E ORNEY GENERAL
Honorable Price Daniel Opinion No. WW-1085
Governor
Austin, Texas Be: Constitutionality of the Eckhardt
Bill levying a gas production tax
on Severance producers and dedi-
Dear Governor Daniel: cated reserve producers.
You have requested the opinion of this office regarding the
constitutionality of the Eckhardt Bill, a copy of which is attached to
this opinion for reference purposes.
This bill levies a gas production tax in addition to the tax
levied by Article 3.01 of Chapter 3, Title 122A, Taxation General
V. A. T. S. and amends said Chapter 3 by adding a new article to be
designated Article 3. 11. The tax is levied on the “residue gas”‘,as that
term is defined in the bill and the rate is on an M. C. F. basis, and
calculated so that all gas severed from the earth and waters of this
State shall be taxed at least at the rate of one cent per thousand cubic
feet, including the seven per cent of value taxed by Article 3. 01. The
additional tax (which applies only when gas is not being taxed at a rate
equal to or greater than one cent per M. C. F. ) is levied against the
producer, except where there is a “dedicated reserve contract” be -
tween a producer and a “dedicated reserve producer”, in which event
the additional tax is levied against the “dedicated reserve producer. I’
“Dedicated reserve producer” is defined as follows:
‘I ’ Dedicated reserve producer’ means any person hold-
ing a written contract for a designated term specified
therein, which confers upon such person the right to take
title to gas from particular lands, leases and reservoirs
in this State and imposes upon a severance producer the
duty to supply all or a designated quantity or portion of
gas produced by that Severance producer (or by that
severance producer in conjunction with other severance
producers) to the dedicated reserve producer at a fixed
or determinable price. I’
and “dedicated reserve contract” is defined as follows:
Honorable Price Daniel, page 2 (WW-1085)
” ’Dedicated reserve contract’ means a written contract
for a designated term specified therein, which confer8
upon a dedicated reserve producer the right to take title
to gas from particular lands, leases and reservoirs in
this State, and imposes upon a severance producer the
duty to supply all or a designated quantity or portion of
gas produced by that severance producer (or by that
severance producer in conjunction with others) to a~dedi-
cated reserve producer at a fixed or determinable price. ”
As this bill levies a gas production tax it does not violate the
commerce clause of the United States Constitution. A tax is not a
burden upon interstate commerce if the taxed ~incident is separable and
attributable to a local activity, even though such incident or activity
arises exclusively from transactions in interstate co-erce. See city
of Chicago v. Willett Co., 344 U.S. 574, (1953), and Pacific T. & T.
v. Tax Commission, 297 U.S. 403, (1936). Production is strictly a
local activity. A tax on production or, severance, doea not violate the,
commerce clause even though the article or commodity produced or
severed is immediately destined for transportation in interstate com-
merce. Oliver Iron Mining Company v. Lord, “262 U. S. 172, (1923);
Hope Natural Gas Co. v. Hall, 274 U.S. 284, (1927); Utah v. Pfost,
286 U.S. 165 (1932); Toomer v. Witsell, 334 U. S. 385, (1948);
Michigan-Wisconsin v. Calvert, 347~U. S. 157 (1954).
As Texas gas can only be praduced in Texas, the taxabk inci-
dent, which is production, cannot be levied by any other state and
thereby subject interstate commerce to multiple taxation.- See Cover-
dale v. Arkansas -~Louisiana, 303 U.S. 604 (1938). :
Dedication contracts between producers and “dedicated reserve
producers, ‘I as they exist in the ~industry, definitely appear to create
substantial and beneficial interests in the “dedicated reserve producers”
which will sustain the tax. Such contracts dedicate and set aside prior
to production certain gas under particular lands, leases or within certain
reservoirs, confer upon the “dedicated reserve producers” the preferen-
tial and exclusive right to take title to the gas when it is produced under
the contract, and obligates the producers to .sever the gas and do all
other acts necessary to make the gas conform to contract specifications
for delivery to the “dedicated reserve producers. ” Support for the pro-
position that the “dedicated reserve producers” in this situation acquire
a taxable interest in production is found in the following cases:
.
