1. A Texas tax on the occupation of "gathering gas," measured by
the entire volume of gas "taken," as applied to an interstate
natural gas pipeline company, where the taxable incidence is the
taking of gas from the outlet of an independent gasoline plant
within the State for the purpose of immediate interstate
invalid under the Commerce Clause of
the Federal Constitution. Pp. 347 U. S.
(a) The validity of the tax under the Commerce Clause depends
upon considerations of constitutional policy having reference to
the substantial effects, actual or potential, of the tax in
suppressing or unduly burdening interstate commerce. P.
347 U. S.
(b) A tax imposed on a local activity related to interstate
commerce is valid only if the local activity is not such an
integral part of the flow of interstate commerce that it cannot
realistically be separated from it. P. 347 U.S. 166
(c) As here applied, the State has delayed the incidence of the
tax beyond the step where production and processing have ceased and
transmission in interstate commerce has begun, so that the tax here
is not levied on the capture or production of the gas, but rather
on its taking into interstate commerce after production, gathering,
and processing. Utah Power & Light Co. v. Pfost,
286 U. S. 165
distinguished. Pp. 347 U.S.
Page 347 U. S. 158
(d) Validation of this tax would permit a multiple burden upon
interstate commerce, for if Texas may impose this "first taking"
tax measured by the total volume of gas so taken, then the other
recipient states would have at least equal right to tax the first
taking or "unloading" from the pipeline of the same gas when it
arrives for distribution, and thus, in effect, would be resurrected
the customs barriers that the Commerce Clause was designed to
eliminate. P. 347 U. S.
2. The Supreme Court of Texas "refused" applications for writs
af error to review a decision of the Court of Civil Appeals which
upheld the validity of a state statute challenged as violative of
the Federal Constitution. By state statute and procedural rule, the
refusal signified that the State Supreme Court deemed the judgment
of the Court of Civil Appeals correct, and that the principles of
law had been correctly determined. Held:
the Court of
Civil Appeals was "the highest court of a State in which a decision
could be had" within the meaning of 28 U.S.C. § 1257, and the
appeals to this Court were properly from the Court of Civil
Appeals, and not from the Supreme Court of Texas. Pp. 347 U. S.
3. The issue of the validity of the tax was properly raised in
this case. P. 165, n
255 S.W.2d 535 reversed.
The Texas Court of Civil Appeals sustained the validity of a
state statute challenged as violative of the Federal Constitution.
255 S.W.2d 535. The State Supreme Court refused writs of error. The
two appellants each took appeals from both the Court of Civil
Appeals and the State Supreme Court. Here, the appeals from the
State Supreme Court are dismissed, and the judgments of the Court
of Civil Appeals are reversed,
pp. 347 U. S. 160
347 U. S.
Page 347 U. S. 159
MR. JUSTICE CLARK delivered the opinion of the Court.
The appellants, two natural gas pipeline companies, brought
separate suits against Texas State officials, appellees here, in a
state district court, seeking a determination that a Texas tax
statute as applied to appellants violates the Commerce Clause of
the Constitution of the United States, and seeking recovery of
money paid under protest in compliance with the statute. The
District Court sustained appellants' contentions and entered
judgment in their favor. The Court of Civil Appeals reversed,
holding that the tax statute, as applied, is constitutional. 255
S.W.2d 535. The Supreme Court of Texas "refused" appellants'
applications for writs of error.
By state statute and procedural rule, the docket notation
"refused," in denying application for writ of error, signifies that
the State Supreme Court deems the judgment of the Court of Civil
Appeals a correct one, and the principles of law declared in the
opinion correctly determined. Appellants were uncertain whether
appeal to this Court was properly from the Court of Civil Appeals
or the Supreme Court of Texas, as "the highest court of a State in
which a decision could be had" within the meaning of 28 U.S.C. §
1257. Hence, each appellant appealed from each of the courts.
] We postponed to
the hearing of the cases on the merits a determination of the
jurisdictional question. 346 U.S. 805.
