EXLP Leasing, LLC v. Ward Cnty. Appraisal Dist., 476 S.W.3d 752 (Tex. App.—El Paso 2015, pet. filed)
This is one of four cases decided on the same day by the El Paso Court of Appeals concerning the valuation of natural gas pipeline compressor packages and involving constitutional challenges to amendments to Texas Property Tax Code §§ 23.1241 and 23.1242. In 2011, the legislature amended those sections, which deal with the valuation of heavy equipment inventory. Whereas previously only dealers who held heavy equipment inventory for sale, or for lease with a purchase option, were entitled to calculation of the market value of their property based on sales for the previous year divided by twelve, after the amendments dealers who held heavy equipment inventory for lease without a purchase option were also entitled to calculation of the market value of their property based on lease payments for the previous year divided by twelve.
Natural gas pipeline compressor packages regulate the pressure for extraction and transfer of natural gas. EXLP Leasing LLC and EES Leasing LLC (collectively, “EXLP”) rent compressor packages to third parties. The compressor packages at issue in this case were rented by EXLP from EXLP’s business center in Midland County to companies that utilized the compressor packages in Ward County on January 1, 2012. Based on the amendments to the Tax Code, EXLP calculated the market value of the compressor packages based on the prior year’s lease payments and rendered them in Midland County. EXLP did not render the property in Ward County. The appraisal district in Ward County declared the compressor packages operating there as of January 1 to be taxable business personal property. After an unsuccessful administrative protest, EXLP filed suit in district court. The appraisal district argued that Sections 23.1241 and 23.1242 were unconstitutional because the resulting taxable value was unrelated to market value and not uniform and equal, that the compressor packages did not qualify as heavy equipment, and that the compressor packages were sitused and taxable in Ward County. The trial court determined on summary judgment that the compressor packages were heavy equipment, but held after a bench trial that Sections 23.1241 and 23.1242 were unconstitutional and that the compressor packages were sitused and taxable in Ward County. EXLP and the appraisal district appealed.
The court of appeals rejected the appraisal district’s argument that the compressor packages did not qualify as heavy equipment inventory because they were not “self-powered.” Construing the term “self-powered,” the court of appeals concluded the legislature intended it to mean equipment supplied with mechanical power through an internal motor or engine, a standard met by compressor packages. The court of appeals declined to interpret the term to require an integrated fuel source, as urged by the appraisal district. Having concluded the property qualified as heavy equipment inventory, the court of appeals next agreed with EXLP that Sections 23.1241 and 23.1242 are constitutional. The Texas constitution mandates that taxes must be based on market value and directs that value is to “be ascertained as may be provided by law.” The court of appeals read this directive to give the legislature the authority to provide for methods of determining market value, as they did in drafting the amendments to Sections 23.1241 and 23.1242. The court held that the legislature’s valuation methodology of valuing heavy equipment inventory held for lease by looking to the lease income actually received was not unreasonable, arbitrary or capricious and thus did not violate the constitutional requirement for taxes based on market value. The court also held that Sections 23.1241 and 23.1242 did not violate the constitutional directive for uniformity and equality in taxation because all heavy equipment inventory dealers were treated equally. The court of appeals finally addressed the question of situs. The court of appeals rejected EXLP’s argument that the taxable situs for the property was in Midland County because its business location for the inventory was there. The court of appeals held that the taxable situs for the compressor packages was in Ward County under Tax Code § 21.02(a) because Sections 23.1241 and 23.1242 did not modify the general rules regarding taxable situs.