JUSTICE MARSHALL delivered the opinion of the Court.
These cases concern an Alabama statute which increased the severance tax on oil and gas extracted from Alabama wells, exempted royalty owners from the tax increase, and prohibited producers from passing on the increase to their purchasers. Appellants challenge the pass-through prohibition and the royalty-owner exemption under the Supremacy Clause, the Contract Clause, and the Equal Protection Clause.
Since 1945 Alabama has imposed a severance tax on oil and gas extracted from wells located in the State. Ala. Code § 40-20-1 et seq. (1975). The tax "is levied upon the producers of such oil or gas in the proportion of their ownership at the time of severance, but . . . shall be paid by the person in charge of the production operations." § 40-20-3(a).
In 1979 the Alabama Legislature enacted Act 79-434, which increased the severance tax from 4% to 6% of the gross value of the oil and gas at the point of production. Whereas the severance tax had previously fallen on royalty owners in proportion to their interests in the oil or gas produced, the amendment specifically exempted royalty owners from the tax increase:
The amendment also prohibited producers from passing the tax increase through to consumers:
The amendment became effective on September 1, 1979. The pass-through prohibition was repealed on May 28, 1980. 1980 Ala. Acts, No. 80-708, p. 1438.
Appellants in both No. 81-1020 and No. 81-1268 have working interests in producing oil and gas wells located in Alabama.
After paying the 2% increase in the severance tax under protest, appellants and eight other oil and gas producers filed suit in the Circuit Court of Montgomery County, Ala., seeking a declaratory judgment that Act 79-434 was unconstitutional and a refund of the taxes paid under protest. The Circuit Court ruled in favor of appellants, concluding that both the royalty-owner exemption and the pass-through prohibition violate the Equal Protection Clause and the Contract Clause, and that the pass-through prohibition is also preempted by the Natural Gas Policy Act of 1978 (NGPA), 15 U. S. C. § 3301 et seq. (1976 ed., Supp. V). Although Act 79-434 contained a severability clause, the court held the entire Act invalid and ordered appellee Commissioner of Revenue of the State of Alabama to refund the taxes paid under protest. The Supreme Court of Alabama reversed, holding Act 79-434 valid in its entirety. 404 So.2d 1 (1981).
Appellants appealed to this Court under 28 U. S. C. § 1257(2). We noted probable jurisdiction. 456 U.S. 970 (1982). We now affirm in part, reverse in part, and remand for further proceedings not inconsistent with this opinion.
We deal first with appellants' contention that the application of the pass-through prohibition to gas was pre-empted
Appellants contend that the pass-through prohibition was in conflict with § 110(a) of the NGPA, 92 Stat. 3368, 15 U. S. C. § 3320(a) (1976 ed., Supp. V), which provides in pertinent part as follows:
We agree with the Supreme Court of Alabama
Although the pass-through prohibition thus was not in conflict with § 110(a) of the NGPA, we nevertheless conclude that it was pre-empted by federal law insofar as it applied to sales of gas in interstate commerce. To that extent, the pass-through prohibition represented an attempt to legislate in a field that Congress has chosen to occupy. The Natural Gas Act (Gas Act), 52 Stat. 821, as amended, 15 U. S. C. §§ 717-717w (1976 ed. and Supp. V), was enacted in 1938 "to provide the Federal Power Commission, now the FERC, with authority to regulate the wholesale pricing of natural gas in the flow of interstate commerce from wellhead to delivery to consumers." Maryland v. Louisiana, 451 U.S. 725, 748 (1981). As we have previously recognized, e. g., Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 682-683 (1954); id., at 685-687 (Frankfurter, J., concurring), the Gas Act was intended to occupy the field of wholesale sales of natural gas in interstate commerce, a field which had previously been left largely unregulated as a result of the absence of federal action and decisions of this Court striking down state regulation of sales of natural gas in interstate commerce. The Committee Reports on the bill that became the Gas Act clearly evidence this intent:
The Alabama pass-through prohibition trespassed upon FERC's authority over wholesale sales of gas in interstate commerce, for it barred gas producers from increasing their prices to pass on a particular expense — the increase in the severance tax — to their purchasers. Whether or not producers should be permitted to recover this expense from their purchasers is a matter within the sphere of FERC's regulatory authority. See FPC v. United Gas Pipe Line Co., 386 U.S. 237, 243 (1967) (emphasis added):
Here, as in Maryland v. Louisiana, the state statute "interfere[d] with the FERC's authority to regulate the determination of the proper allocation of costs associated with the sale of natural gas to consumers." 451 U. S., at 749. Just as the statute at issue in Maryland v. Louisiana was pre-empted because it effectively "shift[ed] the incidence of certain expenses . . . to the ultimate consumer of the processed gas without the prior approval of the FERC," id., at 750, Alabama's pass-through prohibition was pre-empted, insofar as
We reach a different conclusion with respect to the application of the pass-through prohibition to sales of gas in intrastate commerce.
See Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 420-421 (1983) (in enacting the NGPA, "Congress explicitly envisioned that the States would regulate intrastate markets in accordance with the overall national policy").
Since a State may establish a lower price ceiling, we think it may also impose a severance tax and forbid sellers to pass it through to their purchasers. For sellers charging the
We conclude that the pass-through prohibition was pre-empted by federal law insofar as it applied to sales of gas in interstate commerce, but not insofar as it applied to producer sales of gas in intrastate commerce.
We turn next to appellants' contention that the royalty-owner exemption and the pass-through prohibition impaired the obligations of contracts in violation of the Contract Clause.
Appellants' Contract Clause challenge to the royalty-owner exemption fails for the simple reason that there is nothing to suggest that that exemption nullified any contractual
Unlike the royalty-owner exemption, the pass-through prohibition did restrict contractual obligations of which appellants were the beneficiaries. Appellants were parties to sale contracts that permitted them to include in their prices any increase in the severance taxes that they were required to pay on the oil or gas being sold.
While the pass-through prohibition thus affects contractual obligations of which appellants were the beneficiaries, it does not follow that the prohibition constituted a "Law impairing the Obligations of Contracts" within the meaning of the Contract
The Contract Clause does not deprive the States of their "broad power to adopt general regulatory measures without being concerned that private contracts will be impaired, or even destroyed, as a result." United States Trust Co. v. New Jersey, supra, at 22. As Justice Holmes put it: "One whose rights, such as they are, are subject to state restriction, cannot remove them from the power of the State by making a contract about them. The contract will carry with it the infirmity of the subject matter." Hudson Co. v. McCarter, 209 U.S. 349, 357 (1908).
Like the laws upheld in these cases, the pass-through prohibition did not prescribe a rule limited in effect to contractual obligations or remedies, but instead imposed a generally applicable rule of conduct designed to advance "a broad societal interest," Allied Structural Steel Co., supra, at 249: protecting consumers from excessive prices. The prohibition applied to all oil and gas producers, regardless of whether they happened to be parties to sale contracts that contained a provision permitting them to pass tax increases through to their purchasers. The effect of the pass-through prohibition
Because the pass-through prohibition imposed a generally applicable rule of conduct, it is sharply distinguishable from the measures struck down in United States Trust Co. v. New Jersey, supra, and Allied Structural Steel Co. v. Spannaus, supra. United States Trust Co. involved New York and New Jersey statutes whose sole effect was to repeal a covenant that the two States had entered into with the holders of bonds issued by The Port Authority of New York and New Jersey.
Alabama's power to prohibit oil and gas producers from passing the increase in the severance tax on to their purchasers is confirmed by several decisions of this Court rejecting Contract Clause challenges to state rate-setting schemes that displaced any rates previously established by contract. In
Producers Transportation Co. v. Railroad Comm'n of California, 251 U.S. 228 (1920), is particularly instructive for present purposes. In that case the Court upheld an order issued by a state commission under a newly enacted statute empowering the commission to set the rates that could be charged by individuals or corporations offering to transport oil by pipeline. The Court rejected the contention of a pipeline owner that the statute could not override pre-existing contracts:
Finally, we reject appellants' equal protection challenge to the pass-through prohibition and the royalty-owner exemption. Because neither of the challenged provisions adversely affects a fundamental interest, see, e. g., Dunn v. Blumstein, 405 U.S. 330, 336-342 (1972); Shapiro v. Thompson, 394 U.S. 618, 629-631 (1969), or contains a classification based upon a suspect criterion, see, e. g., Graham v. Richardson, 403 U.S. 365, 372 (1971); McLaughlin v. Florida, 379 U.S. 184, 191-192 (1964), they need only be tested under the lenient standard of rationality that this Court has traditionally applied in considering equal protection challenges to
We conclude that the measures at issue here pass muster under this standard. The pass-through prohibition plainly bore a rational relationship to the State's legitimate purpose of protecting consumers from excessive prices. Similarly, we think the Alabama Legislature could have reasonably determined that the royalty-owner exemption would encourage investment in oil or gas production. Our conclusion with respect to the royalty-owner exemption is reinforced by the fact that that provision is solely a tax measure. As we recently stated in Regan v. Taxation with Representation of Washington, 461 U.S. 540, 547 (1983), "[l]egislatures have especially broad latitude in creating classifications and distinctions in tax statutes." See Lehnhausen v. Lake Shore Auto Parts Co., 410 U.S. 356, 359 (1973); Allied Stores of Ohio v. Bowers, 358 U.S. 522, 526-527 (1959).
