April 26, 1939 

Hon. George II, Sheppard 

Comptroller of Public Accounts 

Austin, Texas 

Dear lelr. Sheppard! 

Opinion No. O-633 

Re: Place where "market value" should 

be determined in taxing natural gas 

under Art. 70&?-b 

This is in answer to your inquiry of April 13, 1939, concerning 

the "gross receipts tax" on natural gas provided for in Article 

7049-b of the Revised Civil Statutes. 

The facts involved in your inquiry are as follows: A certain 

company, which we will refer to as the "producer", owns and operates some gas wells in Hutchison and Carson Counties, Texas, and 

it sells its gas to a pipe line company,,which is another and 

separate concern. The p,ipe line company maintains an eighteen 

inch pipe line, conveying gas from that field, which line is 

approximately seven miles from this producer's wells, and the 

pressure in this eighteen inch pipe line averages 320 pounds per 

square pinch. The pressure of most of the gas wells in this field 

is greater than 320 pounds; but the pressure of this particular 

producer's gas wells is less, being only 259 pounds persquare 

inch. This producer made a contract to sell the gas produced by 

its wells to this pipe line company and to deliver it to the pipe 

line of the pipe line company, 

(35). cent 

nt a price of three and one-half 

s per thousand cubic feet, and the contract provided! 

WWThe Seller agrees to sell anddeliver to the Buyer at the 

points of delivery hereinafter designated (which is the Buyer's 

pipe line).****Deliveries of gas hereunder shall be made by 

Buyer to Seller at a pressure sufficient to enter the pipe lines 

of the Buyer against the varied working 

4 

ressures therein." 

It is agreed that three land one-half (3;; cents per thousand 

cubic feet is "the actual market value" of this gas at the pipe 

line company's eighteen inch pipe line seven miles from the wells, 

where it is sold and delivered. Under this contract,it was 

necessary for this producer to build its own pipe line from its 

wells to the pipe line company's eighteen inch pipe line, a 

distance of seven miles, and it was also necessary for this producer to install "compressor stations", which consist of machinery that raises the pressure of its gas, in order that its gas 
- . 

Hon. Ceo. H. Sheppard, Page 2 O-633 

would go into the pipe line company's eighteen inch line. By 

virtue of building this seven mile line and these "compressor 

stations",it costs the producer one-half (&#) cent per thousand 

cubic feet to transport its gas from its wells to the place of 

delivery where it is sold at the pipe line company(s eighteen 

inch line seven miles away. 

The question you want us to answer is whether you should charge 

the natural gas tax, provided for in Article 7047-b on the basis 

of the "actual market value" at the place of sale seven miles 

from the well (which is j$,per 1000 cubic feet) or on the basis 

of the "the actual market value" at the well (which is only 3# 

per 1000 cubic feet). 

The material part of the statute in question which is House 

Bill 547, Ch. 73, p. 111, Acts 1931, 42nd. Leg. amended by 

House Bill 8, Ch. 495 p. 495, p. 2040, Acts 1936, 3rd. Called 

Session 44th. Leg., a 1 1 of which is now codified as Article 

7047-b of Vernon's Annotated Revised Civil' Statutes of Texas, 

reads as follotis: 

"Sec. 1 (a). That from and after the date herein fixed, 

every person engaging or continuing~within this State, in 

the business of producing and saving in paying.quantities, 

for sale or for profit, any natural gas, including casinghead gas, from the soil or waters of this State, and 

"(b) Every person who imports natural gas intothis State 

and thereafter sells the same in. intrastate commerce in this 

State, the tax to be imposed on the first sale; (provided, 

ho.wever, that if any gas is imported into this State from 

another State, in which latter State a severance, occupation 

or excise tax is imposed, the person importing such gas 

shall not be required to pay another tax thereon under the 

provisions of this Act), 

'I(c) Are hereby declared to be,"producers" and engaged in 

the business of producing natural gas within this State and 

shall make quarterly on the 25th day of January, April, 

July and October each year, a report to the Comnroller,**" 

