Mississippi State Tax Commission v. Murphy Oil USA, Inc. ( 2003 )

IN THE SUPREME COURT OF MISSISSIPPI
NO. 2003-CA-00325-SCT
MISSISSIPPI STATE TAX COMMISSION
v.
MURPHY OIL USA, INC.
ON MOTION FOR REHEARING
DATE OF JUDGMENT: 01/21/2003
TRIAL JUDGE: HON. J. LARRY BUFFINGTON
COURT FROM WHICH APPEALED: SIMPSON COUNTY CHANCERY COURT
ATTORNEYS FOR APPELLANT: SAMUEL T. POLK
GARY WOOD STRINGER
ATTORNEYS FOR APPELLEE: JAMIE G. HOUSTON
W. TERRELL STUBBS
NATURE OF THE CASE: CIVIL - STATE BOARDS AND AGENCIES
DISPOSITION: REVERSED AND RENDERED -10/13/2005
MOTION FOR REHEARING FILED: 06/23/2005
MANDATE ISSUED:
EN BANC.
SMITH, CHIEF JUSTICE, FOR THE COURT:
¶1. The motion for rehearing is granted. The prior opinions are withdrawn, and this opinion
is substituted therefor.
¶2. In 1999, the Mississippi State Tax Commission (“Commission”) examined the
Mississippi Combined Income and Franchise tax returns of Murphy Oil U.S.A., Inc. (“Murphy”)
for the following tax years: 1995, 1996, and 1997. As a result of this examination, on
September 30, 1999, the Commission assessed additional franchise taxes and interest against
Murphy in the amount of $87,952.00. After two internal agency appeals, Murphy sought
judicial review in the Chancery Court of Simpson County pursuant to Miss. Code Ann. § 27-
13-45 (Rev. 2003). On January 17, 2003, the chancellor ordered that the additional franchise
tax assessment made by the Commission “shall not be allowed.” The Commission filed a
timely appeal to this Court.
¶3. This Court has specifically rejected the Destination Sales Theory and instead looks to
the volume of business actually conducted in this state. Miss. State Tax Comm’n v. Chevron
U.S.A., Inc., 650 So. 2d 1353 (Miss. 1995). We also find that the franchise tax imposed does
not violate the commerce or due process clauses of the United States Constitution. Thus, we
reverse and render.
FACTS AND PROCEDURAL HISTORY
¶4. Murphy is a Delaware corporation with its principal place of business located in El
Dorado, Arkansas, and is authorized to do business in the State of Mississippi. Murphy is in
the business of refining and marketing petroleum products for wholesale and retail purposes.
As part of its operations, Murphy owned and operated a refinery in Meraux, Louisiana, and
refined products produced at this refinery were shipped through tank trunks, by barge or
through a pipeline known as the Collins Pipeline located in Collins, Mississippi. In addition
to refining and selling products at wholesale, Murphy also owned and operated service stations
in Mississippi to sell products at retail.
¶5. The Collins Pipeline starts at Meraux, Louisiana, and terminates at the T&M terminal
located in Collins, Mississippi. From 1995 to the present, a corporation by the name of
Collins Pipeline Company owns Collins Pipeline. During the tax years in issue, Collins
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Pipeline Company was owned by Murphy and Chalmette Refining, Inc. The facility at which
this pipeline terminates, T&M Terminal, is owned by T&M Terminal Company. T&M Terminal
Company, during the years in question, was also owned by Murphy and Chalmette.
¶6. The T&M terminal at which the Collins Pipeline terminates consists of ten tanks,
referred to as “breakout tankage” where products shipped on the pipeline can be stored.