Page 347 U. S. 160
We think that appeals in these cases were properly from the
Court of Civil Appeals. In American Railway Express Co. v.
Levee, 263 U. S. 19
(1923), the Supreme Court of Louisiana had refused a writ of
certiorari to the State Court of Appeal "for the reason that the
judgment is correct." Mr. Justice Holmes, speaking for a unanimous
". . . [U]nder the Constitution of the State, the jurisdiction
of the Supreme Court is discretionary . . . , and although it was
necessary for the petitioner to invoke that jurisdiction in order
to make it certain that the case could go no farther, . . . when
the jurisdiction was declined, the Court of Appeal was shown to be
the highest Court of the State in which a decision could be had.
Another section of the article cited required the Supreme Court to
give its reasons for refusing the writ, and therefore the fact that
the reason happened to be an opinion upon the merits, rather than
some more technical consideration, did not take from the refusal
its ostensible character of declining jurisdiction. Western
Union Telegraph Co. v. Crovo, 220 U. S.
, 220 U. S. 366
& Suburban Turnpike Co. v. Virginia, 225 U. S.
, 225 U. S. 269
. Of course,
the limit of time for applying to this Court was from the date when
the writ of certiorari was refused."
263 U.S. at 263 U. S. 20
In Lone Star Gas Co. v. Texas, 304 U.
, with the present Texas procedural provisions in
effect, this Court's mandate issued to the Court of Civil Appeals
in a case where the State Supreme Court had "refused" writ of
error. See also United Gas Public Service Co. v. Texas,
301 U.S. 667 (1937).
Accordingly the appeals in Nos. 199 and 201, from the Supreme
Court of Texas, are dismissed. We proceed to consider Nos. 198 and
Page 347 U. S. 161
The question presented is whether the Commerce Clause is
infringed by a Texas tax on the occupation of "gathering gas,"
measured by the entire volume of gas "taken," as applied to an
interstate natural gas pipeline company, where the taxable
incidence is the taking of gas from the outlet of an independent
gasoline plant within the State for the purpose of immediate
interstate transmission. In relevant part, the tax statute
] provides that,
"In addition to all other licenses and taxes levied and assessed
in the Texas, there is hereby levied upon every person engaged in
gathering gas produced in this State, an occupation tax for the
privilege of engaging in such business at the rate of 9/20 of one
cent per thousand (1,000) cubic feet of gas gathered."
Using a beggared definition of the term "gathering gas," the Act
further provides that,
"In the case of gas containing gasoline or liquid hydrocarbons
that are removed or extracted at a plant within the State by
scrubbing, absorption, compression, or any other process, the term
'gathering gas' means the first taking or the first retaining of
possession of such gas for other processing or transmission,
whether through a pipeline, either common carrier or private, or
otherwise, after such gas has passed through the outlet of such
It also prohibits the "gatherer" as therein defined from
shifting the burden of the tax to the producer of the gas, and
provides that the tax shall not be levied as to gas gathered for
local consumption if declared unconstitutional as to that gathered
for interstate transmission.
Michigan-Wisconsin Pipe Line Company and Panhandle Eastern Pipe
Line Company, appellants, are Delaware corporations and are natural
gas companies holding certificates of convenience and necessity
under the Natural Gas Act of 1938, 15 U.S.C. § 717 et
for the transportation and sale
Page 347 U. S. 162
in interstate commerce of natural gas. The nature of their
activities has been stipulated.
