88-1670 - Sales






Petitioner, : FINDINGS OF FACT,



: Appeal No. 88-1670



Respondent. :



This matter came before the Utah State Tax Commission pursuant to the Utah Administrative Procedures Act for a formal hearing on XXXXX before James E. Harward, Presiding Officer. Petitioner was represented by XXXXX, Attorney. Respondent was represented by XXXXX, Assistant Attorney General.

After reviewing the evidence and arguments of the parties in the record and the recommendation of the presiding officer, the Tax Commission hereby makes its:


l. The tax in question is sales and use tax.

2. The period in question is XXXXX through XXXXX.

3. The Petitioner is a Utah corporation and is an XXXXX company that XXXXX, XXXXX, XXXXX, and XXXXX for resale XXXXX in northwest XXXXX, southwest XXXXX, and Utah.

4. Petitioner is classified as a "XXXXX company" under Section l(b) of the Natural Gas Act of 1938, 15 U.S.C. Section 717(b), and its operations are subject to the Natural Gas Policy Act of 1987 and to the jurisdiction of the Federal Energy Regulatory Commission (FERC).

5. Petitioner makes sales for resale at numerous points in XXXXX and in Utah to its local distribution company affiliate in Utah, XXXXX Company. Petitioner also provides XXXXX transportation services through its pipeline system for a wide variety of transportation customers. Petitioner also owns XXXXX underground XXXXX in Utah. The XXXXX and XXXXX are used solely in connection with the operation of Petitioner's interstate system. The third XXXXX, XXXXX, is used for Petitioner's system and also to provide XXXXX storage services to an independent contracting party, XXXXX.

6. Petitioner purchases its XXXXX from field producers and pipelines in XXXXX and Utah, and takes delivery of XXXXX owned by other parties for transportation to various points on its system.

7. Petitioner's XXXXX system also includes several XXXXX facilities which Petitioner owns, maintains, and operates that are used to compress XXXXX for transmission and for underground storage injection. The XXXXX stations located in Utah are the XXXXX, a mainline XXXXX facility, the XXXXX and small XXXXX associated with the XXXXX and XXXXX. An additional XXXXX, the XXXXX, was purchased by Petitioner after the audit period in question. These XXXXX are fueled by XXXXX which is diverted directly from the XXXXX in Petitioner's XXXXX to the engines that drive the XXXXX. This diverted XXXXX is either gas that Petitioner has purchased for resale to XXXXX or is XXXXX that is being transported by Petitioner on behalf of its transportation customers. This XXXXX to fuel the XXXXX is not sold or otherwise transferred by Petitioner to any other entity. This is the XXXXX that is in question in this case. It is not physically separated and stored for later use, nor does it in any way "come to rest" before it is consumed in the XXXXX. The XXXXX that is so consumed constitutes approximately 0.5 percent of the total XXXXX which flows through Petitioner's XXXXX.

8. It is the contention of Petitioner that the XXXXX consumed by the XXXXX is not subject to sales and use tax in Utah because the Commerce Clause of the United States Constitution prohibits the sale from imposing the tax on that use of XXXXX.


1. Utah Code Ann. 59-12-103(1)(c) provides:

(1) There is levied a tax upon the purchaser for the amount paid or charged for the following: . . . .

(c) Gas, electricity, heat, coal, fuel oil, or other fuel sold or furnished for commercial consumption.

Under the provisions of this statute the XXXXX used in Petitioner's XXXXX would be subject to sales and use tax in Utah. Petitioner contends, however, that this statute is preempted by the Commerce Clause of the United States Constitution, Art. I, 8, cl. 3. An analysis of this contention now follows.

2. Utah Code Ann. 59-12-104(12) states that "sales or use of property which the state is prohibited from taxing under the Constitution or laws of the United States" is exempted from sales and use tax.

3. Tax Commission RuleR865-21U-16 provides:

A. The fact that tangible personal property is purchased in interstate or foreign commerce does not exempt the property from the tax if the property is stored, used, or otherwise consumed within this state after the shipment in interstate or foreign commerce has ended.

B. The fact that tangible personal property is used in this state in interstate or foreign commerce following its storage in this state does not exempt the storage of the property from tax. The fact that tangible personal property is used in this state in interstate or foreign commerce does not exempt the use of the property from the tax.

This rule was adopted pursuant to Utah Code Ann. 59-12-107.

4. Petitioner contends that the Commerce Clause and Utah Code Ann. 59-12-104(12) control overR865-21U-16 pursuant to the Supremacy Clause in Article VI of the United States Constitution. An analysis of the case law is necessary to determine the validity of this contention.

5. Both parties agree that the controlling case is Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed 2d 326 (1977). This case articulates a four part test to determine whether taxation of property by a state is proper under the Commerce Clause. This four part test is:

(1) Is the activity sufficiently connected to the state to justify the tax?

(2) Is the tax fairly related to benefits provided to the taxpayer by the state?

(3) Is the tax discriminatory against interstate commerce?

(4) Is the tax fairly apportioned? See 430 U.S. at 287. Complete Auto and its progeny provide the standards by which this case must be analyzed.

6. Both parties agree that the third and fourth prongs, the nondiscrimination and the apportionment prongs, do not apply as issues in this case. Therefore, the analysis must focus on the first two prongs, the nexus and the benefits received prongs.

