JIM MAlTOX 

The Attorney General of Texas 

May 2, 1984 

Attorney General 

Supreme Cowl Building 

P. 0. Box 12546 

Austin, TX. 76711. 2546 

5121475.2501 

Telex 9101674-1367 

Telecopier 5121475-0266 

714 Jackson, Suite 700 

Dallas, TX. 75202.4506 

2141742-6944 

4624 Alberta Ave., Suite 160 

El Paso, TX. 799052793 

9151533-3484 

-1001 Texas, Suite 700 

Houston, TX. 77002-3111 

7131223-5666 

608 Broadway, Suite 312 

Lubbock. TX. 79401.3479 

6061747-5236 

4309 N. Tenth. Suite S 

McAllen, TX. 76501-1665 

512/662-4547 

200 Main Plaza. Suite 400 

San Antonio, TX. 76205.2797 

5121225-4191 

An Equal Opportunity/ 

Affirmative Action Employer 

P 

Honorable Bob Bullock 

Comptroller of Public Accounts 

P. 0. Box 2243 

Austin, Texas 70767 

Opinion No. JR-150 

Re: Taxability of sales of 

natural gas by a company to 

industrial consumers within a 

city under chapter 182 of the 

Tax Code 

Dear Mr. Bullock: 

You ask whether certain sales of natural gas by a company to 

industrial consumers within a city should be taxed pursuant to chapter 

182 of the Tax Code. The determination as to whether the sales at 

issue are taxable is a factual one. On the .basis of the facts which 

you have submitted to us, we conclude'that they should be taxed. 

Section 182.022 of the Tax Code imposes a gross receipts tax on 

each utility company located inan incorporated city or town having a 

population of more than 1,000, according to the last federal census 

next preceding the filing of the report. Section 182.021 of the Tax 

Code defines "utility company" and "business" for purposes of this 

chapter: 

(1) 'Utility company' means a person who owns 

or OperateS a gas, SlsCtriC light, SlsCtriC power, 

or water works, or water and light plant used for 

local sale and distribution located within an 

Incorporated city or town in this state. 

(2) 'Business' means the providing of gas, 

electric light, electric power, or water. 

(Emphasis added). 

You have provided us with the following facts: 

A division of a larger division of the company 

in question (1) transports natural gas by a 

high-pressure pipeline into the Houston Ship 

Channel; (2) has a system of meters and lateral 

lines off this pipeline, which it uses to deliver 

the gas under reduced pressure to industrial 

p. 650 
, 

Honorable Bob Bullock - Page 2 (JM-150) 

consumers in Houston; (3) odorizes the gas under 

requirement of the Texas Railroad Commission; (4) 

has an industrial franchise agreement with the 

city of Houston to.sell gas to the city of Houston 

and industrial users within the city; (5) agrees 

as part of obtaining the Houston franchise that 

'It is understood that lawful power vested by law 

in the city to regulate all public utilities 

within the city within the limits of the 

constitution and laws and to require all persons 

or corporations to discharge the duties and 

undertakings for the performance of which this 

franchise was made, is preserved . . .'; (6) makes 

the sales under negotiated contracts rather than 

by published rate schedules but files rates with 

the city of Houston in accordance with the Public 

Utility Regulatory Act; (7) does not hold itself 

out as selling gas to residential consumers within 

the city of Houston: (8) sells gas to more than 

twenty '(20) industrial consumers in the city of 

Houston. In addition, the larger division sells 

gas in Texas to residential consumers in other 

incorporated cities and towns having populations 

of more than 1,000 and reports and remits tax 

under chapter 182 for these cities and towns. 

You wish to know whether, under these facts, such sales are 

taxable. At the outset we note that the gas industry is 

conventionally divided into three distinct occupations: (1) severance 

(Or production) and gathering; 

pipeline, 

(2) transporting or transmission by 

and (3) local distribution. See Thompson v. United Gas 

Corporation, 190 S.W.2d 504, 506 (Tex. Civ. App. - Austin 1945, writ 

ref'd); Attorney General Opinion WW-1111 (1961). 

