Hon. Robert S. Calvert Opinion No. V-879
Comptroller of Public Accounts
Austin, Texas Re: The basis for computation
of the occupation tax on
business of producing gas
by Union Producing Com-
p-y.
Dear Sir:
Your opinion request dated May 19, 1949, is as follows:
“Please advise me with reference to United Gas
Pipe Line Co.-
A. If the tax under Article 7047b should be com-
puted at 5;2% of the total amount of money paid
to the producers as set out in sub-sections 1 and
2 of Section 1.
B. br if the condensate recovered should be taxed
at the same’rate as oil, as set out in sub-section 3
of Section 1.
...
. . 0
‘“Also advise me if ~your answer is the same under
the terms of the Processing Contract of Chicago Corpo-
ration. ”
The pertinent provisions of Article 7047b, V.C.S., are
as follows:
“Section 1. (1) There is hereby levied an occupa-
tion 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
five .and two-tenths (5.2) per cent of the market value
thereof as and when produced . . .
.
.
Hon. Robert S. Calvert, Page 2 (V-879)
“(2) The market value of gas produced in this
State shall be the value thereof at the mouth of the well;
however, in case gas is sold for cash only, the tax shall
be computed on the producer’s gross-cash receipts. In
all cases where the whole or a part of the consideration
for the sale of gas is a portion of the products extracted
from the producer’s gas or a portion of the residue gas,
or both, the tax shall be computed on the gross value
of all things of value received by the producer, includ-
ing any bonus or premium; . . .
“(3) All liquid hydrocarbons that are recovered
from gas by means of a separator or by other non-
mechanical methods, incidental to the production of
said gas, shall be taxed at the same rate as oil as lev-
ied by Acts 1941 Forty-Seventh Legislature Chapter 184,
Article I, Section 1.” (Emphasis added.)
In 1945, Section 1 of Article 7047b, V.C.S., with regard
to the taxation of liquid hydrocarbons recovered by non-mechanical
means, was amended by adding the words “incidental to the produc-
tion of said gas. ” Acts 45th Leg. 1945, Ch. 269, p. 423. Although
the Legislature gave no indication of the meaning to be accorded
this wording, we cannot assume that the Legislature would do a uses-
less thing. Therefore, giving the words used their usual and com-
mon meaning, in order for liquid hydrocarbons to be taxed at the
same rate as oil (4 l/8%) they must be recovered as an incident to,
or pertaining to, or in connection with, the actual production of the
natural gas by the producer.
After careful study of the contract in question (Skelly
No. 1002) it is clear that under the contract the various producers
own, operate, and equip the gas wells. Production of the natural gas
is completed, the sale is consummated, and the title to the natural
gas and all products passes to the buyer at the well-head. Paragraph
4 of the contract, at page 9, provides in part:
“In addition to the above equipment to be installed
by Seller, Seller agrees, at its expense, to make such
other necessary and reasonable connections or changes
in connections as may be required to enable Buyer to
connect its gathering lines and equipment to each well
covered by this contract, and each such point of connec-
tion to a well shall be a delivery point hereunder, at
which point the title and possession of Seller in and to
the natural gas Xiid-other products sold to Buyer under
this contract shall pass to and vest in Buyer.”
Hon. Robert S. Calvert, Page 3 (V-879)
The taxpayer (United Gas Pipe Line Company) makes
the following statement at page 5 of the memorandum submitted to
the Comptroller:
YJnited Gas Pipe Line Company purchases the
entire production of gas and liquid hydrocarbons at the
mouth of the well from the producers. Title passes at
that point and the ownership is thereafter the United
Gas Pipe Line Company who has bought the production.”
Under the facts presented, the sale is made at well-head
and title passes at that point. The production of the gas is completed
upon delivery by the producer into the lines of the purchaser. The
separators, meters and other equipment located near the wells are
owned and operated by the purchaser. The separation of the ~conden-
sate at the well location is made for the purposes of measuring the
number of cubic feet of gas produced and determining the content of
condensate in the natural gas in order to arrive at the consideration
to be paid the producers under the formula set out in the contract.