Honorable Price Daniel, page 3 (WW-1085)
Barwise V. Sheppard, 299 U.S. 33 (1936);
Canadian River Gas Company v. Bivins, 137 Tex.
347, 153 S. W. 2d 432 (1941);
Cities Service Oil Company v. McCrory, 191 S. W.
2d 791 (Tex. Civ. App., 1941, no writ hist. );
Sheppard V. Stanolind Oil & Gas Company, 125
S. W. 2d 643 (Tex. Civ. App. 1939, err. ref. );
Southwest Pipeline Company V. Empire Natural
Gas Company, 33 F. 2d 248 (C. C. A., 8th Cir., 1929);
Greenshield v. Warren Petroleum Corporation, 248
F. 2d 61 (C. C. A., 10th Cir., 1957);
Graham v. Omar Gasoline Company, 253 S. W. 896;
American Refining Co., et al. V. Tidal Western Oil
Corporation, 264 S. W. 335 (Tex. Civ. App., 1924,
error ref. ).
See also
Tennessee Gas Transmission Company v. Martin,
331 S. W. 2d 947 (Tex. Civ. App. I 1960).
As the tax is equal and uniform against all persons similarly
circumstanced and all taxpayers are treated alike, this bill does not
violate the equal protection clause of the Fourteenth Amendment of tM
United States Constitution, or the equality and uniformity requirements
embodied in Sections 1 and 2 of Article VIII of the Constitution of Texas.
The equal protection clause and the provisions of a state con-
stitution requiring equality and uniformity of taxation impose identical
restrictions upon the State. National Tea Co. V. State, 286 N. W. 360
(Minn. Sup. Ct. s 1939); and see Union Bank and Trust Co. V. Phelps,
288 U.S. 181, 53 S. Ct. 321 (1933); and Brown County, Texas V. Atlan-
tic Pipe Line Co. , 91 F. 2d 394 (C. C. A., 5th Cir., 1937). These
restrictions have been said to be “extremely limited. ” Wisconsin~v.
J. C. Penney Company, 311 U.S. 435, 61 S. Ct. 246 (1940). It is
recognized that absolute equality in taxation is impossible of attainment.
Atchison, T. & S. F. Ry. Co. v. Collins, et al., 294 F. 742, 745 (II. S.
D. C., N. D. Cal., 1923), appeal dis. 267 U.S. 609. Hence, it is well
settled that a state legislature has a wide range of choice in clasxifying
and limiting the subjects of taxation. Henneford, et al. V. Silas Mason,
300 U. S. 577, 57 S. Ct. 524 (1937), and cases there cited; see also
Keeney v. Comptroller of the State of New York, 222 U. S. 525, 32 S. Ct.
105 (1912); Rivera v. Buscaglia, 146 F. 2d 461 (C. C.A., 1st Cir., 1941).
Honorable Price Daniel, page 4 (WW-1085)
This bill also provides for an alternative tax at the rate of one-
fourth of one cent per thousand cubic feet. This bill provides that this
alternative tax shall only be levied in the event that the tax above dis-
cussed is unconstitutional. For the reasons above discussed, this
alternative tax is also constitutional.
We have carefully examined all the provisions of this bill in
light of the various provisions of the United States and Texas Constitu~:
tions, and we are of the opinion that this bill is not violative of any
constitutional provision and is in all things constitutional.
SUMMARY
The Eckhardt bill, a copy of which is attached hereto,
is constitutional.