In Edd,ins-Walcher Butane Company v. Calvert, 298 S.W.2d 93, 96 

(Tex. 1957). the Texas Supreme Court declared that "gas works" for 

purposes of article 7060, V.T.C.S., (the predecessor to chapter 182, 

Tax Code) refers to ,either: "(1) an establishment in which gas is 

manufactured, produced, or processed, or (2) a distribution system 

Consisting of pipes through which the gas flows and is delivered to 

the premises of consumers," (Emphasis added). The court held that a 

butane distributor, delivering butane to the premises of its customers 

inside the city limits by means of trucks, was not subject to the tax. 

In setting forth the scope of the statute, the Texas Supreme 

Court declared: 

[ilt is expressly provided that the tax shall be 

levied only once on the same commodity, and that 

p. 651 
Honorable Bob Bullock - Page 3 (JM-150) 

where the commodity is produced by one person and 

distributed by another, the tax shall be paid by 

the distributor alone. This indicates that 

facilities for the distribution of gas may 

constitute a gas works within the meaning of the 

statute even though the commodity is manufactured 

or produced by another. 

Eddins-Walcher Butane Company v. Calvert, supra, at 95. 

Clearly, the operation at issue is not "an establishment in which 

gas Is manufactured, produced or processed;" the issue is whether it 

is "a distribution system consisting of pipes through which the gas 

flows and is delivered to the premises of consumers." Specifically, 

the issue to be resolved is whether the operation at issue is a local 

gas distribution system and therefore subject to the tax or whether it 

is a gas transmission system incidentally making industrial sales of 

gas along its line. In our opinion, the operation at issue, while 

bearing some of the usual indicia of a gas transmission system, can 

more fairly be described as a gas distribution system for purposes of 

this tax. It is therefore subject to the tax. 

In briefs submitted on behalf of the operation sought to be 

taxed, it is stated that, while a substantial part of the operation's 

business consists of selling gas in large quantities to industrial and 

chemical plants located along Its lines, the majority of its business 

consists of picking up and transmitting natural gas from the wellhead 

and from gas gathering systems to the parent corporation's main system 

transportation division. Further, it Is urged that, under the given 

facts, the operation is substantially similar to the operation which 

was held to be non-taxable in Attorney General Opinion WW-1111 (1961). 

We disagree. We conclude that Attorney General Opinion WW-1111 was, 

in part, incorrectly decided. 

In that opinion, this office concluded that a company engaged in 

certain activities was not operating a "gas works . . . for local sale 

and distribution" and was therefore not taxable. Those activities 

were : (1) maintaining high pressure pipelines crossing into the city 

to the point of delivery; (2) having no network of mains and laterals 

by means of which the gas Is delivered; (3) not odorizing the gas; (4) 

obtaining no franchise from the city; (5) submitting to no local 

regulation of its rates and policies; (6) making the sales at issue 

competitively upon negotiated contracts rather than by published rate 

schedules; and (7) in no manner holding itself out as a public utility 

to serve individual consumers. 

The operation at issue here does bear some of the indicia of a 

transmission company. It too makes its sales under negotiated 

contracts, rather than by regulated rates. It transports gas into the 

p. 652 
Honorable Bob Bullock - Page 4 (JM-150) 

Houston Ship Channel by means of a high pressure pipeline and sells 

gas at reduced pressure to industrial consumers. It does not hold 

itself out as selling gas to residential consumers within the city; it 

is not a "public utility" in the sense in which the phrase is commonly 

understood. On the other hand, it bears several features of a 

distribution system. It has a system of meters and lateral lines off 

the pipeline which it uses to deliver gas , although it does not have 

an extensive grid network which is characteristic of a distribution 

company delivering gas to residential consumers. The "industrial 

franchise agreement" by means of which the city granted to the company 

the authority to lay mains and laterals under city-owned and 

controlled right-of-way provides that the company sell gas to the city 

and to industrial users within the city. The agreement does not 

purport to require the company to sell gas to anyone who wants it, but 

.the agreement contains no limitations on the number of industrial 

consumers to which it sells. The company sells gas under contract to 

more than twenty industrial consumers within the city. 

