MidCon Compression, L.L.C. v. Reeves Cnty. Appraisal Dist., 478 S.W.3d 804 (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. Appellant MidCon Compression, L.L.C. (“MidCon”) rents compressor packages to third parties. The compressor packages at issue in this case were rented by MidCon from MidCon’s yards in Ector and Gray Counties to companies that utilized the compressor packages in Reeves and Loving Counties on January 1, 2012. Based on the amendments to the Tax Code, MidCon calculated the market value of the compressor packages based on the prior year’s lease payments and rendered them in Ector and Gray Counties. MidCon did not render the property in Reeves and Loving Counties. The appraisal districts in Reeves and Loving Counties declared the compressor packages operating in their counties as of January 1 to be taxable business personal property. After an unsuccessful administrative protest, MidCon filed suit in district court. The appraisal districts 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 Reeves and Loving Counties. The trial court determined that the compressor packages were heavy equipment but held that Sections 23.1241 and 23.1242 were unconstitutional and that the compressor packages were sitused and taxable in Reeves and Loving Counties. MidCon appealed.
The court of appeals agreed with MidCon 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. Having found the Sections to be constitutional, the court of appeals turned to the question of situs. The court of appeals rejected MidCon’s argument that the taxable situs for the property was in Ector and Gray Counties because their business locations for the inventory were there. The court of appeals held that the taxable situs for the compressor packages was in Reeves and Loving Counties under Tax Code § 21.02(a) because Sections 23.1241 and 23.1242 did not modify the general rules regarding taxable situs. Finally, the court of appeals held that MidCon was not entitled to attorney’s fees under Tax Code § 42.29 because it did not prevail under § 42.25 (concerning the market value of the property) or § 42.26 (concerning the uniform and equal value of the property). MidCon had argued that its property was not taxable in Reeves and Loving Counties at all, and it did not succeed on that claim.