Yours very truly,
WILL WILSON
Attorney General of Texas
By:
APPROVED: Assistant Attorney General
OPINION COMMITTEE:
Morgan Nesbitt, Chairman
.I. C. Davis
Riley Eugene Fletcher
Jack Goodman
Bob E. Shannon
REVIEWED FOR THE ATTORNEY GENERAL
BY. Leonard Passmore
H.B. BY
A BILL
TO BE ENTITLED
AN ACT amending Title 122A, Chapter 3, by adding a new
Article 3.11 levying a tax on the occupation of produc-
ing gas as a severance beneficiary, which tax is in the
amount of the difference between the present tax on
producers levied under Article 3.01 and one cent per
MCF, with certain exceptions; providing alternatively,
if the same be held invalid, that a tax of one-fourth
cent per MCF shall be levied against severance bene-
ficiaries, with certain exceptions; providing provisions
incidental to the accomplishment of the above purposes;
providing for the allocation of the proceeds; repealing
Chapter 22 of Title 122A and all laws in conflict with
this Act; providing for severability; and declaring an
emergency.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
Section 1. That Title 122A, Chapter 3, Vernon’s Revised Civil
Statutes of Texas be amended by inserting a new article after Article 3. 10,
denominated Article 3. 11, to read as follows:
‘Section 3. 11 Dedicated Reserve Tax.
“(I) Declaration of Policy.
“It is the policy of this State to obtain as near as may be, consistent
with a fair and equitable tax policy, a tax return to the State of not less than
one cent per MCF on each MCF of natural gas produced and saved from the
earth and waters of this State. The same is deemed necessary
“1. to derive a reasonable State revenue from the trillions
of cubic feet of gas removed from the earth and waters
of the State each year, and
“II. to tax equitably all of those persons integrally engaged
in the occupation of removing such gas, so that one
associated group of them will not derive a windfall by
virtue of a very small tax burden on each thousand cubic
feet of gas produced by them, and others will not be dis-
criminated against because of a comparatively large
tax burden on each thousand cubic feet of gas produced
by such others.
“It is further the policy of this State, in order to promote conservation
and to distribute equitably the burden of natural resources taxation, to recog-
nize and clarify fully by statute the relation between various persons engaged
in the occupation of producing natural gas so that the taxpayer in each instance
may be identified clearly, and so that all persons so engaged in the occupation
of production will bear equitably the taxes imposed in connection with the sev-
erance of gas from Texas soil.
“Pursuant to this policy it is recognized that contractual relations
exist in such natural gas production occupation between several definable groups,
all engaged integrally in such occupation of severance of natural gas from the
soil and all having such a direct and beneficial interest in the production of gas
that for the purpose of taxation they may ,be classified as producers of gas.
It is the policy of the State of Texas to recognize that all such persons, integrally
engaged in the occupation of severance of natural gas from the soil - producers,
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severance producers and dedicated reserve producer8 _ have a taxable interest
in production of gas in Texas.
“(2) Definitions.
“The definitions contained in Article 3.04, insofar as applicable,
shall govern the meanings of the terms used in this Article. In addition, the
following definitions are specifically applicable to this Article:
“(a) ‘Severance producer’ means any person owning, controlling,
managing, or leasing any gas well and/or ,any person who produces in any
manner any ga,s by taking it from the earth or waters of this State, and shall
include any person owning any royalty or other interest in gas or its value,
whether produced by him, or by some other person in his behalf, either by
lease or contract or otherwise, when such person producing gas is in contrac-
tual relation with the dedicated reserve producer (either directly, or, if a
royalty or other holder of an interest in gas in place and thereby entitled to a
fractional share of the valu~e of such gas in place, indirectly through the pro-
ducer).
