October 10, 2017
Petition for Review from the Court of Appeals for the
Fourteenth District of Texas
Justice Guzman did not participate in the decision.
JEFFREY V. BROWN, JUSTICE.
Texas Constitution requires that taxation "shall be
equal and uniform" and that property "shall be
taxed in proportion to its value." The Galveston County
appraisal district argues that a statutory formula
determining the taxable value of leased natural-gas
compressors located in its jurisdiction violates these
constitutional provisions because this formula values the
compressors at a "minute fraction" of their market
value. The parties further disagree on which county-Galveston
or Washington-may tax the compressors. We hold that the
county has failed to rebut the presumed constitutionality of
the statutes at issue and that Washington County is the
taxable situs for the compressors. As the court of appeals
held otherwise, we reverse its judgment.
Leasing, LLC, and EES Leasing, LLC (collectively,
"EXLP") are wholly owned subsidiaries of Exterran
Holdings, Inc. EXLP owns and leases out compressor stations
used to deliver natural gas into pipelines. Some of these
compressors are in use in Galveston County.
county traditionally taxed the compressors in its
jurisdiction as business-personal property based on their
full market value. But the legislature overrode that practice
in 2012 when it added leased heavy equipment to a statutory
formula used to appraise the value of heavy equipment held by
dealers for sale. Act of May 21, 2011, 82d Leg., R.S., ch.
322, 2011 Tex. Gen. Laws 938, 938-41.
Accordingly, state law now requires appraisal based on the
lease revenue the compressors generated during the previous
tax year divided by twelve. See Tex. Tax Code §
contends the legislature intended to fix a problem that arose
when the same equipment was leased multiple times within one
year, with each lease counting as an individual sale for tax
purposes. See Briggs Equip. Tr. v. Harris Cty. Appraisal
Dist., 294 S.W.3d 667, 672 (Tex. App.-Houston [1st
Dist.] 2009, pet. denied) (holding that "successive
leases" cannot be "'subsequent sales'"
because "they are not 'dealer-financed
sales'" as defined by the tax code). The new
divide-revenue-by-twelve formula would simplify the appraisal
process while providing an "offsetting gain" for
the tax revenue lost to the fix. See Fiscal Note,
Tex. H.B. 2476, 82d Leg., R.S. (2011). But the county claims
the anticipated offset never materialized because lawmakers
proceeded on the erroneous assumption that counties were not
already taxing leased heavy equipment at full market
value. As a result, a statutory change "intended to
produce a slight gain in tax revenue or remain neutral has
actually resulted in a 97% loss in [compressor-based] tax
revenue" for Galveston County.
and the county are also at odds over where the
compressors may be taxed in light of the 2012 tax-code
amendments. After the amendments were enacted, EXLP took the
position that its compressors in Galveston County are taxable
only in Washington County, where EXLP maintains a business
address and storage yard. The county disagreed. In a letter
to all dealers with heavy equipment leased in its
jurisdiction, the county announced it would appraise leased
heavy equipment under the tax-code provision generally
covering business-personal property, see Tex. Tax
Code § 22.01, declaring that "[r]ecent litigation
has determined that the valuation of leased heavy equipment
under Section 23.1241 of the Texas Property Tax Code is
sued for judicial review pursuant to tax code sections 42.10
and 42.21. Both sides moved for summary judgment. The county
argued that: (1) the tax-code provisions at issue are
unconstitutional as applied to EXLP's compressors in
Galveston County; (2) EXLP's compressors are not actually
"heavy equipment" under the tax code, and therefore
the disputed statute is inapplicable; and (3) Galveston
County is the taxable situs for the compressors at issue.
EXLP urged the trial court to rule that: (1) the legislature
validly exercised its power to prescribe a method for
appraising the value of its compressors; (2) its compressors
are "heavy equipment" as defined by the tax code;
and (3) Washington County is the proper taxable situs. The
trial court granted the county's motion in part,
declaring that EXLP's compressors are heavy equipment
under the tax code, but that tax code sections 23.1241 and
23.1242 are unconstitutional as applied to those compressors.
The trial court also declared Galveston County the
compressors' taxable situs.
appealed. The court of appeals reversed in part,
holding that "[n]either side produced summary[-]judgment
evidence demonstrating, as a matter of law, that the method
of appraising compression unit rental inventories embodied in
sections 23.1241 and 23.1242 of the Tax Code is either a
reasonable or unreasonable method of calculating their
reasonable market value." 475 S.W.3d 421, 428 (Tex.
App.-Houston [14th Dist.] 2015). The case was remanded
"for further proceedings on the constitutionality of
sections 23.1241 and 23.1242 as applied to the compression
unit rental inventories at issue." Id. at 429.
But the court of appeals affirmed the trial court's
declaration of Galveston County as the taxable situs of
EXLP's compressors, holding that tax code section
23.1241(f) "does not create a specific situs rule for
[EXLP's] inventory" and that "its situs is
determined under the general rule of section 21.02."