Attorney General Opinion WW-1111, cites Dallas Gas Company v. 

State, 261 S.W. 1063, 1069 (Tex. Civ. App. - Austin 1924, writ ref'd), 

in support of the proposition that the sort of business sought to be 

taxed "is usually recognized as a public utility over which 

municipalities . . . exercise powers of regulations." Such reliance 

is misplaced. The language from the Dallas Gas case upon which 

Attorney General Opinion WW-1111 relies did not define the scope of 

the statute. It was argued in the Dallas Gas case that the 

predecessor statute to chapter 182 of the Tax Code violated article 

VIII, sections 1 and 2 of the Texas Constitution because the statute 

imposed one rate of taxation upon businesses operating in cities of 

over 25,000 population and a lesser rate in cities of population of 

10,000 to 25,000. Section 1 of article VIII of the Texas Constitution 

requires, in pertinent part, that "[tlaxation shall be equal and 

uniform." Section 2 provides in pertinent part that "[a]11 occupation 

taxes shall be equal and uniform upon the same class of subjects 

within the limits of the authority levying the tax." In support of 

the proposition that sections 1 and 2 were violated, appellant cited a 

Kentucky case in which the Supreme Court of Kentucky struck down an 

occupation tax imposed upon real estate agents classified on the basis 

of the population size of the cities in which they engaged in 

business. The language from the Dallas Gas case upon which Attorney 

General Opinion WW-1111 relied was employed by the court for the sole 

purpose of distinguishing the occupations of real estate agent and 

operator of a gas works. Citing the "peculiar nature of the 

occupation involved" and the principle that acts of the legislature 

should be upheld unless in clear violation of the state or federal 

constitution, the court upheld the tax. 

While it is certainly the case that the tax reaches distributors 

engaging in business properly characterized as a public utility, it 

p. 653 
Honorable Bob Bullock - Page 5 (JM-150) 

does not follow that such tax can be imposed on only those 

distributors who sell to residential consumers. The act itself 

defines "utility company" to refer to, inter alia, a "gas . . . works 

used for local sale and distribution." Tax Code 1182.021. The 

definition imposes no restriction on the imposition of the tax, which 

would limit it only to those distributors selling to residential 

consumers. Moreover, the Texas Supreme Court has defined 

"distribution" in the following way, and clearly did not limit its 

reach to those selling gas to residential consumers: 

This term as used does not mean the transfer of 

the possession of gas, by means of the pipe line, 

to a single purchaser where such purchaser is the 

only customer to whom the gas company sells gas In 

the city. It means the transfer of oossession of 

gas to- various individuals or concerns in the 

city. Any other construction of the term would, 

in our opinion, involve a departure from the 

legislative intent. (Emphasis added). 

Utilities Natural Gas Co. v. State, 128 S.W.2d 1153, 1155 (Tex. 1939). 

The operation here sought to be taxed clearly transfers the 

possession of gas to various individuals or concerns but without 

selling gas to residential consumers. However, were we to hold that 

it is necessary, for the imposition of this tax, that the business 

taxed be a "public utility," we can say that the operation sought here 

to be taxed may properly be so characterized. See Tax Code 

9182.021(l) (definition of "utility company"). The so-called 

"franchise agreement" which the company executed with the city clearly 

provides that 

it is understood that lawful power vested by law 

in the city to regulate all public utilities 

within the city 3 within the limits of the 

constitution and laws, and to require all persons 

or corporations to discharge the duties and 

undertakings for the performance of which this 

franchise was made, is reserved . . . . 

Houston, Texas Ordinance No. 69-1929, 613 (1969). Moreover, while the 

operation does not serve residential consumers, the franchise 

agreement arguably permits the operation to serve both the city and 

any and every industrial consumer within the city. Such an operation 

could fairly be denominated a "utility company" for purposes of this 

tax. 

