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Honorable Robert S. Calvert Opinion Ho. M-1002
Comptroller of Public Accounts
Austin, Texas Re: Application of Natural
Gas Production tax on
deficiency payments
under "take or pay"
provisions of purchase
Dear Mr. Calvert: contracts.
We have rece~lved your request for an official opinion in
regard to the proper application of Chapter 3, Title 122A,
Taxation-General, Vernon's Civil Statutes, in calculating the
tax on producers of natural gas receiving deficiency payments
under "take or pay" provisions of certain gas purchase
contracts,
In connection with your request you submit a detailed
description of these special provisions which we may assume
adequately presents the taxation problems Inquired about.
The terms of such contract are restated in substance as
follows:
The"take or pay" provision thereof requires the buyer to
purchase from the seller and pay for, whether or not received
during each year, a determined minimum dally quantity of gas
per month or per year as the case may be, at a price stated
in terms of so many cents per 1,000 cubic feet (MCP). In
case of failure of buyer to purchase during any year the
minimum quantity contracted for, under contracts providing
for annual minimum purchases, then within 30 days after
such year he Is required to pay seller for the amount of
the deficiency, but he may at any time during the succeeding
four years take and receive such deficiency at the market
price then in effect, by paying therefor only the difference
between the price in effect at delivery and the price actually
paid for such deficiency under the contract. Under some
contracts which provide monthly minimum gas purchases, even
if buyer does not take the minimum amount during the month,
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Honorable Robert S. Calvert, page 2 (M-1002)
he is required to pay for it but has the right to take
the gas In succeeding months. These latter provisions
are referred to as “make-up” periods. The typical contract
In question expressly provides for the provisions and
obligations thereof to go into effect upon the first deliveries
of gas thereunder. However, some of the contracts require
the buyer to make minimum payments before any gas is produced,
or purchased.
In connection with the foregoing described “take or pay”
contracts you have informed us that for many years your office
has taken the uniform position that the producer was liable
for tax on the entire amount received under such contracts,
whether or not the deficiencies, if any, were “made-up”.
The specific questions submitted by you are as follows:
“1 * I would like your official opinion as to
whether the tax levied by Article 3.01 is required
to be reported and paid to Comptroller at the time
the producer receives the minimum prepayment or
at the time the gas is actually taken by the
purchaser during the make-up period?
“2 . If your answer to question one is that the
tax is required to be reported and paid at the time
the gas is actually taken by the purchaser during
the make-up period, and for some reason all or
a part of the deficiencies in gas are not made up
during the contractual make-up period and the
purchaser has to forfeit any of the minimum pre-
payments, Is the production tax due on the for-
feited prepayments. If the production tax is
due, should the tax be computed at the tax rate
in effect at the time the contractual make-up
period expired?
“3 . If your answer to question one is that the
tax is required to be reported and paid at the time
the producer receives the minimum payment, please
advise when the tax Is due in those instances
where the producer has received prepayments for a
period of time before there was any gas produced
or taken by the purchaser under the terms of the
contract?”
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. :
Honorable Robert S. Calvert, page 3 (M-1002)
Chapter 3, Title L22A, Taxation-General, Vernon's
Civil Statutes, insofar as pertinent to the foregoing
questions, provides as follows:
"Article 3.01
(1) There is hereby levied an occupation tax on
the business or occupation of producing gas
within this State, computed as follows:
"A tax shall be paid by each producer on the
amount of gas produced-and saved within this
State equivalent to seven and one-half per
cent (7-s) of the market value thereof as and
when produced.
. . . .
"Article 3.03
(3) The tax herein levied shall be due and
payable at the'office of the Comptroller at
Austin on the last day of the calendar month,
based on the amount of gas oroduced and saved
during the oreceding calendar month, and on or
before said date each such producer shall make
and deliver to the Comptroller a report on forms
prescribed by the Comptroller showing the
amount of gas produced, . . . ." (Emphasis
The recent decision of our SupremaCourt in Mobil Oil
Corporation v. Calvert; 451 S.W.2d 889 (Tex.Sup. 1970),
held, in substance, that the proper method of determining
the tax due on production of natural gas under Chapter 3,
Title 122A, Taxation-General, V.C.S., is to compute the
tax on the market value of the gas at the mouth of the
well measured by the total proceeds of sale. Article
3.02 provides for this measure.
It also has been held that the term "market value" as
used in a former statute (of identical tenor and effect as
our present statute, Art. 3.02) "means the price for which
the producer sells the gas". Calvert v. Union Producing
Co., 258 S.W.2d 176, (C.A.1953-No writ history).
