Honorable Robert S. Calvert Opinion No. M- 968
Comptroller of Pub1,icAccounts
Austin, Texas Re: Calculation of production
tax under Ch. 3, Title
122A, Taxation-General,
V.C.S., on State owned
Dear Mr. Calvert: leases.
We have received your request for our official opinion
reading as follows:
"Reference is made to your Opinion No. M-943,
dated August 23, 1971, which opinion was requested
by Honorable Bob Armstrong, Commissioner of the
General Land Office.
"Based on the same facts presented to you by the
Commissioner of the General Land Office, your
opinion is requested as to the application of
the tax on producers of natural gas, specifically
Article 3.01 and 3.02, Title 122A, Taxation-
General Revised Civil Statutes of Texas.
"In arriving at the taxable market value, is the
producer or operator of the lease entitled to
deduct from the sales price of the gas at the
platform a proportionate part of the amortiza-
tion of the costs of the facilities referred to
and the costs of operating the facilities:
"If your answer to this question is to the effect
that the producer or lease operator is entitled
to deduct a proportionate part of the costs,
should such costs be limited to only the compres-
sion and/or dehydration facilities, plus operat-
ing costs and maintenance, or should the costs
include some part of the cost of the platform
on which the compression and dehydration facil-
ities are located?
-4731-
Honorable Robert S. Calvert, Page 2 (M-968)
"If the producer or lease operator is entitled
to deduct from the sales price of the gas at
the platform a proportionate part of the amorti-
zation of the costs of the facilities referred
to and the costs of operating the facilities,
your opinion is requested as to the application
of the Texas Supreme Court's decision, Item No. 1,
Mobil Oil Corporation vs. Robert S. Calvert, et al.,
No. E-170.1 In other words, since there is no pro-
duction tax due on the state's royalty interest,
is the producer or lease operator entitled to
deduct 5/6ths of the costs,or is he entitled to
deduct 6/6ths of the costs from the sales price
of the 5/6ths taxable portion of the gas?"
The pertinent facts referred to in the foregoing request,
as taken from our Opinion No. M-943, are as follows:
11
. . . The lease operator holds several State
oil and gas leases in the Gulf of Mexico upon
each of which it has drilled several wells that
produce natural gas. On each lease one of the
wells is a platform well or production deck well
upon which are heaters, gas production separators,
dehydrators, and metering devices for gas, con-
densate, and water. Each lease also contains
one or more satellite wells upon which are a
heater, me,terregulator, valves, and flow lines
running from the satellite well to the platform
well. After the gas has been processed through
the above mentioned facilities, it is sold by
the operator to th$ gas gatherer-purchaser at
the platform well.
Our answer to your first question is that the costs of
readying the gas for market after it has been produced, such
as processing and transportation, are deductible from the gross
sale price of the gas in order to ascertain its taxable market
values. If the producer is required to provide other equipment
and machinery for the purpose of making the gas ready for market,
such as compressors, then it would be proper to allow all these
1. Reported at 451 S.W.Zd 889.
-4732-
.
Honorable Robert S. Calvert, Page 3 (M-968)
costs of processing, transportation and compression to be
amortized in arriving at the cost of readying the gas for
market. These costs preparatory to marketing are properly
deductible from the gross proceeds received from the sale
of the gas in order to arrive at the taxable market value
of the gas sold as contemplated by Article 3.02, Title 122A,
Taxation-General, Vernon's Civil Statutes. Mobil Oil Corp.
v. Calvert, 451 S.W.2d 889 (Tex.Sup. 1970).
Our answer to your second question is that only such
facilities as are necessary for processing or making the gas
ready for marketing after it is produced, and which facilities
would not be needed were it not necessary to process the gas
for this purpose, would be deductible as a part of the costs
of marketing the gas. No expense attributable to the platform
should be deducted.