Michigan-Wisconsin has constructed a pipeline extending from
Texas to Michigan and Wisconsin. At points in these two States and
in Missouri and Iowa, it sells gas to distribution companies which
serve markets in those areas. [Footnote 3
] It sells no gas in Texas. The company produces
no gas; it purchases its supply from Phillips Petroleum Company in
Texas under a long-term contract. Phillips collects the gas from
the wells and pipes it to a gasoline plant, where certain
liquefiable hydrocarbons, oxygen, sulphur, hydrogen sulphide, dust
and foreign substances are removed preparatory to the transmission
of the residue. As this residue gas leaves the absorbers, it flows
through pipes owned by Phillips for a distance of 300 yards to the
outlet of its gasoline plant at the boundary between property of
Phillips and property of Michigan-Wisconsin. Phillips has installed
gas meters in its pipes at this point. The gas emerging from the
outlet flows directly into two 26-inch pipelines of
Page 347 U. S. 163
Michigan-Wisconsin. It is this "taking" that is made the taxable
incidence of the statute. After the gas has been taken into the
Michigan-Wisconsin pipes, it flows a distance of approximately
1,215 feet to a compressor station owned and operated by
Michigan-Wisconsin, at which station the pressure of the gas is
raised from about 200 pounds to some 975 pounds to facilitate
movement to distant markets. In the course of its flow through this
station, the gas is compressed, cooled, scrubbed and dehydrated,
and then passes into a 24-inch pipeline which carries it 1.74 miles
to the Oklahoma border, and thence to markets outside Texas.
Additional motive power is furnished by 15 other compressor
stations in other states through which the gas is transported.
The entire movement of the gas, from producing wells through the
Phillips gasoline plant and into the Michigan-Wisconsin pipeline to
consumers outside Texas, is a steady and continuous flow. All of
Michigan-Wisconsin's gas is purchased from Phillips for
transportation to points outside Texas, and is in fact so
Exclusive of the tax in question, Michigan-Wisconsin pays an
tax on the value of all its facilities and
leases within the State. The State also levies on producers a tax
of 5.72% of the value at the well of all gas produced in the State,
and a special tax to cover expenses in enforcing the conservation
and proration laws.
The appellees place much emphasis upon the fact that Texas,
through these conservation and proration measures, has afforded
great benefits and protection to pipeline companies. It is beyond
question that the enforcement of these laws has been not only in
the public interest, but to the commercial advantage of the
industry. But, though this be an appealing truth, these benefits
are relevant here only to show that essential requirements of due
process have been met sufficiently to justify the
Page 347 U. S. 164
imposition of any
tax on the interstate activity. No
challenge is made of the validity of the tax under the Due Process
Clause, the appellants basing their objections only on the Commerce
Clause, and, when we proceed to examine the tax under the latter,
"depends upon other considerations of constitutional policy
having reference to the substantial effects, actual or potential,
of the particular tax in suppressing or burdening unduly the
Nippert v. Richmond, 327 U. S. 416
327 U. S. 424
(1946). We proceed, therefore, to discuss only those relevant
factors involved in the testing of the tax under the Commerce
The tax here assailed applies equally to gas moving in
intrastate and interstate commerce. It is levied in addition to all
other licenses and taxes, and is denominated an occupation tax for
the privilege of engaging in the "gathering of gas." Obviously
appellants are not engaged in "gathering gas" within the meaning of
that term in its ordinary usage, but the tax statute gives the term
a transcendent scope; as to appellants' operations, it is defined
as "the first taking . . . of possession of such gas for other
processing or transmission . . . after such gas has passed through
the outlet" of a gasoline plant. The State Appellate Court
realistically found "the taxable event described by the statute" to
be "the taking or retaining of the gas at the gasoline plant
outlet. . . ." It thought that, since this local activity was not
subject to repetition elsewhere,
"the sole question is whether such local activities are so
closely related to and such an integral part of the interstate
business of [appellants] who transport gas in interstate commerce
as to be within the scope of the Commerce Clause of the
The court concluded that such taking "is just as local in nature
as the production itself is local," and held the tax valid
principally on the authority of Utah
Power & Light Co.
Page 347 U. S. 165
v. Pfost, 286 U. S. 165
(1932), and Hope Natural Gas Co. v. Hall, 274 U.
