                     IN THE SUPREME COURT OF MISSISSIPPI

                               NO. 2003-CA-00325-SCT

MISSISSIPPI STATE TAX COMMISSION

v.

MURPHY OIL USA, INC.

                           ON MOTION FOR REHEARING

DATE OF JUDGMENT:                         01/21/2003
TRIAL JUDGE:                              HON. J. LARRY BUFFINGTON
COURT FROM WHICH APPEALED:                SIMPSON COUNTY CHANCERY COURT
ATTORNEYS FOR APPELLANT:                  GARY WOOD STRINGER
                                          SAMUEL T. POLK
ATTORNEYS FOR APPELLEE:                   CHARLES CLARK
                                          JAMIE G. HOUSTON, III
                                          W. TERRELL STUBBS
NATURE OF THE CASE:                       CIVIL - STATE BOARDS AND AGENCIES
DISPOSITION:                              REVERSED AND RENDERED - 06/15/2006
MOTION FOR REHEARING FILED:               11/10/2005
MANDATE ISSUED:

       EN BANC.

       SMITH, CHIEF JUSTICE, FOR THE COURT:

¶1.    The motion for rehearing is denied. The prior opinion is withdrawn, and this opinion

is substituted therefor.

¶2.    In 1999, the Mississippi State Tax Commission (“Commission”) examined the

Mississippi Combined Income and Franchise tax returns of Murphy Oil U.S.A., Inc.

(“Murphy”) for the following tax years: 1995, 1996, and 1997.         As a result of this

examination, on September 30, 1999, the Commission assessed additional franchise taxes

and interest against Murphy in the amount of $87,952.00. After two internal agency appeals,
Murphy sought judicial review in the Chancery Court of Simpson County pursuant to Miss.

Code Ann. § 27-13-45 (Rev. 2003). On January 17, 2003, the chancellor ordered that the

additional franchise tax assessment made by the Commission “shall not be allowed.” The

Commission filed a timely appeal to this Court.

¶3.    In addition to the destination theory, this Court will look at the entirety of events in

each unique instance for the purpose of determining franchise taxes. We find that the

franchise tax imposed does not violate the commerce or due process clauses of the United

States Constitution. Thus, we reverse and render.

                        FACTS AND PROCEDURAL HISTORY

¶4.    Murphy is a Delaware corporation with its principal place of business in El Dorado,

Arkansas, and is authorized to do business in the State of Mississippi. Murphy is in the

business of refining and marketing petroleum products for wholesale and retail purposes.

As part of its operations, Murphy owned and operated a refinery in Meraux, Louisiana;

refined products produced at this refinery were shipped through tank trunks, by barge or

through a pipeline known as the Collins Pipeline located in Collins, Mississippi. In addition

to refining and selling products at wholesale, Murphy also owned and operated service

stations in Mississippi to sell products at retail.

¶5.    The Collins Pipeline starts at Meraux, Louisiana, and terminates at the T&M terminal

located in Collins, Mississippi. From 1995 to the present, a corporation by the name of

Collins Pipeline Company has owned Collins Pipeline. During the tax years in issue, Collins



                                                2
Pipeline Company was owned by Murphy and Chalmette Refining, Inc. The facility at which

this pipeline terminates, T&M Terminal, is owned by T&M Terminal Company. During the

years in question T&M Terminal Company was also owned by Murphy and Chalmette.

¶6.    The T&M terminal at which the Collins Pipeline terminates consists of ten tanks,

referred to as “breakout tankage” where products shipped on the pipeline can be stored.