For the foregoing reasons, we conclude that the application of the pass-through prohibition to sales of gas in interstate commerce was pre-empted by federal law, but we uphold both the pass-through prohibition and the royalty-owner exemption against appellants' challenges under the Contract Clause and the Equal Protection Clause. Since the severability of the pass-through prohibition from the remainder
It is so ordered.
Although appellants in No. 81-1268 also contend that the application of the pass-through prohibition to oil was pre-empted by the Emergency petroleum Allocation Act of 1973 (EPAA), 15 U. S. C. § 751 et seq. (1976 ed. and Supp. V), and the regulations promulgated thereunder, we conclude that we have no jurisdiction to consider this contention. The decision below does not discuss this issue, and when " `the highest state court has failed to pass upon a federal question, it will be assumed that the omission was due to want of proper presentation in the state courts, unless the aggrieved party in this Court can affirmatively show the contrary.' " Fuller v. Oregon, 417 U.S. 40, 50, n. 11 (1974), quoting Street v. New York, 394 U.S. 576, 582 (1969). No such showing has been made here. Although appellants in No. 81-1268 have represented to this Court that the trial court held the pass-through prohibition to be pre-empted by the EPAA, Juris. Statement 3, an examination of the trial court opinion reveals that in fact the court made no mention of the EPAA. Nor does anything in the record before us indicate that this issue was raised in the trial court. Appellants did address the EPAA in their brief before the Supreme Court of Alabama, Brief for Appellees Exchange Oil and Gas Corp., Getty Oil Co., Placid Oil Co., Union Oil Co. of California in No. 79-823, pp. 51-53, but that court did not pass on the issue. Under these circumstances we have no jurisdiction to consider whether the EPAA pre-empted the application of the pass-through prohibition to oil, for it does not affirmatively appear that that issue was decided below. Bailey v. Anderson, 326 U.S. 203, 206-207 (1945). The general practice of the Alabama appellate courts is not to consider issues raised for the first time on appeal. See, e. g., State v. Newberry, 336 So.2d 181, 182 (Ala. 1976); State v. Graf, 280 Ala. 71, 72, 189 So.2d 912, 913 (1966); Burton v. Burton, 379 So.2d 617, 618 (Civ. App. 1980); Crews v. Houston County Dept. of Pensions & Security, 358 So.2d 451, 455 (Civ. App.), cert. denied, 358 So.2d 456 (Ala. 1978).
Appellants in No. 81-1268 have also burdened this Court with a labored argument that they were denied due process by the Supreme Court of Alabama's refusal to consider the legislative history of the 1979 amendments to the state severance tax, a history which, according to appellants, shows that those amendments were intended to apply only to certain wells located in one county in the State and not to apply statewide. Suffice it to say that the weight to be given to the legislative history of an Alabama statute is a matter of Alabama law to be determined by the Supreme Court of Alabama.
"Nowhere in that section [§ 110(a) of the NGPA] is it stated that the oil companies are entitled to `pass-through' increases on state severance taxes. Rather, the Act merely provides that the lawful ceiling on the first sale at the wellhead may be raised if a severance tax is imposed by the states. The two Acts are aimed at entirely different purposes. In other words, although it would be perfectly permissible for the oil and gas companies to raise the price for the first sale of natural gas, subject to the limitations of the Natural Gas Policy Act, all that Act No. 79-434 requires is that the increase in severance tax mandated by that Act be borne by the producer or severer of the oil or gas."
Relying on this passage, appellee Commissioner of Revenue contends that the pass-through prohibition did not bar a producer from increasing its price by an amount equal to the increase in the severance tax, provided that the producer did not label that increase a tax:
"The Commissioner believes that the seller may include in the lawful maximum price an amount equal to Alabama's severance taxes borne by the seller resulting from the production of natural gas. The Commissioner believes that it was the intent of the Alabama Legislature in adopting the pass-through prohibition that it did not want to be perceived as levying an additional tax on the consumer. Therefore it prohibited anyone from passing along the increase levied by Act 79-434 as a tax." Brief for Appellee Eagerton 16-17 (emphasis in original).