Our answer to your third question is that the rule laid
down in Mobil Oil Corp. v. Calvert, supra, is controlling. In
construing that case, our nni ninn 3 f. +.ha~t t.he method
-I*..^.s.. -I “a-w _...
for deter-
mining the amount of tax~~(iue under the facts_YOU oresent to us
mm
is as follows: ?iiinmy gross sale price of the gas for
a given length of time (less the allowed cost of processing
and transoortation) times the tax rate of 7s. The total tax
due is then allocated between the various interest owners in
proportion to the interest owned. For instance: if the gross
sale price of the gas is $60,000 and the cost of processing
and transportation is $6,000 then the taxable market value is
$54,000. The taxable market value of $54,000 is then multiplied
by the tax rate of 7% to get the total tax due of $4,050. The
total tax of $4,050 is then multiplied by the fractional interest
of the taxpayer, which is given by you as 5/6ths, to determine
how much of the tax is owed by the producer. That sum is $3,375.
If the royalty owner were a non-exempt taxpayer owning a 1/6th
interest in the proceeds, then his tax would be computed by
multiplying the total tax due of $4,050 by 1/6th to arrive at
the sum of $675.
The case of Mobil Oil Corporation v. Calvert, 451 S.W.Zd
889 (Tex.Sup. 1970), referred to in your opinion request, announces
orincicles of law particularly pertaining to and controlling the
q,uestibnshere involved. In that case the court in defining the
provisions of Chapter 3, Taxation-General, Vernon's Civil Statutes,
relating to the calculation of the tax on producers of natural
gas, held, at page 892 of the opinion, as follows:
-4733-
Honorable Robert S. Calvert, Page 4 (M-968)
"We find no sound basis in the quoted statutes
for holding that the tax imposed thereby must
be computed on each ownership interest separately.
noun, 'producer,' as used in the statutes, defines
two classes or persons, to wit: all owners
of interests in the gas as define6lln Art. 3.04(l),
including royalty owners, and (2) only those
owners of working interests who actually produce
the gas; and by our further conclusion that the
provisions of Art. 3.01(l) directing that the tax
be computed by each producer.on the amount of gas
produced and saved, refers to the second class of
producers. Considered in connection with the pro-
visions of Art. 3.04(11), Art. 3.01(l) would seem
to bear no other reasonable internretation. When
the statute is interpreted as indicated, the tax
to be paid was not affected by Mobil's agreement
'LO assume payment of th processing costs thereto-
Tore paid by the royalt; owners.l' (underscoring
added)
Thus, according to the Mobil Oil case, the total tax due
-upon
under Article 3.01 is calculate basis of the total
proceeds of the sale of all component parts of the gas produced,
less allowable transportation and processing costs. The tax so
calculated is then borne ratably by the various interested
parties. The formula for calculating the tax due is: sale
price, less allowable transportation and processing, times tax
rate, times taxpayer's ratable interest.
SUMMARY
In calculating the amount of natural gas
production tax due from a producer owning the
working interest in a lease in which the State
-4734-
Honorable Robert S. Calvert, Page 5 (M-968)
of Texas, as a royalty owner, is an exempt
producer, the gross sale price of the gas
produced for a given length of time, less
the allowed cost of processing and trans-
portation, is to be multiplied by the frac-
tional interest of the taxpayer and the tax
rate applied to the resulting figure. This
method of tax calculation under Chapter 3,
Title 122A, Taxation-General, V.C.S., effects
an allowance of a deduction of costs from
the proceeds of sale to the producer owning
the working interest in an amount propor-
tionate to his interest in the lease.
All facilities necessary and pertaining
solely to the processing of the gas for mar-
ket after it is produced, plus reasonable
operating and maintenance costs thereof, may
be deducted from the proceeds of sale as
part of the costs of marketing such gas.
If such facilities and equipment are neces-
sary for the purpose of making the gas ready
for market, it is proper to allow the costs
thereof to be amortized in arriving at the
cost of readying the gas
Prepared by R. L. Lattimore
Assistant Attorney General
APPROVED:
OPINION COMMITTEE
Kerns Taylor, Chairman
W. E. Allen, Co-Chairman
Jim Broadhurst
Wardlow Lane
W. 0. Shultz
Dean Moorhead
Milton Richardson
-4735-
. .
Honorable Robert S. Calvert, Page 6 (M-968)
SAM MCDANIEL
Acting Staff Legal Assistant
ALFRED WALKER
Executive Assistant
NOLA WHITE
First Assistant
-4736-