An Alabama statute imposes a severance tax on oil and gas
extracted from wells located in the State. In 1979, a statute (Act
79-434) was enacted which increased the tax, exempted royalty
owners from the increase, and prohibited producers from passing on
the increase to consumers. Appellant producers were parties to
preexisting contracts that provided for allocation of severance
taxes among themselves, the royalty owners, and any nonworking
interests. The contracts also required the purchasers to reimburse
appellants for severance taxes paid. After paying the increase in
the severance tax under protest, appellants and other producers
filed suit in an Alabama state court, seeking a declaratory
judgment that Act 79-434 was unconstitutional and a refund of the
taxes paid. Concluding that both the royalty owner exemption and
the pass-through prohibition violated the Equal Protection Clause
of the Fourteenth Amendment and the Contract Clause, and that the
pass-through prohibition was also preempted by the Natural Gas
Policy Act of 1978 (NGPA), the trial court held Act 79-434 invalid
in its entirety and ordered appellee Alabama Commissioner of
Revenue to refund the taxes. The Alabama Supreme Court
reversed.
Held:
1. The pass-through prohibition of Act 79-434 was preempted by
federal law insofar as it applied to sales of gas in interstate
commerce, but not insofar as it applied to sales of gas in
intrastate commerce. Pp.
462 U. S.
180-187.
(a) The Natural Gas Act, which was enacted in 1938, was intended
to occupy the field of wholesale sales of natural gas in interstate
commerce. Alabama's pass-through prohibition trespassed upon the
authority of the Federal Energy Regulatory Commission (FERC) under
that Act to regulate the wholesale prices of natural gas sold in
interstate commerce, for the prohibition bars gas producers from
increasing their prices to pass on a particular expense -- the
increase in the severance tax -- to their purchasers. Whether or
not producers should be permitted
Page 462 U. S. 177
to recover this expense from their purchasers is a matter within
the sphere of FERC's regulatory authority. Pp.
462 U. S.
184-186.
(b) Although the NGPA extended federal authority to control
natural gas prices to the intrastate market, Congress also provided
that this extension did not deprive the States of the power to
establish a price ceiling for intrastate sales at a level lower
than the federal ceiling. Since a State may establish a lower price
ceiling, it may also impose a severance tax and forbid sellers to
pass it through to their customers. Pp.
462 U. S.
186-187.
2. The royalty owner exemption of Act 79-434 does not violate
the Contract Clause, since it did not nullify any contractual
obligation of which appellants were the beneficiaries. The
exemption provides only that the incidence of the severance tax
increase shall not fall on royalty owners, and nowhere states that
producers may not shift the burden of the increase to royalty
owners. Pp.
462 U. S.
187-189.
3. Nor does the pass-through prohibition of Act 79-434 violate
the Contract Clause. While the prohibition affected contractual
obligations of which appellants were the beneficiaries, it does not
constitute a "Law impairing the Obligations of Contracts" within
the meaning of the Contract Clause. The prohibition imposed a
generally applicable rule of conduct, the main effect of which was
to shield consumers from the burden of the tax increase. Its effect
on existing contracts permitting producers to pass the increase
through to consumers was only incidental.
Cf. Producers
Transportation Co. v. Railroad Comm'n of California,
251 U. S. 228. Pp.
462 U. S.
189-194.
4. Neither the pass-through prohibition nor the royalty owner
exemption of Act 79-434 violates the Equal Protection Clause. Both
measures pass muster under the standard of rationality applied in
considering equal protection challenges to statutes regulating
economic and commercial matters. The pass-through prohibition
plainly bore a rational relationship to the State's legitimate
purpose of protecting consumers from excessive prices. Similarly,
the Alabama Legislature could have reasonably determined that the
royalty owner exemption would encourage investment in oil or gas
production. Pp.
462 U. S.
195-196.
404 So.
2d 1, affirmed in part, reversed in part, and remanded.
MARSHALL, J., delivered the opinion for a unanimous Court.
Page 462 U. S. 178
JUSTICE MARSHALL delivered the opinion of the Court.
These cases concern an Alabama statute which increased the
severance tax on oil and gas extracted from Alabama wells, exempted
royalty owners from the tax increase, and prohibited producers from
passing on the increase to their purchasers. Appellants challenge
the pass-through prohibition and the royalty owner exemption under
the Supremacy Clause, the Contract Clause, and the Equal Protection
Clause.
I
Since 1945 Alabama has imposed a severance tax on oil and gas
extracted from wells located in the State. Ala.Code § 40-20-1
et seq. (197). The tax
"is levied upon the producers of such oil or gas in the
proportion of their ownership at the time of severance, but . . .
shall be paid by the person in charge of the production
operations."
§ 40-20-3(a). [
Footnote 1]
The person in charge of production operations is
"authorized, empowered and required to deduct from any amount
due to producers of such production at the time of severance the
proportionate amount of the tax herein levied before making
payments to such producers."
§ 40-20-3(a). The statute defines a "producer" as "[a]ny person
engaging or continuing in the business of oil or gas production,"
including
"the owning, controlling, managing, or leasing of any oil or gas
property or oil or gas well, and producing in any
Page 462 U. S. 179
manner any oil or gas . . . and . . . receiving money or other
valuable consideration as royalty or rental for oil or gas
produced. . . ."
§ 40-20-1(8).
