Barwise v. Sheppard

Background

The case was brought by landowners who hold royalty interests under a 1925 oil lease. The lease gave the lessee the right to produce oil and required delivery of the lessor’s share “free of cost” into the pipeline. Texas had previously taxed only the active producer, but a 1933 law imposed a production tax to be borne ratably by all interested parties, authorized purchasers to pay and deduct the tax, and allowed withholding from royalty payments. The royalty owners paid under protest, sued the State Comptroller and Treasurer for a refund and to stop further collection, and lost in the lower courts before appealing here.

Reasoning

The central question was whether the 1933 law violated the Fourteenth Amendment’s due process protection or the Constitution’s ban on state laws impairing contracts. The Court treated the statute as an excise on oil production measured by production and fairly apportioned among those with a direct, beneficial interest in the oil, including royalty owners. The Court held that the tax was not an arbitrary denial of due process and that the State’s power to tax production and to prescribe who must pay overrides private promises in the lease. The Court explained that a lease is subordinate to a later lawful change in taxation and that an agreement to deliver “free of cost” does not prevent the State from charging a production tax.

Real world impact

The decision lets states apportion production taxes to royalty owners as part of an excise on the production of oil. Purchasers may be used to collect and withhold taxes from payments. The ruling affirms that private lease terms cannot block a valid state tax change.