Additionally, at the T&M terminal, there are pipes, valves and other equipment that connect that
facility to both Colonial Pipeline and Plantation Pipeline to allow for the injection of product
from the T&M terminal into either of these pipelines. Colonial Pipeline begins at Pasadena,
Texas, and terminates in New Jersey, with numerous terminals and facilities along its pipeline
system in Texas, Louisiana, Mississippi, Alabama, Tennessee, Georgia, South Carolina, North
Carolina, Virginia, Maryland, Delaware, and New Jersey. Plantation Pipeline begins in Baton
Rouge, Louisiana, and terminates in Washington, D.C., with numerous terminals and facilities
along its pipelines in Louisiana, Mississippi, Alabama, Tennessee, Georgia, South Carolina,
North Carolina, Virginia, and the District of Columbia.
¶7. The sales by Murphy, which the auditor reclassified as Mississippi sales resulting in the
assessment of additional franchise taxes, were sales made by Murphy where title and control
of the property sold was transferred to the purchaser at Collins, Mississippi. The amount of
these sales for each of the tax years in issue is as follows: (1) tax year 1995 =
$156,826,131.00; (2) tax year 1996 = $199,285,823.00; and (3) tax year 1997 =
$155,652,973.00. The negotiations of these sales began with traders in El Dorado, Arkansas,
determining what product being manufactured in Meraux is available for sale. Based upon a
review of the market conditions, a trader would determine which pipeline would give Murphy
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the greatest return on its sale. After this was determined, the trader would attempt to market
the product to potential buyers who were willing to purchase the product using the pipeline
selected.
¶8. The product to be sold belonged to Murphy while it was being shipped from Meraux to
Collins on the Collins Pipeline and while it was in the breakout tankage at the T&M terminal.
The product would remain in the breakout tankage at T&M terminal for a few hours up to
several days. The length of this time the product is stored in Collins, Mississippi depends on
quantity and product cycle requirements of the pipelines. Many times, Murphy would already
have a buyer for the product before it left the refinery in Meraux, Louisiana. At other times,
Murphy would not have a buyer for the product until after the product had left the refinery and
at times, even after it had been placed in the breakout tankage at the T&M terminal. Under the
terms of the sales at issue, title, possession and control of the product passed from Murphy
to the purchaser when the product was injected from the T&M terminal into either the Colonial
Pipeline or the Plantation Pipeline in Collins, Mississippi. Title actually passed as the product
was being metered when it was injected into the pipelines. This metering of the injection of
the product into Colonial or Plantation Pipeline was used by Murphy to bill its purchaser for
payment. Upon receipt of the report of this metering that took place in Collins, Mississippi,
Murphy would bill its customers who would then pay Murphy by wire transfer.
¶9. Upon injection into Colonial or Plantation Pipelines, Murphy had no knowledge of the
whereabouts of the product or where the product is ultimately offloaded. Murphy contends
that these sales are not Mississippi sales for determining its Mississippi sales factor.
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Furthermore, Murphy had not included these sales as sales in any other state in determining
the sales factors.
¶10. The Commission examined the Mississippi Combined Income and Franchise Tax
Returns of Murphy for tax years 1995, 1996 and 1997. As a result of this examination, an
assessment of additional Mississippi franchise tax and interest was issued against Murphy on
September 30, 1999. Murphy, pursuant to Miss. Code Ann. § 27-13-43, appealed this
assessment to the Board of Review of the Commission for a hearing on this matter. After
proper notice and a hearing before the Board of Review on March 9, 2000, the Board entered
its order affirming the assessment in the original amount of $87,952.00. Following this
decision by the Board of Review, Murphy appealed to the full Mississippi State Tax
Commission for a hearing on the decision of the Board of Review to affirm the tax in question.
A hearing before the full Commission was held on June 21, 2000. On December 6, 2000, the
full Commission affirmed the assessment in issue. Murphy was ordered to pay to the
Commission the entire assessment of $87,952.00 plus up to date interest.
¶11. Following the decision of the full Commission, Murphy timely filed a petition for
judicial review in the Chancery Court of Simpson County. After discovery and trial, the
chancellor signed a final judgment wherein he ordered “that the additional assessments made
by the Mississippi State Tax Commission shall not be allowed and that the sales for the years
in question shall be those that were, in fact, downloaded in the state of Mississippi for final
destination in the state of Mississippi.” The Commission timely filed its appeal with this
Court.