We accept the State court's determination of the operating
incidence of the tax, and we think the court has correctly stated
the essential question presented. But we are unable to agree with
its answer thereto, or with its conclusion of
Appellants' business is the interstate transportation and sale
of natural gas. Under the Commerce Clause, interstate commerce and
its instrumentalities are not totally immune from state taxation,
absent action by Congress. Frequently it has been said that
interstate business must pay its way, Postal Telegraph-Cable
Co. v. Richmond, 249 U. S. 252
249 U. S. 259
(1919); Western Live Stock v. Bureau
Page 347 U. S. 166
Revenue, 303 U. S. 250
303 U. S. 254
(1938); and the Court has done more than pay lip service to this
idea. Numerous cases have upheld state levies where it is thought
that the tax does not operate to discriminate against commerce or
unduly burden it either directly or by the possibility of multiple
taxation resulting from other taxes of the same sort being imposed
by other states. The recurring problem is to resolve a conflict
between the Constitution's mandate that trade between the states be
permitted to flow freely without unnecessary obstruction from any
source and the state's rightful desire to require that interstate
business bear its proper share of the costs of local government in
return for benefits received. Some have thought that the wisest
course would be for this Court to uphold all state taxes not
patently discriminatory, and wait for Congress to adjust conflicts
when and as it wished. But this view has not prevailed, and the
Court has therefore been forced to decide in many varied factual
situations whether the application of a given state tax to a given
aspect of interstate activity violates the Commerce Clause. It is
now well settled that a tax imposed on a local activity related to
interstate commerce is valid if, and only if, the local activity is
not such an integral part of the interstate process, the flow of
commerce that it cannot realistically be separated from it.
Memphis Natural Gas Co. v. Stone, 335 U. S.
, 335 U. S. 87
(1948); Western Live Stock v. Bureau of Revenue, supra,
303 U. S. 258
And if a genuine separation of the taxed local activity from the
interstate process is impossible, it is more likely that other
states through which the commerce passes or into which it flows
can, with equal right, impose a similar levy on the goods, with the
net effect of prejudicing or unduly burdening commerce.
The problem in this case is not whether the State could tax the
actual gathering of all gas whether transmitted in interstate
commerce or not, cf. Hope Natural Gas Co. v.
Page 347 U. S. 167
but whether here the State has delayed the
incidence of the tax beyond the step where production and
processing have ceased and transmission in interstate commerce has
begun. Cf. Utah Power & Light Co. v. Pfost, supra.
incidence of the tax here at issue, as stated by the Texas
appellate court, is appellants' "taking" of gas from Phillips'
gasoline plant. This event, as stipulated, occurs after the gas has
been produced, gathered, and processed by others than appellants.
The "taking" into appellants' pipelines is solely for interstate
transmission, and the gas at that time is not only actually
committed to, but is moving in, interstate commerce. What Texas
seeks to tax is therefore more than merely the loading of an
interstate carrier which was condemned in Joseph v. Carter
& Weekes Stevedoring Co., 330 U.
, 330 U. S. 427
(1947), for the gas here simultaneously enters the pipeline carrier
and moves on continuously to its outside market. "There is no
break, no period of deliberation, but a steady flow ending as
contemplated from the beginning beyond the state line." United
Fuel Gas Co. v. Hallanan, 257 U. S. 277
257 U. S. 281
(1921). As early as Gloucester Ferry Co. v. Pennsylvania,
114 U. S. 196
114 U. S. 213
(1885), this Court said, "Receiving and landing passengers and
freight is incident to their transportation." But receipt of the
gas in the pipeline is more than its "taking"; from a practical
standpoint, it is its "taking off" in appellants' carrier into
commerce; in reality, the tax is therefore on the exit of the gas
from the State. This economic process is inherently unsusceptible
of division into a distinct local activity capable of forming the
basis for the tax here imposed, on the one hand, and a separate
movement in commerce, on the other. It is difficult to conceive of
a factual situation where the incidence of taking or loading for
transmission is more closely related to the transmission itself.
This Court has held that much less integrated activity is "so
closely related to interstate
Page 347 U. S. 168
transportation as to be practically a part of it." [Footnote 5
] We are therefore of the
opinion that the taking of the gas here is essentially a part of
interstate commerce itself.
