Property Tax and Foreign Commerce

One of the more confusing issues relating to the taxation of personal property involves the question of when property is exempt from Texas property taxes as a part of foreign commerce.

The import-export clause of the United States Constitution provides:

No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws....

Though the Constitutional provision alone is sufficient to provide for the exemption of goods in foreign commerce, the exemption is also impliedly found in the Texas Tax Code under two separate sections. Section 11.12 provides that, if property is exempt under federal law, it is exempt under state law. And, Section 11.01(c) defines when the state has jurisdiction to tax personal property and provides that there is no jurisdiction if the property is in Texas only temporarily.

The Texas Supreme Court has addressed the issue of foreign commerce in three opinions. Each is summarized below.

Diamond Shamrock Refining and Marketing Co. v. Nueces County Appraisal District, 876 S.W.2d 298 (Tex. 1994)

In this case, Diamond Shamrock imported oil from abroad into Texas. The final destination for the oil was intended to be in Texas, but not in the specific county where the oil was stored pending delivery to other locations in Texas. Diamond Shamrock claimed that the imported oil remained in foreign commerce until it reached its final destination in the state.

The Supreme Court held that, once the imported oil reached its final destination state, the oil could no longer be considered to be in foreign commerce. Though the oil might continue on a journey to another destination in the state, it ceased being a part of foreign commerce once it entered Texas as there was no intent for the oil to continue in transit to another location outside of Texas.

Though any individual barrel of oil (if it could be segregated) might be held in Nueces County for no longer than a period of 25 days and more likely less, some oil remained in Nueces County at all times throughout the year. The Supreme Court believed that this was a primary factor in determining the taxability of the oil. It stated that it was the year-round presence of oil at the site which benefited from government services and therefore subjected the oil located in Nueces County on January 1 to taxation.

The court distinguished situations where the oil flows continuously through pipelines without stopping and situations where other goods are transported by trucks through the state without stopping enroute towards a final destination, but which by chance might be located in a particular county on January 1. The court said that oil passing through without stopping would not be considered in the county for more than a temporary period and would not be subject to taxation.

Virginia Indonesia Company v. Harris County Appraisal District, 910 S.W.2d 905 (Tex. 1995)

In this case, Virginia Indonesia purchased goods from throughout the United States. Upon purchase, the goods were shipped from the various source locations to a facility in Harris County. At that facility, the goods were inspected and approval for export to Indonesia requested. Upon obtaining the approval, the goods were packed and shipped. The goods normally might remain in Harris County for as long as 45 days before reshipment. However, in some cases where problems with goods or transport were encountered, the goods might remain in Harris County up to 175 days. Some amount of goods remained at the facility throughout the year.

Virginia Indonesia claimed the goods were in foreign commerce because they were only temporarily held in Harris County for shipment to a foreign country.

The Supreme Court held that the goods entered the export stream for foreign commerce when they were shipped from their original sources and did not exit the stream until reaching the final destination of Indonesia. The Supreme Court relied in part on the fact that the goods were precommitted to a foreign destination. In other words, the goods were acquired with the intent to ship them to Indonesia and the stoppage in Harris County was only intended to prepare the goods for eventual shipment to Indonesia.

The court noted that, if the stoppage was for a business purpose of the owner, then the export stream would have been interrupted and the goods could be taxable. Business purposes could include storage while awaiting orders or some sort of processing that changes the condition of the goods.

Vinmar, Inc. v. Harris County Appraisal District, 947 S.W.2d 554 (Tex. 1997)

In this case, Vinmar purchased plastic resin upon receiving an order from a foreign client. Upon purchasing the resin, the resin was stored in Harris County waiting for foreign export clearance, currency clearance, and financing to complete the transaction. When Harris County attempted to tax the resin, Vinmar claimed that taxation violated the Commerce Clause. Relying on its previous decision in Virginia Indonesia, the Supreme Court held that taxation was not allowed. The key to the decision appeared to be that the goods were acquired with the intent to be transported out of the country.

The primary focus in each of these cases appears to be the purpose for which the goods at issue were acquired. If the goods were acquired with the purpose to export them, then they appear to be in foreign commerce from the moment they begin their journey (assuming that there is no stoppage for a business purpose). If the goods were acquired with the purpose to import them to Texas, then they ceased to be in foreign commerce once they reached Texas.

However, the purpose must be more than intent or anticipation. In other words, it is not enough that the goods are acquired with an anticipation that they will be shipped to another state or country. The goods must be committed upon receipt (and perhaps as early as acquisition) to another state or country location.

And, some issues remain unclear. For example, do the goods remain in foreign commerce until they reach another state if the intent is to transport them to another state and the stoppage in Texas is only temporary? Based on Diamond Shamrock, the likely answer is yes. The court held that goods merely passing through the state are not subject to taxation, if they are not delayed in Texas for some business purpose unrelated to the transportation of the goods. However, if the goods are processed in some manner (such as assembly) or merely stored waiting for orders for the goods, then foreign commerce would likely cease in Texas.

Based on these cases, there appear to be four possible situations relating to the import of goods from another country.

1.If goods are received in import with the purpose to immediately export to another country or to another state, and it can be shown (through pre-orders or other documentation) that the goods are committed to another country or state upon receipt, then the goods probably remain in the stream of commerce and be exempt from Texas property taxation.

2.If goods are received in import with the purpose to export to another country or to another state, but there is no precommitment for the goods but the goods are instead stored waiting for orders, then the goods probably exited the stream of commerce at the warehouse or other facility where received. The storage would be a business purpose. The goods would thus be subject to Texas property tax.

3.If goods are received in import with the purpose or even the possibility that the goods will be utilized in Texas, then the goods have exited the stream of commerce at the facility where received. The goods then become subject to Texas property tax.

4.If goods are processed in some manner upon receipt in Texas (whether some sort of assembling of components, repackaging, etc.), then the goods probably have exited the stream of commerce at the warehouse site. The processing would likely constitute a business purpose. The goods would become subject to Texas property tax.

With regard to goods planned for export to another country, there appear to be three possible situations.

1.If the goods are precommitted for export to another country, then the stream of foreign commerce should begin at the first source of shipment, assuming that nothing occurs during transit that would constitute a business purpose. In other words, if the goods are originally located in Dallas, committed to a foreign country, and shipped to Houston to hold until export, then the goods enter foreign commerce when shipped from Dallas.

2.If the same goods were shipped from Dallas to Houston for storage in anticipation of foreign shipment, but without any precommitment, then the goods probably do not enter foreign commerce until the goods are actually segregated and committed for foreign shipment. Until such time, the goods remain subject to Texas property tax.

3.If the goods are processed in some manner, such as assembling of component parts or repackaging, then the goods probably do not enter foreign commerce until the processing is completed, the processed goods are segregated, the goods are committed to export, and the goods begin to move in transit. The goods likely would not be considered in foreign commerce until they are actually shipped. Until the goods begin moving in export, they probably are not yet in the stream of foreign commerce.

If you have any questions about the contents of this article, please contact the GPD Property Tax Section at propertytax@gpd.com.