ISSUES
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I. Whether the Destination Sales Theory Should Be Applied for
Franchise Tax Purposes.
II. Whether the Franchise Tax Violates of the Commerce or Due
Process Clauses of the United States Constitution.
ANALYSIS
I.
¶12. The chancery court reviewed this matter in a full evidentiary hearing, complete with a
full record. In Tenneco, Inc. v. Barr, 224 So. 2d 208, 211 (Miss. 1969), this Court held that
“[i]t is manifest, from the express provisions of [Mississippi Code 1942 Annotated] § 9220-
31, that the Legislature has made it the public policy of this state to provide a full evidentiary
judicial hearing in cases of the character now under consideration.” Section 9220-31 is the
predecessor to the applicable current Miss. Code Ann. §§ 27-7-73 (income tax–judicial
review) and 27-13-45 (franchise tax–judicial review). In Tenneco, as well as in the present
matter, “the chancellor heard evidence and determined the cause as in ‘other cases’ as provided
by the statute.” 224 So. 2d at 210. Thus, in accordance with Tenneco the chancellor in this
case reviewed evidence and determined the cause under the authority of §§ 27-7-73 and 27-13-
45. Therefore, this Court must now ascertain whether or not the chancery court arrived at the
proper determination.
¶13. Murphy argues that the chancellor’s ruling should be affirmed because § 27-7-23 (c)(3)
(Rev. 1991) provides for the application of the Destination Sales Theory to determine those
“sales” assignable to Mississippi for purposes of any formula in which a sales factor is
included regardless of ownership, title, control or risk of loss.
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¶14. This Court has rejected the Destination Sales Theory as a way to account for
Mississippi receipts for franchise tax purposes. However, Murphy indicates that § 27-7-
23(c)(3) (Rev. 1991) provides for application of the Destination Sales Theory to determine
whether sales are assignable to Mississippi for franchise tax purposes. This conclusion is
inconsistent with Mississippi State Tax Comm’n v. Chevron U.S.A., Inc., 650 So. 2d 1353
(Miss. 1995).
¶15. In Chevron, this Court noted that the destination theory was specifically rejected by this
Court as a way to account for Mississippi receipts for franchise tax purposes. Id. at 1357.
This Court specifically stated that “franchise tax is imposed on a corporation based on what is
actually being done in Mississippi, regardless of the ultimate destination of the product.” Id.
(citing Southern Package Corp v. State Tax Comm’n, 195 Miss. 864, 15 So. 2d 436, 437-38
(1944)). In Chevron, Chevron claimed that its records were maintained on a destination and
origin basis and that it only attributed a sale as being in Mississippi when the customer
physically came to the state or the product was consumed in the state. Id. at 1359. However,
this Court specifically stated that “this does not reflect the volume of business that Chevron
conducts within this State, the basis on which franchise tax liability is now determined.” Id.
(emphasis added). The same version of § 27-7-23 was in effect when Chevron was decided.
Moreover, in accordance with Chevron, a franchise tax is measured by the volume of business
conducted in Mississippi and not the ultimate destination.
II.
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¶16. Furthermore, Murphy contends that Mississippi’s claiming these sales on the basis that
the sales are not being claimed by another state violates the commerce clause. On the other
hand, the Commission argues that these sales should be treated as Mississippi sales unless
Murphy can show the sales are being reported or assigned to another state. Murphy provides
that Mississippi cannot assign these sales unless the taxing statute so provides and such
assignment does not offend the due process and the commerce clauses. First of all,
Mississippi can assign these sales because the franchise tax statute does allow Mississippi to
tax these activities. Furthermore, the taxing statute also provides that Mississippi can assign
these sales if “the taxpayer is not taxable in the state of the purchaser.” Miss. Code Ann. § 27-
7-23 (c)(3)(ii)(b) (Rev. 1991). Murphy had no knowledge of the whereabouts of the product
or its ultimate destination and was not taxed by the state of the purchaser. Therefore,
Mississippi can tax these sales unless such a tax would violate the commerce clause.
