; Answer 11 { XXXV, 13 J XL). The Master

concluded that evidentiary proceedings are necessary be-

cause “[t]here is an ongoing dispute between the parties

as to the legal effect of the processing by which the hy-

drocarbons are extracted and its effect on the natural

gas” (Report 28). See also Report 37.

But the decisions of this Court establish that the

interstate journey of OCS and federal enclave natural

gas is not interrupted by the occurrence of any of the

taxable “uses” enumerated in the Louisiana tax statute

unless the gas is sold for ultimate consumption in Louisi-

ana. Thus, whatever the extent of processing or treat-

ment that occurs within Louisiana, it is settled that such

processing does not break the interstate journey of gas

that is produced outside of Louisiana and is brought

into and/or through Louisiana for ultimate consumption

in other states. We turn now to a discussion of each

of the taxable “uses” enumerated in the Louisiana First

Use Tax Act.

a. The “sale” or “transfer of possession of relin-

quishment of control at a delivery point [within Louisi-

ana]” (La. Rev. Stat. Ann. § 47:1302(8) (West Supp.

1980) ) does not necessarily interrupt the interstate move-

ment of gas subject to the First Use Tax. Jllinois Natural

Gas Co. v. Central Illinois Public Service Co., supra,

314 U.S. at 503-504; Peoples Natural Gas Co. v. Public

Service Commission of Pennsylvania, 270 U.S. 550, 554

(1926).

In transactions involving gas that is sold and/or deliv-

ered to another pipeline, which transports the gas, or

commingles it with gas transported, out of Louisiana, or

sells and/or delivers the gas to a third pipeline, which

transports the gas out of Louisiana, “the particular

point at which the title and custody of the gas pass to the

purchaser, without arresting its movement to its in-

tended destination, does not affect the essential interstate

nature of the business.” Jilinois Natural Gas Co. v.

Central Illinois Public Service Co., supra, 314 U.S. at

503-504.'*

b. The “transportation in [Louisiana] to the point

of delivery at the inlet of any processing plant” or “the

transportation in [Louisiana] of unprocessed gas to the

point of delivery at the inlet of any measurment or stor-

age facility” (La. Rev. Stat. Ann. § 47:1302(8) (West

Supp. 1980) ) by an interstate pipeline does not interrupt

the interstate movement of the gas. To the contrary,

such transportation is an inseparable segment of the

interstate movement of the gas from wellhead to the ulti-

mate consumers located in Louisiana and in other states.

Cf. Michigan-Wisconsin Pipe Line Co. v. Calvert, 347

U.S. 157, 168 (1954) ; Area Rate Proceeding (Southern

Louisiana Area), 40 F.P.C. 580, 611 (1968), aff’d, 428

F.2d 407 (5th Cir.), cert. denied, 400 U.S. 950 (1970).

ec. The storage of gas within Louisiana by an inter-

state pipeline, which may constitute “other ascertainable

16 On the other hand, if the gas is sold and delivered to an intra-

state pipeline, or distribution company at the border of, or within,

Louisiana, and is actually consumed within that state, it ceases to

be in interstate commerce once that delivery is made. 15 U.S.C.

717(c) ; Illinois Natural Gas Co. v. Central Illinois Public Service

Co., supra, 314 U.S. at 503-504; FPC v. East Ohio Gas Co., supra,

338 U.S. at 472-473. The same is true if gas is sold and delivered

to an industrial or other user within Louisiana. 15 U.S.C. 717(b);

Panhandle Eastern Pipe Line Co. v. Public Service Commission,

332 U.S. 507 (1947).

Gas which is subject to the First Use Tax and which is “use[d]

in manufacturing” in Louisiana (§ 47:1302(8)) has ceased to be

in interstate commerce with its delivery to the manufacturer, or

the local distribution company or intrastate pipeline which serves

that manufacturer. Moreover, the various credits and exclusions

would minimize or eliminate any tax on this use. See Report

87 n.20.

action at a point within the state” (§ 47:1802(8)) does

not interrupt the interstate movement if it is a tem-

porary incident of such movement. Cf. Board of Trade

of City of Chicago v. Olsen, 262 U.S. 1, 33-84 (1923) .?"

This gas has moved in interstate commerce prior to stor-

age and will so move upon withdrawal from storage

in the manner previously authorized by the Commission

until such time as the Commission, by an amendment to

the certificate authorizing operation of the storage facil-

ity, authorizes a different movement. The seasonal stor-

age of such gas does not break the interstate journey

because the gas is stored to facilitate its movement to

the ultimate consumers, whether in Louisiana or in other

states, during the winter heating season when the demand

for gas is the greatest.'* Cf. Champlin Realty Co. Vv.

Brattleboro, 260 U.S. 366, 376-377 (1962).

d. Finally, the delivery of gas to the operator of a

treating and/or processing plant, treatment of the gas

for removal of impurities and/or waste products, and

processing to extract liquid and liquefiable hydrocarbons

(see § 47:1802(8)) do not interrupt the interstate move-

ment. Instead, as this Court has observed, the “[t]he

entire movement of the gas, from the producing wells

through the [processing plants] and into the [interstate]

pipeline[s] to consumers outside [Louisiana] is a steady

and continuous flow.” Michigan-Wisconsin Pipe Line Co.

17 Storage of gas subject to the First Use Tax by an intrastate

pipeline, local distribution company, or industrial or other consumer

of gas within Louisiana presents a different legal issue. Such gas

has ceased to be in interstate commerce by reason of the sale of

such gas to those persons.

18 See Federal Power Commission, Natural Gas Survey, Vol. I,

at 39-40, 44-46, 47 (1975).

- |

v. Calvert, 347 U.S. 157, 168 (1954) ; California v. Lo-

Vaca Gathering Co., 379 U.S. 366, 369 (1965); Inter-

state Natural Gas Co. v. FPC, 331 U.S. 682, 685 n.7

(1947). Public Service Commission of Kentucky v.

FERC, 610 F.2d 439, 444 (6th Cir. 1979). Thus, proc-

essing does not interrupt the continuous movement of the

gas from the wellhead to consumer burner tips * * *.”

Deep South Oil Co. v. FPC, supra, 247 F.2d at 888.

