E ORNE GENERAL

0m-T13x~8

Awsniu 11. TExas WILL WILSON AITORNEY GENERAL



### April10,1959

Hon. V. L. Ramsey, Chairman Opinion No, W-592: Revenue &Taxation Committee House of Representatives Re: Constftntionality of R.Bi AyAAn, Texas 

### No,43, 56thLegi.slature:, levying a tax to be known as,the Weverance BenefiDear Mr. Ramsey: ciary Tax.n

Your committee has reque.sted the opinion of this, office as to, the constitutionality of HouseBill: No, %j:, levying a tax to 

### be, knownas a severance beneficiary tax, particularly with reference to the const~ltutionality of the bill insofar as it affe~ct,s ges transmis,aion lines, ,both~long lines and those involved in dnterstate commerce.

House Bill No, 43.is Xeng~thy,consisting of X-2 page,s, andmost of t;heprov5sions therein cont~ained are WILLlar in form.to those contained ,fn Article 

### 70&7b,Vernon% Civil Statutes,, which provi,des for an occupation tax on the production of,natural gas in Texas. Therefore,, the question of the. constitutionality of House Bi,ll: No. 

### 4-3, wfldbe,

confined to those sections of th,e~ act. providing for the taxati~on of the production of dedicated ga.sto be.paid by the s,everante beneficiary.

Sectio~n l(1) of the act provides that’ in addition to the, oc.cupation tax o,n,producers of natural gas nowlevied under the provisions of Article 704,7b, V.C,S. there~fs levied an occupation tax on the oocupation or pr vilege i of obtaining the production of dedicated gas withinthis State, and on the business or occupation of producing such gas, to,be knownas the “Severance, Beneficiary Tax,)Ithe tax being based on a percentage of the market value of the gas,produced at the well.
Section IL&) states that the tax herebv levied is

“an occupation tax on the occupation or privilege,of obtaining the production of ‘dedicated gas” andon the business or occupation of producing such gas as a ‘severance beneficiary,l as those terms are defined herein.”

Section 

### l(5)provides that the tax shall be a liability of the producer of the gas, but if produced for or sold to.Hon. V. L. Ramsey, page 2 (ww-5921

a severance beneficiary other than the producer, the tax shall be naid bu the severance beneficiary. but that the liability-of the producer shall end only Lion the payment of the tax by the severance beneficiary, anduntil such time both the producer and the severance beneficiary shall be jointly Uable for payment of the tax. Wheregas is sold to a severance beneficiary and reported to the Comptroller of Public Accounts “as provided in‘the act,: the’.producer shall never be required to ’ pay:the tax unless the severance beneficiary fails to do ’so or is held~,,by‘a,final court order notto be liable~ therefor. ,,

Section l(6) provides that the first purchaser of gas shall pay the’tax on the gas so purchased,.and Unless he is the severance beneficiary, the tax so paid shall be d,educted from the paynientdue the’ producer.

Section 2 of.The act, defining terms, is identical with the provisions of Section2, Article 7047b, with the following exceptions: ”

“(1) For the purpose of thinsAct, ‘producer’ shall meanany person (other.than anon-operating royalty owner) owning, controlling, managing, or leasing any gas well,or land,producing gas, and any person whoproduces in anymannerany gas by taking it from the earth or waters in this State.
TV (2) ‘First’ rurchaser Ishall mean’any person purchasing gas from the,,producer ,or from a severante beneficiary. In the event there is no ’ ‘first purchaser I or severance beneficiary, then the producer shall, be deemedthepurchdser and pay the tax levied by this Act. “(31 ‘Dedicated, Gas’ shall isxrraW all gas produced and saved in this State’covered by any’ purchase contract, option, “oreagreement. bywhich’ gas is to be produced for, ‘sold to, or used by a severance beneficiary; as herein, defined, OF gas produced and saved by the producer thereon whenthere is no other severance beneficiary. ll(4j ‘Severance ~Beneficiary’ ,shall mean,any

‘person for’whom gas is produced andto whomit’is first sold by the’ producer: under a~dedication contract or’ under any other agreement of sale made prior to the production thereof under which a person acquires dedicated,gds reserves in this State or exclusive or beneficial rights in gas under theHon. V. L. Ramsey, page 

