                             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:                     SAMUEL T. POLK
                                             GARY WOOD STRINGER
ATTORNEYS FOR APPELLEE:                      JAMIE G. HOUSTON
                                             W. TERRELL STUBBS
NATURE OF THE CASE:                          CIVIL - STATE BOARDS AND AGENCIES
DISPOSITION:                                 REVERSED AND RENDERED -10/13/2005
MOTION FOR REHEARING FILED:                  06/23/2005
MANDATE ISSUED:



        EN BANC.

        SMITH, CHIEF JUSTICE, FOR THE COURT:


¶1.     The motion for rehearing is granted. The prior opinions are withdrawn, and this opinion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.     This Court has specifically rejected the Destination Sales Theory and instead looks to

the volume of business actually conducted in this state. Miss. State Tax Comm’n v. Chevron

U.S.A., Inc., 650 So. 2d 1353 (Miss. 1995). We also 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 located 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, and

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 owns Collins Pipeline.            During the tax years in issue, Collins


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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. T&M Terminal

Company, during the years in question, 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) tax year 1995 =

$156,826,131.00; (2) tax year 1996 = $199,285,823.00; and (3) tax year 1997 =

$155,652,973.00.     The negotiations of these sales began with traders in El Dorado, Arkansas,

determining what product being manufactured in Meraux is available for sale.      Based upon a

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


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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 this time the product is stored in Collins, Mississippi depends 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 when it was 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 this metering that took place in Collins, Mississippi,

Murphy would bill its customers who would then pay Murphy by wire transfer.

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

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

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




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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 on this matter.             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 in issue.           Murphy was ordered to pay to the

Commission the entire assessment of $87,952.00 plus up to date 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

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


                                                  5
        I.       Whether the Destination Sales Theory Should Be Applied for
                 Franchise Tax Purposes.

        II.      Whether the Franchise Tax Violates of 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 1942 Annotated] § 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 the applicable 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 provided

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

case reviewed evidence and determined the cause under the authority of §§ 27-7-73 and 27-13-

45. Therefore, this Court must now ascertain whether or not the chancery court arrived at the

proper determination.

¶13.    Murphy argues that the chancellor’s ruling should be affirmed because § 27-7-23 (c)(3)

(Rev. 1991) 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.




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¶14.    This Court has rejected the Destination Sales Theory as a way to account for

Mississippi receipts for franchise tax purposes.         However, Murphy indicates that § 27-7-

23(c)(3) (Rev. 1991) provides for application of the Destination Sales Theory to determine

whether sales are assignable to Mississippi for franchise tax purposes.       This conclusion is

inconsistent with Mississippi State Tax Comm’n v. Chevron U.S.A., Inc., 650 So. 2d 1353

(Miss. 1995).

¶15.    In Chevron, this Court noted that the destination theory was specifically rejected by this

Court as a way to account for Mississippi receipts for franchise tax purposes.       Id. at 1357.

This Court specifically stated 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.

(citing Southern Package Corp v. State Tax Comm’n, 195 Miss. 864, 15 So. 2d 436, 437-38

(1944)). In Chevron, Chevron claimed that its records were maintained on a destination and

origin basis and that it only attributed a sale as being in Mississippi when the customer

physically came to the state or the product was consumed in the state. Id. at 1359. However,

this Court specifically stated that “this does not reflect the volume of business that Chevron

conducts within this State, the basis on which franchise tax liability is now determined.” Id.

(emphasis added). The same version of § 27-7-23 was in effect when Chevron was decided.

Moreover, in accordance with Chevron, a franchise tax is measured by the volume of business

conducted in Mississippi and not the ultimate destination.

                                                   II.




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¶16.    Furthermore, Murphy 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 provides

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

assignment does not offend the due process and the commerce clauses.                   First of all,

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 state of the purchaser.             Therefore,

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

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

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

Auto test as provided for 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 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

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¶18.    Murphy contends that 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 the commerce clause challenge, so long as there is

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

¶19.    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

v. Truck Renting & Leasing Ass’n, Inc., 520 So. 2d 1333, 1342 (Miss. 1987)). 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 return for what it has given the

taxpayer.      Id.   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.

¶20.    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

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. Therefore, Murphy did not merely store the fuel in Mississippi, and there

                                                   9
is a substantial nexus to warrant franchise taxation.        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.

Therefore, there is a substantial nexus between the tax and the transaction within Mississippi.

        2. Tax Fairly Apportioned

¶21.    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 v. Truck Renting & Leasing Ass’n, Inc., 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 an inclusion of the sales

at issue into the franchise tax apportionment formula results in an inconsistent tax assessment

by the Commission.        Murphy      suggests that 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 infers that due to the Commission’s designation

of these sales as “Mississippi Receipts”, and the subsequent inclusion of these sales in the

numerator of the franchise tax formula, results in an improper tax franchise.

¶22.    As previously determined under the first prong 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.

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,




                                                   10
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

¶23.    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 v. Truck

Renting & Leasing Ass'n Inc., 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 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

¶24.    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 thus 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, 592, 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

                                                      11
and other advantages of civilized society. D.H. Holmes Co. v. McNamara, 486 U.S. 24, 32,

108 S. Ct. 1619, 1624, 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.” Tenn. Gas Pipeline, 594 So. 2d at 619, citing American Trucking

Ass’ns, Inc. v. Scheiner, 483 U.S. 266, 296, 107 S. Ct. 2829, 2846, 97 L. Ed. 2d 226, 251

(1987).

¶25.      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.

¶26.      The franchise tax imposed by the Commission has a sufficient nexus with Mississippi,

is fairly apportioned under the apportionment formula, does not discriminate against 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 of the commerce or due process clauses of the United States

Constitution.

                                           CONCLUSION

¶27.      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.

¶28.      REVERSED AND RENDERED.

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

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