Additionally, at the T&M terminal, there are pipes, valves and other equipment that connect

that facility to both Colonial Pipeline and Plantation Pipeline to allow for the injection of

product from the T&M terminal into either of these pipelines. Colonial Pipeline begins at

Pasadena, Texas, and terminates in New Jersey, with numerous terminals and facilities along

its pipeline system in Texas, Louisiana, Mississippi, Alabama, Tennessee, Georgia, South

Carolina, North Carolina, Virginia, Maryland, Delaware, and New Jersey. Plantation

Pipeline begins in Baton Rouge, Louisiana, and terminates in Washington, D.C., with

numerous terminals and facilities along its pipelines in Louisiana, Mississippi, Alabama,

Tennessee, Georgia, South Carolina, North Carolina, Virginia, and the District of Columbia.

¶7.    The sales by Murphy, which the auditor reclassified as Mississippi sales resulting in

the assessment of additional franchise taxes, were sales made by Murphy where title and

control of the property sold was transferred to the purchaser at Collins, Mississippi. The

amount of these sales for each of the tax years in issue is as follows: (1) 1995           –

$156,826,131.00; (2) 1996 – $199,285,823.00; and (3) 1997 – $155,652,973.00. The

negotiations of these sales began with traders in El Dorado, Arkansas, who determined what



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product being manufactured in Meraux was available for sale. Based on a review of the

market conditions, a trader would determine which pipeline would give Murphy the greatest

return on its sale. After this was determined, the trader would attempt to market the product

to potential buyers who were willing to purchase the product using the pipeline selected.

¶8.    The product to be sold belonged to Murphy while it was being shipped from Meraux

to Collins on the Collins Pipeline and while it was in the breakout tankage at the T&M

terminal. The product would remain in the breakout tankage at T&M terminal for a few

hours up to several days. The length of time the product was stored in Collins, Mississippi

depended on quantity and product cycle requirements of the pipelines. Many times, Murphy

would already have a buyer for the product before it left the refinery in Meraux, Louisiana.

At other times, Murphy would not have a buyer for the product until after the product had

left the refinery, and at times, even after it had been placed in the breakout tankage at the

T&M terminal. Under the terms of the sales at issue, title, possession and control of the

product passed from Murphy to the purchaser when the product was injected from the T&M

terminal into either the Colonial Pipeline or the Plantation Pipeline in Collins, Mississippi.

Title actually passed as the product was being metered and injected into the pipelines. This

metering of the injection of the product into Colonial or Plantation Pipeline was used by

Murphy to bill its purchaser for payment. Upon receipt of the report of the metering that took

place in Collins, Mississippi, Murphy would bill its customers who would then pay Murphy

by wire transfer.



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¶9.    After injection into Colonial or Plantation Pipelines, Murphy had no knowledge of the

whereabouts of the product or where the product was ultimately offloaded. Murphy contends

these sales are not Mississippi sales for determining its Mississippi sales factor.

Furthermore, Murphy had not included these sales as sales in any other state in determining

the sales factors.

¶10.   The Commission examined the Mississippi Combined Income and Franchise Tax

Returns of Murphy for tax years 1995, 1996 and 1997. As a result of this examination, an

assessment of additional Mississippi franchise tax and interest was issued against Murphy

on September 30, 1999. Murphy, pursuant to Miss. Code Ann. § 27-13-43, appealed this

assessment to the Board of Review of the Commission for a hearing. After proper notice and

a hearing before the Board of Review on March 9, 2000, the Board entered its order

affirming the assessment in the original amount of $87,952.00. Following this decision by

the Board of Review, Murphy appealed to the full Mississippi State Tax Commission for a

hearing on the decision of the Board of Review to affirm the tax in question. A hearing

before the full Commission was held on June 21, 2000. On December 6, 2000, the full

Commission affirmed the assessment. Murphy was ordered to pay to the Commission the

entire assessment of $87,952.00 plus interest.

¶11.   Following the decision of the full Commission, Murphy timely filed a petition for

judicial review in the Chancery Court of Simpson County. After discovery and trial, the

chancellor signed a final judgment wherein he ordered “that the additional assessments made



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by the Mississippi State Tax Commission shall not be allowed and that the sales for the years

in question shall be those that were, in fact, downloaded in the state of Mississippi for final

destination in the state of Mississippi.” The Commission timely filed its appeal with this

Court.