In 1979, the Alabama Legislature enacted Act 79-434, which
increased the severance tax from 4% to 6% of the gross value of the
oil and gas at the point of production. Whereas the severance tax
had previously fallen on royalty owners in proportion to their
interests in the oil or gas produced, the amendment specifically
exempted royalty owners from the tax increase:
"Any person who is a royalty owner shall be exempt from the
payment of any increase in taxes herein levied and shall not be
liable therefor."
1979 Ala. Acts, No. 79-434, p. 687, § 1, as amended, Ala.Code §
40-202(d) (1982). The amendment also prohibited producers from
passing the tax increase through to consumers:
"The privilege tax herein levied shall be absorbed and paid by
those persons engaged in the business of producing or severing oil
or gas only, and the producer shall not pass on the costs of such
tax payments, either directly or indirectly, to the consumer; it
being the express intent of this act that the tax herein levied
shall be borne exclusively by the producer or severer of oil or
gas."
1979 Ala. Acts, No. 79-434, p. 687, § 1(e). The amendment became
effective on September 1, 1979. The pass-through prohibition was
repealed on May 28, 1980. 1980 Ala. Acts, No. 80-708, p. 1438.
Appellants in both No. 81-1020 and No. 81-1268 have working
interests in producing oil and gas wells located in Alabama.
[
Footnote 2] They drill and
operate the wells and are responsible for selling the oil and gas
extracted. Appellants are obligated
Page 462 U. S. 180
to pay the landowners a percentage of the sale proceeds as
royalties, the percentage depending upon the provisions of the
applicable lease. Within any given production unit, there may be
tracts of land which the owners of the land have leased to
nonworking interests, who are also entitled to a share of the sale
proceeds. Appellants were parties to contracts providing for the
allocation of severance taxes among themselves, the royalty owners,
and any nonworking interests in proportion to each party's share of
the sale proceeds. Appellants were also parties to sale contracts
that required the purchasers to reimburse them for any and all
severance taxes on the oil or gas sold.
After paying the 2% increase in the severance tax under protest,
appellants and eight other oil and gas producers filed suit in the
Circuit Court of Montgomery County, Ala., seeking a declaratory
judgment that Act 79-434 was unconstitutional and a refund of the
taxes paid under protest. The Circuit Court ruled in favor of
appellants, concluding that both the royalty owner exemption and
the pass-through prohibition violate the Equal Protection Clause
and the Contract Clause, and that the pass-through prohibition is
also preempted by the Natural Gas Policy Act of 1978 (NGPA), 15
U.S.C. § 3301
et seq. (1976 ed., Supp. V). Although Act
79-434 contained a severability clause, the court held the entire
Act invalid, and ordered appellee Commissioner of Revenue of the
State of Alabama to refund the taxes paid under protest. The
Supreme Court of Alabama reversed, holding Act 79-434 valid in its
entirety.
404 So. 2d
1 (1981).
Appellants appealed to this Court under 28 U.S.C. § 1257(2). We
noted probable jurisdiction. 456 U.S. 970 (1982). We now affirm in
part, reverse in part, and remand for further proceedings not
inconsistent with this opinion.
II
We deal first with appellants' contention that the application
of the pass-through prohibition to gas was preempted
Page 462 U. S. 181
by federal law. [
Footnote 3]
The applicable principles of preemption were recently summarized in
Pacific Gas & Electric Co. v. State Energy Resources
Conservation & Development Comm'n, 461 U.
S. 190,
461 U. S.
203-204 (1983):
Page 462 U. S. 182
"Absent explicit preemptive language, Congress' intent to
supersede state law altogether may be found from a"
"'scheme of federal regulation . . . so pervasive as to make
reasonable the inference that Congress left no room for the States
to supplement it,' because 'the Act of Congress may touch a field
in which the federal interest is so dominant that the federal
system will be assumed to preclude enforcement of state laws on the
same subject,' or because 'the object sought to be obtained by the
federal law and the character of obligations imposed by it may
reveal the same purpose.'"
"
Fidelity Federal Savings & Loan Assn. v. De la
Cuesta, 458 U. S. 141,
458 U. S.
153 (1982), quoting
Rice v. Santa Fe Elevator
Corp., 331 U. S. 218,
331 U. S.
230 (1947). Even where Congress has not entirely
displaced state regulation in a specific area, state law is
preempted to the extent that it actually conflicts with federal
law. Such a conflict arises when 'compliance with both federal and
state regulations is a physical impossibility,'
Florida Lime
& Avocado Growers, Inc. v. Paul, 373 U. S.
132,
373 U. S. 142-143 (1963), or
where state law 'stands as an obstacle to the accomplishment and
execution of the full purposes and objectives of Congress.'
Hines v. Davidowitz, 312 U. S. 52,
312 U. S.
67 (1941)."
Appellants contend that the pass-through prohibition was in
conflict with § 110(a) of the NGPA, 92 Stat. 3368, 15 U.S.C. §
3320(a) (1976 ed., Supp. V), which provides in pertinent part as
follows:
"[A] price for the first sale of natural gas shall not be
considered to exceed the maximum lawful price applicable
Page 462 U. S. 183
to the first sale of such natural gas under this part if such
first sale price exceeds the maximum lawful price to the extent
necessary to recover -- "
"(1) State severance taxes attributable to the production of
such natural gas and borne by the seller. . . ."