C. The Louisiana Tax Interferes With The Federal

Regulation Of The Transportation And Sale Of

Natural Gas In Interstate Commerce

1. Once it is recognized that the First Use Tax is

imposed upon OCS and federal enclave natural gas, and

that these categories of gas move in interstate commerce,

it can be readily seen that the Louisiana levy interferes

with the federal regulation of the transportation and sale

of gas in interstate commerce and is therefore invalid

under the Supremacy Clause.’®

We focus on § 47:1303 C of the First Use Tax as

it interferes with the Commission’s regulation of the

transportation and sale of natural gas in interstate com-

merce. By the terms of the First Use Tax Act, § 4(2),

1978 La. Sess. Law Serv. 486, if that provision is un-

constitutional, the entire statute becomes void.” Thus, if

the Court agrees with our submission that the pleadings

19 “Although [these claims are] basically constitutional in nature,

deriving [their] force from the operation of the Supremacy Clause,

Art. VI, cl. 2, they are treated as ‘statutory’ for purposes * * * of

deciding statutory claims first to avoid unnecessary constitutional

adjudications.” Douglas v. Seacoast Products, Inc., 431 U.S. 265,

271-272 & n.6 (1977) ; Hagans v. Lavine, 415 U.S. 528, 549 (1974).

20 See Hearings on H.B. 768 Before the Revenue and Fiscal Af-

fairs Committee of the Louisiana Senate 4, 13, 28 (Rep. Tauzin)

(June 26, 1978).

show, without more, that § 47:1303 C is invalid under

the Supremacy Clause, it need not reach any of the

plaintiffs’ other claims.”

Section 47:1303 C declares the First Use Tax to be “a

cost associated with uses made by the owner in prepara-

tion of [sic] marketing of the natural gas.” It abro-

gates “agreement[s] or contract[s] by which an owner

of natural gas at the time a taxable use first occurs

claims a right to reimbursement or refund of such taxes

from any other party in interest, other than a purchaser

of such natural gas * * * on the basis that this tax con-

stitutes a cost incurred by such owner by virtue of the

separation or processing of natural gas for extraction of

liquid or liquefiable hydrocarbons, or * * * any other

grounds for reimbursement or refund * * *.” Louisiana’s

answer states that “the sole purpose, intent, and applica-

tion of [§ 47:1303 C is] to ensure that the First Use Tax

will not unreasonably burden any person within the in-

terstate commerce stream but will be passed along to the

ultimate users and consumers.” Answer 21 J LX. The

pleadings therefore show that § 47:1303 C seeks to regu-

late the apportionment of costs among producers, proc-

essors, and pipelines, and that it interferes with the

Commission’s exclusive jurisdiction.

2. Section 47:13803 C impinges upon the Commission’s

ratemaking authority under Sections 4 and 5 of the Nat-

ural Gas Act (15 U.S.C. 717¢ and 717d). Insofar as it

characterizes the First Use Tax as a cost associated with

21Contrary to Louisiana’s denial (Answer 17-18 { XLVIII),

§ 47:1808 C is a regulation of the transportation and sale of

natural gas in interstate and foreign commerce. To “ ‘regulate’ is

to lay down the rule by which a thing shall be done.” FPC v. Cor-

poration Commission of Oklahoma, 362 F. Supp. 522, 532 (W.D.

Okla. 1973) (three-judge court), aff’d per curiam, 415 U.S. 961

(1974). As it prescribes, “the rule by which natural gas produced

[outside of Louisiana’s taxing jurisdiction] may move from [Loui-

siana] to other states[,] [§ 47:1303 C] constitute[s], therefore, a

regulation * * *” (362 F. Supp. at 533).

uses of the gas by the interstate pipeline owner and

abrogates contractual provisions which would require per-

sons other than gas consumers to bear the tax, § 47:1303

C interferes with the Commission’s authority to allocate

costs between gas consumers and the owners of liquid

and liquefiable hydrocarbons which aer carried by inter-

state pipelines,

Because many natural gas pipelines transport ex-

tractable hydrocarbons as well as natural gas, the Com-

mission must determine which costs should be borne by

natural gas consumers and which should be borne by the

owners of the extractable hydrocarbons.”? The First Use

22 Mobil Oil Corp. v. FPC, 488 F.2d 1238, 1241-1248, 1247, 1249

(D.C. Cir. 1973) ; City of Detroit v. FPC, 280 F.2d 810, 819-821

(D.C. Cir. 1955), cert. denied, 352 U.S. 829 (1956) ; Cities Service

Gas Co. v. FPC, 155 F.2d 694, 703 (10th Cir.), cert. denied, 329

U.S. 773 (1946) ; Hope Natural Gas Co. v. FPC, 134 F.2d 287, 307-

308 (4th Cir. 1943), rev’d on other grounds, 320 U.S. 591 (1944) ;

Panhandle Eastern Pipe Line Co. v. FPC, 324 U.S. 635, 641-642

(1945); Colorado Interstate Gas Co. v. FPC, 324 U.S. 581, 588-590

(1945).

When these cases were decided, the Commission could not directly

prescribe rates for the transportation of liquid hydrocarbons; it

could only assign costs to that service and preclude the recovery of

such costs in rates charged natural gas consumers. Mobil Oil Corp.

Vv. FPC, supra, 483 F.2d at 1246-1249. Arguably, the Commission

could regulate the terms on, and rates at, which liquefiable hydro-

carbons—those hydrocarbons produced with natural gas existing in

a gaseous state when produced and transported that may be ex-

tracted from the gas stream by processing, liquefied, and treated as

liquids (id. at 1241)—are transported in interstate commerce pur-

suant to the Natural Gas Act (id. at 1242, 1246, 1249). The Com-

mission’s authority to regulate the transportation of liquid and

liquefiable hydrocarbons by interstate natural gas pipelines (cf. id.

at 1242-1243), was established when the Department of Energy

Organization Act (“DOE Act”) vested the Commission with juris-

diction to set rates for the transportation of oil by common-

carrier pipeline (DOE Act, Section 402(b), 42 U.S.C. (Supp. II)

7172(b)), including any “petroleum by-products, derivatives or

petrochemicals.” H.R. Rep. No. 95-539, 95th Cong., 1st Sess. 69

(1977). Thus, the Commission may now prescribe directly the rates

for the transportation of liquid and liquefiable hydrocarbons by

natural gas pipelines providing common carriage for such prod-

Tax, like other taxes and costs, is an element of the pipe-

line’s cost of service. FPC v. United Gas Pipe Line Co.,

386 U.S. 237, 243 (1967). It is for the Commission and

the Commission alone to determine whether this cost

should be borne by gas consumers or others. Id. at 243-

246,

The Commission has consistently held that a pipeline’s

natural gas customers do not receive any benefits from

the pipeline’s transportation of liquid and _ liquefiable

hydrocarbons for the owners, and that the costs associ-

ated with the transportation and delivery of those prod-

ucts at the inlet of a processing plant must be borne by

the producers, who benefit from such activities, and not

by natural gas consumers.”* The Commission has also

held that costs associated with the processing of natural

gas to extract the liquid and liquefiable hydrocarbons

must be borne by the owners of the products, and not by

the natural gas consumers.

ucts. Accordingly, since any natural gas pipeline operating on the

Outer Continental Shelf, which carries liquid and liquefiable hydro-

carbons for producers, must operate as a common carrier (43 U.S.C.