‘l(b), ‘Dedicated reserve producer’ means any person holding a written
contract for a designated term specified therein which confers upon such per-
son the right to take title to gas from particular lands, leases and reservoirs
in this State and imposes upon a severance producer the duty to supply all or a
designated quantity or portion of gas produced by that severance producer
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(or by that severance producer in conjunction with other severance producers)
to the dedicated reserve producer at a fixed or determinable price.
l’(c) ‘Severance beneficiary’ has the following meaning,:
“I. In the case where there is in effect a dedicated reserve
contract as to the gas in question, the term ‘severance
beneficiary’ refers to the dedicated reserve producer
“II. In the case where there is no dedicated reserve con-
tract in effect as to the gas in question, the term
‘severance beneficiary’ refers to the producer.
‘l(d) ‘Dedicated reserve contract’ means any written contract for a
designated term specified therein which confers upon a dedicated reserve pro-
ducer the right to take title to gas from particular lands, leases and reser-
voirs in this State, and imposes upon a severance producer the duty to supply
all or a designated quantity or portion of gas produced by that severance pro-
ducer (or by that severance producer in conjunction with~~others) to the dedi-
cated reserve producer at a fixed or determinable price.
‘l(e) I. Meaning of Residue Gas.
“A. As to gas from which liquefiable hydrocarbons are removed
‘residue gas’ means that constituent pa,rt of the whole quantity of gas removed from
the earth and waters of this State which eventually constitutes the residue. The
tax is applicable under the terms of this Article to such constituent part of the
whole quantity of gas at the time when it, along with the associated gasoline or
other liquefiable hydrocarbons, is actually severed from the earth and waters
of this State.
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“B. As to gas from~which liquefiable hydrocarbons are not removed
‘residue gas’ means the entire quantity except that gas which is
W injecte,d into the earth, unless sold for such purpose;
(ii) produced from oil wells with oil and lawfully vented
or flared; or
(iii) used for lifting oil, unless sold for such purpose.
“II. How Measured
“Such residue gas shall be measured by determining that portion of
gas containing gasoline or other liquefiable hydrocarbons (that are to be re-
moved or extracted at a plant by scrubbing, absorption, compression, or any
other process) which is left after the application of such process and which
flows through the outlet of such plant. In the event that such gas is processed
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in more than one such plant, the residue gas content shall be measured as that
portion of the gas which flows through the outlet of the first plant.
“As to that gas which passes through a separator and which is not pro-
cessed in a plant to remove or ,extract the gasoline or other liquefiable hydro-
carbons, the residue gas content shall be measured as that portion of the gas
remaining after its passage through such separator. In C&heevent that such
gas passes through more than one separator, the residue gas content shall be
measured as that gas remaining after the passage through the first separator.
“As to that gas which passes through a drip or trap and which does not
pass through a separator and which is not processed in a plant to remove or
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extract gasoline or other liquefiable hydrocarbons, the residue gas content
shall be measured as that portion of the gas remaining after passage through
such drip or trap. In the event that such gas passes through more than one drip
or trap, then the residue gas content shall be measured as that portion of the
gas remaining after its passage through the last drip or trap.
“As to that gas which passes through a meter and which does not pass
through a drip or trap and which does not pass through a separator and which
is not processed in a plant to remove or ,extract the gasoline or other liquefiable
hydrocarbons, the residue gas content shall be measured as that portion of the
gas remaining after it passes through such meter. In the event that such gas
passes through more than one meter, then the residue gas content shall be
measured as that gas which passes through the first meter.
‘j(f) ‘MCF’ means thousand cubic feet.
“(3) The Tax Herein Levied.
“(a) There is hereby levied, in addition to all other occupation taxes
on the occupation of producing gas in Texas, an occupation tax on the busin,ess
or occupation of producing gas within this State a,8 a Severance beneficiary at
the rate of one cent per thousand cubic feet,of residue gas produced, applicable
at the time the said gas is severed from the earth or waters of this State,
less the amount of tax paid per MCF under the provisions of Article 3.01 of
this Chapter, computed in the following manner:
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“In the case of all gas subject to the tax imposed by Article 2. 01 ther,e
shall be ascertained the amount of tax in cents and fra.ctions of a cent per
thousand cubic feet paid to the State with respect to each quantity of such ga,s
by virtue of the seven per cent of value tax provided in that Article. If such
amount is less than one cent per MCF, then there shall~be determined the
difference between such amount and one cent per MCF. Such amount multiplied
by the quantity of the residue gas in question shall constitute the tax obligation
of the severance beneficiary of such residue gas.