We agree with the Supreme Court of Alabama [
Footnote 4] that the pass-through prohibition did
not conflict with this provision. On its face, § 110(a) of the NGPA
does not give any seller the affirmative right to include in his
price an amount necessary
Page 462 U. S. 184
to recover state severance taxes. It simply provides that a
seller who does include such an amount in his price shall not be
deemed to have exceeded the federal price ceiling if he would not
have exceeded it had that amount not been included. Nothing in the
legislative history of the NGPA has been called to our attention to
indicate that § 110(a) was intended to have a greater effect than
its language would indicate. [
Footnote 5]
Although the pass-through prohibition thus was not in conflict
with § 110(a) of the NGPA, we nevertheless conclude that it was
preempted by federal law insofar as it applied to sales of gas in
interstate commerce. To that extent, the pass-through prohibition
represented an attempt to legislate in a field that Congress has
chosen to occupy. The Natural Gas Act (Gas Act), 52 Stat. 821, as
amended, 15 U.S.C. §§ 717-717w (1976 ed. and Supp. V), was enacted
in 1938
"to provide the Federal Power Commission, now the FERC, with
authority to regulate the wholesale pricing of natural gas in the
flow of interstate commerce from wellhead to delivery to
consumers."
Maryland v. Louisiana, 451 U.
S. 725,
451 U. S. 748
(1981). As we have previously recognized,
e.g., Phillips
Petroleum Co. v. Wisconsin, 347 U. S. 672,
347 U. S.
682-683 (1954);
id. at
347 U. S.
685-687 (Frankfurter, J., concurring), the Gas Act was
intended to occupy the field of wholesale sales of natural gas in
interstate commerce, a field which had previously been left largely
unregulated as a result of the absence of federal action and
decisions of this Court striking down state regulation of sales of
natural gas in interstate commerce. The Committee Reports on the
bill that became the Gas Act clearly evidence this intent:
"[S]ales for resale, or so-called wholesale sales, in interstate
commerce (for example, sales by producing companies
Page 462 U. S. 185
to distributing companies) . . . have been considered to be not
local in character and, even in the absence of Congressional
action, not subject to State regulation.
The basic purpose of
the present legislation is to occupy this field in which the
Supreme Court has held that the States may not act."
H.R.Rep. No. 709, 75th Cong., 1st Sess., 1-2 (1937); S.Rep. No.
1162, 75th Cong., 1st Sess., 2 (1937) (citations omitted) (emphasis
added).
The Alabama pass-through prohibition trespassed upon FERC's
authority over wholesale sales of gas in interstate commerce, for
it barred gas producers from increasing their prices to pass on a
particular expense -- the increase in the severance tax -- to their
purchasers. Whether or not producers should be permitted to recover
this expense from their purchasers is a matter within the sphere of
FERC's regulatory authority.
See FPC v. United Gas Pipe Line
Co., 386 U. S. 237,
386 U. S. 243
(1967) (emphasis added):
"One of [the FPC's] statutory duties is to determine just and
reasonable rates which will be sufficient to permit the company to
recover its costs of service and a reasonable return on its
investment. Cost of service is therefore a major focus of inquiry.
Normally included as a cost of service is a proper allowance
for taxes. . . ."
Here, as in
Maryland v. Louisiana, the state
statute
"interfere[d] with the FERC's authority to regulate the
determination of the proper allocation of costs associated with the
sale of natural gas to consumers."
451 U.S. at
451 U. S. 749.
Just as the statute at issue in
Maryland v. Louisiana was
preempted because it effectively
"shift[ed] the incidence of certain expenses . . . to the
ultimate consumer of the processed gas without the prior approval
of the FERC,"
id. at
451 U. S. 750,
Alabama's pass-through prohibition was preempted, insofar as
Page 462 U. S. 186
it applied to sales of gas in interstate commerce, because it
required that certain expenses be absorbed by producers. We reach a
different conclusion with respect to the application of the
pass-through prohibition to sales of gas in intrastate commerce.
[
Footnote 6] Although § 105(a)
of the NGPA extended federal authority to control prices to the
intrastate market, 15 U.S.C. § 3315(a) (1976 ed., Supp. V),
Congress also provided that this extension of federal authority did
not deprive the States of the power to establish a price ceiling
for intrastate producer sales of gas at a level lower than the
federal ceiling. Section 602(a) of the NGPA, 92 Stat. 3411, as set
forth in 15 U.S.C. § 3432(a) (1976 ed., Supp. V), states that
"[n]othing in this chapter shall affect the authority of any
State to establish or enforce any maximum lawful price for the
first sale of natural gas produced in such State which does not
exceed the applicable maximum lawful price, if any, under
subchapter I of this chapter."
See Energy Reserves Group, Inc. v. Kansas Power & Light
Co., 459 U. S. 400,
459 U. S.
420-421 (1983) (in enacting the NGPA, "Congress
explicitly envisioned that the States would regulate intrastate
markets in accordance with the overall national policy").
Since a State may establish a lower price ceiling, we think it
may also impose a severance tax and forbid sellers to pass it
through to their purchasers. For sellers charging the
Page 462 U. S. 187
maximum price allowed by federal law, a state tax increase
coupled with a pass-through prohibition will not differ in
practical effect from a state tax increase coupled with the
imposition of a state price ceiling that maintains the price
ceiling imposed by federal law prior to the tax increase. In both
cases, sellers are required to absorb expenses that they might be
able to pass through to their customers absent the state
restrictions. Given the absence of any express preemption provision
in the NGPA and Congress' express approval of one form of state
regulation, we do not think it can fairly be inferred that Congress
contemplated that the general scheme created by the NGPA would
preclude another form of state regulation that is no more
intrusive. [
Footnote 7]
We conclude that the pass-through prohibition was preempted by
federal law insofar as it applied to sales of gas in interstate
commerce, but not insofar as it applied to producer sales of gas in
intrastate commerce.