¶17. Murphy concludes that treating the sales as Mississippi sales under the facts of this
case would violate the commerce clause and due process clauses under the four-part Complete
Auto test as provided for in Marx v. Truck Renting & Leasing Ass’n, Inc., 520 So. 2d 1333,
1342-43 (Miss. 1987) (citing Complete Auto Transit Inc. v. Brady, 430 U.S. 274, 97 S. Ct.
1076, 51 L. Ed. 2d (1977)). This test requires that “(1) [t]he tax must be applied to an activity
with a substantial nexus with the taxing state; (2) the tax must be fairly apportioned; (3) the tax
must not discriminate against interstate commerce; (4) the tax must be fairly related to
services provided by the taxing state. Marx, 520 So. 2d at 1342-43. However, Murphy only
argues that the first and fourth prongs of the test are violated.
1. Nexus with the Taxing State
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¶18. Murphy contends that the tax does not have a substantial nexus with Mississippi. As this
Court has stated, the mere fact that income is generated outside this state will not prevent
taxation of that income, for purposes of the commerce clause challenge, so long as there is
a nexus between the tax and the transaction within the taxing state. Id at 1343.
¶19. In order to satisfy the minimal connection prong of the four-prong test, the corporation
being taxed must avail itself of “the substantial privilege of carrying on business within the
state.” Miss. State Tax Comm'n v. Bates, 567 So. 2d 190, 193 (Miss. 1990) (citing Marx
v. Truck Renting & Leasing Ass’n, Inc., 520 So. 2d 1333, 1342 (Miss. 1987)). The taxing
power exerted by the state must bear a fiscal relation to protections, opportunities, and
benefits given by the state so that the state may properly ask return for what it has given the
taxpayer. Id. In determining whether the first prong is met, the inquiry must focus on the
underlying activities conducted within the state and in order for the taxpayer to avoid such
taxation it must show the income was derived from activities unrelated to activities conducted
within the taxing state. Id.
¶20. Again, franchise taxation is based on what is actually being done or carried on in
Mississippi. In addition to being merely stored in Mississippi for periods not exceeding five
days, the product was metered when it was stored in Collins, Mississippi, which was the basis
for Murphy to bill its purchasers for the sale. In addition to being metered and billed in
Mississippi, the transfer of title, ownership and control of the product also occurred in
Collins, Mississippi. Once metered and billed in Mississippi, the purchasers took absolute
control of the product, and Murphy had no knowledge of the whereabouts of the product or its
ultimate destination. Therefore, Murphy did not merely store the fuel in Mississippi, and there
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is a substantial nexus to warrant franchise taxation. A franchise tax is measured by what is
actually being done or carried on in Mississippi, which is exactly what occurred when Murphy
stored, metered, billed and transferred title and ownership of the petroleum products.
Therefore, there is a substantial nexus between the tax and the transaction within Mississippi.
2. Tax Fairly Apportioned
¶21. The party opposing the tax must show by clear and cogent evidence that the tax is out
of proportion to the activity which takes place in Mississippi. Tenn. Gas Pipeline Co. v.
Marx, 594 So. 2d 615, 618 (Miss. 1992); Marx v. Truck Renting & Leasing Ass’n, Inc., 520
So. 2d at 1344. Murphy does not specifically address the second prong of the test;
nevertheless, we will address this issue. Murphy merely asserts that an inclusion of the sales
at issue into the franchise tax apportionment formula results in an inconsistent tax assessment
by the Commission. Murphy suggests that the Commission’s determination of the sales at
issue as “Mississippi Receipts” leads to a less than equitable tax level after calculation of the
franchise tax apportionment formula. Murphy infers that due to the Commission’s designation
of these sales as “Mississippi Receipts”, and the subsequent inclusion of these sales in the
numerator of the franchise tax formula, results in an improper tax franchise.