                                           ISSUES

         I.     Whether the Destination Sales Theory Should Be Applied for
                Franchise Tax Purposes.

         II.    Whether the Franchise Tax Violates the Commerce or Due Process
                Clauses of the United States Constitution.

                                         ANALYSIS

                                              I.

¶12.     The chancery court reviewed this matter in a full evidentiary hearing, complete with

a full record. In Tenneco, Inc. v. Barr, 224 So. 2d 208, 211 (Miss. 1969), this Court held

that “[i]t is manifest, from the express provisions of [Mississippi Code Annotated 1942] §

9220-31, that the Legislature has made it the public policy of this state to provide a full

evidentiary judicial hearing in cases of the character now under consideration.” Section

9220-31 is the predecessor to current Miss. Code Ann. §§ 27-7-73 (income tax–judicial

review) and 27-13-45 (franchise tax–judicial review). In Tenneco, as well as in the present

matter, “the chancellor heard evidence and determined the cause as in ‘other cases’ as




                                              6
provided by the statute.” 224 So. 2d at 210. Thus, in accordance with Tenneco, the

chancellor in this case reviewed evidence and determined the case under the authority of §§

27-7-73 and 27-13-45. This Court must now ascertain whether the chancery court arrived

at the proper determination.

¶13.   Murphy argues the chancellor’s ruling should be affirmed because the pre-1996

version of Miss. Code Ann. Section 27-7-23(c)(3)(A)(I) provides for the application of the

Destination Sales Theory to determine those “sales” assignable to Mississippi for purposes

of any formula in which a sales factor is included regardless of ownership, title, control or

risk of loss. The pre-1996 version of Section 27-7-23(c)(3)(A), in its entirety provides:

       (3) Except as provided in Sections 27-2-24, 27-7-24.1, 27-2-24.3, 27-2-24.5
       and 27-2-24.7, Mississippi Code of 1972, for the purpose of any formula
       which includes a sales factor, sales shall be assigned to Mississippi based on
       the following conditions:
               (A) Sales of tangible personal property, including interest,
               carrying charges, deferred charges and delivery charges incident
               to such sales, are in this state if:
                      (I) The property is delivered or shipped to a purchaser, or
                      to the designee of the purchaser, other than the United
                      States Government, within this state regardless of f.o.b.
                      point or other conditions of the sale; or
                      (ii) The property is shipped from an office, store,
                      warehouse, factory, or other place of storage in this state,
                      and (a) the purchaser is the United States Government, or
                      (b) the taxpayer is not taxable in the state of the
                      purchaser.

¶14.   Murphy contends § 27-7-23(c)(3)(A)(I) (Rev. 1996) provides for application of the

destination sales theory to determine whether sales are assignable to Mississippi for franchise

tax purposes; however, the language of Section 27-2-23(c)(3)(A)(ii) clearly and plainly

                                              7
provides for an additional method, other than the destination of the product, for determining

a formula’s sales factor.

¶15.   In Mississippi State Tax Comm’n v. Chevron U.S.A., Inc., 650 So. 2d 1353 (Miss.

1995), this Court stated:

              Mississippi follows a destination sales theory which means that the sale
       is allocated to the state where the product is delivered to the customer.
       However, this theory does not identify what is actually being done in
       Mississippi, rather, it is a method by which interstate sales are apportioned to
       the various states where the corporate taxpayer does business.

               The destination sales theory was specifically rejected by this Court as
       a way to account for Mississippi receipts for franchise tax purposes. See
       Southern Package Corp. v. State Tax Comm’n, 195 Miss. 864, 15 So. 2d 436
       (1944). . . . This Court recognized that franchise tax is imposed on a
       corporation based on what is actually being done in Mississippi, regardless of
       the ultimate destination of the product. Id. 15 So. 2d at 437-38.