III
We turn next to appellants' contention that the royalty owner
exemption and the pass-through prohibition impaired the obligations
of contracts in violation of the Contract Clause. [
Footnote 8]
A
Appellants' Contract Clause challenge to the royalty owner
exemption fails for the simple reason that there is nothing to
suggest that that exemption nullified any contractual
Page 462 U. S. 188
obligations of which appellants were the beneficiaries.
[
Footnote 9] The relevant
provision of Act 79-434 states that "[a]ny person who is a royalty
owner shall be exempt from the payment of any increase in taxes
levied and shall not be liable therefor." On its face, this portion
of the Act provides only that the legal incidence of the tax
increase does not fall on royalty
Page 462 U. S. 189
owners,
i.e., the State cannot look to them for payment
of the additional taxes. In contrast to the pass-through
prohibition, the royalty owner exemption nowhere states that
producers may not shift the burden of the tax increase in whole or
in part to royalty owners. Nor is there anything in the opinion
below to suggest that the Supreme Court of Alabama interpreted the
exemption to have this effect. We will not strain to reach a
constitutional question by speculating that the Alabama courts
might in the future interpret the royalty owner exemption to forbid
enforcement of a contractual arrangement to shift the burden of the
tax increase.
See Ashwander v. TVA, 297 U.
S. 288,
297 U. S.
346-347 (1936) (Brandeis, J., concurring).
B
Unlike the royalty owner exemption, the pass-through prohibition
did restrict contractual obligations of which appellants were the
beneficiaries. Appellants were parties to sale contracts that
permitted them to include in their prices any increase in the
severance taxes that they were required to pay on the oil or gas
being sold. [
Footnote 10]
The contracts were entered into before the pass-through prohibition
was enacted, and their terms extended through the period during
which the prohibition was in effect. By barring appellants from
passing the tax increase through to their purchasers, the
pass-through prohibition nullified
pro tanto the
purchasers' contractual obligations to reimburse appellants for any
severance taxes.
While the pass-through prohibition thus affects contractual
obligations of which appellants were the beneficiaries, it does not
follow that the prohibition constituted a "Law impairing the
Obligations of Contracts" within the meaning of the Contract
Page 462 U. S. 190
Clause.
See United States Trust Co. v. New Jersey,
431 U. S. 1,
431 U. S. 21
(1977).
"Although the language of the Contract Clause is facially
absolute, its prohibition must be accommodated to the inherent
police power of the State 'to safeguard the vital interests of its
people.'"
Energy Reserves Group, Inc. v. Kansas Power & Light
Co., 459 U.S. at
459 U. S. 410,
quoting
Home Bldg. & Loan Assn. v. Blaisdell,
290 U. S. 398,
290 U. S. 434
(1934). This Court has long recognized that a statute does not
violate the Contract Clause simply because it has the effect of
restricting, or even barring altogether, the performance of duties
created by contracts entered into prior to its enactment.
See
Allied Structural Steel Co. v. Spannaus, 438 U.
S. 234,
438 U. S.
241-242 (1978). If the law were otherwise, "one would be
able to obtain immunity from state regulation by making private
contractual arrangements."
United States Trust Co. v. New
Jersey, supra, at
431 U. S. 22.
The Contract Clause does not deprive the States of their
"broad power to adopt general regulatory measures without being
concerned that private contracts will be impaired, or even
destroyed, as a result."
United States Trust Co. v. New Jersey, supra, at
431 U. S. 22. As
Justice Holmes put it:
"One whose rights, such as they are, are subject to state
restriction, cannot remove them from the power of the State by
making a contract about them. The contract will carry with it the
infirmity of the subject matter."
Hudson Co. v. McCarter, 209 U.
S. 349,
209 U. S. 357
(1908). [
Footnote 11] Thus,
a state prohibition
Page 462 U. S. 191
law may be applied to contracts for the sale of beer that were
valid when entered into,
Beer Co. v. Massachusetts,
97 U. S. 25 (1878),
a law barring lotteries may be applied to lottery tickets that were
valid when issued,
Stone v. Mississippi, 101 U.
S. 814 (1880), and a workmen's compensation law may be
applied to employers and employees operating under preexisting
contracts of employment that made no provision for work-related
injuries,
New York Central R. Co. v. White, 243 U.
S. 188 (1917). [
Footnote 12]
Like the laws upheld in these cases, the pass-through
prohibition did not prescribe a rule limited in effect to
contractual obligations or remedies, but instead imposed a
generally applicable rule of conduct designed to advance "a broad
societal interest,"
Allied Structural Steel Co., supra, at
438 U. S. 249:
protecting consumers from excessive prices. The prohibition applied
to all oil and gas producers, regardless of whether they happened
to be parties to sale contracts that contained a provision
permitting them to pass tax increases through to their purchasers.
The effect of the pass-through prohibition
Page 462 U. S. 192
on existing contracts that did contain such a provision was
incidental to its main effect of shielding consumers from the
burden of the tax increase.