1334(c)), the Commission may now prescribe directly the rates

for the transportation by pipeline of liquid hydrocarbons as well

as for the liquefiable hydrocarbons and natural gas carried by such

pipelines.

23 Union Oil Company of California, Docket Nos. C177-828,

et al., order at 7, 10-11 (Apr. 12, 1978); Canadian Superior Oil

(U.S.) Ltd., Docket No. C177-802 (Mar. 28, 1978); High Island

Offshore System, Docket Nos. CP75-104, et al., order at 10, 16-17,

18 (June 4, 1976); Tennessee Gas Pipeline Co., 38 F.P.C. 691,

698 (1967); Northern Natural Gas Co., 28 F.P.C. 1155, 1163-1165

(1962); aff’d sub nom. Mid-American Pipeline Co. v. FPC, 330

F.2d 226 (D.C. Cir. 1964); Continental Oil Co., 27 F.P.C. 96,

107-108 (1962); Texas Eastern Transmission Corporation, 11

F.P.C. 485, 447 (1952). See also Pipeline Costs Allocable to the

Transportation of Liquids, Liquefiable Hydrocarbons, etc., For

Others, 47 F.P.C. 208 (1972), rev’d on other grounds sub nom.

Mobil Oil Corp. v. FPC, 483 F.2d 1238 (D.C. Cir. 1973).

24 Natural gas is processed to extract liquid and liquefiable hydro-

carbons because those products are considered more valuable than

the processed gas. E.g., Deep South Oil Co. of Texas v. FPC, supra,

247 F.2d at 888; National Rates for Natural Gas, 54 F.P.C. 3090,

-*%

The First Use Tax is such a cost. It is imposed on

activities which, in most cases, occur solely because the

pipeline transports and delivers the gas stream to a

processing plant so that the producers may separate and

extract the liquid and liquefiable hydrocarbons contained

in that stream. Thus, “the transportation in [Louisiana]

‘3096-3102 (1975), reh. denied, 15 P.U.R. 4th 1, 12-13 (1976),

aff’d in part and rev’d in part on other grounds sub nom. Ten-

neco Oil Co. v. FERC, 571 F.2d 834, 844-845 (5th Cir. 1978).

The removal of these hydrocarbon products does not benefit

gas consumers because it reduces both the volume, and heat con-

tent, of the processed gas. Area Rate Proceeding (Southern Louisi-

ana Area), 40 F.P.C. 530, 611 (1968), aff’d, 428 F.2d 407 (5th

Cir.), cert. denied, 400 U.S. 950 (1970); Northern Natural Gas

Co., 28 F.P.C. 1155, 1158, 1163-1165 (1962), aff’d sub nom. Mid-

American Pipe Line Co. v. FPC, 330 F.2d 226 (D.C. Cir. 1964).

Although the methodologies have differed, the Commission has

applied the policy of requiring the owner of hydrocarbons to bear

the cost of their extraction in establishing rates for producers as

well as for pipelines. In establishing producer rates, the Commis-

sion had either credited revenues from the sale of the extracted

hydrocarbons against costs, or allocated costs between the processed

gas and the extracted hydrocarbons on the basis of economic and

physical characteristics of the two products. National Rates For

Natural Gas, Docket No. RM75-14, Opinion No. 770, 15 P.U.R. 4th

21, 49-50 (1976), reh. denied, Opinion No. 770-A, 17 P.U.R. 4th

317, 346-347 (1976), aff’d sui nom. American Public Gas Associa-

tion v. FPC, 567 F.2d 1016 (D.C. Cir. 1977), cert. denied, 435 U.S.

907 (1978) ; National Rates for Natural Gas, 54 F.P.C. 3090, 3096-

3102 (1975), reh. denied, 15 P.U.R. 4th 1, 12-14 (1976). In estab-

lishing rates for those pipelines, which own the extracted hydro-

carbons as well as the processed gas, the Commission has credited

the revenues from the sales of the liquids against the pipeline’s

cost of service. Kansas-Nebraska Natural Gas Company, 53 F.P.C.

1691, 1702-1703 (1975), reh. denied, 54 F.P.C. 923 (1975);

Panhandle Eastern Pipe Line Co., 25 F.P.C. 787, 797-798 (1961),

remanded sub nom. Panhandle Eastern Pipe Line Co. v. FPC,

805 F.2d 763, 767-768 (D.C. Cir. 1962), cert. denied, 372 U.S.

916 (1963), aff’d on remand, 32 F.P.C. 636 (1964), aff'd per

curiam, 348 F.2d 340 (D.C. Cir.), cert. denied, 382 U.S. 944 (1965) ;

Northern Natural Gas Co., 28 F.P.C. 1155, 1163-1165 (1962), aff’d

sub nom. Mid-American Pipeline Co. v. FPC, 330 F.2d 226 (D.C.

Cir. 1964); Tennessee Gas Transmission Co., 18 F.P.C. 428, 435

(1957) ; id. at 474-479 (Initial Decision).

of unprocessed natural gas to the point of delivery at the

inlet of any measurement or storage facility[,] er

processing jor the extraction of liquefiable component

products or waste material[,] * * * [and] treatment” *°

occur solely because the gas is delivered to a producer-

owned processing plant. Moreover, the pipeline must

“transfer * * * possession or relinquish[] control at

a delivery point in [Louisiana]” (§ 47:13802(8)) at the

inlet of the processing plant to enable the producers to

process the gas. Since such activities benefit only the

producers, the Commission must determine whether the

producers or the pipelines’ natural gas customers must

bear the costs (including any taxes) incurred by the

pipelines because of these activities.

Section 47:13803 C, however, seeks to preclude the Com-

mission from classifying the First Use Tax as a cost

associated with the extraction of hydrocarbons and re-

quiring that it be recovered from those products. It

does this by abrogating contracts which require the

owners of the extracted hydrocarbons to reimburse the

transporting interstate pipelines for costs allocated to

transporting and processing of those products. This abro-

gation prohibits the interstate pipeline from obtaining

reimbursement from the owner of the extracted hydro-

carbons and requires the interstate pipeline to seek re-

imbursement, if at all, from subsequent purchasers of

the processed gas. The practical effect of this provision

is to shift the incidence of significant costs incurred

primarily for the benefit of the owners of the extracted

hydrocarbons to the ultimate consumer of the processed

gas without the prior approval of the Commission.