650 So. 2d at 1357. For the most part Chevron correctly states the applicable law, however

a complete rejection of the destination sales theory is a somewhat broad interpretation of this

Court’s holding in Southern Package. Southern Package expressly states: “the franchise

tax is for the corporate privilege or franchise of doing in this state what was done and is

being done here regardless of the ultimate destination of the products or by what legalistic

means they may get there.” Southern Package, 195 Miss. at 874, 15 So. 2d at 438. Thus,

Southern Package does not specifically reject the destination theory for franchise tax

purposes, as Chevron states.      Therefore, to quell future concerns, we recognize the

incongruity between Chevron and Southern Package. Although, Chevron and Southern




                                              8
Package are factually distinguishable from the case at bar, the destination theory theme in

each case vastly outweighs any factual dissimilarities among the cases.

¶16.   Notwithstanding the over-broad nature of Chevron, today we acknowledge that

because a franchise tax is based on what is being done in Mississippi, the destination theory

will never be used as the sole method of determining franchise taxes, but a product’s

destination may be used as a factor for franchise tax assessment. It is apparent to this Court

that the destination of a product is only one facet of measuring what is being done in the state

(the true measure of determining franchise taxes). Hence, we now look at the entirety of

events in each unique instance to determine whether a Mississippi sale is present for

franchise tax purposes.

¶17.   Additionally, the problem in Southern Package was the package corporation was

attempting to manipulate its operations to reduce its amount of franchise tax liability. Here,

Murphy is apparently attempting the same but on a smaller, less obvious scale. In this case,

Murphy shipped their unsold product to the storage tanks at Collins, Mississippi, where the

product was held for a number of days and eventually sold from Murphy’s office in Arkansas

to a buyer in an entirely different state.       Moreover, Murphy did not consider these

transactions as sales in any state, despite recording them as Mississippi sales in its accounting

records. Thus, as the Commission insists, Murphy has effectively created “nowhere sales.”

¶18.   A “nowhere sale” is obviously what the language of § 27-2-23(c)(3)(A)(ii) was

designed to preclude. See supra. Pursuant to § 27-2-23(c)(3)(A)(ii), in the case at bar, the



                                               9
product was shipped from a “place of storage in this state” (the breakout tankage), and

Murphy was not taxable in the state of the purchaser. Therefore, in accordance with the

statute, the product should be thrown back to Mississippi and treated as sales in this state for

the purpose of calculating an applicable formula for calculating franchise taxes.

¶19.   Further when the pertinent facts of this case are considered in the overall scheme of

the activity being conducted in this state, we find franchise taxes should be assessed. A

bird’s eye view of pertinent facts leads to such a conclusion; these facts include:

1.     Murphy accounts for the sales at issue by using a Mississippi state code;

2.     The product at issue was unsold when it was placed into the breakout tank storage;

3.     Murphy did not apportion the sales to any state, effectively creating a nowhere sale;

4.     The product was stored and metered in Collins, Mississippi;

5.     Transfer of title, ownership and control occurred in Mississippi;

6.     Murphy’s product received public protection, among other advantages, while being
       stored in Mississippi.

¶20.   This Court does however point out the activity in the case at bar is just inside the

franchise tax’s threshold; absent one of the elements set forth in the facts of this case the

results could be different. Nevertheless, after a collective review of the foregoing facts we

find the chancellor’s judgment was erroneous.




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                                              II.

¶21.   Murphy also contends that Mississippi’s claiming these sales on the basis that the

sales are not being claimed by another state violates the commerce clause. On the other

hand, the Commission argues that these sales should be treated as Mississippi sales unless

Murphy can show the sales are being reported or assigned to another state. Murphy contends

that Mississippi cannot assign these sales unless the taxing statute so provides and such

assignment does not offend the due process and commerce clauses. First, Mississippi can

assign these sales because the franchise tax statute does allow Mississippi to tax these

activities. Furthermore, the taxing statute also provides that Mississippi can assign these

sales if “the taxpayer is not taxable in the state of the purchaser.” Miss. Code Ann. § 27-7-23

(c)(3)(ii)(b) (Rev. 1991). Murphy had no knowledge of the whereabouts of the product or

its ultimate destination and was not taxed by the states of the purchasers. Therefore,

Mississippi can tax these sales unless such a tax would violate the commerce clause.