Cf. Henderson Co. v. Thompson,
300 U. S. 258,
300 U. S. 266
(1937);
Beer Co. v. Massachusetts, supra, at
97 U. S. 32.
Because the pass-through prohibition imposed a generally
applicable rule of conduct, it is sharply distinguishable from the
measures struck down in
United States Trust Co. v. New Jersey,
supra, and
Allied Structural Steel Co. v. Spannaus,
supra. United States Trust Co. involved New York and
New Jersey statutes whose sole effect was to repeal a covenant that
the two States had entered into with the holders of bonds issued by
The Port Authority of New York and New Jersey. [
Footnote 13] Similarly, the statute at
issue in
Allied Structural Steel Co. directly
"
adjust[ed] the rights and responsibilities of contracting
parties.'" 438 U.S. at 438 U. S. 244,
quoting United States Trust Co. v. New Jersey, supra, at
431 U. S. 22. The
statute required a private employer that had contracted with its
employees to provide pension benefits to pay additional benefits,
beyond those it had agreed to provide, if it terminated the pension
plan or closed a Minnesota office. Since the statute applied only
to employers that had entered into pension agreements, its sole
effect was to alter contractual duties. Cf. Worthen Co. v.
Kavanaugh, 295 U. S. 56 (1935)
(statute which drastically limited the remedies available to
mortgagees held invalid under the Contract Clause).
Alabama's power to prohibit oil and gas producers from passing
the increase in the severance tax on to their purchasers is
confirmed by several decisions of this Court rejecting Contract
Clause challenges to state rate-setting schemes that displaced any
rates previously established by contract. In
Page 462 U. S. 193
Midland Realty Co. v. Kansas City Power & Light
Co., 300 U. S. 109
(1937), it was held that a party to a long-term contract with a
utility could not invoke the Contract Clause to obtain immunity
from a state public service commission's imposition of a rate for
steam heating that was higher than the rate established in the
contract. The Court declared that "the State has power to annul and
supersede rates previously established by contract between
utilities and their customers."
Id. at
300 U. S. 113
(footnote omitted). In
Union Dry Goods Co. v. Georgia Public
Service Corp., 248 U. S. 372
(1919), the Court rejected a Contract Clause challenge to an order
of a state commission setting the rates that could be charged for
supplying electric light and power, notwithstanding the effect of
the order on preexisting contracts.
Accord, Stephenson v.
Binford, 287 U. S. 251
(1932) (upholding law which barred private contract carriers from
using the highways unless they charged rates which might exceed
those they had contracted to charge).
Producers Transportation Co. v. Railroad Comm'n of
California, 251 U. S. 228
(1920), is particularly instructive for present purposes. In that
case, the Court upheld an order issued by a state commission under
a newly enacted statute empowering the commission to set the rates
that could be charged by individuals or corporations offering to
transport oil by pipeline. The Court rejected the contention of a
pipeline owner that the statute could not override preexisting
contracts:
"That some of the contracts . . . were entered into before the
statute was adopted or the order made is not material. A common
carrier cannot, by making contracts for future transportation or by
mortgaging its property or pledging its income, prevent or postpone
the exertion by the State of the power to regulate the carrier's
rates and practices. Nor does the contract clause of the
Constitution interpose any obstacle to the exertion of that
power."
Id. at
251 U. S.
232.
Page 462 U. S. 194
There is no material difference between
Producers
Transportation Co. and the cases before us. If a party that
has entered into a contract to transport oil is not immune from
subsequently enacted state regulation of the rates that may be
charged for such transportation, parties that have entered into
contracts to sell oil and gas likewise are not immune from state
regulation of the prices that may be charged for those commodities.
And if the Contract Clause does not prevent a State from dictating
the price that sellers may charge their customers, plainly it does
not prevent a State from requiring that sellers absorb a tax
increase themselves, rather than pass it through to their
customers. If one form of state regulation is permissible under the
Contract Clause notwithstanding its incidental effect on
preexisting contracts, the other form of regulation must be
permissible as well. [
Footnote
14]
Page 462 U. S. 195
IV
Finally, we reject appellants' equal protection challenge to the
pass-through prohibition and the royalty owner exemption. Because
neither of the challenged provisions adversely affects a
fundamental interest,
see, e.g., Dun v. Blumstein,
405 U. S. 330,
405 U. S.
336-342 (1972);
Shapiro v. Thompson,
394 U. S. 618,
394 U. S.
629-631 (1969), or contains a classification based upon
a suspect criterion,
see, e.g., Graham v. Richardson,
403 U. S. 365,
403 U. S. 372
(1971);
McLaughlin v. Florida, 379 U.
S. 184,
379 U. S.
191-192 (1964), they need only be tested under the
lenient standard of rationality that this Court has traditionally
applied in considering equal protection challenges to
Page 462 U. S. 196
regulation of economic and commercial matters.
See, e.g.,
Western & Southern Life Ins. Co. v. State Board of
Equalization, 451 U. S. 648,
451 U. S. 668
(1981);
Minnesota v. Clover Leaf Creamery Co.,
449 U. S. 456,
449 U. S.
461-463 (1981);
Kotch v. Board of River Pilot
Comm'rs, 330 U. S. 552,
330 U. S. 564
(1947). Under that standard, a statute will be sustained if the
legislature could have reasonably concluded that the challenged
classification would promote a legitimate state purpose.