D. No Evidentiary Proceedings Are Necessary To

Establish The Invalidity Of The First Use Tax

Under The Supremacy Clause

1. In his Report, the Master acknowledged that Con-

gress has vested in the Federal Energy Regulatory Com-

mission the exclusive authority to regulate the sale and

25 La. Rev. Stat. Ann. § 47:1802(8) (West Supp. 1980).

transportation of natural gas in interstate commerce

and that “the impact of the tax appears to be directed at

interstate sales by reason of the exemptions and credits

granted intrastate users” (Report 27). Despite the con-

ceded conflict between the Louisiana tax and the fed-

eral regulatory scheme, the Master nevertheless concluded

that “a decision [on the Supremacy Clause] is hard to

make on the pleadings since it is difficult to calculate

how great an effect on the regulatory power of the FERC

is imposed” (ibid.). As the Master saw the matter, “[t]he

issue eventually to be resolved is whether the first use

tax is just one of the many factors affecting the price,

some of which are beyond the FERC control, or whether

it is a substantial hindrance to the Commission’s powers”

(tbid.). In so ruling, the Master observed that “it may

be that in the end FERC’s orders can be adjusted so

that the laws will mesh without conflict” (Report 29).

But the Master’s conclusion that further inquiry is

required to determine the degree of conflict between

the Louisiana tax and the authority of the Commission

cannot be squared with the decisions of this Court inter-

preting the Supremacy Clause. The Master’s point might

be well taken if this were a case where Congress has

legislated in an area which the States have tradition-

ally occupied. In those circumstances, the Court “start[s]

with the assumption that the historic police powers of

the States were not to be superseded by the Federal Act

unless that was the clear and manifest purpose of

Congress.” Rice v. Santa Fe Elevator Corp., 331 U.S.

218, 230 (1947); Jones v. Rath Packing Co., 430 US.

519, 525 (1977) ; Ray v. Atlantic Richfield Co., 485 U.S.

151, 157-158 (1978), and cases cited therein. In such a

case, the state statute is void to the extent that it ac-

tually conflicts with a valid federal statute, i.e., “where

compliance with both federal and state regulations is a

physical impossibility * * *” (Florida Lime & Avocado

Growers, Inc. v. Paul, 373 U.S. 182, 142-143 (1963) ),

or where the state “law stands as an obstacle to the ac-

complishment and execution of the full purposes and ob-

jectives of Congress.” Hines V. Davidowitz, 312 U.S. 52,

67 (1941). .

This is not a case in which actual coniiict between

federal and state authority must be proved to establish a

violation of the Supremacy Clause. Here, the federal

regulation scheme is “so pervasive as to make reasonable

the inference that Congress left no room for the States

to supplement it.” Rice v. Santa Fe Elevator Corp.,

supra, 331 U.S. at 230. Indeed, it is beyond question

that the states have not traditionally occupied the field

of regulation of interstate sales of gas. As we have

pointed out (supra, page 11), “it was settled even be-

fore the passage of the Natural Gas Act, that direct

regulation of the prices of wholesales of natural gas in

interstate commerce is beyond the constitutional power

of the States—whether or not framed to achieve ends,

such as conservation, ordinarily within the ambit of

state power.” Northern Natural Gas Co. v. Kansas Com-

mission, supra, 372 U.S. at 90 (emphasis in original).

Accord: Public Utilities Commission v. Attleboro Steam

& Electric Co., 273 U.S. 83 (1927); Missouri v. Kansas

Natural Gas Co., 265 U.S. 298 (1924) ; Pennsylvania v.

West Virginia, 262 U.S. 553 (1923); West v. Kansas

Natural Gas Co., 221 U.S. 229 (1911). Thus, in passing

the Natural Gas Act in 1938, Congress intended to “touch

a field in which the federal interest is so dominant that

the federal system will be assumed to preclude enforce-

ment of state laws of the same subject.” Rice v. Santa

Fe Elevator Corp., supra, 331 U.S. at 230. See also Ray

v. Atlantic Richfield Co., supra, 485 U.S. at 157-158, and

eases cited therein. Accordingly, Congress did not intend

to complement existing state regulation but to establish

an exclusive federal authority that would preempt all

forms of state regulation not expressly authorized.”

26 Portlund Pipe Line Corp. Vv. Environmental Improvement Com-

mission, 307 A.2d 1 (Me. 1973), which the Master cited as “[t]he

case which most strongly supports Louisiana’s position” (Report

30), has no bearing on the Supremacy Clause issue. There, the

Supreme Court of Maine upheld a Maine tax levied upon the move-

In these circumstances, there is no need for a factual

inquiry to determine the degree of interference between

the Louisiana tax and the authority of the Commission.

Given Congress’ intent to preempt the field, Louisiana

cannot enact laws that “conflict, or interfere with, cur-

tail or complement, the federal law, or enforce additional

or auxiliary regulations.” Hines v. Davidowitz, supra,

- $12 U.S. at 66-67; Jones v. Rath Packing Co., supra, 430

U.S. at 525; San Diego Building Trades Council v. Gar-

mon, 359 U.S. 236, 244 (1959) ; Machinists v. Wisconsin

Employment Relations Commission, 427 U.S. 132, 138-

139 (1976). Accordingly, any possible interference be-

tween the First Use Tax and the authority of FERC

voids the state statute. As the Court stated in the closely

analogous situation in Northern Natural Gas Co. v. Kan-

sas Commission, supra, 372 U.S. at 92, “although

collision between the state and federal regulation may

not be an inevitable consequence, there lurks such immi-

nent possibility of collision * * * that the orders must

be declared a nullity to assure the effectuation of the

comprehensive federal regulation ordained by Congress.”

Here, the Louisiana tax indisputably adds a cost to the

price of gas sold in interstate commerce and requires

that such cost be absorbed by the pipeline or passed on

ment of oil in the state harbor waters in order to provide funds

to clean up oil spills. But the court did not consider whether the

tax violated the Supremacy Clause. Rather, it addressed claims

raised under the Due Process, Commerce, Import-Export, Tonnage,

and Admiralty Clauses.

Moreover, the Master’s suggestion (ibid.) that a question could

have been raised in that case about the supremacy of the Water

Quality Improvement Act of 1970, 33 U.S.C. 1321, is not well

taken. As the Maine court correctly observed (307 A.2d at 40),

there was no conflict between federal and state law. Congress

declared in that statute that “it did not intend to preempt the

field.” See also 33 U.S.C. 1251(b) (“It is the policy of the Congress

to recognize, preserve, and protect the primary responsibilities

and rights of States to prevent, reduce, and eliminate pollution

* * *”). Here, on the other hand, Congress did preempt the field

of interstate natural gas regulation.

to the ultimate consumer. Congress has decreed that it

is for the Commission—and not Louisiana—to make such

a judgment. The Commission is not required to accom-

modate its orders to the Louisiana tax.*’ Hence, the

First Use Tax violates the Supremacy Clause; no amount

of evidence that Louisiana may submit can save the

tax from a judgment of invalidity.