We do not agree with appellee that the Supreme Court of Alabama interpreted the pass-through prohibition to leave sellers free to pass through the tax increase so long as they did not tell their customers that that is what they were doing. The statute contains no language that would suggest this limitation, and as we understand the opinion below, the point of the passage relied upon by appellee was only that the pass-through prohibition did not conflict with federal law.
"Lessor shall bear and pay, and there shall be deducted from the royalties due hereunder, Lessor's proportionate royalty share of:
"(a) All applicable severance, production and other such taxes levied or imposed upon production from the leased premises." App. in No. 81-1020, pp. 76-77.
"LESSOR AND LESSEE shall bear in proportion to their respective participation in the production hereunder, all taxes levied on minerals covered hereby or any part thereof, or on the severance or production thereof, and all increases . . . in taxes on the lease premises or any part thereof." Id., at 184.
These provisions would seem to entitle appellants to recover from the royalty owners a portion of the tax increase in proportion to the royalty owners' interests in the proceeds of the oil or gas sold by appellants, regardless of the legal incidence of the tax increase.
Even if these contractual provisions were to be interpreted to entitle appellants to reimbursement only for that portion of the severance tax which state law itself imposes on the royalty owners, appellants would still have no objection under the Contract Clause. In that event, the increase in the severance tax would be absorbed by appellants not because the State has nullified any contractual obligation, but simply because the provisions as so interpreted would impose no obligation on the royalty owners to reimburse appellants for the tax increase.
Since appellants have not shown that the royalty-owner exemption affects anything other than the legal incidence of the tax increase, their contention that the exemption is pre-empted by the Gas Act and the NGPA is plainly without merit.
"[I]t is said that the members had formed a contract between themselves, which would be dissolved by the stoppage of their business. And what then? Is that such a violation of contracts as is prohibited by the constitution of the United States? Consider to what such a construction would lead. Let us suppose, that in one of the states there is no law against gaming, cock-fighting, horse-racing, or public masquerades, and that companies should be formed for the purpose of carrying on these practices. And suppose, that the legislature of that state, being [seriously] convinced of the pernicious effect of these institutions, should venture to interdict them: will it be seriously contended, that the constitution of the United States has been violated?" Myers v. Irwin, 2 Serg. & Rawle 368, 372 (Pa. 1816).
With respect to gas, see supra, at 184-186; Energy Reserves Group, Inc. v. Kansas Power & Light Co., supra, at 413-416. During the time the pass-through prohibition was in effect, the Federal Government controlled the prices of crude oil under the EPAA, 15 U. S. C. § 751 et seq. (1976 ed. and Supp. V). Regulations promulgated under the EPAA established maximum prices for most categories of crude oil. 10 CFR Part 212, Subpart D — Producers of Crude Petroleum, § 212.71 et seq. (1975).
Appellants' reliance on Barwise v. Sheppard, 299 U.S. 33 (1936), is misplaced. In Barwise the owners of royalty interests challenged a Texas statute that imposed a new tax on oil production, which was to be borne "ratably by all interested parties including royalty interests." The statute authorized the producers to pay the tax and withhold from any royalty owners their proportionate share of the tax. The royalty owners in Barwise were parties to contracts that entitled them to specified shares of the oil produced by their lessee and required the lessee to deliver the oil "free of cost." Id., at 35. They contended that the statute, by authorizing the lessee to deduct their portion of the tax from any payments due them, impermissibly impaired the lessee's obligation to deliver the oil "free of cost." This Court concluded that the statute did not run afoul of the Contract Clause:
"[T]he lease was made in subordination to the power of the State to tax the production of oil and to apportion the tax between the lessors and the lessee. . . . Plainly no stipulation in the lease can be of any avail as against the power of the State to impose the tax, prescribe who shall be under a duty to the State to pay it, and fix the time and mode of payment. And this is true even though it be assumed to be admissible for the lessors and lessee to stipulate as to who, as between themselves, shall ultimately bear the tax." Id., at 40.
We reject appellants' assertion that the last sentence of this quotation was meant to indicate that the statute would have violated the Contract Clause if, instead of simply specifying the legal incidence of the tax, it had nullified an agreement as to who would ultimately bear the burden of the tax. We think the thrust of the sentence was simply that even though the law left the lessors and the lessee free to allocate the ultimate burden of the tax as they saw fit, no agreement between them could limit the State's power to decide who must pay the tax and to specify the time and manner of payment.
Barwise is relevant to these cases only insofar as it confirms Alabama's power to decide that no part of the legal incidence of the increase in the severance tax would fall on owners of royalty interests. See Part III-A, supra.