The Court of Civil Appeals, as we have stated, relied largely on
Utah Power & Light Co. v. Pfost, supra.
But that case
involved a license tax on the generation of electricity produced in
a hydraulic power plant within the Idaho and transmitted to Utah.
The question the Court was called upon to solve was whether
"the generation of electrical energy, like manufacture or
production generally, [is] a process essentially local in
character, and complete in itself, or is it so linked with the
transmission as to make it an inseparable part of a transaction in
The Court thought it inaccurate to say that the entire system
was purely a transferring device. "On the contrary," it said,
"the generator and the transmission lines perform different
functions, with a result comparable, so far as the question here
under consideration is concerned, to the manufacture of physical
articles of trade and their subsequent shipment and transportation
in commerce. [Footnote 6
Cited to support this principle was Oliver
Iron Mining Co. v. Lord,
Page 347 U. S. 169
172 (1923), where a state tax levied on all "engaged in the
business of mining or producing iron ore or other ores" was upheld
since the "ore does not enter interstate commerce until after the
mining is done, and the tax is imposed only in respect of the
mining," 262 U.S. at 262 U. S. 179
and Hope Natural Gas Co. v. Hall, supra,
which upheld a
tax on "producers of natural gas reckoned according to the value of
that commodity at the well." But the tax here is not levied on the
capture or production of the gas, but rather on its taking into
interstate commerce after production, gathering and processing.
The State Appellate Court recognized that nothing was done to
the gas at the point of "taking;" its form was not changed in any
way; it merely continued its journey. However, the court thought
that it would be unfair to base a decision on the fluid nature of
natural gas, and that there was in fact a two-step process, taking
and transmission, with interference in between found in title
passing and processing. But the processing, on which this tax is
not imposed, was done by Phillips, and took place prior to the
taxable event of "taking." As for the interference of title
passing, appellees readily admit this levy was designed to avoid
taxing the sale, and we think that, as a basis for finding a
separate local activity, the incidence must be a more substantial
economic factor than the movement of the gas from a local outlet of
one owner into the connecting interstate pipeline of another. Such
an aspect of interstate transportation cannot be "carve[d] out from
what is an entire or integral economic process," Nippert v.
at 327 U. S. 423
by legislative whimsy and segregated as a basis for the tax. The
separation must be realistic. [Footnote 7
Page 347 U. S. 170
Here it is perhaps sufficient that the privilege taxed, namely
the taking of the gas, is not so separate and distinct from
interstate transportation as to support the tax. But additional
objection is present if the tax be upheld. It would "permit a
multiple burden upon that commerce," Joseph v. Carter &
Weekes Stevedoring Co., supra,
at 330 U. S. 429
for if Texas may impose this "first taking" tax measured by the
total volume of gas so taken, then Michigan and the other recipient
states have at least equal right to tax the first taking or
"unloading" from the pipeline of the same gas when it arrives for
distribution. Oklahoma might then seek to tax the first taking of
the gas as it crossed into that State. The net effect would be
substantially to resurrect the customs barriers which the Commerce
Clause was designed to eliminate.
"The very purpose of the Commerce Clause was to create an area
of free trade among the several States. That clause vested the
power of taxing a transaction forming an unbroken process of
interstate commerce in the Congress, not in the States."
McLeod v. J. E. Dilworth Co., 322 U.
, 322 U. S.
* Together with No. 200, Panhandle Eastern Pipe Line Co. v.
Calvert, Comptroller of Public Accounts, et al.,
from the same court; and No. 199, Michigan-Wisconsin Pipe Line
Co. v. Calvert, Comptroller of Public Accounts, et al.,
No. 201, Panhandle Eastern Pipe Line Co. v. Calvert,
Comptroller of Public Accounts, et al.,
both on appeal from
the Supreme Court of Texas.
Cf. Western Union Tel. Co. v. Priester, 276 U.