Indeed, the Court’s decision in Northern Natural Gas

Co. v. Kansas Commission, supra, underscores our point

with particular force. There, this Court held that the

orders of the Kansas Commission—requiring an inter-

state pipeline to purchase ratably from all wells con-

nected to its pipelines system within the state—imper-

27 Hence, the Master erred in relying (Report 27) upon the fact

“that the FERC has permitted, over its strong disinclination to

do so, the first use tax to be treated as a cost of transportation

and of processing and therefore included as one of the underlying

factors on which the price to consumers is fixed.”

To begin with, the Master has misapprehended the purpose and

nature of the Commission’s action. The Commission does not

consider the First Use Tax to be a cost which should be passed

along to consumers. State of Louisiana First Use Tax in Pipeline

Rate Cases, Order No. 10, 43 Fed. Reg. 45553 (1978); Order No.

10-A, 43 Fed. Reg. 604388 (1978); Order No. 10-B, 44 Fed. Reg.

13460, 13461-13462 & nn.16, 19, 20 (1979); Order No. 10-C, 45

Fed. Reg. 29011, 29012, 29014 (1980), petitions for review pending

sub nom. Tennessee Gas Pipeline Company v. FERC, No. 78-3816

(5th Cir.). The Commission has allowed the pipelines to collect the

tax subject to refund while the constitutionality of the First Use

Tax is litigated only because the courts have held that, where a

utility is required to pay a tax and sue for a refund, it is entitled to

collect the tax subject to refund while the tax refund suit is pending.

See Tennessee Natural Gas Lines, Inc. v. FPC, 221 F.2d 531 (D.C.

Cir. 1954); accord: City of Cleveland v. FPC, 525 F.2d 845, 850

n.37 (D.C. Cir. 1976).

At all events, even on the assumption that the Commission

has adjusted, albeit provisionally, to the economic reality imposed

by the tax, the fact of the Commission proceeding has no bearing

on the resolution of the Supremacy Clause issue. Since Congress

has preempted the field of the regulation of the interstate sale of

natural gas, the critical question is not whether the Commission

can accommodate itself to the Louisiana tax but whether the

tax impinges upon the Commission’s authority.

missibly encroached upon the Commission’s exclusive reg-

ulatory domain (372 U.S. at 91-92, 97-98), because they

“necessarily deal with matters which directly affect the

ability of the Federal [Energy Regulatory] Commission

to regulate comprehensively and effectively the transpor-

tation and sale of natural gas, and to achieve the uni-

formity of regulation which was an objective of the

Natural Gas Act” (id. at 91-92). The Court found that

the State order to purchasers to take ratably “could seri-

ously impair the * * * Commission’s authority to regu-

late the intricate relationship between the purchasers’

cost structures and eventual costs to wholesale customers

who sell to consumers in other States[,] * * * a matter

.. With respect to which Congress has given the [Commis-

. sion] paramount and exclusive authority” (id. at 92).

The Court then held that, since “Congress [had] so

plainly occupied the regulatory field,” the state regula-

tion must be subordinated to federal regulation to avoid

jeopardizing the objective of uniformity (id. at 93, 98).

Like the orders of the Kansas Commission, § 47:1303

C of the Louisiana statute seeks to regulate the costs

to be borne by interstate pipelines. Section 47:1303

C requires that when an interstate pipeline pays the

First Use Tax, the pipeline must recover the tax, if at

all, from subsequent purchasers of the gas and may not

pass the burden of tax back to the producers. Section

47:1303 C thus seeks to determine the apportionment of

costs between producers, pipelines, and consumers. But

regulation of this very type of apportionment is a matter

over which Congress has given the Commission para-

mount and exclusive authority. Sections 4, 5 and 7 of

the Natural Gas Act of 1938, 15 U.S.C. 717c, 717d and

717f; Section 110 of the Natural Gas Policy Act of 1978,

15 U.S.C. (Supp. II) 3320. “The federal regulatory

scheme leaves no room either for direct state regulation

of the prices of interstate wholesales of natural gas * * *

or for state regulations which would indirectly achieve

the same result.” Northern Natural Gas Co. v. Kansas

Commission, supra, 372 U.S. at 91.

2. Nor is there any need to hold evidentiary hear-

ings on the legal effect of § 47:1303 C of the Louisiana

statute that prohibits contracts that pass the tax back to

producers but permit it to be added to the purchase price

of the consumers. In addressing this provision, the Master

acknowledged (Report 28) that “FERC had previously

accepted contracts that provided that the processing in-

volved and the tax on it were properly considered costs

of producing liquid and liquefiable hydrocarbons, not

properly to be borne by consumers of the natural gas.”

Despite the conflict between the Louisiana tax that

outlaws contracts and the exclusive authority of the

Commission to which such contracts are subject, the

Master concluded that “[t]here is an ongoing dispute

between the parties as to the legal effect of the process-

ing by which the hydrocarbons are extracted and its ef-

fect on the natural gas” (ibid.). The Master concluded

that the Commission’s position would be sound only if the

gas emerges from the processing plant in essentially the

same state and that evidence should be taken on this

point.

But in so ruling, the Master has overlooked the critical

fact that the allocation of costs among producers, pipe-

lines, and consumers of natural gas is a judgment for the

Cominission, and the Commission alone, to make. The

Commission has the exclusive authority to make that

determination. The fact that Louisiana has outlawed

contracts that require the producers to bear the tax

where such contracts are subject to the exclusive regu-

lation of the Commission necessarily voids the Louisiana

levy under the Supremacy Clause.

There is accordingly no need to take evidence on the

nature of the processing of the gas. Even if the process-

ing involves the chemical transformation of “wet gas”

into “dry gas” and other products, as Louisiana contends

(Report 29),?® the Commission still has the exclusive

28 Louisiana’s description of the nature and purpose of processing

(Motion to Dismiss and Brief in Support of Motion to Dismiss

and in Opposition to Motion for Judgment on the Pleadings

24-26; Brief in Response to Brief for the United States and the .

authority to determine whether the tax may be passed

on to consumers or back to the producers.

In light of the foregoing, it is clear that § 47:1303

C trenches upon “matters which directly affect the

ability of the [Commission] to regulate comprehen-

sively and effectively the transportation and sale of nat-

ural gas, and to achieve the uniformity of regulation

which [is] an objective of the Natural Gas Act [and the

Natural Gas Policy Act].” Northern Natural Gas Co. v.

Kansas Commission, supra, 872 U.S. at 91-92. By pro-

viding that the First Use Tax can only be passed on only

to natural gas consumers, § 47:1303 C “seriously im-

pair[s] the [Commission’s] authority to regulate the in-

tricate relationship between the [pipeline] purchasers’

cost structures and eventual costs to wholesale customers

who sell to consumers in other states” (372 U.S. at 92).