See,
e.g., Western & Southern Life Ins. Co., supra, at
451 U. S. 668;
Clover Leaf Creamery Co., supra, at
449 U. S.
461-462,
449 U. S.
464.
We conclude that the measures at issue here pass muster under
this standard. The pass-through prohibition plainly bore a rational
relationship to the State's legitimate purpose of protecting
consumers from excessive prices. Similarly, we think the Alabama
Legislature could have reasonably determined that the royalty owner
exemption would encourage investment in oil or gas production. Our
conclusion with respect to the royalty owner exemption is
reinforced by the fact that that provision is solely a tax measure.
As we recently stated in
Regan v. Taxation with Representation
of Washington, 461 U. S. 540,
461 U. S. 547
(1983), "[l]egislatures have especially broad latitude in creating
classifications and distinctions in tax statutes."
See
Lehnhausen v. Lake Shore Auto Parts Co., 410 U.
S. 356,
410 U. S. 359
(1973);
Allied Stores of Ohio v. Bowers, 358 U.
S. 522,
358 U. S.
526-527 (1959).
V
For the foregoing reasons, we conclude that the application of
the pass-through prohibition to sales of gas in interstate commerce
was preempted by federal law, but we uphold both the pass-through
prohibition and the royalty owner exemption against appellants'
challenges under the Contract Clause and the Equal Protection
Clause. Since the severability of the pass-through prohibition from
the remainder
Page 462 U. S. 197
of the 1979 amendments is a matter of state law, we remand to
the Supreme Court of Alabama for that court to determine whether
the partial invalidity of the pass-through prohibition entitles
appellants to a refund of some or all of the taxes paid under
protest.
See n 6,
supra. Accordingly, the judgment of the Supreme Court of
Alabama is affirmed in part and reversed in part, and the case is
remanded for further proceedings not inconsistent with this
opinion.
It is so ordered.
* Together with No. 81-1268,
Exchange Oil & Gas Corp. et
al. v. Eagerton, Commissioner of Revenue of Alabama, also on
appeal from the same court.
[
Footnote 1]
The amount of tax that is due and payable constitutes
"a first lien upon any of the oil or gas so produced when in the
possession of the original producer or any purchaser of such oil or
gas in its unmanufactured state or condition."
§ 40-20-3(a).
[
Footnote 2]
Appellants in No. 81-1020 are Exxon Corp., Gulf Oil Corp., and
the Louisiana Land and Exploration Co. Appellant in No. 81-1268 are
Exchange Oil and Gas Corp., Getty Oil Co., and Union Oil Co. of
California.
[
Footnote 3]
The Supremacy Clause of the Constitution provides that
"[t]his Constitution, and the Laws of the United States which
shall be made in Pursuance thereof . . . shall be the supreme Law
of the Land . . . any Thing in the Constitution or Laws of any
State to the contrary notwithstanding."
Art. VI, cl. 2.
Although appellants in No. 81-1268 also contend that the
application of the pass-through prohibition to oil was preempted by
the Emergency Petroleum Allocation Act of 1973 (EPAA), 15 U.S.C. §
751
et seq. (1976 ed. and Supp. V), and the regulations
promulgated thereunder, we conclude that we have no jurisdiction to
consider this contention. The decision below does not discuss this
issue, and when
"'the highest state court has failed to pass upon a federal
question, it will be assumed that the omission was due to want of
proper presentation in the state courts, unless the aggrieved party
in this Court can affirmatively show the contrary.'"
Fuller v. Oregon, 417 U. S. 40,
417 U. S. 50, n.
11 (1974), quoting
Street v. New York, 394 U.
S. 576,
394 U. S. 582
(1969). No such showing has been made here. Although appellants in
No. 81-1268 have represented to this Court that the trial court
held the pass-through prohibition to be preempted by the EPAA,
Juris.Statement 3, an examination of the trial court opinion
reveals that, in fact, the court made no mention of the EPAA. Nor
does anything in the record before us indicate that this issue was
raised in the trial court. Appellants did address the EPAA in their
brief before the Supreme Court of Alabama, Brief for Appellees
Exchange Oil and Gas Corp., Getty Oil Co., Placid Oil Co., Union
Oil Co. of California in No. 79-823, pp. 51-53, but that court did
not pass on the issue. Under these circumstances, we have no
jurisdiction to consider whether the EPAA preempted the application
of the pass-through prohibition to oil, for it does not
affirmatively appear that that issue was decided below.
Bailey
v. Anderson, 326 U. S. 203,
326 U. S.
206-207 (1945). The general practice of the Alabama
appellate courts is not to consider issues raised for the first
time on appeal.
See, e.g., State v.
Newberry, 336 So. 2d
181, 182 (Ala.1976);
State v. Graf, 280 Ala. 71, 72,
189 So. 2d
912, 913 (1966);
Burton v. Burton, 379 So.
2d 617, 618 (Civ.App.1980);
Crews v. Houston County Dept.
of Pensions & Security, 358 So.
2d 451, 455 (Civ.App.),
cert. denied, 358 So. 2d
456 (Ala.1978).
Appellants in No. 81-1268 have also burdened this Court with a
labored argument that they were denied due process by the Supreme
Court of Alabama's refusal to consider the legislative history of
the 1979 amendments to the state severance tax, a history which,
according to appellants, shows that those amendments were intended
to apply only to certain wells located in one county in the State,
and not to apply statewide. Suffice it to say that the weight to be
given to the legislative history of an Alabama statute is a matter
of Alabama law, to be determined by the Supreme Court of
Alabama.