¶22. As previously determined under the first prong a franchise tax is measured by what is
actually being done or carried on in Mississippi, which is exactly what occurred when Murphy
stored, metered, billed and transferred title and ownership of the petroleum products.
Therefore, it is proper to include these sales in the franchise tax apportionment formula
because the franchise tax statute does allow Mississippi to tax these activities. Further,
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Murphy does not present any clear and cogent evidence to the contrary. Thus, the Commission
fairly apportioned the franchise tax under the apportionment formula.
3. No Discrimination Against Interstate Commerce
¶23. Murphy does not address the third prong of the test, nevertheless we must consider this
element. In Marx, this Court decreed that “[i]f the tax causes so called ‘double taxation’ so
that an interstate taxpayer is subjected to two taxes on the same income that an intrastate
taxpayer would pay one tax on, then the tax is said to be discriminatory.” Marx v. Truck
Renting & Leasing Ass'n Inc., 520 So. 2d at 1345, citing Armco Inc. v. Hardesty, 467 U.S.
638, 104 S. Ct. 2620, 81 L. Ed. 2d 540 (1984). Further, “[a] state tax that favors an in-state
business over an out-of-state business for the sole reason of location is prohibited by the
commerce clause.” Tenn. Gas Pipeline, 594 So. 2d at 618. Murphy is not subject to double
taxation as a result of the franchise tax in this case, nor does the franchise tax imposed
discriminate against interstate commerce in favor of intrastate commerce. Therefore, the
franchise tax is not discriminatory, and this prong of the test is satisfied.
4. Tax is Fairly Related to Services of the State
¶24. The final prong of the test determines whether the activity which generated the income
is related to the activities conducted in Mississippi. Additionally, “the fourth prong of the
Complete Auto test thus focuses on the wide range of benefits provided to the taxpayer, not
just the precise activity connected to the interstate activity at issue.” Goldberg v. Sweet, 488
U.S. 252, 267, 109 S. Ct. 582, 592, 102 L. Ed. 2d 607 (1989). In the present case, all of the
activities mentioned above occurred in Mississippi and relate to the particular sales in
question. Moreover, Murphy receives police and fire protection, use of transit in Mississippi
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and other advantages of civilized society. D.H. Holmes Co. v. McNamara, 486 U.S. 24, 32,
108 S. Ct. 1619, 1624, 100 L. Ed. 2d 21 (1988). “Furthermore, [Murphy] is currently availing
itself of the use of our court system.” Tenn. Gas Pipeline, 594 So. 2d at 619. “It follows that
[Murphy] should pay its share of the tax burden in Mississippi although it is involved in
interstate commerce.” Tenn. Gas Pipeline, 594 So. 2d at 619, citing American Trucking
Ass’ns, Inc. v. Scheiner, 483 U.S. 266, 296, 107 S. Ct. 2829, 2846, 97 L. Ed. 2d 226, 251
(1987).
¶25. Consequently, there is a fair relationship between the services provided by Mississippi
in allowing the sales to occur and the value of those sales. Hence the fourth and final prong of
the test is satisfied.
¶26. The franchise tax imposed by the Commission has a sufficient nexus with Mississippi,
is fairly apportioned under the apportionment formula, does not discriminate against interstate
commerce in favor of intrastate commerce, and is fairly related to services provided by
Mississippi. Therefore, contrary to Murphy’s contention, the franchise tax imposed by the
Commission does not violate of the commerce or due process clauses of the United States
Constitution.
CONCLUSION
¶27. For these reasons, we reverse the judgment of the chancery court, and we render
judgment reinstating and affirming the order of the Mississippi State Tax Commission.
¶28. REVERSED AND RENDERED.
WALLER AND COBB, P.JJ., EASLEY, CARLSON, DICKINSON AND
RANDOLPH, JJ., CONCUR. GRAVES, J., DISSENTS WITHOUT SEPARATE WRITTEN
OPINION. DIAZ, J., NOT PARTICIPATING.
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