### 3 (WW-592)

earth or waters of this State. Aperson purchasing gas pursuant to such a contract shall be deemedto be engaged in obtaining the production of dedicated gas in this State, which is avaluable occupation or privilege for which this tax is levied; provided, however that a producer producing gas for his ownuse or for sale andnot subject to,a contract as described above, shall be considered a severance ,beneficiary for the purpose of this Act.". Construing the foregoing definitions with the provisions of Section 1, sub-sections (1) through 

### (81,itis apparent that House Bill No. 

### 43is an act levying an occupation tax upon the occupation or privilege of obtaining the production of'gas produced and saved in Texas, which is subject to any purchase contract, option, or agreement, under the terms of which the gas is to be produced for, sold to, or ,used by any person for whomthe gas is produced andto whom it is f1rs.t sold bythe producer under the contract or agreement of sale madeprior to .the production of the gas, andby which such person acquires gas reserves or the exclusive or beneficial rights in gas under the earth or waters of this State. Under the terms of HouseBill No. 

### 43a person for whomsuch,gas is produced, or whohas the' right to produce or acquire such gas, is engaged in a valuable occupation or privilege which constitutes the basis for the levy of the tax upon such occupation or privilege. If the severance beneficiary uponwhomthe tax is primarily levied is also the producer, then the tax so levied is a tax levied upon the production of such gas in addition to the original production or severance tax levied under the provisions of Article 7047b, V.C.S. Thetax levied under House Bill No. 

### 43 is a privilege or occupation tax upon the producer of natural gas calculated according to,the value of the gas so produced at'the well HoDeNatural Gas C

. Hall 274 U.S. 

### 284'(1926) and sinci it does not enter y&t: interitate commerceuntil It has been produced

uroduc ion. Eand the tax imposed, thereon is only in respect to the merce is involved: no discrimination against interstate comOliver Iron Co. v.-Lord 262 U.S. 

### 172 I;;;;;; Utah Power &Light Co. v. Pfost? 288U.S. 165, 

### 182

. Thetax is an occupation or privilege tax which falls alike on those engaged in interstate commerceor in intrastate commerce, or both, andtherefore does not violate the Commerce clause of the Constitution of the United States. Coverdale v. Piueline Co., 

### 303u.s._604,610 (1938).Hon. V. L. Ramsey, page 4 (W- 

### 592)

Since the incidence of the tax is based solely upon the occupation or privilege of the production of “dedicated gas” from the earth or waters of this State by a %everance beneficiary,” as those terms are defined, irrespective of the ultimate disposal of the gas so produced--whether in intrastate or interstate commerce--it is purely local in nature and therefore not violative of the Commerceclause of the Federal Constitution, HoneNatural Gas’Co. v. Hall, suora.

HouseBill No. 

### 43is not subject to the constitutional objections raised in Michigan-Wisconsin Pipeline Co. v. Calvert, 

### 347U.S. 

### 157 (1953), wherein the SupremeCourt of the United States held that the “gas gathering” tax wasviolative of the Commerceclause of the Federal Constitution for the reason that the taxable event or incident which formed the basis for the tax was “not levied on the capture or production of the gas but rather on its taking into interstate commerceafter production, gathering, and processing.

. .I’ Noris the tax levied by House Bill No. 

### 43subject to the additional objection stated by the Court in the “gas gathering” case that it would permit amultiple burden upon interstate ~commerce,~since the taxable incident, i.e. the production of the gas, is a purely local incident which cannot be the subject of repeated tax exactions in other states, Coverdale v. Pipeline Co., 

### 303U.S. 

### 612.

In Section l(5), which provides that the tax levied upon the occupation or privilege of obtaining the production of dedicated gas should be paid by the severance beneficiary, it is further provided that:

II

. . . In no event shall the severance-beneficiary deduct, charget or collect the tax hereby levied from his paymens to the producer, andno contract or agreement heretofore or hereafter made shall be Interpreted as requiring the producer to pay any portion of the tax which is the liability of the severance beneficiary under the provisions of this Act. It is hereby declared to be against the public policy of this State, and to contribute to economic andactual..waste ,and to,~beanunlawful limitation upon the conserva ion andtaxing powers i, of the State of Texas, for any contract to require the producer to pay the severance beneficiary tax hereby levied whenthere is a severance beneficiary as defined herein other than the producer himself j it being the intention of this Act that the producer shall be required to pay the tax hereby levied only if the gas is produced for his ownuse or independent sale andnot under any prior contract to produce for sale to another, or if the severance. -

Hon. V. L. Ramsey, page 

### 5 (WrJ-592)

beneficiary is declared by final court judgment not to be liable for the tax hereby levied.