"Sec. 3. A tax shall be paid by each such producer on the 

amount of gas produced and saved within this State., and on 

gas imported into the State, upon the first sale thereof 

in intrastate commerce upon' the following basis: 

"A tax equivalent to three per cent (3%) of the market value 

of the total amount of gas produced and sarad~within this 

State, or sold, if imported into this State, at the actual 

market value thereof, as andwhen produced.*****" 
Hon. Geo. H. Sheppard, Page 3 O-633 

It will be noticed that in Section 3 it 'says: 'A tax shall be 

paid***u on 

cent (3;; *T 

the following basis: A tax equivalent to three per 

of the market value***at the actuzl market value ther‘::of, 

as and when produced." Je think these are the controlling words, 

and thqt,the phrase "as --- and.when p reduced" refera to all of the 

gas, both that produced.in the State and that imported into the 

State. 

It might be oontencled that' the' phrase 

of" controls 

"upon the first sale'there- 

, and if that phrase was standink alone we think it 

would controi,.but~ we must-look at the statute as a whole and 

when we do that we conclude that it must yield and give way to 

the phrase in the next senten.ce, towit, "as --- andwhen produced." 

It might also be contended thatthe phrase "as and when produced" 

applies .only.to~that part of the sentence set off in commas, towit, 

~"if imported into.this State"; that is, it might be said that the 

phrase applies only to imported gas; but we think that phrase 

applies to and modifies the whole sentence. The Legislature was 

talking aboutthe taxing of all gas "as and when produced". 

What does the word"produoe mean? Webster's frew International 

Di.ctionary, 2nd Ed:, gives a definition of'the word nproduce" 

as follows: 

."To bring forth, as .young, or as a natural product or growth; 

to give birth'to; .to~.bear; generate; yield; furnish; as, the'. 

.earth:.produces grass;~trees produce fruit.~" 

.We'think that natural gas is produced when it comes out of the 

ground. The mouth of the well is thefiace where it is produced. 

We frankly admit, and anyone else, regardless of which side of 

this question they urge, must admit, that the words of this 

statute are doubtful; The. Supreme Court of the United States in 

the case of United States v. Merriam, 263 U. S. 179, 44'S; Ct. 

69, 68 L. Ed. 240, 29 A. .L. R. 1547, said: 

"*****in statutes levying taxes the literal meaning of the 

words employed is most important, for such statutes are not 

to ge extended,b 

language.used. f 

implication beyond,the clear import of the 

f the words are doubtful, the doubt must 

be resolved.against the. Government and in favor of the taxpayer." 

. 

The same rule has been'adopted by the courts in Texas. Franklin 

Fire Ins; Co. v. Hall, .(Tex..Sup. Ct.) 112 Tex. 332, 247 S. ~1. 

822; Western Public Service Co; v. Meharg, (Tex. Comm. App.) 

116 Tex. 193, 292 S. W. 168% and Daniel v. Life Ins. Co. of 

.Virginia, (Tex. Civ. App.) 102 S. W. 2nd 256. Applying that 

rule to the case in question we would be compelled to hold that 

the tax should be charged on the basis of the market value of 
- 

Hon. Geo. H. Sheppard, Page 4 O-633 

the gas at the well, which is the construction most favorable 

to the taxpayer. 

We have been unable to find,any tax cases on this question in 

this State or any other jurisdiction. However, we have found 

where a similiar question has arisen in several states in rega.rd 

to whether the producer, who operates the well, should pay the 

royalty owners their share of the proceeds from the sale of the 

oil or gas several miles from the well to where it is piped 

by the producer and sold to a pipe line company, or should pay 

the royalty owners on the basis of the lower market value at 

the mouth of the well. This question of the amount to be paid 

to the royalty owners has arisen where the lease contract is 

ambiguous or silent on the question; and in those cases the 

courts have held that the payment should be on the basis of the 

market value at the well. 

said: 

In 3 Summers Oil and Gas 415, it is 

"One of the principal questions arising in connection with 

gas royalty clauses of the types above mentioned is whether 

the lessor is entitled to be paid on the basis of the value 

of the gas at the well, upon the basis of the price actually 

received at the point, where'the gas is delivered into the 

pipe line of a purchasing company, or at the price received 

by the lessee where it delivers gas to consumers directly 

through its own lines. Where leases provide for the payment 

of one-~eighth royalty, the value of one-eighth of the'gas, 

or the market value thereof, most courts hold that the 

lessor's royalty should be computed upon the basis of the 

~market value actually exists, and if it does not, upon the 

basis of the reasonable value of such gas as established by 

competent evidence." 