‘l(b) The above is subject to the following exception:
“Without regard to any other provision of this Chapter no producer pro-
ducing natural gas from a newly discovered field shall be required to pay more
than the seven per cent of the market value of gas therefrom produced until
establishment of the first field rules for such field by the Railroad Commission
or until the passage of six months from the date of the first discovery of natural
gas in such field, whichever time shall~be the shorter.
“(4) Alternative Computation of Tax.
“(a) If the method of levy of the tax as set out in Par. (3) above is held
unconstitutional after application of the severability clause hereinafter set
forth, or if the same is held not to be effective to levy a tax based on the differ-
ence between the seven per cent of value tax levied in Title 122A, Chapter 3,
Article 3.01, and one cent per thousand cubic feet, which tax is to be paid
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by dedicated reserve producers and/or producers under the terms of this Act
as the same may finally be interpreted, then the following additional tax (above
the said seven per cent tax) shall apply:
“There is hereby levied in addition to all other occupation taxes on
the occupation of producing gas in Texas an occupation tax on the business
or occupation of producing gas within this State a.8 a severance beneficiary,
at the rate of one-fourth cent per MCF of residue gas produced.
‘l(b) The above is subject totthe following exception:
“Without regard to any other provision of this Chapter no producer pro-
ducing natural gas from a newly discovered field shall be required to pay more
than the seven per cent of the market value of gas therefrom produced until
establishment of the first field rules for such field by the Railroad Commission
or until the passage of six months from the date of the first discovery of natural
gas in such field, whichever time shall be the ~shorter.
“(5) Collection of Tax.
“(a) The tax hereby levied shall be a liability of the severance beneficiary.
It shall be his duty to keep accurate records of all gas produced and all matters
reasonably necessary or pertinent, a.8 determined by the Comptroller, for the
calculation and collection of the tax. The severance beneficiary shall remit the
tax additionally levied by this Article. The tax levied herein shall be due and
payable at the Office of the Comptrolle~r ,of Public Accounts at Austin on the last
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day of the calendar month. Each person liable for the tax imposed herein shall
make and deliver to the Comptroller a verified report on forms furnished by
the Comptr~oller showing such information as the Comptroller may deem nec-
essary for the administration and enforcement of this Article. Such report shall
Abe accompanied by legal tender or cashier’s check payable to the State Treasurer
for the proper amount of taxes herein levied.
‘l(b) The Comptroller shall employ auditors and/or other technical
assistants for the purpose of verifying reports and investigating the affairs of
producers, including severance producers and dedicated reserve producers,
to determine whether the tax is being properly reported and paid. He or ,they
shall have the power to enter on the premises of any taxpayer liable for a
tax under this Act and any other premises necessary in determining the correct
tax liability, and to examine any books or records and to secure any informa-
tion directly or indirectly concerned, according to law, and to promulgate
rules pertinent to the enforcement of this Article which rules shall have the
effect of law. Before any division or allotment of the tax collected hereunder
is made, . 5% of the gross amount of that tax shall be set aside in the State
Treasury for the use of the Comptroller in the administration and enforcement
of this Article; and so much of the said proceeds of .5’$ of the occupation tax
paid monthly as may be needed in such administration and enforcement is
hereby set aside for such purposes, subject to appropriation by the Legislature.
‘l(c) In the event that any taxpayer liable for a tax under this Act shall
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not file a report, the ,Attorney General shall .have the right to enjoin such person
until the delinquent tax is paid or ,said reports are filed,, and venue is hereby
fixed in Travis County.
