           THE    AYTCBRNEX           GENERAL
                      OF    TEXAS                          “,,,,
                                                      _.



                      Oct.ober 22,   1968

lionorableRobert S. Calvert,         Opinion No. My 298
Comptrollerof Public Account~s
Austin, Tex'as                       Re : Whether rental pay-
                                          ments made for pipe-
                                          lines located in an
                                          opep easement are
                                          subject to the Texas
Dear Mr.   Calvert:                       Sales Tax.
       You have requested our opinion concerning the tax-
ability under the~Texas~Limit.edSales, Excise and Use Tax
Act of a lease transactionin which Lessor let, leased,
and demised a pipeline to Lessee. The pipeline in question
is one of several such pipes running through one of Leesorts
two shafts. These two shafts are connected by a tunnel
which runs under and across the Houston S’hlp Channel. Ina
supplementallet.teryouhave further request~edthat we
render ouropinion in.such .a,manner.as to c,overother exist-
ing factual situationswith which you are confront.ed, and
they~will.bediscussed during the cours&oof this opinion t,o
providelegal guidelineswhich,will enable your,office to
dispose of such matters,
       The pertinent part of this act, Texas Tsxation-
General Article 20.02 (Supplement1967) (here,inaftercited
by article number) states.:
                  "There shall be Imposed a limited ~'
             sales tax at the rate of t.woper cent
             (2%) on the receipts from the sale at
             retail of all tan#lble personal property
                                                 .1
             within the State.           ,'

       The word "sale" as used in this statute encompasses
the words lease or rental:




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 I,:   “’




Honorable-RobertS. Calvert, Page 2      (M- 298).         '.

                        'Sale'means abd lnciudes


             change, lease or rental, conditional
             or otherwise, in any manner or by any
             meanswhatsoever, of tangible per-
            :sonal property ~fora consideration."'.
             (hphasis added.) Article 20.01(K).
       And lease price or rental price have been defined
in Article 20.01(H) as follows:
                  "(2)~ 'Rental Price' or 'Lease
             Price' means the total smount for
             which tangible personal property is
             rented or leased, valued in money, ',
             whether paid in money or otherwise,'
             without any deduction on account of
             any ~ofthe following:


                  rented
                    :' or leased.
                       I?(>) The cotitof mai .
                     .:;I,                            .
                  terial used, labor orser-         ',,
                  vice ~002, 'Interestchtiged';
                  losses, or any other ex-
                  penses.
                       "(c) The cost of trans-
                  portation of tangible per-
                  sonal property at any time.
                  "(2) The total amount~ifor,which
             tangkble personal property is rented.
             norleased includes 'allof the follow: '_'
             ing:
                      "(a) Any'services \wh;l‘ch
                 ,area part of the lease or
                 4yta.l.




                         -143S-
Honorable Robert S. Calvert, Page 3   (M-298)

                      "(b) Any amount for
                 which credit .lsgiven to the
                 lessee or rentee by the les-
                 sor or rentor."
      ,In the'lease you have submitted to us, the lessor
in Article IV'stated, "It is understood that the Lessor
does not represent or warrant that it,has good title to
the ri t or .easement.toconstruct and or maintain said
tunnelP into tihichthe pipeline that is leased is contain-
ed. It is unimportant,for sales tax purposes, whether
the lessor avows or disavows true title to the lessee,
when in fact lessor's title has not been challenged 'and
lessee continues to pay an agreed rental. As between this
lessor and lessee, it would appear that title, or at least
the power, if not the rightto lease, is understood to lay
with the lessor, since possession of property is prima
facie evidence of title to it. ContinentalCredit Corpor-
ation v. Norman, 303 S.W.2d 449 TTex. Civ~.App. 1957,
error re ,, n.r.e.)