This question of the basis on which a producer should pay royalty, 

where the lease contract is not clear, has been acted on by 

courts in Kansas Kentucky and Louisiana.. In the case of Scott 

v. Steinberger, fKan. Sup. Ct.) 113 Kani 67, 213 Pac.646, the 

court said: 

"***the dispute arises whether the plaintiff was entitled to 

the value of ,the gas at the wells or at the price at which 

it was sold at the end of the pipe line,*** 

"The terms of the lease are somewhat ambiguous as to the 

point where the gaswas to.be measured and its price fixed. 

There was no pipe line in the vicinity when the contract 

was.made. Evidently the'parties contemplated that, if oil 

or gas in paying quantities was found, some pipe,line company would build into the field and transport it to places 

of consumption.***** 
Hon. Geo. H. Sheppard, Page 5 O-633 

"We think the parties contemplated and the provision should 

be construed that gas, if produced, should be measured and 

and the price determined at the place where the wells were 

connected with pipe lines, and not at some distant market 

that might be found at the end of a pipe line remote from 

the field and where the cost of transportation might equal 

or exceed the value of the gas produced. If the pipe line 

had been built by defendants to Kansas City or Chicago, 

and the gas transported and marketed there at four or five 

timesits value at the place of production, would it be 

contended that the price received at either of these distant 

markets should be the measure of defendants liability?***" 

In the case of~warfield Natural Gas Co, v. Allen, (Ky. Ct. App.) 

261 Ky. 840, 88 S. W. (2d) 989, the Court said: 

"The .lease recited, TThat the Lessee isto deliver to the 

Lessor in tanks, .tank cars, or pipe lines a royalty-on oneeighth. (l/8) of all. oil produced and,saved from the premises, 

and to pay for each gaswell from the time and while the 

gas is marketed the sum of one-eighth of,pre~ceeds received 

from,the sale thereof, payable each three months'***" 

PDefendant had the-exclusive right to produce the gas and 

to market the gas. Itwas as much its duty to find the 

market as to find,the~ gas.*** 

"The lease is silent as 'to where this market must be found. 

In.such cases, it is usually held to be at the'place of production.*+* 

"So we cant say the defendant took this gas at the well, and 

the question is what must itpay for it. Must it pay its 

value there or must it pay what it may'ultimately have got 

:for it? 

"The testimony of the.plaintiff J. H.. Allen shows gas is 

usually sold at the well in the~locality where these wells 

are situated and the 12 cents per thousand feet is the usual 

pr.ice in that locality, and thatthis price and custom prevailed there when these.leaseswere made. Then that must 

have .'been what the partiescontemplated when they made this 

,lease.*** 

"Nothing.was said in the :Iease about a sale elsewhere'and 

this lease must be held to mean one-eighth of the gross 

proceeds of a'sale ,of the gas at the well side, and that is 

all for which defendant must a.ccount even though it may market the gas elsewhere and get a much greater sum for it.***" 

In the case of Wall v. .United GasPublic Service CO., 

178 La. go$, 152 SOU. 561, the Court said: 

(La sup. ct.1 
1 

Hon. Geo. H. Sheppard, Page 6 O-633 

"In the lease contract here involved, the lessee was required to pay to the lessor one-eighth of the value of the 

gas sold off the premises, 

thereof. 

calculated at the "market price" 

The price to be paid was left open or made to 

depend upon the 'market price' at the time the gas was 

produced. The lessee settled with the lessors for the gas 

at 4 cents per thousand cubic feet, which it contends was 

the 'market price' at the well, its theory being that the 

market price there is the proper basis for the settlement. 