Federal Energy Regulatory Commission as Amici Curiae 38 & n.8)

is at odds with the definition of processing in the First Use

Tax (La. Rev. Stat. Ann. § 47:1302(3) (West Supp. 1980) ). There,

the Act defines “processing” as

the scrubbing of a natural gas stream by specifically applied

mechanical processes of absorption, compression, cooling,

cryogenics, refrigeration or any combination thereof for the

purpose of extracting natural or casinghead gasoline, methane,

ethane, propane, butane and other liquefiable hydrocarbons[.]

It is also at odds with the description of natural gas production,

transportaiton to processing plants, and processing found in Mobil

Oil Corp. v. FPC, 483 F.2d 1288, 1241 (D.C. Cir. 1973) (transpor-

tation to processing plants) ; Freeland v. Sun Oil Co., 184 F. Supp.

754, 756, 758-759 (W.D. La. 1959), aff’d, 277 F.2d 154 (5th Cir.),

cert. denied, 364 U.S. 826 (1960) (processing) ; Continental Oil Co.,

27 F.P.C. 96, 149-150 (1962) (Initial Decision) (movement of gas

from offshore platform through a processing plant) ; Deep South

Oil Company of Texas, 14 F.P.C. 308, 318 (1955) (processing),

aff’d, 247 F.2d 882 (5th Cir. 1957), and Phillips Petroleum Co.,

10 F.P.C. 246, 255-261 (1950) (processing), rev’d on other grounds,

847 U.S. 672 (1954).

In practical effect, Louisiana seeks to resurrect the long-

discredited distinction between “wet gas” and “dry gas.” See,

e.g., Deep South Oil Company of Texas v. FPC, supra. Moreover,

Louisiana’s position is contrary to the well-established exclusive

jurisdiction of the Commission to allocate costs incurred prior to

the completion of processing.

Since regulation of “[t]his relationship is a matter with

respect to which Congress has given the [Commission]

paramount and exclusive authority[,]” § 47:1303 C

should be “declared a nullity in order to assure the effec-

tuation of the [regulatory scheme] ordained by Congress”

(372 U.S. at 92).

II. THE PLEADINGS ESTABLISH THAT THE LOUI-

SIANA FIRST USE TAX IS INVALID UNDER THE

COMMERCE CLAUSE

A. The Louisiana Tax Is A Transit Levy On Gas

Moving In Interstate Commerce

1. Article I, Section 8, Clause 3 of the Constitution

provides that: “Congress shall have power * * * to regu-

late Commerce with foreign Nations, and among the

several States, and with the Indian Tribes.” As the

Court observed in McLeod v. J. E. Dilworth Co., 322

U.S. 327, 330 (1944), “[t]he very purpose of the Com-

merce Clause was to create an area of free trade among

the several States.” It is settled by the decisions of this

Court that “the Commerce Clause was not merely an

authorization to Congress to enact laws for the protec-

tion and encouragement of commerce among the States,

but by its own force created an area of trade free from

interference by the States. * * * [T]he Commerce Clause

even without implementing legislation by Congress is a

limitation upon the power of the States.” Freeman v.

Hewit, 329 U.S. 245, 252 (1946). See also Boston Stock

Exchange v. State Tax Comm’n, 429 U.S. 318, 328

(1977).

The Commerce Clause flatly prohibits state taxation of

goods that are merely in transit through the state when

the tax is assessed. Michigan-Wisconsin Pipe Line Co.

v. Calvert, 347 U.S. 157 (1954) ; Michelin Tire Corp. v. °

Wages, 423 U.S. 276, 290 n.11 (1976). Moreover, to the

extent the goods come to rest and the tax can be said to

reach a local activity, it is valid only where it is applied

to activities having a substantial nexus with the state, is

fairly apportioned, does not discriminate against inter-

state commerce, and is fairly related to the services pro-

vided by the state. See, e.g., Wash. Rev. Dep’t v. Steve-

doring Ass’n, 435 U.S. 784, 750 (1978) ; Complete Auto

Transit, Inc. v. Brady, 480 U.S. 274, 279 (1977).

2.a. The First Use Tax is imposed upon gas that is

in transit through Louisiana in interstate commerce.

While the tax is characterized as “upon the privilege of

performance or allowing the performance by the owner,

of the enumerated actions comprising first use within

[Louisiana]” (La. Rev. Stat. Ann. § 47:1803 E (West

Supp. 1980) (Mot. App. 6a), provisions of the Act

demonstrate that the tax falls on the transportation of

the natural gas within Louisiana, not the privilege of

use.”°

As we have pointed out (pages 4-5, supra), “[t]he

tax imposed * * * shall be computed at a rate of seven

cents on each unit of natural gas as to which a use

first occurs within [Louisiana]” and the term “unit”

is defined as “one thousand cubic feet of natural gas”

measured at a specified pressure and temperature. La.

Rev. Stat. Ann. § 47:1303 B (West Supp. 1980) (Mot.

App. 5a). But such a levy is no different than a tax

imposed “at the rate of 9/20 of one cent per thousand

(1,000) cubic feet of gas gathered” at the outlet of a

processing plant that this Court struck down in Michigan-

Wisconsin Pipe Line Co. v. Calvert, supra, 347 U.S. at

161. There, Texas levied a tax’on the production of

natural gas measured by the entire volume of gas to be

shipped in interstate commerce. A refinery extracted the

gas from crude oil and transported it 300 yards to the

pipeline. Like Louisiana, the State identified, as a local

2° “Where a federal right is concerned we are not bound by the

characterization given to a state tax by state courts or legislatures,

or relieved by it from the duty of considering the real nature of

the tax and its effect upon the federal right asserted.” Carpenter

Vv. Shaw, 280 U.S. 363, 367-368 (1930). See also Society for Sav-

ings V. Bowers, 349 U.S. 148, 150 (1955); Lawrence v. State Taz

Commission, 286 U.S. 276, 280 (1982).

incident, the transfer of gas from the refinery to the pipe-

line. The Court held the tax to be unconstitutional under

the Commerce Clause because it was an unapportioned

levy on the transportation of the entire volume of gas.

The extraction did not relate to the length of the Texas

portion of the pipeline or the percentage of the taxpay-

er’s business that was attributable to Texas. In these

circumstances, the Court ruled that the Texas tax could

not survive attack under the Commerce Clause.