       It is quite apparent from a perusal of these rele-.
vant statutes that where there is a transfer of possession
of tangible personalty for value, a fortiori a rental or
lease, a taxable incident has occurred. This office, in
Attorney General Opinion No. ~-165  (‘1967),   announced this
same position, although reaching a non-taxab3.e"r~s~~~t~'d'ile
to the novel fact situation presented. There the '~::i.,
telephone company and the utility company had jointly
agreed to a'inutualsharing of their respectivewooden
poles. Such an arrangementprevented each,companyfrom
having to erect duplicate poles in t,heasme location
which resulted in a considerablemonetary savings to each.
The parties jointly called this arrangementa 'pole-rental',
In the course of the opinion , we held that "there must be
more than the denominationby the parties that such trans-
action be a,,rental. There must be a transfer of possess-
ion.          (hphasis added ) N t           f    f
ionwas shown in that case on*whicz tEa%pzieoa rz:","!?--
ability, and the telephone,polesthere ihvol'ved     were con-',
sidered to be a part of the repty and not tangible,per-
sonalty.
       In the present case, however, the necessary transfer ,,
of possession'.didoccur. Here, in the lease entered into



                         -1439-
Honorable Robert C. Calvert, Page 4    (MY298)

'November 19, 1964, between the lessor Pipe Line Company
 and the lessee ~&J.pe
                     Line Company, the transfer of,possess-
 Ion was clearly illustratedin the introductory "where-
 as provision" of that 'lease:
             "NOW, THEFiEFORE,for and in consider-
       ation of the sum of One Dollar ($1.00)
       and other good and valuable consideration,
       paid said lessor by said lessee, the re-,
       ceipt of which is hereby acknowledged,
       said lessor does hereby let, lease, and'.
       demise unto said lessee, for the term of'
       five (5) years'from the 13th day of April,
       1965,  one (1) eight inch (8") welded pipe-
       line No. 4 into and through said shafts
       and tunnel. . ,. ."
It is also ~ascertainable
                        In Article IX of this lease:
            "It is expressly understood and agreed
       bet,weenthe partiesheret~othat any failure
       or default on the part~'ofthe lessee to
       strictly keep and perform each and every
       covenant, condition, and limitationherein
       contained and set forth shall forfelt.all
       rights, privileges and options of said
       lessee hereunder. and that uoon a dkclar-
                                                 -it,




       Since the necessary transfer of possession took
place, the only relevant remaining questlon.iswhether
the one eight i,nch
                . welded pipeline in issue is tangible
personalty or i&c fixture adjunct to the realty. .This.
question presents two basic issues: first, whether an
easementis realty; and second, whether a pipeline is
personalty or a.fixture and hence part of the realty. .



                       -1440-
Honorable Robert S. Calvert, Page 5   w   298)

Adverting to the first issue, it has long'been held in
Texas that an easement is an interest in land and there-
fore is realty.' Burgess vq.City and County of Dallas
Levee Improvement District, 153 S W 2d 402 405 (Tex. Civ.
   . 41 error ref'd w.o.m.). Thherefore'as    long as
t:i owner'and lessor of an easement, be it a public dr
private concern, leases a part of its interest in the
land to a lessee for the purpose of Installing a pipe-
line, it is of little consequencethat the lessor is
not also the fee owner of the real estate, For the',les-
sor-easement-holderis no less an owner of realt by not
also possessing fee title. See West v. Giesen 2$2 S.W.
312 (Tex. Civ. App. 1922, error ref'd).
  ..:
       Therefore, those chattels which are affixed to
the easement which meet the test of fixtures, later
discussed, become a part of the realty for all purposes.
However, the,??elationshipof the parties Involved,e,g.,
landlord-tenantor mortgagor-mortgagee,must be care-
fully scrutinizedbefore a final determinationof the
classificationof the chattel may be made. See 25 Tex.
Jur. 2d Fixtures, Sets. 17-p.
       Turning to the second issue propounded in this i
question, thisoffice is unable to determine, as.a
matter of lawi the proper classific,ationof pipelines
without a full development and presentationof the pert11
nent facts in this case. No decision by the Texas courts,
has been found which would lend credence to a determin-
ation that pipelines are either fixtures or personalty.
Also jurisdictionsoutside our own lend little pelp, be-
ing divided on the resolution of this question.


