EA SEP ENEiR!A&
OF TEXAS
QERALDC.MANN AUSTXNI~TEXAS
Honorable George H. Sheppard
Comptroller of Public Accounts
Austin, Texas
Dear Sir:
Opinion No. O-3516
Fe:* Rulesconcerning and
construction of, Art, II,
H. B. 8, 47th Leg., 1 41
(Art,.7@+7b, V.A.C.S.P
Bbmmonly known as the fiatural
@as Production Tax Law.
This is in answer to your request for ouropinion on a construc-
tion of certain features of Article II of House Bill 8, ,Forty-
seventh Legislature, 1941, (codified as Article 7047b of Vernon's
Annotated Revised Civil Statutes of Texa$commonly known asthe
"natural gas production tax" law.
Ordlnarlly in writing an opinion we first state the questions
asked, and then we discuss the statutes and the rules of law
concerning the questions and~conclude with our answers. But,
in this opinion there are twelve questions and the answer to
each depends upon a lengthy analyzation of a statute, and there-
fore we will first state the statute involved and analyze it to
some extent and then state each question and follow it by an
answer.
The pertinent parts of said Article II of House Bill 8, Forty-
seventh Legislature, 1941, (Art. 7047b, V.A.C.S.) reads-as
follows:
"Sec. 1 (1) Thereti:hereby levied an occupation tax on the-
business or occupation oilproduoihg gas within this State,
computed as follows:
"A tax shall be paid by each producer,on the amount of gas
produced within this State, and on the amount of gas produced
in another State and Imported into this State upon the first
sale thereof in intrastate commerce; equivalentsto five and two
~tenths (5.2) per cent of the market value of all gas Including
caslnghead gas produced and saved within this State, and of
all gas sold if produced In another State and imported into
this State, at the market value thereof, as and when produced,
or as and when imported.
.
Honorable George H. Sheppard, Page 2, O-3516
"The market value of gas produced in another State and Imported
into this State shall be the average value at the mouth of the
well of like gas soldW.thin this State as revealed by reports
made to the Comptroller for the quarter immediately preceding
the quarter In which such gas was imported and sold. Provided,
however, that the amsunt of the tax on sweet and sour natural
as shall never be less than eleven one hundred fiftieths
711/150) of one (1) cent per one thousand (1,000) cubic feet on
sweet and sour natural gas sold or produced and saved In this
State, and not thereafter lawfully injected into the earth in
the State of Texas, for the following purposes; (a) storage
thereof; (b) recycling; (c) repressuring; (d) lifting oil and
not thereafter; (e) lawfully vented or flared in connection
with the production of oil.
"The market value of gas produced in this State shall be the
value thereof plus any bonus, or premium, or anything of value
paid therefor, or any sum of money that such gas will reasonably
bring if produced and sold In accordanoe with the laws, rules
and regulations of this State, provided that notwit,hstandlng'any
other provision herein to the contrary, where gas is processed
for its liquid hydrocarbon content and the residue gas is returned
by recycling methods to the same gas-producing formation under-
lying the land from which the gas Is reduced, the taxable value
of such gas shall be three fifths (3P5) of the gross value of all
products extracted, separated and saved from such gas,
'In case gas is sold for cash the tax shall be computed on the
producers' gross receipts of such sale; and in case the whole
or a part of the consideration for the sale of gas is any por-
tion of the products extracted from such gas, the tax shall be
computed on the gross value of the products received plus all
other things of'val.uereceived by the producer, except in case
of gas processed by recycling operations.
'In determining the market value of gas for the purpose of
computing the tax due, there shall be excluded the value of
residue gas lawfully injected into the earth in the State of
Texas for the following purposes: (a) storage~thereof; (b)
represurrlng; (c) Lifting oil; and also (d) gas lawfully vented
or flared in connection with the production of oil,;save and
except however, if any g,as so injected into the 'earth is sold for
such purposes, then the market value of the gas so sold shall
not be excluded in computing the tax. All liquid hydrocarbons
that are recovered from gas by means of a separator or by other
nonmechanical methods shall be taxed at the same rate as oil as
levied by Article 1 of this Act.
"(2) The tax hereby levied shall be a liablltty of the producer
of gas and it shall be the duty of each such producer to keep
Honorable George H. Sheppard, Page 3,;O-3516
accurate records in Texas of all gas produced, making monthly
reports under oath as hereinafter provided.
. . .
Y(6) .The tax herein levied shall be borne ratably by all
interested parties, including royalty interests; and produders
and/or purchasers of gas are hereby authorized and required to
withhold from any payment due interested parties the proportion-
ate tax duesnd remit the same to the Comptroller.
