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 HonorableBob Bullock Comptrollerof PublicAccounts P. 0. Box 2243 Austin, Texas 70767 OpinionNo. JR-150

Re: Taxability of sales of natural gas by a company to industrial consumerswithin a city under chapter 182 of the Tax Code

DearMr. Bullock:

You ask whether certain sales of natural gas by a company to industrialconsumerswithin a city shouldbe taxedpursuant to chapter 182 of the Tax Code. The determination as to whether the sales at issue are taxable is a factual one. On the .basisof the factswhich you have submittedtous,we conclude'thatthey shouldbe taxed.
Section 182.022 of the Tax Code imposes a gross receipts tax on each utility company located inan incorporatedcity or townhaving 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) 'Utilitycompany'means a person who owns

or **OperateS** a gas, **SlsCtriC** light, **SlsCtriC** power, or water works, or water and lightplant used for local sale and distribution located within an Incorporatedcity or town in this state.
(2) 'Business' means the providing of gas, electric light, electric power, or water. (Emphasisadded).

You have providedus 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

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Honorable Bob Bullock - Page 2 (JM-150)

consumers in Houston; (3) odorizes the gas under requirementof the Texas Railroad Commission; (4) has an industrial franchise agreement with the city of Houston to.sellgas 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 franchisewas made, ispreserved

. . .'; (6)makes the sales under negotiated contracts rather than by published rate schedules but files rates with the city of Houston in accordancewith the Public Utility Regulatory Act; (7) does not hold itself out as sellinggas to residentialconsumerswithin 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 citiesand towns.

You wish to know whether, under these facts, such sales are taxable. At the outset we note that the gas industry is conventionallydivided into threedistinctoccupations: (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);AttorneyGeneral OpinionWW-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., (thepredecessor 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 thepremises of consumers," (Emphasisadded). The courtheld that a butane distributor,deliveringbutane to thepremises of its customers inside the city limitsby means of trucks,was not subject to the tax.

In setting forth the scope of the statute, the Texas Supreme Court declared:

[ilt is expresslyprovided that the tax shall be levied only once on the same commodity, and that

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where the commodity is produced by one person and distributedby 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 producedby another.
Eddins-WalcherButane Companyv. Calvert,supra, at 95.
Clearly, the operationat issue is not "an establishmentinwhich 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 tobe resolved iswhether the operation at issue is a local gas distributionsystem and therefore subject to the tax orwhether it is a gas transmission system incidentallymaking 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 fairlybe describedas 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 substantialpart of the operation's business consistsof sellinggas in large quantitiesto industrialand chemicalplants locatedalong Its lines, themajority of its business consists of picking up and transmittingnatural gas from thewellhead and from gas gathering systems to theparent corporation'smain system transportationdivision. Further, it Is urged that, under the given facts, the operation is substantially similar to the operationwhich was held tobe non-taxable inAttorneyGeneralOpinionWW-1111 (1961). We disagree. We conclude that Attorney General Opinion WW-1111 was, inpart, incorrectlydecided.

In that opinion, this office concluded that a company engaged in certainactivitieswas not operatinga "gasworks

. . . for local sale and distribution" and was therefore not taxable. Those activities were: (1)maintaininghigh pressurepipelines crossing into the city to thepoint of delivery; (2)having no network of mains and laterals by means ofwhich 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 competitivelyupon negotiated contracts rather than by published rate schedules;and (7) inno manner holding itselfout as a publicutility to serve individualconsumers.
The operation at issue here does bear some of the indicia of a transmission company. It too makes its sales under negotiated contracts,rather thanby regulatedrates. It transportsgas into the

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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 sellinggas to residentialconsumerswithin the city; it isnot a "publicutility" in the sense inwhich thephrase 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 franchiseagreement"by means ofwhich the city granted to the company the authority to lay mains and laterals under city-owned and controlledright-of-wayprovides that the company sellgas to the city and to industrial users within the city. The agreement does not purport to require the company to sell gas to anyonewho wants it,but .the agreement contains no limitations on the number of industrial consumers towhich it sells. The company sells gas under contract to more than twenty industrialconsumerswithin 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 Constitutionbecause 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 10,000to 25,000. Section 1 of articleVIII of the Texas Constitution requires, in pertinent part, that "[tlaxation shall be equal and uniform." Section 2 provides inpertinentpart 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 theproposition that sections 1 and 2were violated, appellantcited a Kentucky case in which the Supreme Court of Kentucky struck down an occupation tax imposedupon real estate agents classifiedon thebasis of the population size of the cities in which they engaged in business. The language from the Dallas Gas case upon which Attorney GeneralOpinionWW-1111 reliedwas employedby 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 courtupheld the tax.
While it is certainly the case that the tax reachesdistributors engaging in business properly characterized as a public utility, it

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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 imposesno restrictionon the impositionof 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 sellinggas to residentialconsumers:

This term as used does not mean the transfer of the possession of gas, by means of the pipe line, to a singlepurchaserwhere such purchaser is the only customertowhom the gas company sellsgas In the city. Itmeans 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 legislativeintent. (Emphasisadded).
UtilitiesNaturalGas 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 taxedbe a "publicutility,"we can say that the operation soughthere to be taxed may properly be so characterized. See Tax Code 9182.021(l) (definition of "utility company"). The so-called "franchiseagreement"which the companyexecutedwith the city clearly provides that

it is understood that lawful power vested by law in the city to regulate all public utilities within the city3 within the limits of the constitutionand laws, and to require all persons or corporations to discharge the duties and undertakings for the performance of which this franchisewas made, is reserved

. . . . Houston,Texas OrdinanceNo. 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 consumerwithin 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

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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 locatedwithin the limits of an incorporatedcitywhich purchased gas through a singlemeter located at the base boundary and consumed all of the gas except for a certain amountwhich was sold to private concessionairesusing gas on thebasewas in thebusiness of operating
a "gasworks" for purposes of the predecessor statutes to chapter 182 of the code. The opinion concludedthat itwas not:

Construing the two cases together [the Eddins-Walcher case and the UtilitiesNatural 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 consistingof pipes throughwhich gas flows and is delivered to the premises of consumers. The Air Force Base is not in either suchbusiness. In all but a few instances, theAir Force, or one of its components, is the consumer of the gas. (Emphasisadded).
Id. at 3. rimposed, The opinion finally concludedthat the tax liabilityshould

not on theAir Force, but rather on the gas companywhich sold the gas to thebase.
The opinion did not hold that, since the Air Force base is not engaged in the primarybusiness of distributing gas, it cannot be considered tobe a "gasworks" for purposes of the tax even though it made incidentalsales to concessionaireson base. Rather, the opinion held that the gas companywas 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 corporationdistributing 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 statuteby 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 ?

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Air Force base was held to be the consumer and not the distributor. Accordingly, itwas 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 salesby a companywhose primarybusiness is transportingthe gas. To the extent of conflict, Attorney General Opinion WW-1111 (1951) is hereby overruled. Accordingly,we conclude that the operation sought tobe taxed can fairlybe describedas engaging in the distributionof gas and receipts from the sale of its gas are therefore subject to the tax imposedby 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 imposedby chapter 182 of the Tax Code.

JIM MATTOX AttorneyGeneral of Texas

TOM GREEN FirstAssistantAttorneyGeneral

DAVID R. RICHARDS ExecutiveAssistantAttorneyGeneral Preparedby Jim Moellinger AssistantAttorneyGeneral

APPROVED: OPINION COMMITTEE
Rick Gilpin,Chairman Jon Bible Colin Carl SusanGarrison Jim Moellinger Nancy Sutton

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