Tex.Laws 1951, c. 402, § XXIII.
The two appellants, through the distribution companies, supply
gas for consumer markets with a population of about 12,000,000
people. As noted by the court below,
"[E]xcept for minor variations, Panhandle conducts its
activities in the same manner as Michigan-Wisconsin. Panhandle
loads its interstate pipeline with gas from the outlets of three
gasoline plants, rather than with gas from only one plant; it
produces a portion of the gas which it takes at the outlet of one
of such plants, and it makes sales in Texas to three small
customers, rather than sending all of its gas outside the
We agree with that court that, for purposes of this decision,
Panhandle's operations are not significantly different from those
of Michigan-Wisconsin. Only the interstate aspects of the
enterprise are in question. The operations of Michigan-Wisconsin,
which transmits all of its gas out of Texas, most clearly present
the question to be decided, and will be the basis of our
discussion. This approach was utilized by the State court, and
appellees do not suggest that the situations of the two appellants
are different for purposes of decision here.
Appellees challenge at the outset of their argument this Court's
jurisdiction to consider these appeals, on the ground that
appellants present no question, federal or otherwise, for the
Court's determination. The argument is, in substance, that
appellants' grounds of protest in the State courts set forth a
number of alleged operating incidences of the tax, none of which
coincided with the operating incidence found by the Court of Civil
Appeals; that the State court's finding on this subject is
conclusive and binding on this Court; that appellants, in urging
that the tax is a burden on and discriminatory against interstate
commerce, are advancing new grounds not considered by the State
courts, and hence waived under the Texas protest statute; in short,
that the issue of the validity of the tax was not properly raised.
We think there is no substance to this contention. In their
complaints and continuously thereafter, appellants specifically
challenged the validity of the tax statute under the Commerce
Clause. The trial court held the tax invalid as violating the
Commerce Clause. The Court of Civil Appeals expressly stated that
the question for its decision was whether the statute, as applied
to appellants, "violates the commerce clause of the Constitution of
the United States. If so, it is void; if not, it is valid." Since
the State courts have clearly treated the single issue here
presented as properly raised and preserved, and since appellees
first suggested the contrary in their brief on argument in this
Court, we think the objections to jurisdiction are not well
Baltimore & O.S.W. R. Co. v. Burtch, 263 U.
, 263 U. S. 544
(1924) ("loading or unloading of a shipment"); also see
Telegraph Co. v. Texas, 105 U. S. 460
105 U. S. 466
(1881) (tax on "sending" of messages outside state is a regulation
of interstate commerce); Puget Sound Stevedoring Co. v. State
Tax Commission, 302 U. S. 90
302 U. S. 92
(1937) ("loading and discharge of cargoes" is interstate
operation); Richfield Oil Corp. v. State Board,
329 U. S. 69
329 U. S. 83
(1946) (commerce begins "no later than the delivery of the oil into
286 U.S. at 286 U. S.
-181. The Court found that in the operation there
involved it was necessary to convert the mechanical energy into
electrical energy before it could be transmitted and that this
transformation was completed at the generator, where the interstate
movement began. This is analogous to the situation here where the
gas is prepared by Phillips for transmission, and is then fed into
Appellees also rely on Memphis Natural Gas Co. v. Stone,
supra; Western Live Stock v. Bureau of Revenue, supra; Edelman v.
Boeing Air Transport, 289 U. S. 249
(1933); Chassaniol v. Greenwood, 291 U.
(1934); Coverdale v. Arkansas-Louisiana Pipe
Line Co., 303 U. S. 604
(1938). We think these cases are distinguishable from the present
one, in that, in each of them, the tax was imposed on a less
integral part of the commerce process involved. Also
distinguishable is McGoldrick v. Berwind-White Coal Mining
Co., 309 U. S. 33
(1940), involving a tax on the sale of goods for consumption,
imposed by the city in which the goods had come to rest. The Court
there found that commerce, as to the goods, had ended prior to the
taxable event, and likened the tax to an ad valorem