April 26, 1939

Hon. George II,Sheppard Comptroller of Public Accounts Austin, Texas

Dear lelr.

Sheppard! Opinion No. O-633

Re: Place where "marketvalue" 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 inquiryare as follows: A certain company,which we will refer to as the "producer",owns and operates some gas wells in Hutchisonand Carson Counties, Texas, and it sells its gas to a pipe line company,,whichis another and separate concern. The p,ipeline companymaintains an eighteen inch pipe line, conveying gas from that field,which line is approximately sevenmiles from this producer'swells, and the pressure in this eighteen inchpipe line averages 320 pounds per squarepinch. 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 producermade a contract to sell the gas producedby 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 contractprovided! WWThe Seller agrees to sell anddeliver to the Buyer at the points of delivery hereinafterdesignated (which is the Buyer's pipe line).****Deliveriesof gas hereunder shall be made by Buyer to Seller at a pressure sufficientto enter the pipe lines of the Buyer against the variedworking4 ressures therein." It is agreed that threelandone-half (3;; cents per thousand cubic feet is "the actual market value" of this gas at the pipe line company's eighteen inchpipe line seven miles from the wells, where it is soldand delivered. Under this contract,itwas 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'seighteen inch line. By virtue of building this sevenmile line and these "compressor stations",it costs the producer one-half (&#) cent per thousand cubic feet to transport its gasfrom its wells to the place of delivery where it is sold at the pipe line company(seighteen inch line sevenmiles away.
The question you want us to answer iswhether you should charge the natural gas tax, provided for in Article 7047-b on the basis of the "actualmarket value" at the place of sale sevenmiles 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., 1 a 1 of which is now codifiedas 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~withinthis State, in thebusiness of producing and saving in paying.quantities, for sale or for profit,any naturalgas, including casinghead gas,from the soil or waters of this State, and
"(b) Every person who importsnatural gas intothis State and thereafter sells the same in.intrastatecommerce in this State, the tax to be imposed on the first sale; (provided, ho.wever,

that if any gas is imported into this Statefrom 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 thereonunder the provisions of this Act),
'I(c)Are hereby declared to be,"producers"and engaged in the business of producing natural gaswithin this State and shallmake 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 savedwithin this State., and on gas imported into the State, upon the first sale thereof in intrastatecommerce upon'the followingbasis:

"A tax equivalent to three per cent (3%)of the market value of the total amount of gas produced and sarad~withinthis State, or sold, if imported into this State,at theactual 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 actuzlmarket value ther‘::of,
as and when produced." Je think these are thecontrolling words, and thqt,the phrase "as and.when preduced" --- refera to all of the gas, both that produced.in the State and that imported into the State.

It might beoontencled that'the'

phrase of" controls "upon the first sale'there-

, and if that phrase was standinkalone 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, ~"ifimported into.this State"; that is, itmight be said that the phrase applies only to importedgas; but we think that phrase applies to and modifies thewhole sentence. The Legislaturewas talkingaboutthe taxing of all gas "as and when produced".

What does theword"produoe mean? Webster's frewInternational Di.ctionary,

2nd Ed:, gives a definition of'the word nproduce"
as follows:

."Tobring 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 producefruit.~"
.We'thinkthat natural gas is producedwhen it comes out of the ground. The mouth of the well is thefiacewhere it is produced.

We frankly admit, and anyone else, regardless ofwhich side of this question they urge, mustadmit, thatthe words of this statute are doubtful; The. Supreme Court of the United States in the case of United Statesv. Merriam, 263 U. S. 179, 44'S; Ct. 69, 68 L. Ed. 240, 29 A. .L.R. 1547, said:
"*****in statutes levying taxes the literalmeaning of the words employed is most important, for such statutes are not to ge extended,b language.used. f implicationbeyond,the clear import of the

f the words are doubtful, thedoubt must be resolved.againstthe. Governmentand 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 questionwewould 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 thewell, which is the constructionmost 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 questionhas arisen in several states in rega.rd to whether the producer,who operates thewell, shouldpay the royalty owners their share of the proceeds from the sale of the oil or gas severalmiles from the well to where it is piped by the producer and sold to a pipe line company, or shouldpay 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 shouldbe 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 connectionwith 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 lesseewhere it delivers gas to consumersdirectly 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 shouldbe computed upon the basis of the ~marketvalue actually exists, and if it does not, upon the basis of the reasonablevalue of such gas as establishedby 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:

"***thedispute ariseswhether the plaintiffwas entitled to the value of ,thegas 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'partiescontemplated that, if oil
or gas in paying quantitieswas 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 contemplatedand the provision should be construed that gas, if produced, shouldbe measured and and the price determinedat the place where the wells were connectedwith pipe lines, and not at some distantmarket that might be found at the end of a pipe line remotefrom the field and where the cost of transportationmight 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 transportedand 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 shouldbe the measure of defendants liability?***"

In the case of~warfieldNatural Gas Co, v. Allen, (Ky.Ct. App.) 261 Ky. 840, 88 S. W. (2d) 989, the Court said:

"The .leaserecited, TThat the Lessee isto deliver to the Lessor in tanks, .tankcars, 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 thegas. Itwas as much its duty to find the market as to find,the~ gas.***

"The lease is silent as 'towhere this market must be found. In.such cases, it is usually held to be at the'place of production.*+*

"So we cantsay 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'ultimatelyhave got :forit?