. .~.I1
Based upon,the above quoted provisions of Section 

### l(5),declaring it to be the public policy of this State and to contribute to economic or actual waste anda limitation upon the conservation powers of the State for any contract to require the produce,r to pay the tax leviedupon the severance beneficiary I the power of the State to enact legislation for the prevent on of economic and physical waste of natural gas as against the contention thatsuch legislation violated the due nrocess and eaual Drotection clauses of the Fourteenth zndment of the Con;t$Mon of the United States, wasupheld Cities Service Ga v. Peerless Oil &GasCo. 

### 35,220 P.2d 279. 289 

### (19501,aff'd 

### 340U.S. 

### 179.1852?:9$::* TheOklahomastatute provided that the .OklahomaCorporation Commission was empoweredto fix the price paid to the producers for gas taken at the well, because the taking of gas at the prevailing price resulted in both economic and physical waste of gas and loss to the producers and loss to the State in gross production taxes and the constitutionality of such statute was sustained by the SupremeCourt of Oklahomaandthe SupremeCourt of the United States.

Theprovision that the severance beneficiary may neither deduct, charge, or collect the tax from his paymentto the producer, and that no contract or agreement heretofore or hereafter madeshall be interpreted to as to require the producer to payall or anypart of the tax for which the severance beneficiary is primarily liable under the provisions of the act, does not impair the obligation of a contract in violation of Article I. Section 

### 16.Constitution of Texas. or Article I. Section 16 Constitution of the United States, Henderson Co. v. Thomuson, 300 U.S. 258, 266 (1936).

Thetax imposed~by House Bill No. 

### 43 is a production or severance tax based upon the occupation of producing gas from the earth andwaters of this State prior to its entry into either intrastate or interstate commerce, and irrespective of the ultimate destination of the gas so produced, the fact that it maybe subsequently transported through pipelines which are engaged in either interstate or intrastate commerce, or both, does not affect the constitutionality of the act itself.

It is the opinion of this office that the provisions of House Bill No. 

### 43which levy an occupation tax uponthe occupation or privilege of obtaining the production of dedicated gas within this State, and on the busi-less andoccupation of producing such gas to be paid by the severance beneficiary or theHon. V. L. Ramsey, page 6 (WW-592)

producer thereof, donot violate the due process andequal protection clauses-of Article I, Sections 

### 16and.19, Constitution of Texas,and Section I of the Fourteenth Amendmentto the Constitution of the United States, or impair the obligation of contracts in violation of Article I, Section 16, Constitution of Texas, andArticle I States. Since the tax i Section 10,' Constitution of the United s levied upon the production of gas 'within the State of Texas, the fact that whenproduced such gas

transmitted through nieelines for final disuosition in maybe either cle I, tution interstate or intFas%aie commercedoes not Violate ArtiSection 

### 8,Clause 

### 3,the Commerceclause of the Constiof the United States.
SUMMARY
House Bill No. 

### 43which levies an occupation tax on the occupation or privilege of obtaining the production of dedicated gas within this State, andon the business and occupation of producing such gas to be paid by~the severance beneficiary or the producer thereof, does not violate the due process and equal protection clauses or impair the obligations of contracts under the provisions of the Constitution of Texas and the Constitution of the United States, nor does it violate the provisions of the "Commerceclause" of the U.S. Constitution.
Yours very truly,

CKR:wb WILLWILSON ;;-&$JJofy=&

C. K. Richards Assistant
APPROVED: OPINIONCOMMITTEE Geo. P. Blackburn, Chairman, Fred Werkenthin John Reeves Jack Price PEVIEWED

FORTHEATTORNEY

GENERAL
BY: W.V. Geppert