It is further urged, again in reliance upon Attorney General 

Opinion Ww-1111 that the primary occupation of the taxpayer is the 

p. 654 
Honorable Bob Bullock - Page 6 (JM-150) 

crucial test for application of the statute. In support of this 

assertion, Attorney General Opinion Ww-1111 cites Attorney General 

Opinion WW-909 (1960). Again, such reliance is misplaced. In 

Attorney General Opinion WW-909, the issue was whether an Air Force 

base located within the limits of an incorporated city which purchased 

gas through a single meter located at the base boundary and consumed 

all of the gas except for a certain amount which was sold to private 

concessionaires using gas on the base was in the business of operating 

a "gas works" for purposes of the predecessor statutes to chapter 182 

of the code. The opinion concluded that it was not: 

Construing the two cases together [the 

Eddins-Walcher case and the Utilities Natural Gas 

co. case], it appears that to come within the 

6s of [chapter 182 of the Tax Code], it is 

necessary that a tax payer be engaged in the 

business of operating, managing or controlling an 

establishment in which gas is manufactured, 

produced or processed for local sale and 

distribution, or in the business of owning, 

operating, controlling or managing a distribution 

system consisting of pipes through which gas flows 

and is delivered to the premises of consumers. 

The Air Force Base is not in either such business. 

In all but a few instances, the Air Force, or one 

of its components, is the consumer of the gas. 

(Emphasis added). 

Id. at 3. 

rimposed, 

The opinion finally concluded that the tax liability should 

not on the Air Force, but rather on the gas company which 

sold the gas to the base. 

The opinion did not hold that, since the Air Force base is not 

engaged in the primarybusiness of distributing gas, it cannot be 

considered to be a "gas works" for purposes of the tax even though it 

made incidental sales to concessionaires on base. Rather, the opinion 

held that the gas company was the distributor and that the air base 

was the ultimate consumer. A similar rationale was employed and 

result reached in an earlier opinion, Attorney General Opinion ~~-810 

(1960). In that opinion, it was held that a corporation distributing 

gas to a gas distribution system owned and operated by the city of 

Houston, the latter being the final distributor of the gas that it 

received, is not liable for a tax on such sales. The opinion 

concluded that the city, as final distributor and not as consumer, 

would be liable for the tax were it not expressly exempted by the 

statute by virtue of the fact that it is a political subdivision. The 

gas company was not the actual final distributor; hence, it was not 

liable for the tax. Likewise, in Attorney General Opinion WW-909 the 

? 

-. 

p. 655 
Eonorable Bob Bullock - Page 7 (JM-150) 

Air Force base was held to be the consumer and not the distributor. 

Accordingly, it was not liable for the tax. 

We therefore conclude that the tax does not, as Attorney General 

Opinion WW-1111 suggests, reach only those whose primary business is 

manufacturing and distributing gas. The tax reaches even incidental 

sales by a company whose primary business is transporting the gas. To 

the extent of conflict, Attorney General Opinion WW-1111 (1951) is 

hereby overruled. Accordingly, we conclude that the operation sought 

to be taxed can fairly be described as engaging in the distribution of 

gas and receipts from the sale of its gas are therefore subject to the 

tax imposed by chapter 182 of the Tax Code. 

SUMMARY 

Under the facts presented, receipts from the 

sale of natural gas to industrial consumers in a 

city are subject to the tax imposed by chapter 182 

of the Tax Code. 

JIM MATTOX 

Attorney General of Texas 

TOM GREEN 

First Assistant Attorney General 

DAVID R. RICHARDS 

Executive Assistant Attorney General 

Prepared by Jim Moellinger 

Assistant Attorney General 

APPROVED: 

OPINION COMMITTEE 

Rick Gilpin, Chairman 

Jon Bible 

Colin Carl 

Susan Garrison 

Jim Moellinger 

Nancy Sutton 

p. 656