"The testimony of the.plaintiffJ. H.. Allen shows gas is usually sold at the well in the~localitywhere thesewells
are situated and the 12 cents per thousand feet is the usual pr.icein that locality, and thatthis price and custom prevailed therewhen these.leaseswere made. Then thatmust have .'been

what the partiescontemplated when they made this ,lease.*** "Nothing.was said in the :Ieaseabout a sale elsewhere'and this lease must be held to mean one-eighth of the gross proceeds of a'sale ,ofthe gas at the well side, and that is all for which defendantmust a.ccounteven though it may market the gas elsewhere and get a much greater sumfor it.***"

In the case of Wall v. .UnitedGasPublic Service CO., 178 La. go$, 152 SOU. 561, the Court said: (La sup. ct.11

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

"In the lease contract here involved, the lesseewas required to pay to the lessor one-eighth of the value of the gas sold off the premises, thereof. calculatedat the "market price"

The price to be paid was left open or made to depend upon the 'marketprice' at the time the gas was produced. The lessee settledwith the lessors for the gas at 4 cents per thousand cubic feet, which it contendswas the 'marketprice' at the well, its theorybeing 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 itselfnor in the testimony to show the intent of the parties touching the question whether the term 'marketprice' meant the price at thewell or the price the.gaswould bring in a market remote from the well. rJethink it reasonable to assume that the parties intended that,~'if there'was a market .forgas in the field, the currentmarket price there should be paid. There is where the gas was reduced to.possessionand there is where ownership of.it.sprang into existence. The result of bringing the 'gasto .the'surface'of, the ground 'inthe 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, .inwhich the Court of Civil Appeals at Fort Worth, with only the pleadings of the case before it by virtue of a demurrerhaving been‘sustained,held that the lessee (producer)shouldpay 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 decisionwas based solely on the working of the lease in which it,was expresslyprovided that the lesseewas"***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 insthe Scott case would not be applied because of the specificwords in the lease in the Ladd case. The Ladd case.was affirmed by the Supreme Court of Texas (Uphamv; Ladd, 12$ Tex. 14, ,95S.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.beapparent. 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 shouldbe paid on the basis of the market value at the well sheds some light on the question as to what basis this tax shouldbe paid on. It should likewisebe paid on the basis of the market value at the well.

An objectionhas 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 6cSlavens, 92 S. U. 823 (marketvalue of cattle) as follows:

"***The rule is well settled that where the questionhis 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 .costof transportationin order to *** deduce the value at the place in question. Suth. on Damages (2dEd.) Sec. 445.***"
This rule was adhered to in the case of Dale Oil & Refining Co.
v. City of Tulia, 25, S. W. 2nd. 671 (marketvalue of oil); and Kerr v. Blaer, 106 S.W. 549 (marketvalue 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 LouisianaNatural gas tax act, which is almost identicalwith 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 concernatHon. 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 sevenmiles 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 practicalmanner. Xe think it intended for the tax to be paid on a basis of the marketvalue at the well.

The final considerationwe wish to advance is that by virtue of the fact that the Consituttion of the State of Texas (Sec.1 Art. VIII) provides that "taxationshall 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 inother jurisdictions that such a rule can properly be applied in construing our statutes. In the case in question if this tax ischarged 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 someinstancesat the well and in other instancesmany 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 shouldbear itsfair andequalhlrden of taxation, and a liberal constructionwill be indulged to accomplish that end."

In the 'caseof 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 equitablydistributes the burdens of taxation, the court should adopt that view, unless compelled to do otherwiseby decisions or a long course of conductwhich ought not to be altered."

The conclusionwe 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., assistantsunder Attorney GeneralMcGraw; and that opinion is i%ergfone overruled.

Thewords "actualmarket value"must be given their literalmeaning. We have stated at thebeginning of this opinion that it is agreed that three and one-half (346) centsper thousand cubic feet is "the actualmarket value" of this gas at the pipe line company'se.ighteeninch line. We made that statementbecause the pipe line company is paying that price. Usually the price paid by the purchasingpipe line company is a proper criterion

### Ron.Geo.H. Sheppard,Page 9 O-633



### onwhich to figure "marketvalue",but it couldbe thata produceranda purchaserwouldenter intoa contractfora price less thanthemarketvalueormore than themarketvalue for reasonsknownonlyto themselves,and sucha pricein those
cases shouldnotbe takenby the Comptroller asmarketvalue. He shouldbe governedby'%he actualmarketvalue",whichmay changefrom timetotime.

Our answerto your Inquiryis thatunderthe facts of thecase in questionyou shouldchargethenaturalgastax,provided for inArticle7047-b,on thebasisof the .actual marketvalue at they&1X;andnot on thebasisof the actualmarketvalue at theplaceof the firstsaleifthat place isaway fromthe well;. andyou areadvisedthat if thegas hasnomarketvalue at thewellyoumaydetermineitsmarketvalueat thewell.by takingtheactualmarketvaluewhere there is a marketand deductingthe costof takingthegas to thatmarket.

Youravery truly

ATTORNEYQENERALbF 

### TEXAS

OCR: jm



### APPROVED: BY 

### Geoil,G.Botsch Aesirstant

QBRALB ‘MANN



### ATTORNEYGENERALOF TEXAS