It admits that it sold the gas ata place two miles from 

the field at 5.8 cents per thousand cubic feet. The plaintiffs demand settlement on the basis of the sale price of 

the gas where sold. 

"There is nothing in the contract itself nor in the testimony to show the intent of the parties touching the question 

whether the term 'market price' meant the price at the well 

or the price the.gas would bring in a market remote from 

the well. rJe think it reasonable to assume that the parties 

intended that,~'if there'was a market .for gas in the field, 

the current market price there should be paid. There is 

where the gas was reduced to.possession and there is where 

ownership of.it.sprang into existence. The result of bringing the 'gas to .the'surface 'of, the ground 'in the field was 

to reduce to ownership~'there~ to a commercial commodity.***n 

In considering this rule as applied to the payment of royalties, 

we are not unmindful of the Texas case of,Ladd v. Upham,~ (Tex. 

Ct. Civ. App.) 58 S.W. (2d) lO37, .in which the Court of Civil 

Appeals at Fort Worth, with only the pleadings of the case before 

it by virtue of a demurrer having been‘sustained, held that the 

lessee (producer) should pay the royalties on the basis of the 

higher price received for the gas at a distant ooint from the 

well where the gas was produced, instea~d of:paying the lower 

market price at the well; but, that decision was based solely 

on the working of the lease in which it,was expressly provided 

that the lessee was"***to pay lessor as royalty one-eighth of the 

proceeds from the sale of gas*'**. There was no ambiguity in 

the lease in that case, and the co,urt held that that language 

required payment of one-eighth of the proceeds from the first sale; 

and in that connection the court recpgnized the rule in Scott 

v. Steinberger, sunra, and said that the rule ins the Scott case 

would not be applied because of the specific words in the lease 

in the Ladd case. The Ladd case.was affirmed by the Supreme 

Court of Texas (Upham v; Ladd, 12$ Tex. 14, ,95 S.L'~. 2nd 3651, 

but it based its opinion on a different ground than that relied 

on by the Court of Civil'Appeals, and onthe question of "the 

amount due to the lessor" it said: *That no view on that question can properly be expressed here should.be apparent. The 

contract sued upon is such as to require that it be construed 

in the light of the facts and circumstances surrounding the par- 
Bon. Geo. Ii. Sheppard, Page 7 C-633 

ties when it was made." We think by that language that the 

Supreme Court cast a doubt on the Court of Civil Appeals opinion 

distinguishing its holding from the Scott v. Stein~bcrger holding. 

tie believe that the rule that where the lease does not provide 

otherwise royalties should be paid on the basis of the market 

value at the well sheds some light on the question as to what 

basis this tax should be paid on. It should likewise be paid on 

the basis of the market value at the well. 

An objection has been raised to charging this tax on the basis 

of "the actual market value" at the well, the ground of the 

objection being that there is really no market at the well and 

the only market is some distance away at the nearest pipe line 

‘(7 miles in this case); but the Courts of this State have already 

answered this objection by giving a rule by which market value 

in such cases can be found, and that rule is expressed in A.T. 

& S.F. Ry. v. Nation 6c Slavens, 92 S. U. 823 (market value of 

cattle) as follows: 

"***The rule is well settled that where the question his 

what was the value of-property~ at a particular place, and 

there was no market value there , proof may be given of such 

value at other places with~the .cost of transportation in 

order to *** deduce the value at the place in question. 

Suth. on Damages (2d Ed.) Sec. 445.***" 

This rule was adhered to in the case of Dale Oil & Refining Co. 

v. City of Tulia, 25, S. W. 2nd. 671 (market value of oil); and 

Kerr v. Blaer, 106 S.W. 549 (market value of rice). 

We believe that this tax is what is sometimes referred to as a 

"severance tax", and if that is true it is reasonable to believe 

that the legislature intended to charge the tax immediately 

upon the gas being severed from the earth. The Louisiana Natural 

gas tax act, which is almost identical with the Texas statute 

we are considering, was held to be a 'tseverance tax" in the ca.s; 

of Bulf Refining Co. v. McFarland, 154 La. 251, 97 Sou. 433. 