'Sec. 2 (1) For the purpose of this Act 'producer' shall mean
any person owning, controlling, mananging, or leasing any,gas
well and/or any person who produces in any manner any gas by
taking it from the earth or waters in this State, and shall
,includeany person owning any royalty or other interest in any
gas or its value whether produced by him, or by some other
person on his behalf, either by lease, contract, or otherwise.
. . .
"(12) For the purpose of this Article, by the term "cubic feet
of gas' is meant volume of gas expressed in cubic feet and
computed at a base p,ressureof four (4) ounces per square inch
above the average barometric pressure of fourteen and four tenths
(14.4) pounds per square inch, a standard base and flowing
temperature of sfxty (60) degrees Fahrenheit; correction to be
made for pressure according to Boyle's Law, and for specific
gravity according to test made by,the balance method.
'Sec. 2a. (1) 'The tax herein imposed on the producing of gas
shall be the primary liability of the producer as hereinbefore
defined, and every person purchasing gas from producerthereof
and taking delivery thereof at or near the premises where
produce,d,
shall collect said tax imposed by this Article from the
producer. Every purchase including the first purchaser and the
subsequent purchaser, required to collect any tax under this
Article, shall make such collection by deducting and withholding
the ammount of such tax from any payments made by such purchaser
to the producer, and remit same as herein provided.
"Sec. 3. The Comptroller shall employ auditors and/or other
technical assistants for the purpose of verifying reports and
investigating the affairs of producers and/or purchasers to
determine whether the tax is being properly reported and paid.
He shall have the power to enter upon the premise,sof any tax-
payer liable for a tax under this Article, and any other premises
necessary in determining the correct tax liability, and to
examine, or cause to be exsmined, any books, or records of any
person, subject to a tax under this Article, and to secure any
Honorable George H. Sheppard, Page 4, O-3516
other information
- . .directly
_ . _ or indirectly
_ concerned
_ in the
enforcement of'this Article, and to promulgate and enforce,
according to law, rules and regulations pertinent to the
enforcement of this Article, which shall have the full force
and effect of law. Before any division or allotment of the
occupation tsxcollected under the provisions of this Article
is made, one half (l/2) of the one (1) per cent of the gross
amount of said tax shall be set &de In the Treasury for the
use of the Comptroller in the administration and enforcement
of the provisionsof this Article; and so much of the said
proceeds of one ,half (l/2) of one (1) per cent of the occupation
tax paid monthly as may,be needed in such administration and
enforcement is hereby appropriated for such Rurposes, subject
,however to appropriation by the Legislature.
'I A statute' says Bish. Cr. Law, 1 291, 'is simply a fresh
particle of,legal matter dropped Into the previously existing
oceap of law'" State v. Rechnitz, 20 Mont. 488. To our way of
thinking, this particular particle, to-wit, said Article 704713,
even though it be fresh, has certainly muddied the waters of the
ocean of law with its ramifications and complications on market
value. The plain term "market value" has been the subject'of
controversy and discussion by the courts for many years, but we
,are,not confronted with'a lain form of "market 'value!here
because the definition of berm in this case is adorned with
an intricate set'of provisos and qualifications that excel all
'previous legislative Ingenuity. In this opinion we will attempt
to unrave~land explain the Legislature's involved phraseology
that goes to make up the definition of 'market'value' and that
levies a tax calcuiated onthe same.
We are,only going to deal In this opinion with gas produced in the
State of Texas.~
#This statute levies an oocupation tax on the business of produe=
ing gas. (See the recent ,caseof Canadian RIverGas Co. v.
Bivins, No. 7657, decided June 11, 1941, by the Supreme Court of
, Texas, construing the former natural gas production,tcyclaw;
and see also the case of Trustees of Cook's Estate v. Sheppard,
.8g S. W. (2d) 1026, construing the gross production oil tax law.)
The'smount of the tax is a sum equivalent to,5.2 per,cent of the
,Jmarket value" of,the gas "as'and when produced."
"Market value" is deflned'inthe statute by a definition, with
various;kinds 'of provisos, qualifications, exceptions; and
,exc,eptionsto the exceptlons;,and in order,to give us a clearer
set of rules by which to decide your questions we have analyzed
the 'mamvalue' provisions of the statute and are stating
Honorable George Ii.Sheppard, Page 5, O-3516
them in rules, in somewhat different order from that In which
they arexed in the statute, as follows:
1. GENERAL DEFINITION OF MARKET VALUE. "The market value of gas
. . .shall be the value thereof plus any bonus, or premium, or
anything of value paid therefor,-or any sum of-money 'that such
gas will reasonably bring if produced and sold in accordance
with the laws, rules and regulations of this State, . .'
PT WHEN GAS IS
The amount of
r be less than
weet and sour
natural gas . produ,cedand saved in this State, and not
thereafter lawfully injected into'the earth in the State of
Texas for the following purposes; (a),storage thereof; (b)
recycling; (c) represurrlng; (d) lifting oil,and not thereafter;
(c) lawfully vented or flared in connectiqn with the production
of oil."