7. One of the principal cases upon which Petitioner relies is Midwestern Gas Transmission Co. v. Wisconsin Department of Revenue, 84 Wis. 2d 261, 267 N.W. 2d 253 (1978). This case has a factual pattern almost identical to the case now before the Tax Commission. In that case, the taxpayer was an interstate pipeline company that purchased its natural gas from outside of Wisconsin and sold it to customers within that state. The pipeline operations included two compressors located within Wisconsin that, as in this case, took gas from the pipeline stream in order to fuel the compressors. The Midwestern Gas court found that although the operation of the compressors and the diversion of the gas to fuel them occurred within the state of Wisconsin, yet that consumption was such an integral part of the process of interstate commerce, which did not have a substantial nexus with the state of Wisconsin, that this activity was not taxable by Wisconsin. In coming to this conclusion, that court relied in part upon the "comes to rest" doctrine enunciated in Michigan-Wisconsin Pipe Line Co. v. Michigan, 227 N.W. 2d 334 (Mich. 1975); Texas Eastern Corp. v. Benson, 480 S.W. 2d 905 (Tenn. 1972); Texas Gas Transmission Corp. v. Benson, 444 S.W. 2d 137 (Tenn. 1969), which essentially means that one of the criteria for determining whether there is a substantial nexus with a particular state is whether the commodity, in this case natural gas, comes to rest within the state at any particular time or whether it continues on without stopping in the interstate stream of commerce. Petitioner argues under the language of these cases that the consumption of the gas to fuel the XXXXX which keep the natural gas moving in interstate commerce is indistinguishable from interstate commerce, and therefore is not subject to the sales and use tax since no substantial nexus is present.

8. Petitioner also cites Goldberq v. Sweet, 488 U.S. , 109 S.Ct. 582, 102 L.Ed 607 (1989). This case involved the taxation of interstate phone calls which Petitioner asserts is analogous to the interstate transportation of natural gas. The Supreme Court in Goldberg determined that under the facts of that case the taxation was proper. Petitioner in support of its case refers to some language within Goldberq which states: "We also doubt that termination of an interstate phone call, by itself, provides a substantial enough nexus for a state to tax a call." Relying upon this language, Petitioner states that the natural gas in question merely terminates within Utah, but that it is not necessarily ultimately committed to commerce within this state, no one within the state other than Petitioner is ever involved with that gas and the gas is used only in the interstate operation of Petitioner's pipeline system. Therefore, according to Petitioner, since the gas in question only terminates in Utah like the phone calls in Goldberq, under the dicta in that case the gas is not taxable in Utah.

9. The Tax Commission finds that Petitioner's analysis is deficient. Not only does the gas in question terminate within the state of Utah, but also some of it originates within the state of Utah. This was apparently not the case in Midwestern Gas. Once the gas that does originate in Utah enters Petitioner's pipeline it becomes indistinguishable from that which is carried in interstate commerce. It is fair to conclude that while some of the gas that fuels the compressors does not originate in Utah, yet some of it does originate in Utah and is, therefore, taxable. This establishes a much clearer nexus between Petitioner's operations and the state than a case where the gas would merely terminate within the state. Moreover, Midwestern Gas relies in part upon the "comes to rest" doctrine which has been discredited by the Supreme Court as no longer applicable or relevant under the four part test of Complete Auto. D.H. Holmes Co. Ltd. v. McNamara, 108 S.Ct. 1619 (1988). The court in D.H. Holmes held essentially that the distinction between the "comes to rest" doctrine and whether or not the goods are still in the interstate commerce stream is largely irrelevant in Commerce Clause analysis. It is also a fact that Petitioner is not a foreign corporation as was the corporation involved in Midwestern Gas, but Petitioner is a Utah Corporation and, therefore, has substantially more nexus than was the case in Midwestern Gas.

10. Another case that the Tax Commission finds persuasive is National Geoqraphic Society v. California Board of Equalization, 430 U.S. 551, 97 S.Ct. 1386, 51 L.Ed. 2d 631 (1977). In that case the Supreme Court ruled that the maintenance of two of Petitioner's offices in the state of California was sufficient nexus between the National Geographic Society and California to render the Society's activities taxable in that state. The nexus, therefore, under National Geographic is not only between the activity which is sought to be taxed and the state but also the person or entity that the state is seeking to tax and the state, and the activity which the state is trying to tax is not the only activity that can be used to determine the nexus question.

11. Although neither party argues substantially regarding the second prong of the Complete Auto test, that the tax must be fairly related to benefits provided to the taxpayer from the state, that issue still remains unresolved and will now be dealt with. It is clear that Petitioner's XXXXX located within Utah as well as Petitioner's other facilities located within the state all enjoy the usual and traditional public services provided by the state of Utah, and also have benefit of the protection of the state laws and legal system.

12. Under the above analysis, the Tax Commission finds that Petitioner, through its activities in conducting the operations of the pipeline and XXXXX, does have a substantial nexus with the state so that the gas used to fuel those XXXXX is subject to Utah's use tax. The tax is also fairly related to the benefits that Utah provides to Petitioner. Since the other two prongs of the Complete Auto test are not being contested by the Petitioner, it is clear under this analysis that the tax in question does satisfy the Complete Auto test and is therefore valid under the United States Constitution and the laws of the state of Utah.


Based upon the foregoing, it is the decision and order of the Utah State Tax Commission that the gas used to fuel Petitioner's XXXXX within the state of Utah is subject to the state's use tax and Petitioner's request is denied.

DATED this 12 day of April, 1990.


R. H. Hansen Roger O. Tew

Chairman Commissioner

Joe B. Pacheco G. Blaine Davis

Commissioner Commissioner