Memphis Natural Gas Co. v. Beeler

Background

A Delaware natural gas company bought gas in Louisiana and piped it into Tennessee, where it delivered most of its supply to a Memphis distributor and a small share to another local distributor. The company had an agreement with the Memphis firm to share revenues and to divide annual profits after agreed costs. The company ran its business from a Memphis office and paid local employees. The company sued in chancery court saying a Tennessee excise tax on net earnings from in-state business violated the commerce clause. The appeal as of right was dismissed for procedural reasons, but the Court granted review and addressed the tax’s validity.

Reasoning

The central question was whether the Tennessee tax on net earnings from gas sold or distributed in Tennessee unlawfully burdened interstate commerce. The Tennessee Supreme Court found the contract created a joint undertaking: the pipeline company contributed gas and the Memphis company provided local distribution, with profits shared. The U.S. Supreme Court found a substantial basis for that state finding. Because the company participated in local distribution and had a commercial domicile in Memphis, its in-state earnings were properly taxable. The Court also noted that a nondiscriminatory net-income tax on a foreign corporation doing business locally is not barred by the commerce clause when the taxable income is attributable to the state.

Real world impact

The decision lets Tennessee collect an excise tax measured by net earnings tied to local distribution when an out-of-state company operates and shares profits with a local distributor. Companies that transport goods across state lines but take part in local sales or profit-sharing may be treated as doing taxable in-state business. The ruling affirms existing lines of decisions permitting state taxation in similar circumstances.