3. PROVISO WHEN GAS IS SOLD FOR CASH. ,"In case (gas is sold
for cash the tax shall be cfmputed on the producer's gross
receipts of such sale . . .
4. PROVISO WREN CONSIDERATION IS PART OF EXTRACTED PRODUCTS,
GAS-Y . "fn
case the whole or a part of the consideration for the sale of
gas is any portion of the produets extcact,edfrom such gas,
the tsx shall be computed on the gross value of the products
received ~1~s all other thinns.of value received'by the
producer,*EXCEPT in case of gas processed by,recyciing opera-
tions ."
5. IQUID HYDROCARBONS AND
DS 'Wheregas is
processed for itsliquid hydrocarbon con&t and the residue
gas is returned by'recycling methods to the ssme gas-producing
formation underlying the land from which the gas is produced,
the taxable value of such gas shall be 3/5th of the gross valu$
of all products extracted, separated, and saved from such gas.
mCERTAIN:'In determining the market value of gas
_ _ .. there shall be excluded the value,of residue gas lawfully
injected into the earth in the State of Texas for the following
purposes: (a) storage thereof;,(b) represurring; (c) lifting
oil; and also (d) gas lawfully vented or flared in connection
with the production of oil; save and except however, if any gas
Honorable ffeorgeH. Sheppard, page 6, O-3.516
50 Injected Into the earth is sold for such purposes, then the
market value of the gas so sold shall not be excluded In com-
puting the tax.
7’. QUALIFICATION TO THE AFFECT THAT LIQUID HYDROCARBONS
We will now proceed to state and answer each of your twelve
questions.
Your first question is as follows:
"A producer, 'A', also owns the pipeline to which a well Is
connected, and his payment for royalty is on a long term con-
tract for l/8 at a set price per MGF. Does this contract
constitute a sale of the l/8? Is the taxable market value of
the 8/8 t,o~becomputed as eight times such pay for l/8?"
It appears to us that the taxable value of this gas is con-
trolled by rule 1 (General Definition of Market Value) and
rule 3 (Proviso When Gas is Sold for Cash), stated above.
Rule 3 (Proviso When Gas is Sold for Cash) states clearly that
itapplies when gas is sold for cahh. However, we believe it
would only apply to bona fide;cash sales, that is, it would not
apply;if the sale was made at a price lower than usual in order
to de,fraudthe State or for any other unfair purpose. For
ex&le, If a sale was between two affiliated corporations con-
trolled by the same interests through stock ownership, or between
parties of any kind actiq in collusion, and the sale was not an
arm's length transaction , rule 3 would not apply. If the
producer's gross receipts derived from a bona fide cash sale are
either more or less than the market value as defined in rule 1
(General Deflnitioribf Market Value); nevertheless the value
prescribed in said rule 3, to-wit, the gross receipts from the
cash sale, would be the value upon which,the tsx should be based.
We also believe that rule 3 (Proviso When Gas is Sold for Cash)
would only apply to cash sales of gas made as and when said gas
is produced, that is, at the,time and at or near the place of
production.
Is any of the gas sold for cash in this case, that is, Is there
any gas to which rule 3 (Proviso When Gas is Sold for Cash)
applies? We think that the 1/8th royalty gas Is sold for cas.h
as and when said gas is produced, and that the taxable value
Honorable George H. Sheppard, Page 7, O-3516
thereof should be determined under rule 3. (We assume that
the lessee is paying a cash royalty as the gas is produced.)
Our conclusion is based on the theory that under the terms of
the contract, which we assume is an ordinary gas lease of the
type containing the provisions you describe, the lessor has
title to 1/8th of the gas in the ground , and the lessee has
title to 7/8ths of the gas in the ground. Sheffield v. Hogg,
124 Tex. 290, 77 S.W. (26) 1021. When said gas is produced
title passes in said 1/8th royaltygrom the lessor to the lessee,
and the lessee pays for the same at an agreed price per M.C.F.,
regardless of the market price of other gas in the same vicinity.
In other words the lessee has contracted to purchase the lessor's
1/8th royalty gas at a set price, instead of merely selling
said 1/8th royalty gas alongwtth h3.s.7/8thsof the gas to a
third person at a fluctuating market price and accounting to
the lessor for the price received from the third person.
Rule 3 (Proviso When Gas is Sold for Cash) can only be used to
compute the tax on that part of the gas that is actually sold
for cash. If only l/&h of a given quantity of gas is sold for
cash, 'andrule 3 is applicable, as in the case under consideration,
said rule 3 can only be used to compute ~the tax on said 1/8th of
the gas, and the tax on the remaining 7/8ths should be computed
by some other rule.
In the