E ORNE GENERAL 

0m-T13x~8 

Awsniu 11. TExas 

WILL WILSON 

AITORNEY GENERAL 

April 10, 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, 56th Legi.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 House Bill: No, %j:, 

levying a tax to be, known as 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, and most of t;he prov5sions 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, wfld be, confined to those sections of th,e~ act. providing for the taxati~on 

of the production of dedicated ga.s to 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 now levied 

under the provisions of Article 704,7b, V.C,S. there~ fs levied an occupation tax on the oocupation or pr i vilege of obtaining the production of dedicated gas withinthis State, and 

on the business or occupation of producing such gas, to, be 

known as the “Severance, Beneficiary Tax, )I the 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” and on 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- 592 1 

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, and until such 

time both the producer and the severance beneficiary shall 

be jointly Uable for payment of the tax. Where gas 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 paynient due 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 thins Act, ‘producer’ 

shall mean any person (other.than a non-operating 

royalty owner) owning, controlling, managing, or 

leasing any gas well,or land,producing gas, and 

any person who produces in any manner any gas by 

taking it from the earth or waters in this State. 

TV (2) ‘First’ rurchaser I shall 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 deemed thepurchdser and pay the 

tax levied by this Act. 

“(3 1 ‘Dedicated, Gas ’ shall isxrraW all gas 

produced and saved in this State’covered by any’ 

purchase contract, option, “ore agreement. by which’ 

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 and to whom it’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 the 
Hon. V. L. Ramsey, page 3 (WW-592) 

earth or waters of this State. A person purchasing gas pursuant to such a contract shall be 

deemed to be engaged in obtaining the production 

of dedicated gas in this State, which is a valuable occupation or privilege for which this tax 

is levied; provided, however that a producer producing gas for his own use or for sale and not 

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, it is 

apparent that House Bill No. 43 is 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 whom the gas is produced and to whom 

it is f1rs.t sold by the producer under the contract or agreement of sale made prior to .the production of the gas, and by 

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 House Bill No. 43 a person for 

whom such,gas is produced, or who has 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 upon whom the 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. 

The tax 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 HoDe Natural Gas C . Hall 274 U.S. 284 '(1926) and 

sinci it does not enter y&t: interitate commerce until It has 

been produced 

uroduc E ion. 

and 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? 288 U.S. 165, 182 

. The tax is an occupation or privilege tax which falls 

alike on those engaged in interstate commerce or in intrastate 

commerce, or both, and therefore does not violate the Commerce 

clause of the Constitution of the United States. Coverdale v. 

Piueline Co., 303 u.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 Commerce clause of the Federal 

Constitution, Hone Natural Gas’ Co. v. Hall, suora. 

House Bill No. 43 is not subject to the constitutional 

objections raised in Michigan-Wisconsin Pipeline Co. v. Calvert, 

347 U.S. 157 (1953), wherein the Supreme Court of the United 

States held that the “gas gathering” tax was violative of the 

Commerce clause 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 commerce after production, 

gathering, and processing. . .I’ Nor is the tax levied by House 

Bill No. 43 subject to the additional objection stated by the 

Court in the “gas gathering” case that it would permit a multiple 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., 303 U.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, charge 

t 

or collect the tax hereby 

levied from his paymen s to the producer, and no 

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 and actual..waste ,and to,~be an unlawful 

limitation upon the conserva i, ion and taxing powers 

of the State of Texas, for any contract to require 

the producer to pay the severance beneficiary tax 

hereby levied when there 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 own use or 

independent sale and not 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 and a 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, was upheld 

Cities Service Ga v. Peerless Oil & Gas Co. 

35, 220 P.2d 279. 289 (19501, aff'd 340 U.S. 179. 1852?:9$::* 

The Oklahoma statute provided that the .Oklahoma Corporation 

Commission was empowered to 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 Supreme Court of Oklahoma and the 

Supreme Court of the United States. 

The provision that the severance beneficiary may 

neither deduct, charge, or collect the tax from his payment to 

the producer, and that no contract or agreement heretofore or 

hereafter made shall be interpreted to as to require the producer to pay all or any part 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). 

The tax imposed~ by House Bill No. 43 is a production 

or severance tax based upon the occupation of producing gas 

from the earth and waters 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 may be 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. 43 which levy an occupation tax upon the occupation or privilege of obtaining the production of dedicated gas 

within this State, and on the busi-less and occupation of producing such gas to be paid by the severance beneficiary or the 
Hon. V. L. Ramsey, page 6 (WW-592) 

producer thereof, do not violate the due process and equal protection clauses-of Article I, Sections 16 and.19, Constitution 

of Texas,and Section I of the Fourteenth Amendment to the Constitution of the United States, or impair the obligation of 

contracts in violation of Article I, Section 16, Constitution 

of Texas, and Article 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 when produced such gas 

may be transmitted through nieelines for final disuosition in 

either 

cle I, 

tution 

interstate or intFas%aie commerce does not Violate ArtiSection 8, Clause 3, the Commerce clause of the Constiof the United States. 

SUMMARY 

House Bill No. 43 which levies an occupation 

tax on the occupation or privilege of obtaining 

the production of dedicated gas within this State, 

and on 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 "Commerce clause" of the U.S. Constitution. 

Yours very truly, 

CKR:wb 

WILL WILSON 

;;-&$JJofy=& 

C. K. Richards 

Assistant 

APPROVED: 

OPINION COMMITTEE 

Geo. P. Blackburn, Chairman, 

Fred Werkenthin 

John Reeves 

Jack Price 

PEVIEWED FOR THE ATTORNEY GENERAL 

BY: W. V. Geppert