Interstate Pipelines and Property Taxes

Publication August 11, 2016

Tennessee can subject interstate pipelines to high property tax rates as utilities, a Tennessee court said in late July.

The Colonial Pipeline Company challenged the constitutionality of how it is taxed for property tax purposes in Tennessee. It transports gasoline, home heating oil, and jet and diesel fuel from Texas to Linden, New Jersey near New York City. It has delivery points in Chattanooga, Knoxville and Nashville. It does not own the products it transports. It charges solely for transportation at rates that are regulated by the Federal Energy Regulatory Commission. It can use eminent domain to take land.              

Tennessee collects property taxes on industrial and commercial equipment at 30% of value. Industrial and commercial real property is assessed at 40% of value. Utility property is assessed at 55% of value.

Colonial argued that its pipelines should be classified as commercial and industrial equipment and assessed at 30% of value.

The state legislature classified pipelines as utility property by statute in 1973 and added that they are real property in 2004.

Colonial argued that this is unconstitutional, because it is an impermissible state interference with interstate commerce and a denial of equal protection under the law. The state acknowledged that some local pipelines that are locally assessed by county assessors may be treated as commercial equipment and assessed at a 30% rate. Interstate pipelines are assessed at the state level. Colonial also argued that it is not a utility because it has no monopoly to provide services.

The court said the state legislature was entitled to classify pipelines as utility property as long as it had a reasonable basis for doing so. It had such a basis. The court said there is no discrimination against interstate pipelines, and if Colonial is being taxed differently than some of its competitors who are assessed locally, this is a problem with execution of the laws by the state rather than a sign that the statutes violate the constitution.           

The case is Colonial Pipeline Co. v. Wilson. The Tennessee chancery court released its decision on July 29.


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