¶22.   Murphy concludes that treating the sales as Mississippi sales under the facts of this

case would violate the commerce clause and due process clause under the four-part Complete

Auto test as provided in Marx v. Truck Renting & Leasing Ass’n, Inc., 520 So. 2d 1333,

1342-43 (Miss. 1987) (citing Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S. Ct.

1076, 51 L. Ed. 2d (1977)). This test requires that “(1) [t]he tax must be applied to an

activity with a substantial nexus with the taxing state; (2) the tax must be fairly apportioned;

(3) the tax must not discriminate against interstate commerce; (4) the tax must be fairly



                                              11
related to services provided by the taxing state.” Marx, 520 So. 2d at 1342-43. However,

Murphy only argues that the first and fourth prongs of the test are violated.

       1. Nexus with the Taxing State

¶23.   Murphy contends the tax does not have a substantial nexus with Mississippi. As this

Court has stated, the mere fact that income is generated outside this state will not prevent

taxation of that income, for purposes of a commerce clause challenge, so long as there is a

nexus between the tax and the transaction within the taxing state. Id. at 1343.

¶24.   In order to satisfy the minimal connection prong of the four-prong test, the corporation

being taxed must avail itself of “the substantial privilege of carrying on business within the

state.” Miss. State Tax Comm'n v. Bates, 567 So. 2d 190, 193 (Miss. 1990) (citing Marx,

520 So. 2d at 1342). The taxing power exerted by the state must bear a fiscal relation to

protections, opportunities, and benefits given by the state so that the state may properly ask

for compensation for what it has given the taxpayer. Bates, 567 So. 2d at 193. In

determining whether the first prong is met, the inquiry must focus on the underlying activities

conducted within the state, and in order for the taxpayer to avoid such taxation it must show

the income was derived from activities unrelated to activities conducted within the taxing

state. Id.

¶25.   Again, franchise taxation is based on what is actually being done or carried on in

Mississippi. In addition to being merely stored in Mississippi for periods not exceeding five

days, the product was metered when it was stored in Collins, Mississippi, which was the basis



                                              12
for Murphy to bill its purchasers for the sale. In addition to being metered and billed in

Mississippi, the transfer of title, ownership and control of the product also occurred in

Collins, Mississippi. Once metered and billed in Mississippi, the purchasers took absolute

control of the product, and Murphy had no knowledge of the whereabouts of the product or

its ultimate destination. A franchise tax is measured by what is actually being done or carried

on in Mississippi, which is exactly what occurred when Murphy stored, metered, billed and

transferred title and ownership of the petroleum products. Murphy did not merely store the

fuel in Mississippi.   Therefore, there is a substantial nexus between the tax and the

transaction within Mississippi.

       2. Tax Fairly Apportioned

¶26.   The party opposing the tax must show by clear and cogent evidence that the tax is out

of proportion to the activity which takes place in Mississippi. Tenn. Gas Pipeline Co. v.

Marx, 594 So. 2d 615, 618 (Miss. 1992); Marx, 520 So. 2d at 1344. Murphy does not

specifically address the second prong of the test; nevertheless, we will address this issue.

Murphy merely asserts that inclusion of the sales at issue into the franchise tax apportionment

formula results in an inconsistent tax assessment by the Commission. Murphy suggests the

Commission’s determination of the sales at issue as “Mississippi Receipts” leads to a less

than equitable tax level after calculation of the franchise tax apportionment formula. Murphy

implies that the Commission’s designation of these sales as “Mississippi Receipts”, and the




                                              13
subsequent inclusion of these sales in the numerator of the franchise tax formula, results in

an improper franchise tax.