In our view, Michigan-Wisconsin Pipe Line Co. con-

trols the Commerce Clause aspects of this case. Stripped

to its essentials, the Louisiana tax is simply a transit fee

on the privilege of moving gas through the state. It is

unrelated to the actual consumption of the gas within

the state. Indeed, to the extent that gas subject to tax

comes to rest and is consumed within the state, there

are credits that are available to offset other Louisiana

taxes payable by the users. Nor does the tax bear any

reasonable relationship to the transporter’s business

within Louisiana. It is nothing more than an “unappor-

tioned levy on the transportation of the entire volume

of gas” (Wash. Rev. Dep’t v. Stevedoring Ass’n, supra,

435 U.S. at 749 n.18) and is therefore invalid under the

Commerce Clause.

b. The Master acknowledged the force of our conten-

tion under Michigan-Wisconsin Pipe Line Co., by observ-

ing that it is “the case which on its facts is closest to this

one” (Report 36). He further conceded that “[a]p-

plying the Michigan-Wisconsin Pipe Line Co. case to

Louisiana’s uses as defined in the act would result in

some of the acts being too intimately connected with

interstate transmission to survive” (ibid.). However, the

Master resisted the conclusion that the tax was invalid

under the Commerce Clause because “[t]here is a very

real dispute among the parties as to the legal effect of

the ‘processing’ use” (Report 37).

But the Master’s reservations with respect to the “proc-

essing” use cannot be squared with the well settled au-

thorities (which he apparently accepted—see Report 31-

32) holding that “processing does not interrupt the con-

tinuous movement of the gas from the wellhead to con-

sumer burner tips and is merely a part of the business

of transporting and marketing gas in interstate com-

merce” (Deep South Oil Company of Texas v. FPC,

supra, 247 F.2d at 888; accord, Michigan-Wisconsin

Pipe Line Co. v. Calvert, supra, 347 U.S. at 163; Inter-

state Natural Gas Co. v. FPC, supra, 331 U.S. at 685

n.7; Public Service Commission of Kentucky v. FERC,

supra, 610 F.2d at 444), and that “gas which crosses a

state line at any stage of its movement from wellhead

to ultimate consumption [is] ‘in interstate commerce’

within the meaning of the [Natural Gas] Act.” Calli-

fornia v. Lo-Vaca Gathering Co., supra, 379 U.S. at 369.

There is accordingly no basis for the Master’s suggestion

that “processing” may be local activity subject to state

tax.

B. The Louisiana Tax Is Not Fairly Apportioned And

Discriminates Against Interstate Commerce

1. A tax on interstate activities is properly appor-

tioned if it is related to the value of identifiable ac-

tivities occurring within the taxing state (Wash. Rev.

Dep’t v. Stevedoring Ass’n, supra, 435 U.S. at 746-747),

the taxpayer’s investment in facilities within the state

(Colonial Pipeline Co. v. Traigle, 421 U.S. 100, 107 n.5

(1975) ; Memphis Natural Gas Co. v. Stone, 335 U.S. 80,

81-82 nn.1 & 2, 93 (1948) (Opinion of Reed, J.)), gross

income from business conducted within the state (Wash.

Rev. Dep’t v. Stevedoring Ass’n, supra, 485 U.S. at 787-

738 & n.4, 750; Complete Auto Transit, Inc. v. Brady,

supra, 430 U.S. at 275), the percentage of the taxpayer’s

business in the state (Wash. Rev. Dep’t v. Stevedoring

Ass’n, supra, 435 U.S. at 749 n.18; Case of the State

Freight Tax, 82 U.S. (15 Wall.) 282, 273, 278 (1872)),

or the length of the facilities or distance traveled within

the state (Norfolk & W. Ry. v. Tax Comm’n, 390 US.

317, 323-325 (1968) ).

The First Use Tax is not related to any of these fac-

tors. Rather, it is imposed on the entire volume of OCS

and federal enclave gas entering the state, except such

gas as is consumed in certain uses with Louisiana. La.

Rev. Stat. Ann. §§ 47:1303 A, B (West Supp. 1980)

(Mot. App. 4a-5a). The tax “is the same whether the

[gas is] moved one mile or three hundred.” Case of

the State Freight Tax, supra, 82 U.S. (15 Wall.) at 273.

It is therefore simply “an unapportioned levy on the

transportation of the entire volume of gas.” Wash. Rev.

Dep’t v. Stevedoring Ass’n, supra, 485 U.S. at 749 n.18.

Contrary to Louisiana’s contention (Answer 10

7] XXXIV, 12 {XXXVII), and the Master’s observations

(Report 35-36), the tax is not apportioned simply be-

cause it applies only if the gas is subjected to one of

the enumerated uses. The Louisiana taxable “uses,” like

the taking of gas by a pipeline at the outlet of a process-

ing plant, are inseparable elements of the interstate

transmission of gas. Michigan-Wisconsin Pipe Line Co.

v. Calvert, supra. As the Court there stated, in terms

that are strikingly appropriate to this case, there are

“aspect[s] of interstate transportation [which] cannot

be ‘carve[d] out from what is an entire or integral

economic process,’ * * * by legislative whimsy and

segregated as a basis for [a] tax” (347 U.S. at 169,

quoting Nippert v. Richmond, 327 U.S. 416, 423 (1946) ).

The Master therefore erred in concluding (Report 36)

that “[i]t does not seem * * * that the apportionment re-

quirement has any application here.”

2. One of the unquestioned principles in this Court’s

Commerce Clause jurisprudence is that no state, consist-

ent with the Commerce Clause, may “impose a tax which

discriminates against interstate commerce * * * by pro-

viding a direct commercial advantage to local business”

(Northwestern States Portland Cement Co. v. Minnesota,

358 U.S. 450, 457 (1959)). See also Halliburton Oil

Well Co. v. Reily, 373 U.S. 64 (1963) ; Nippert v. Rich-

mond, 327 U.S. 416 (1946) ; I. M. Darnell & Son v. Mem-

phis, 208 U.S. 113 (1908); Guy v. Baltimore, 100 U.S.

434, 443 (1880); Welton v. Missouri, 91 U.S. 275

(1876). “The prohibition against discriminatory treat-.

ment of interstate commerce follows inexorably from

the basic purpose of the Clause. Permitting the indi-

vidual States to enact laws that favor local enterprises

at the expense of out-of-state businesses ‘would invite

a multiplication of preferential trade areas destructive’

of the free trade which the Clause protects.” Boston

Stock Exchange v. State Tax Comm’n, supra, 429 US.

at 329, quoting from Dean Milk Co. v. Madison, 340 U.S.

349, 356 (1951). The First Use Tax discriminates

against interstate commerce in two distinctive ways.

a. First, Louisiana has prohibited the purchasers of

gas subject to the First Use Tax from shifting any or

all of that tax to the producer. La. Rev. Stat. Ann.