57 Corpus Juris 538 "severance tax" is defined as follows: 

Veverance tax. An excise tax upon the privilege of severing, 

or upon the right to sever the natural resources from the 

soil; a tax upon the natural resources severed from the soil." 

We should look at this tax from a practical standpoint, and see 

how it operates. If we charge this tax on the basis of the higher 

market value at the place of sale seven miles away instead of on 

the basis of the lower market value at the well, then all the 

operator has to do in order to escape the higher tax would be to 

sell and convey its ltcompressor stations" and seven mile pipe 

line to another concern, and sell its gas to this other concern at 
Hon. Geo. H. Sheppard, Page 8 o-633 

3 cents at the mouth of the well, and let this other concern 

compress the gas 

3;:; cents. 

and transport it seven miles and resell it at 

The legislature is presumed to have known the actual 

conditions the act was to apply to when it passed it; and it 

intended for the law to operate in a practical manner. Xe think 

it intended for the tax to be paid on a basis of the market value 

at the well. 

The final consideration we wish to advance is that by virtue of 

the fact that the Consituttion of the State of Texas (Sec. 1 

Art. VIII) provides that "taxation shall be equal and uniform", 

it is the duty of the courts to endeavor to place a construction 

on a'.taxing statute that will make the tax equal and uniform if 

there is more than one constructionthat can be placed on the 

statute. Such a rule has not been stated by a Texas court 

but we think in view of what has been said in other jurisdictions 

that such a rule can properly be applied in construing our 

statutes. In the case in question if this tax is charged on the 

basis of the market value atthewell the tax will come nearer 

being euqal and uniform than if it is charged on thebasis of 

where itis sold,--in some instances at the well and in other 

instances many miles away from the~well. In the case of Feather 

River Power Co. v. State Board of Equalization (Cal. Sup. Ct.) 

206 Ca. 486, 274 Pac. 962, it was said: 

"It is the policy of the law that all property.within the 

state should bear its fair andequalhlrden of taxation, 

and a liberal construction will be indulged to accomplish 

that end." 

In the 'case of City of Providence v. Hall (R. I. Sup. Ct.) 49 

R. I. 230, 142 Atl. 156, it was said: 

"If two views are possible; of which one more equitably distributes the burdens of taxation, the court should adopt 

that view, unless compelled to do otherwise by decisions or 

a long course of conduct which ought not to be altered." 

The conclusion we have reached as to the basis on which to charge 

this tax is contrary to an opinion dated March 8, 1938, addressed 

to Hon. George H. Sheppard, by Mr. John McKay and Nr. E. N. 

Avery Jr., assistants under Attorney General McGraw; and that 

opinion is i%ergfone overruled. 

The words "actual market value" must be given their literal meaning. We have stated at thebeginning of this opinion that it is 

agreed that three and one-half (346) cents per thousand cubic 

feet is "the actual market value" of this gas at the pipe line 

company's e.ighteen inch line. We made that statement because 

the pipe line company is paying that price. Usually the price 

paid by the purchasing pipe line company is a proper criterion 
Ron. Geo. H. Sheppard, Page 9 O-633 

on which to figure "market value", but it could be that a producer and a purchaser would enter into a contract for a price 

less than the market value or more than the market value for 

reasons known only to themselves, and such a price in those 

cases should not be taken by the Comptroller as market value. 

He should be governed by'%he actual market value", which may 

change from time to time. 

Our answer to your Inquiry is that under the facts of the case 

in question you should charge the natural gas tax, provided 

for in Article 7047-b, on the basis of the .actual market value 

at the y&1X; and not on the basis of the actual market value 

at the place of the first sale if that place is away from the 

well;. and you are advised that if the gas has no market value 

at the well you may determine its market value at the well.by 

taking the actual market value where there is a market and 

deducting the cost of taking the gas to that market. 

Youra very truly 

ATTORNEY QENERAL bF TEXAS 

OCR : jm 

APPROVED: 

BY 

Geoil,G. Botsch 

Aesirstant 

QBRALB ‘MANN 

ATTORNEY GENERAL OF TEXAS