¶27.   As previously determined under the first prong, a franchise tax is measured by what

is actually being done or carried on in Mississippi; here, Murphy stored, metered, billed and

transferred title and ownership of the petroleum products. Therefore, it is proper to include

these sales in the franchise tax apportionment formula because the franchise tax statute does

allow Mississippi to tax these activities. Further, Murphy does not present any clear and

cogent evidence to the contrary. Thus, the Commission fairly apportioned the franchise tax

under the apportionment formula.

       3. No Discrimination Against Interstate Commerce

¶28.   Murphy does not address the third prong of the test, nevertheless we must consider

this element. In Marx, this Court decreed that “[i]f the tax causes so called ‘double taxation’

so that an interstate taxpayer is subjected to two taxes on the same income that an intrastate

taxpayer would pay one tax on, then the tax is said to be discriminatory.” Marx, 520 So.2d

at 1345 (citing Armco Inc. v. Hardesty, 467 U.S. 638, 104 S. Ct. 2620, 81 L. Ed. 2d 540

(1984)). Further, “[a] state tax that favors an in-state business over an out-of-state business

for the sole reason of location is prohibited by the commerce clause.” Tenn. Gas Pipeline,

594 So. 2d at 618. Murphy is not subject to double taxation as a result of the franchise tax

in this case, nor does the franchise tax imposed discriminate against interstate commerce in




                                              14
favor of intrastate commerce. Therefore, the franchise tax is not discriminatory, and this

prong of the test is satisfied.

       4. Tax is Fairly Related to Services of the State

¶29.   The final prong of the test determines whether the activity which generated the income

is related to the activities conducted in Mississippi. Additionally, “the fourth prong of the

Complete Auto test focuses on the wide range of benefits provided to the taxpayer, not just

the precise activity connected to the interstate activity at issue.” Goldberg v. Sweet, 488 U.S.

252, 267, 109 S. Ct. 582, 102 L. Ed. 2d 607 (1989). In the present case, all of the activities

mentioned above occurred in Mississippi and relate to the particular sales in question.

Moreover, Murphy receives police and fire protection, use of transit in Mississippi and other

advantages of civilized society. See D.H. Holmes Co., Ltd. v. McNamara, 486 U.S. 24, 32,

108 S. Ct. 1619, 100 L. Ed. 2d 21 (1988). “Furthermore, [Murphy] is currently availing itself

of the use of our court system.” Tenn. Gas Pipeline, 594 So. 2d at 619. “It follows that

[Murphy] should pay its share of the tax burden in Mississippi although it is involved in

interstate commerce.” Id. (citing American Trucking Ass’ns, Inc. v. Scheiner, 483 U.S.

266, 296, 107 S. Ct. 2829, 97 L. Ed. 2d 226 (1987)). Consequently, there is a fair

relationship between the services provided by Mississippi in allowing the sales to occur and

the value of those sales. Hence the fourth and final prong of the test is satisfied.

¶30.   The franchise tax imposed by the Commission has a sufficient nexus with Mississippi;

is fairly apportioned under the apportionment formula; does not discriminate against



                                              15
interstate commerce in favor of intrastate commerce; and is fairly related to services provided

by Mississippi. Therefore, contrary to Murphy’s contention, the franchise tax imposed by

the Commission does not violate the commerce or due process clauses of the United States

Constitution.

                                      CONCLUSION

¶31.   For these reasons, we reverse the judgment of the chancery court, and we render

judgment reinstating and affirming the order of the Mississippi State Tax Commission.

¶32.   REVERSED AND RENDERED.

     WALLER AND COBB, P.JJ., EASLEY, CARLSON AND DICKINSON, JJ.,
CONCUR. GRAVES, J., DISSENTS WITHOUT SEPARATE WRITTEN OPINION.
DIAZ AND RANDOLPH, JJ., NOT PARTICIPATING.




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