[
Footnote 4]
See 404 So.2d at 6:
"Nowhere in that section [§ 110(a) of the NGPA] is it stated
that the oil companies are entitled to 'pass through' increases on
state severance taxes. Rather, the Act merely provides that the
lawful ceiling on the first sale at the wellhead may be raised if a
severance tax is imposed by the states. The two Acts are aimed at
entirely different purposes. In other words, although it would be
perfectly permissible for the oil and gas companies to raise the
price for the first sale of natural gas, subject to the limitations
of the Natural Gas Policy Act, all that Act No. 79-434 requires is
that the increase in severance tax mandated by that Act be borne by
the producer or severer of the oil or gas."
Relying on this passage, appellee Commissioner of Revenue
contends that the pass-through prohibition did not bar a producer
from increasing its price by an amount equal to the increase in the
severance tax, provided that the producer did not label that
increase a tax:
"The Commissioner believes that the seller may include in the
lawful maximum price an amount equal to Alabama's severance taxes
borne by the seller resulting from the production of natural gas.
The Commissioner believes that it was the intent of the Alabama
Legislature in adopting the pass-through prohibition that it did
not want to be perceived as levying an additional tax on the
consumer. Therefore it prohibited anyone from passing along the
increase levied by Act 79-434
as a tax."
Brief for Appellee Eagerton 16-17 (emphasis in original).
We do not agree with appellee that the Supreme Court of Alabama
interpreted the pass-through prohibition to leave sellers free to
pass through the tax increase so long as they did not tell their
customers that that is what they were doing. The statute contains
no language that would suggest this limitation, and, as we
understand the opinion below, the point of the passage relied upon
by appellee was only that the pass-through prohibition did not
conflict with federal law.
[
Footnote 5]
Although the United States and the Federal Energy Regulatory
Commission (FERC) in their
amicus brief point to the
statement in the Conference Report that "[a]ll ceiling prices under
this Act are exclusive of State severance taxes borne by the seller
. . . ," H.R.Conf.Rep. No. 95-1752, p. 90 (1978), we do not see how
this statement supports their position that the pass-through
prohibition was in conflict with § 110(a).
[
Footnote 6]
The parties stipulated that a substantial portion of the gas
extracted by appellants was sold in interstate commerce. App. in
No. 81-1020, pp. 78, 184-185. Because the trial court concluded
that the pass-through prohibition was in conflict with § 110(a) of
the NGPA, it did not determine how much of the taxes at issue in
this case were levied on gas sold in intrastate and interstate
commerce. If, on remand, when the Supreme Court of Alabama inquires
into the question of severability,
see infra at
462 U. S.
196-197, that court holds that the Alabama Legislature
would have intended to impose the tax increase on the severance of
gas if and only if the increase could not be passed through to
consumers when the gas is sold, such a determination may have to be
made.
[
Footnote 7]
We note that these cases do not involve any attempt by a State
to prohibit gas producers from passing through the cost of a factor
of production such as labor or machinery. Such a prohibition might
raise additional considerations not present here because of the
inducement it would create for producers to shift away from the
factor of production to which the pass-through prohibition
applied.
[
Footnote 8]
The Contract Clause provides that "No State shall . . . pass any
. . . Law impairing the Obligation of Contracts. . . ." U.S.Const.,
Art. I, 10, cl. 1.
[
Footnote 9]
The contracts into which appellants had entered appear to
entitle them to reimbursement from the royalty owners for a share
of any severance tax paid by appellants in proportion to the
royalty owners' interest in the oil or gas, regardless of whether
state law imposes that tax on the producer or on the royalty owner.
Appellants cite the following contractual provisions as typical of
the agreements which they contend are impaired by the royalty owner
exemption:
"Lessor shall bear and pay, and there shall be deducted from the
royalties due hereunder, Lessor's proportionate royalty share
of:"
"(a) All applicable severance, production and other such taxes
levied or imposed upon production from the leased premises."
App. in No. 81-1020, pp. 76-77.
"LESSOR AND LESSEE shall bear in proportion to their respective
participation in the production hereunder, all taxes levied on
minerals covered hereby or any part thereof, or on the severance or
production thereof, and all increases . . . in taxes on the lease
premises or any part thereof."
Id. at 184. These provisions would seem to entitle
appellants to recover from the royalty owners a portion of the tax
increase in proportion to the royalty owners' interests in the
proceeds of the oil or gas sold by appellants, regardless of the
legal incidence of the tax increase.
Even if these contractual provisions were to be interpreted to
entitle appellants to reimbursement only for that portion of the
severance tax which state law itself imposes on the royalty owners,
appellants would still have no objection under the Contract Clause.
In that event, the increase in the severance tax would be absorbed
by appellants not because the State has nullified any contractual
obligation, but simply because the provisions as so interpreted
would impose no obligation on the royalty owners to reimburse
appellants for the tax increase.
Since appellants have not shown that the royalty owner exemption
affects anything other than the legal incidence of the tax
increase, their contention that the exemption is preempted by the
Gas Act and the NGPA is plainly without merit.
[
Footnote 10]
For example, appellant Union Oil Co. was a party to a contract
concerning oil under which the purchaser was required to reimburse
it for "100 percent of the amount by which any severance taxes paid
by seller are in excess of the rates of such taxes levied as of
April 1, 1976."