1.               Manv jurisdictionshave held that
       pipelines are fixtures, See, e.g., Californian,
       Domestic Water Co. v. Los Angeles Count& 10




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Honorable Robert S. Calvert, Page 6    (M-298)

      Little help is gained from studying the dizergent
treatment given to property other than pipelines.
       It should be noted, however, that a former Attorney
General, when faced with a similar issue, decided, based
upon the facts presented, that the pipeline there in
question was not a fixture ahd hence was personalty.
Attorney General No. O-5268 (1943). Unfortunately,:this
decision has since been frequentlymisinterpretedas
announcing that the on1 test for determining the~status
of'propertywas whetFG'
                     er a right of removal was preserved
to the lessee.


       2 R-1. 15, 55 Am. DC&   621 (1851).
            On the,other hand, some jurisdictions
      have taken the contrary position assi&&ng
      pipelines the status of personalty.
             Melrose v. Cooley, 50 Cal.App. 768'
      1"i
        z '6. 105 (1920); Shaw v. Welch, 136 &.
      736, 18 P. ,2d189, 190 (1933) Yellowstone
         e Line Co. v. State Board bf Equallzation,
           Mt bO3 358 P 2d 55 btc (19bO);cf      ::
      Crabb ;. KefrstonePipe &'Supply Co., n? S.W.2d
        9 (T     Ci   A    1944 error ref'd) Also
      in Mar~~'Co.v&ncpPv.State, 168 S.W.2d'510
      (Tex. Ci    A    1943 error ref'd) the court
      inter re:ed !%. Rev: Cfv. Stat, Ann. art 7146
      (19617 as not necessarilymaking appurtenances-,:
      under the soil fixtures.
           For a full treatment of the Texas
      cases see 25 Tex.Jr.2dFixtures, Sets. ll-
      14 (1961). For other .iurlsdictions see.
         * -In.'reOLidoBeach-SewageCollection
      %t;ict~ 4 Misc. 2d 384 243 N.Y.S.2d 223
      '2T$asau      County ct. i963) (holdingsew&s;:
      are fixtures); Indianola County Club v. Fireman's
      Ins. Co., 250 IEl,    92 N W 2d 402 404 (lm)
      m)that        a buried electric cable is a
               .




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Honorable Robert'S.'~Calvert,
                            Page 7    @-29f3)

       Albeit, the right of removal was an important factor
inthat fact,situation,it cannot be regarded as the only '
test or the paramount one. Indeed, the right of removal is
a factor o be considered in determining the status of
property,3 but It must be applied in conjunctionwith the
other determinativefactors. See Van Valkenburg v. Ford,
207 S.W. 405:(Tex. Civ. App. lg18), aff'd Z!'8 S .w 0 194
(Tex. Comm'n. App. 1921, Qinlon adoptea):
       As between the two immediate parties to the contract,
in-the absence of any other evidence,the right of removal
may be determinative;,but it is now well settled that such
a determinationwill not act to the detriment of a third
party (or a taxing authority):
      beloni;q2;;e;?;lis affixyd z; ;;;es;oil
                         . . . .
      stances It is difficult to determine just
      ~whethera fixture has become a part of the
      realty, or 'whetherit retains its original
      character as personalty; as for instance,
      where it Is questionablewhether annexation
      is of a permanent oharacter or not. In such
      cases where the true status of the property
      Is doubtful, It would perhapsbe permissible
      for the,partiesby agreement to impress it
      with the character of personalty so long as
      the agreement was made in good faith, and
      not for the purpose of evading or contravening
      the statutory provision,[or applicable tax2.   . . .'


3.          In furtheranceof this test, especially
       part,two, it is st.atedat ip5Tex.Jur.2d
       Fixtures, Sec. 7 at page 339:
                  els lose their identity as personal
          '~j!Chatt
       property where they are so annexed to'the
       rgalt~ythat they cannot be det.achedwithout
       damage to the freehold, or without destroying
       the usefulness of the prdperty to which they
       are annexed. Conversely,the things affixed
       retain their character as'personaltywhere,
       they can be removed with slight tr no injury
       to the realty, or to themselves.
                        ~.,,
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       Honorable Robert S. Cal,vert,Page 8   (M-298)