After this initial separation of the condensate and the measurement
of the gas produced from each well, the condensate is again commin-
gled with the gas and transported with the gas through the gathering
lines of the purchaser to the plant proper for separation of the con-
densate and extraction and processing of the natural gasoline.
In answering this question, we assume that the producer,
in consideration for the sale of the natural gas, has been allocated
a fair share of the total actual production which was marketed by
the buyer at its fair market value. Admittedly, for tax purposes,
the pr~oducer and purchaser can make any sort of a contract for the
sale of the natural gas based on any sort of a formula as long as it
is an “arm’s length” transaction and the contract sales price includes
everything of value received by the producer including any bonus or
premium. The formula adopted in the contract by the producer and
purchaser has for its purpose that of determining the amount to be
paid the producer. It is expressed in the terms of a percentage of
the value of the liquids separated and processed from the total nat-
ural gas produced by each well. In this case (Skelly Oil Company’s
W. F. Beall Unit No. 1 T) approximately 59% of the total value of
the liquids allocated to the unit are paid as “royalty” to the producer
by United Gas Pipe Line Company.
Since this is a sale for cash, the market value of the g,as
should be computed on the producer’s gross cash receipts. Thus
the taxable value of the gas as produced will be the sum of the fol-
lowing .items:
.f-. .
Hon. Robert S. Calvert, Page 4 (V-879)
(I) The amount received for the sale of the gas
at the well-head at 4$ per m.c.f.
(2) The amount received by the producer or
seller for the sale of the liquid hydrocarbons extract-
ed, processed and sold by the buyer as determined by
the contract formula.
It is therefore our opinion that the producer should be
taxed at the rate of 5.2% of the total “value” received for the sale
of his product.
Your second question concerns the computation of the
tax under the terms of the submitted Processing Agreement be-
tween the Chicago Corporation and the producers of natural gas in
the Carthage Field. Under the terms of the submitted Processing
Agreement, the producer drills, equips, and operates the well. The
producer measures the volume of gas produced with his own equip-
ment and delivers the gas to the processor’s intake lines located at
the plant site designated the delivery point. The producer is allo-
cated a portion of the total plant products based on a formula which
has as its basis the percentage which the producer’s total theoret-
ical production bears to the total theoretical liquid hydrocarbon
content of all the gas delivered to the plant. The theoretical liquid
content of the gas produced by each well, or unit, per thousand cu-
bic feet is determined by tests made by the processor every six
months,‘using special testing apparatus,
The processor (Chicago Corporation), acting as an agent
under the contract, processes the natural gas for the producer. In
consideratiorrfor his services in processing the gas, the producer
assigns the agent a percentage of the products extracted from the
gas produced. This percentage of the products becomes~the absolute
property bf the processing agent when actually separated and ex-
tracted. If the producer &es not elect to take his share of the prod-
acts in kind, the processing agent is authorieed to sell the producer’s
portion on the same terms and for the same price as it sells its own
share, deducting the leading oosts and other actual costs incurred
in marketing the products.
The contract does not provide for any separation of the
liquids except at the plant (with the exception of the tests made peri-
odically to determine liquid content). Any non-mechanical separa-
tion is made by the processor at the plant. After careful considera-
tion.of this contract it is our opinion, assuming a bona fide sale at
“arm’s length,“ that the taxable value of the gas is the total amount
of money received by the producer for the sale of the gas computed
at the rate of five and two-tenths (5.2) per cent of such value.
I .
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H4n. Robert S. Calvert, Page 5 (V-879)
SUMMARY
The producers of natural gas under the submitted,
contracts are liable for gas production taxes computed
at the rate of 5.2 per cent of the gross cash receipts,
since none of the liquid hydrocarbons are recovered by
non-mechanical means incidental to the production ef
the gas. Art. 7047b, V.C.S.
Yours very truly
ATTORNEY GENERAL OF TEXAS
BY 6-f&
Frank Lake
Assistant
FL/mwb
KJi
ATTORNEYGENERAL