Id. at 430. Both parties sought our review.
is always a presumption of constitutional validity with
regard to legislation and it is especially strong in respect
to statutes relating to taxation." In re Nestle USA,
Inc., 387 S.W.3d 610, 623 (Tex. 2012) (quoting
Vinson v. Burgess, 773 S.W.2d 263, 266 (Tex. 1989)).
Courts presume that the Legislature "understands and
correctly appreciates the needs of its own people, that its
laws are directed to problems made manifest by experience,
and that its discriminations are based upon adequate
grounds." Enron Corp. v. Spring Indep. Sch.
Dist., 922 S.W.2d 931, 934 (Tex. 1996) (quoting
Smith v. Davis, 426 S.W.2d 827, 831 (Tex. 1968)).
The party challenging the statute's constitutionality
bears the burden of demonstrating that the enactment fails to
meet constitutional requirements. Spring Branch Indep.
Sch. Dist. v. Stamos, 695 S.W.2d 556, 558 (Tex. 1985).
Texas Constitution provides that "[t]axation shall be
equal and uniform." Tex. Const. art. VIII, § 1(a).
We have held that the constitutional provisions that follow
this directive are examples of equal and uniform taxation,
see Nestle, 387 S.W.3d at 620, including the
requirement that "real property . . . shall be taxed in
proportion to its value, which shall be ascertained as may be
provided by law" but "never at a greater value than
its fair market cash value." Tex. Const. art. VIII,
§§ 1(b), 20. Accordingly, a property tax is equal
and uniform "only if it is in proportion to property
value." Nestle, 387 S.W.3d at 620.
county argues that for constitutional purposes,
"value" under article VIII, section 1(b) means the
actual market value a willing buyer would pay a willing
seller for the compressors at issue. Cf. Tex. Tax
Code § 1.04(7) (defining "market value" as
"the price at which a property would transfer for cash
or its equivalent under prevailing market conditions");
City of Harlingen v. Estate of Sharboneau, 48 S.W.3d
177, 187 (Tex. 2001) ("Market value is the price the
property would bring when it is offered for sale by one who
desires, but is not obligated to sell, and is bought by one
who is under no necessity of buying." (internal
quotation marks omitted)). The county contends the
legislature's chosen approach for dealer-held leased
heavy equipment, however, values the compressors for tax
purposes at "a minute fraction" of their market
in the constitution, however, binds the legislature to tax
only on "market value" as so defined. The
constitution refers only to the legislature's authority
to set the "value" of property for taxation.
See Tex. Const. art. VIII, § 1(b). It sets no
requirement that "value" must approximate
"market value." In fact, section 1(b) does not
mention "market value" at all. Instead, the
constitution assigns to the legislature the task of
determining "value, " providing that it "shall
be ascertained as may be provided by law." Id.
This provision "would seem to leave the Legislature free
to adopt the mode of ascertaining the value of any class of
property by such method as it might deem best." Mo.,
K. & T. Ry. Co. of Tex. v. Shannon, 100 S.W. 138,
144 (Tex. 1907); see also Republic Ins. Co. v. Highland
Park Indep. Sch. Dist., 102 S.W.2d 184, 193 (Tex. 1937)
(observing that "the fixing of a standard of
valuation" is "purely of the exercise of discretion
and judgment on the part of the Legislature").
"market value" into the constitution would both add
a word the drafters omitted and reduce legislative discretion
to a purely ministerial duty. If "value" must
always mean "market value, " what is left for the
legislature to "ascertain" and "provide by
law"? See Tex. Const. art. VIII, § 1(b).
Plainly, it is the legislature's province under the
constitution to decide how property should be valued for
taxation. In doing so, the legislature is not tethered to an
extra-textual valuation methodology that would dictate a
county argues our case law acknowledges "market
value" as the appropriate constitutional benchmark.
See, e.g., Enron, 922 S.W.2d at 935
("We have further held that section 1 of article VIII of
our Constitution requires 'value' for ad valorem
purposes to be based on the reasonable market value of the
property."); State v. Whittenburg, 265 S.W.2d
569, 572 (Tex. 1954) (noting that courts "have
interpreted [article VIII, section 1 and a statute providing
that 'real property shall be valued at its true and full
value in money'] to mean that assessed valuations shall
be based on the reasonable cash market value of
property" (internal quotation marks omitted));
Lively v. Mo., K. & T. Ry. of Tex., 120 S.W.
852, 856 (Tex. 1909) ("The value of the property is to
be determined by what it can be bought and sold for."
(quoting New York State v. Barker, 179 U.S. 279, 285
(1900)). The county further contends this interpretation has
been "codified" in the tax code; indeed, the
valuation statute challenged here itself purports to
determine the "market value" of dealer-held leased
heavy equipment. See Tex. Tax Code §
case law contradicts the constitution's plain text, our
case law is wrong. But we do not believe any of our decisions
warrant the conclusion that "value" must be
constitutionally attached to "market value." And
while many of the tax code's valuation methodologies are
based on market value, the code also provides for alternative
valuation methods in some circumstances. In any event, the
legislature's reliance on market valuation for ...