§ 47:1303 C (West Supp. 1980) abrogates provisions

of contracts that require persons other than purchasers

of such gas to pay the First Use Tax. On the other

hand, Louisiana does not prohibit purchasers of gas sub-

ject to its severance tax from shifting all or part of the

tax to the producer. To the contrary, Louisiana permits

the purchasers and sellers of snch gas to determine, by

contract, who shall bear that tax. La. Rev. Stat. Ann.

§ 47:633.1 (West Supp. 1980).

The practical effect of prohibiting the shifting of

the First Use Tax while allowing the shifting of the

severance tax is to impose a tax on OCS and federal

enclave gas which is greater than the tax imposed on

gas produced within Louisiana. As matters now stand,

purchasers of gas produced in Louisiana, and sold in

either interstate or intrastate commerce, can seek the

advantage of the lower tax burden that is denied to

interstate purchasers of the gas subject to the First Use

Tax. There is no constitutional warrant for such dis-

criminatory treatment. Boston Stock Exchange v. State

Tax Comm’n, supra, 429 U.S. at 333-336. “The con-

clusion is inescapable: equal treatment for in-state and

out-of-state taxpayers similarly situated taxpayers is

the condition precedent for a valid use tax on goods

imported from out-of-state.” Halliburton Oil Well Co.

v. Reily, supra, 373 U.S. at 70.

b. The Louisiana First Use Tax also discriminates

against Interstate commerce by requiring out-of-state

consumers to bear the entire burden of the levy. This

discrimination is accomplished by a system of exemp-

tions and credits designed to ensure that Louisiana con-

sumers are relieved of First Use Tax liability.

La. Rev. Stat. Ann. § 47:1303 A (West Supp. 1929)

(Mot. App. 4a-5a),®° provides that the First Use Tax

shall not be levied against natural gas, otherwise subject

to the tax, which is consumed in specified uses within

Louisiana. However, natural gas subject to the tax

which is consumed in identical uses in other states is

not granted a similar exemption. So, also, the related

Severance Tax Credit *' permits taxpayers liable for

the First Use Tax to credit that liability, dollar-for-

dollar, against their liability for Louisiana’s severance

tax. As a result of this credit, Louisiana imposes a

higher tax on those persons who do not pay Louisiana

severance taxes than it does on those who do.** Thus,

Louisiana businesses enjoy a distinct commercial advan-

tage over their out-of-state competitors in the form of

lower prices for natural gas.

subject [to the tax] * * * used or consumed in the drilling for

or production of oil, natural gas, sulphur, or in the processing

of natural gas for liquids extraction within the state; nor * * * to

gas shrinkage volumes attributable to the extraction of ethane,

propane, butanes natural or casinghead gasoline or other liquefied

hydrocarbons * * *[,] nor * * * to natural gas used or consumed

in the manufacture of fertilizer and anhydrous ammonia within

the state.” § 47:1303 A.

31 First Use Tax On Natural Gas—Severance Tax Credit, Act

No. 4386, 1978 La. Sess. Law Serv. 842 (West), La. Rev. Stat.

Ann. § 47:647 (West Supp. 1980).

82 This difference can be illustrated by the following example.

Owner A has 1000 Mcf of OCS gas; Owner B has 500 Mcf of OCS

gas and 500 Mcf of gas subject to Louisiana’s severance tax. A

owes $70 of first use tax; B owes $35 of first use tax and $35 in

severance tax. B, however, pays only $35 in first use taxes. He

owes no severance tax because he can credit the first use tax

payment against his severance tax liability (see Report 34 n.18).

c. Finally, Act No. 599 * allows every Louisiana elec-

tric generating plant, gas distribution service, and direct

purchaser of natural gas from an interstate pipeline, to

recoup that portion of increased ra’.s it pays for nat-

ural gas which is attributable to increased transportation

and marketing costs for natural gas from the federal

domain of the Outer Continental Shelf through direct

credits against any tax or combination of taxes, other

than severance taxes, owed to Louisiana. Since the First

Use Tax is “deemed [to be] a cost associated with” the

transportation and marketing of OCS and federal enclave

natural gas (La. Rev. Stat. Ann. § 47:1303 C (West

Supp. 1980)) (Mot. App. 5a), Louisiana consumers of

such gas may effectively recoup the amounts attributable

to that tax through a reduction in other state taxes. The

legislative history indicates that the sole purpose of Act

No. 599 is to ensure that Louisiana consumers do not

incur any increased costs for natural gas as a result of

the First Use Tax.”

In sum, the equivalence between the First Use Tax and

the Louisiana Severance Tax suggested by the Master

(Report 35) is illusory. Purchasers of gas subject to

severance tax can shift the burden of the tax to the pro-

ducer of gas but purchasers of gas subject to the “equiva-

lent” First Use Tax cannot shift the burden of the levy

other than onto the consumer. Thus, contrary to the

Master’s belief (ibid.), no adjustments in the base prices

or allowances can be made that would reduce or eliminate

this discrimination against the out-of-state consumer.*

33 Tax Credit for Electric and Natural Gas Service, 1978 La. Sess.

Law Serv. 1112 (West), codified as La. Rev. Stat. Ann. § 47:11

(West Supp. 1980).

%4 Hearings on H.B. 768 Before the Committee on Ways and

Means of the Louisiana House of Representatives 4 (Rep. Tauzin

and unidentified speakers), 5 (colloquy between Reps. Sour and

Bagert), 6 (Rep. Laborde) (June 5, 1978).

85 The Master’s reliance (Report 35) upon Henneford v. Silas

Mason Co., 300 U.S. 577 (1937), is therefore misplaced. There,

Moreover, the burden of the First Use Tax falls entirely

on out-of-state consumers of gas. The Louisiana First

Use Tax therefore “falls short of the substantially even-

handed treatment demanded by the Commerce Clause.”

Boston Stock Exchange v. State Tax Comm’n, supra, 429

U.S. at 332.

CONCLUSION

For the reasons stated, the plaintiffs’ motion for judg-

ment on the pleadings should be granted.

Respectfully submitted.

WADE H. MCCREE, JR.

Solicitor General

STUART A. SMITH

Assistant to the Solicitor General

ROBERT R. NORDHAUS

General Counsel

JEROME M. FEIT

Deputy Solicitor

J. PAUL DOUGLAS

Assistant Solicitor

Federal Energy Regulatory

_ Commission

NOVEMBER 1980

the Court upheld a state use tax because it did not violate the

Commerce Clause and it was a “compensating” tax intended to

complement the state sales tax. Thus, the fact that Louisiana has a

valid severance tax cannot save its unconstitutional First Use Tax

even on the assumption that the latter levy may “compensate” for

the severance tax.

W ou. 8. Government PRINTING OFFICE; 1980 332793 135

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