              Ginnerls Mutual Underwritersv. Wiley
      .I.    & House, 19 S W 629 632 (T Cl
             ~App. 1912, Lo writ); ice Van %ke%urg
              v.,Ford, supra; Philliz;.vCi;ewsome,
              lm.      1123 1124 (T        . APP.
              1915,'no writ); 1 Thompson, Real Property
              381 (1964).
              This office, therefore,belleves that the answer to,
       whether a chattel is personalty or realty should be gleaned
       not merely from the contractualpresence of a right of re-    '~
       moval but more importantlyshould be gleaned from the
       classical tripartite approach of Hutchins v. Masterson & ,,.
       Street, Assignees & C., 46 Tex. 551 (1877):
                  "It is said, the weight of modern
             authoritiesestablish the doctrine.that .'
             the true criterion for determing whether
             a chat~telhas become an Immovable fixture,
             consists In the united applicationof the
             following tests:
                        "1st. Has there been a reals           .
                   or constructiveannexation of the       ~
                   article in question to realty?
                                                              .'
                        "2nd. Was there a fitness
                   ,oradaptationof such,articleto
                   the uses or purposes of the realty
                   with which it is connected?
                        "3rd. Whether or not it was
                   the intention of the party making
                   'theannexation that the chattel
                   should become a.permanentaccession
                   t.othe rreehold? - - ,&J this ,in-'.,I' ,,"
                   tention being inferab e from the
                   nature of the article,fi2 the
                   relation and'situat.ionof t,he :
                   parties interested,      the policy :
                   of the law in respec
                   fig the mode of annexation and
                   purpose,or use for which the annex-
                   ,ationis made."




                                -1444-
Honorable Robert S. Calvert, Page 9 .. (M- 298),

This test has been numerously approved and cited in
this State. E.g.; Carter v, Straus - Frank Company,
297 S.W.2d 195, 1977
Public Service Companyec::SmTCh,P!$ S.W.id"&y(Tei.
mv. App. 1929, error dism'd).
       In Hutchins, at page 554, the court went on to ..
say that.of the three part.s,therepresented, preeminence
has been given to the intent of the parties. In addition
to the first two parts of the Hutchin's test, the char-
acter of the property should also be determined from the
intention of the parties (part three of the test) which
may be ascertainedfrom decid~ingwhether the pipeline
has: e.g., (1) a long useful life; (2) a relatively
high initial investmentwhich can only be recouped from
prolonged usage of the pipeline; (3) an appreciable
amount of cost and labor to insure a long useful life
       a non-corrosivecoating that will last many ~
g,:,j; (4) whether the pipeline increases the proper-
ty value for ad valorem tax purposes; (5) and after
the pipeline is no longer used, whether it is left in
t~heground or,,!extracted.
       Therefore, it will be necessary in each instance
for the,Comptroller,by applying the applicable legal
guid~elinespresented, to make atfactual determination
of the true character of each plpeline:in issye;.and
where it Is found to be personalty under the test im-
posed, a proper assessment should be made where the pipe-
line is the subject of a.taxable rental or sale.


                     SUMMARY
            The determinationwhether the
       rental of a pipeline Is subject to the
       Limited Sales, EXCiSe and Use Tax and
       is thereforepersonalty, or whether     4
       the rental of a pipeline is not subject
       to this tax at?dis therefore a fixture
       ad~junctto the realty, is a factques-




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                                                       .   .,   .




  Honorable Robert S. Calvert, Page 10     (M-298)

       '* tion which must be answered in the
          flrst~intitanceby'the,~Comptrollerof
          Public Accounts by employi@ the
          leg'alguidelines herein,stat~eb,                          ,:
                                         ruly yours,


                                           &&zy                          I'
                                           &nertil of'Texas
  Prepared by Alvin,L. Zlmtn'erMn
  Assistant Attorney General   .,
   APPROVED:
'.:OPINION CCMMITTEE:
   Hawthorne Phillips, Cha1rW.n
   Kerns Taylor, Co-Chairman
   Arthur Sklbell .I       4
   Bob &?avis
   R. D. Green
   Rex White
   A. J. Carubbi, Jr.
   Executiye.Assls,tant,




                           -1446-.