‘l(d) All persons having an obligation imposed by this Article shall be
subject to a penalty of not less than $100 or ,more than $l~,.OOO for violation
hereof, each day’s violation constituting a separate offense. The State shall
have a prior lien for all delinquent taxes, penalties and interest on all property
used by them or in their business of producing or purchasing gas, and if any
of them shall fail to remit the proper taxes, penalties and/or interest due,
the Comptroller may employ personnel to ascertain the correct amount due,
and the person violating any of the provisions of this Article shall be liable,
as additional penalty, for the reasonable expenses or the reasonable value of
such services of representatives of the Comptrollers, incurred in, such inves-
tigation and audit. The Attorney,General shall file suit,,in the name of the
State of Texas for all delinquent taxes,. penalties, ‘and other amounts due for
the enforcement of all liens under ,this Article.
‘l(e) The provisions of Article 3. 09 of this Chapter shall also be appli-
cable to the enforcement of the provisions of this Article, and where the terms
‘producer’ or ‘purchaser’ are used in that Article, ,they shall be construed to be
broad enough to include ‘severance producer’~ and ‘dedicated reserve producer’,
as the case may be.
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“(6)Allocation of Revenue.
“(a) The revenue derived under the provisions of this Article shall be
allocated in the following manner:
“I. . 5% for administration and enforcement as hereinabove provided;
“II. One-fourth of the net revenue shall be allocated to the Available
School Fund;
“III. The remaining three-fourths shall be deposited in the Omnibus
Tax Clearance Fund and shall be ,set aside for the purpose of transfer and allo-
cation from the Omnibus Tax Clearance ,I?und to the Medical Assistance Fund
as provided by~section 2 of Article XX of Chapter 184, Acts, of the Forty-
Seventh Legislature, Regular.Session, 1941, as amended, it being specifically
provided that no portion of the revenues deposite,d to the Omnibus Clearance
Fund by virtue of this Act shall be distributed or allocated to any other fund
under the provisions governing the Omnibus Clearance Fund unless the needs
of the Medical Assistance Fund have been met fully.
‘l(b) ‘Revenue derived.under the provisions of this Act’ as used in this
section means such revenue as may be added by vir,tue of the provisions of this
Article 3. 11 to that revenue which would otherwise be obtained under other
provisions of law.
“(7) In case two or more persons pay under protest challenging the
constitutionality of any portion of this Article, the Attorney General shall,
within thirty days after the filing of the second protest, ,institute a suit for .~~
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declaratory judgment in the District Court of Travis County, Texas. In
order to expedite the decision in such case o,r cases, and also in suits filed
by taxpayers under Article ,7057b, Vernon’s Revised Civil Statutes, any such
cases involving the constitutionality, of any portion of this Act shall be ad-
vanced to the top of the docket of any~,Dietrict or Appellate Court in which
the cases might be filed or appealed. ‘I
Sec. 2. Repealer ‘.
All laws or parts of laws in conflict with this Act ar~e hereby repealed to
the extent of such conflict only. Specifically, Chapter 22, Title 122A, is hereby
repealed.
Sec. 3. Severability Clause.
If any article, section, subsection, sentence. clause, or phrase of this
Act ,is for any~reason held to be invalid or unconstitutional such decision shall
not affect the remaining portion8 or .eectione of this Act. The Legislature
hereby declares that it would have passed such portions of this Act as may,be
held valid and constitutional,independently of such section, SUbSeCtiOn, sentence,
clause, phrase or portion of this Act as may.be held unconstitutional and invalid.
Sec. 4. Emergency Clause.
The reasons set for.th in the declaration ~of policy and the fact ,that
additional revenue is urgently needed to meet the budgetary requirements
of the State, creates an emergency and an imperative public necessity that
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. , ,
the constitutional rule requiring bills to be read on three several days in
each House be suspended, and this rule is hereby suspended, and that this
Act take effect and be in force from and after its passage, and it is so
enacted.
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