Ibid.
[
Footnote 11]
This point was aptly stated in an early decision holding that a
statute prohibiting the issuance of notes by unincorporated banking
associations did not violate the Contract Clause by preventing the
performance of existing contracts entered into by members of such
associations:
"[I]t is said that the members had formed a contract between
themselves which would be dissolved by the stoppage of their
business. And what then? Is that such a violation of contracts as
is prohibited by the constitution of the United State? Consider to
what such a construction would lead. Let us suppose that, in one of
the states, there is no law against gaming, cock-fighting,
horse-racing, or public masquerades, and that companies should be
formed for the purpose of carrying on these practices. And suppose
that the legislature of that state, being [seriously] convinced of
the pernicious effect of these institutions, should venture to
interdict them: will it be seriously contended, that the
constitution of the United States has been violated?"
Myers v. Irwin, 2 Serg. & Rawle 368, 372 (Pa.
1816).
[
Footnote 12]
See generally Home Bldg. & Loan Assn. v. Blaisdell,
290 U. S. 398,
290 U. S.
436-437 (1934);
id. at
290 U. S.
475-477 (Sutherland, J., dissenting);
Dillingham v.
McLaughlin, 264 U. S. 370,
264 U. S. 374
(1924) ("The operation of reasonable laws for the protection of the
public cannot be headed off by making contracts reaching into the
future") (Holmes, J.);
Manigault v. Springs, 199 U.
S. 473,
199 U. S. 480
(1905) ("parties by entering into contracts may not estop the
legislature from enacting laws intended for the public good");
Ogden v.
Saunders, 12 Wheat. 213,
25 U. S. 291
(1827) (when "laws are passed rendering that unlawful, even
incidentally, which was lawful at the time of the contract[,] it is
the government that puts an end to the contract, and yet no one
ever imagined that it thereby violates the obligation of a
contract"); Hale, The Supreme Court and the Contract Clause: II, 57
Harv.L.Rev. 621, 671-674 (1944).
[
Footnote 13]
The statutes under review in
United States Trust Co.
also implicated the special concerns associated with a State's
impairment of its own contractual obligations.
See 431
U.S. at
431 U. S. 25-28;
Energy Reserves Group, Inc. v. Kansas Power & Light
Co., 459 U. S. 400,
459 U. S.
412-413, and n. 14 (1983).
[
Footnote 14]
Our conclusion is buttressed by the fact that appellants operate
in industries that have been subject to heavy regulation.
See
Energy Reserves Group, Inc. v. Kansas Power & Light Co.,
supra, at
459 U. S. 416
("Price regulation existed and was foreseeable as the type of law
that would alter contract obligations");
Veix v. Sixth Ward
Bldg. & Loan Assn., 310 U. S. 32,
310 U. S. 38
(1940) ("When he purchased into an enterprise already regulated in
the particular to which he now objects, he purchased subject to
further legislation upon the same topic.").
With respect to gas,
see supra at
462 U. S.
184-186;
Energy Reserves Group, Inc. v. Kansas Power
& Light Co., supra, at
459 U. S.
413-416. During the time the pass-through prohibition
was in effect, the Federal Government controlled the prices of
crude oil under the EPAA, 15 U.S.C. § 751
et seq. (1976
ed. and Supp. V). Regulations promulgated under the EPAA
established maximum prices for most categories of crude oil. 10 CFR
Part 212, Subpart D -- Producers of Crude Petroleum, § 212.71
et seq. (1975).
Appellants' reliance on
Barwise v. Sheppard,
299 U. S. 33
(1936), is misplaced. In
Barwise, the owners of royalty
interests challenged a Texas statute that imposed a new tax on oil
production, which was to be borne "ratably by all interested
parties, including royalty interests." The statute authorized the
producers to pay the tax and withhold from any royalty owners their
proportionate share of the tax. The royalty owners in
Barwise were parties to contracts that entitled them to
specified shares of the oil produced by their lessee and required
the lessee to deliver the oil "free of cost."
Id. at
299 U. S. 35.
They contended that the statute, by authorizing the lessee to
deduct their portion of the tax from any payments due them,
impermissibly impaired the lessee's obligation to deliver the oil
"free of cost." This Court concluded that the statute did not run
afoul of the Contract Clause:
"[T]he lease was made in subordination to the power of the State
to tax the production of oil and to apportion the tax between the
lessors and the lessee. . . . Plainly no stipulation in the lease
can be of any avail as against the power of the State to impose the
tax, prescribe who shall be under a duty to the State to pay it,
and fix the time and mode of payment. And this is true even though
it be assumed to be admissible for the lessors and lessee to
stipulate as to who, as between themselves, shall ultimately bear
the tax."
Id. at
299 U. S.
40.
We reject appellants' assertion that the last sentence of this
quotation was meant to indicate that the statute would have
violated the Contract Clause if, instead of simply specifying the
legal incidence of the tax, it had nullified an agreement as to who
would ultimately bear the burden of the tax. We think the thrust of
the sentence was simply that, even though the law left the lessors
and the lessee free to allocate the ultimate burden of the tax as
they saw fit, no agreement between them could limit the State's
power to decide who must pay the tax and to specify the time and
manner of payment.
Barwise is relevant to these cases only insofar as it
confirms Alabama's power to decide that no part of the legal
incidence of the increase in the severance tax would fall on owners
of royalty interests.
See Part III-A,
supra.