Thus, according to the plain import of Chapter 3,
Title 122A, Taxation-General, the tax therein levied is to
be computed on the amount of gas produced and saved at the
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Honorable Robert S. Calvert, page 4 (M-1002)
rate of 7-l/2$ of the market value of such gas as and when
produced. Consequently, until such gas Is i;;d;T;a;oi;ax
can be computed thereon under the statute,
thereby assessed until production and a sale or other
disposition thereof has occurred. Mindful of the foregoing,
we conclude that the tax levied by Article 3.01 Is not due
until actual production of the gas has occurred and such
tax Is then measured by Its "market value" as provided in
Article 3.02. Attorney General Opinion No. WW-554(1959).
Hence, our answer to your question 1 is that the time
such gas is actually produced during the make-up period,
rather than the time of the minimum prepayment, is the
taxable event with regard to the “make-up” gas.
Your question 2 concerns a situation where the deficiencies
under the contract are not received during the make-up period
and the minimum prepayments made under the contract are
forfeited. We assume that a substantial amount of gas was
produced and sold under the contract, although less than the
minimum on which the price was computed. This default by
the buyer under the typical contract described by you brings
about an effect analogous to one that might be produced by
a similar default of the buyer under a “take or pay” contract
having no provision allowing the "make-up" of any deficiency
below the minimum daily quantity of gas contracted for a
specified time at a total price calculated on the basis of
so many cents per 1,000 cubic feet (MCF). This latter type
of “no-makeup” contract has been called to our attention as
being one of “the several different fact situations”
arising under "take or pay" provisions of gas purchase
contracts mentioned in your inquiry but not described in
detail.
As a consequence of the absence of the production and
the purchase of the deficiency by the buyer under either of
the next foregoing described contracts, there is no production
or sale thereof on which a tax could be assessed against such
gas not produced and sold. However, the price paid for the
substantial amount actually purchased and received was set
by the terms of such contracts at the total figure determined
by the minimum amount of gas therein contracted for. Whether
the difference between the amount of gas agreed to be purchased
and the amount actually received under the contracts is
termed a “deficiency”, and a proportionate part of the total
contract price is called a “forfeiture”, Is of no import
when considered in relation to the issue actually involved.
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Honorable Robert S. Calvert, page 5 (M-1002)
The paramount issue under each contract is the determination
of the total proceeds of the sale of the gross production
under each of the contracts in question. There is no
difficulty in determining the gross production. This is
the respective amount actually produced and ourchased bv
buyers under the contracts. Thus, the total-proceeds of the
gas actually produced under such contracts is the total
amount received under the contracts, includinn the_ navn
,-,.nents
-55 lculated on the so-called deflciencles~, 'he tax on the
Gtal amount of gas produced and purchased under such
contracts is measured by such total proceeds of sale and
based on the tax rate in effect at the time such gas is
actually produced, rather than at the time of the minimum
prepayments.
We are cognizant of the fact that a question of
contract construction may arise Independent of the proper
construction of the tax statute and its application to
each contract. Mobil Oil Corp. v. Calvert, 451 S.W.2d
889(Tex.Sup.1970). However, we are here passing only
upon the construction to be placed upon the tax statute.
The prior opinions of this office support the above con-
clusion and would have to be overruled if we concluded
otherwise. This same holding and construction was made in
Attorney General Opinion No. Q-6355 (1946); and see also
Opinion No. v-555(1948).
It is the policy of this office to follow earlier~
opinions on the same subject where not patently erroneous.
Attorney General Opinions Nos. O-1659 (1939); c-69 (1963);
and ~-605 (1970). This Is likewise the rule followed by
the courts concerning the meaning of a statute. Thomas v.
Groebl, 147 Tex.70, 212 S.W.2d 625 (1948). Such a construction
-is entitled to great weight where, as here, it has been
followed over a period of years by the state agency charged
with the administration and enforcement of the statute.
Thompson v. Calvert, 301 S.W.2d 496,(Tex.Civ.App.~~l9571 no
writ), Gaynor Construction Co. v. Board of Trustees, etc.,
233 S.W.2d 472 (Tex.Civ.App. 1950, no writ).
In view of the foregoing considerations, you are advised
that the total price paid under the contracts in question
is the measure of the market value of the actual amount of
gas produced and sold, based on the tax rate in effect at
the time such gas is actually produced.
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Honorable Robert S. Calvert, page 6 (M-1002)
Our foregoing answers to question 1 and 2 preclude
the answering of question 3.
-SUMMARY-
Under natural gas purchase contracts
containing "take or pay" provisions, the
time the gas is actually produced is the
event which actuates the accrual of the
tax under Ch. 3, Title 122A, Taxation-
General, V.C.S.
The total price paid under any of such
contracts Is the measure of the actual amount
of gas produced and sold thereunder, based on
the tax rate in effect at the time such gas is
actually produced.
Y{J very truly,
General of Texas
Prepared by R. L. Lattimore
Assistant Attorney General
APPROVED:
OPINION COMMITTEE
Kerns Taylor, Chairman
W.E. Allen, Co-Chairman
James Broadhurst
William Craig
Milton Richardson
Houghton Prownlee
SAMUELD. MCDANIEL
Staff Legal Assistant
NOLA WHITE
First Assistant
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