Exxon Corp. v. Eagerton
76 L. Ed. 2d 497, 462 U.S. 176, 1983 U.S. LEXIS 52 (1983)
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Rule of Law:
A state law prohibiting businesses from passing on a tax increase to purchasers does not violate the Contract Clause if it is a generally applicable rule designed to advance a broad societal interest. However, such a prohibition is preempted by federal law under the Supremacy Clause when applied to wholesale sales of natural gas in interstate commerce, a field occupied by the Natural Gas Act.
Facts:
- In 1979, the Alabama Legislature enacted Act 79-434, increasing the state's severance tax on oil and gas from 4% to 6%.
- The Act specifically exempted royalty owners from having to pay the 2% tax increase.
- The Act also contained a 'pass-through prohibition,' which forbade the oil and gas producers from passing the cost of the tax increase on to their purchasers.
- Appellants, including Exxon Corp., were oil and gas producers operating in Alabama.
- Prior to the Act, Appellants had existing sales contracts with purchasers that required the purchasers to reimburse them for any severance taxes levied on the oil or gas sold.
- Appellants also had contracts with royalty owners that provided for the allocation of severance taxes among all parties in proportion to their share of the proceeds.
Procedural Posture:
- Appellants paid the increased severance tax under protest.
- Appellants filed suit in the Circuit Court of Montgomery County, Alabama (a state trial court), seeking a declaratory judgment that the Act was unconstitutional and a tax refund.
- The Circuit Court ruled in favor of Appellants, holding that the royalty-owner exemption and the pass-through prohibition were unconstitutional.
- The Commissioner of Revenue of Alabama appealed to the Supreme Court of Alabama.
- The Supreme Court of Alabama (the state's highest court) reversed the trial court's decision, holding the Act was valid in its entirety.
- Appellants appealed to the Supreme Court of the United States, which noted probable jurisdiction.
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Issue:
Does an Alabama statute that increases a severance tax, exempts royalty owners from the increase, and prohibits producers from passing the increase on to purchasers, violate the Supremacy Clause, the Contract Clause, or the Equal Protection Clause?
Opinions:
Majority - Justice Marshall
No and Yes. The statute's pass-through prohibition is preempted by federal law as applied to interstate gas sales but is not preempted for intrastate sales, and the statute's provisions do not violate the Contract Clause or the Equal Protection Clause. The Natural Gas Act established a pervasive scheme of federal regulation over wholesale gas prices in interstate commerce, thereby preempting Alabama's attempt to legislate in this field by barring producers from recovering a specific cost. However, for intrastate sales, the Natural Gas Policy Act of 1978 explicitly permits states to set price ceilings lower than the federal one, and prohibiting the pass-through of a tax is a permissible form of state regulation analogous to setting a price ceiling. The pass-through prohibition does not violate the Contract Clause because it is a generally applicable regulatory measure designed to advance the broad societal interest of protecting consumers from excessive prices, not a law specifically targeting contractual obligations. Finally, both the pass-through prohibition and the royalty-owner exemption survive an Equal Protection challenge because they bear a rational relationship to legitimate state purposes, namely consumer protection and the encouragement of investment in oil and gas production, respectively.
Analysis:
This case provides a key illustration of modern Contract Clause jurisprudence, emphasizing that a state's general police power to regulate for a broad public purpose can justify the incidental impairment of private contracts. It distinguishes between generally applicable economic regulations and laws that specifically target and rewrite contractual obligations. Furthermore, the decision clarifies the scope of federal field preemption in the context of natural gas regulation, drawing a sharp line between federally-controlled interstate sales and state-regulated intrastate sales, an authority explicitly preserved by Congress in the Natural Gas Policy Act.
