April 24, 1957

Hon.Robed s. Calvert Cmnptroller

of Publio,

Accounts Callit Station &h.n, Texas GpinlonHo. WI+68
Re: W&her or not the gas reflerred to aa “free”pa received by’theCity of &Allen is exempt from the oocupation

tax providedfor by Article 7CJ47b,

V.C.S. DsarMr. Calvert:

You requestthe opinion, of the occupation

tax upon the business this State imposedby Artiole 7G47b, conditions

hereinafter

stated. this officeupon the application of or occupation

of producing

gas within Vernon’8

Civil.Statutes,

under the

Gn February 1, 1952,TaylorRefiningCompany and Rayfairs

Minerals, Inc.,both Texas corporatione, and the city of &Allen, a municipaloorporation,entered into a Gas Sales Contract. In this contract they designated themselves

%nnpaniea” and “City”and we shall 80 refer to them in this opinion..

Ry the terma of the contract Companies

acquiredfrom City all the minerals

under certainland owned by City for the purposeof oil, gas and mineral

development. For the same purposeCompanies acquiredall the minerals

in land owned by privateprtiee, the total of which the oontraoting partiesdesignated vI+Allen

GeneralArea”. The net result is that Companies

acquired

all the gas in place in the McAllenGeneral Area. City agreedto cooperate and assist Companies in acquiring

for mineral development the land wned by privateparties within the corpbrate limits of City. ParagraphII of the Gas Sales Contract, which ve deem most important, is,

aa follows:
“In consideration

of the City’8 right hereunder to purohase

gas for a nominalprice,which is practically tantamount

to receiving

pa free of any cost to it, and ‘in consideration

of the City’8unconditional right hereunder to assign this agreement or to resell to any party the gas purchased

by it hereunder

at a eubetantial

monetary profit to City, City covenants and agrees to forthwith, a8 Iesaor,executeand deliverto Companfes, as Leaeee,

without the paymentof any bonus to City, valid oil, gas and mineral leaaes on terms identical with thoae.contained

in lease form submitted by Companies

toHon. Robert S. Calvert, page 2 (WW-68)

city, - citv u&rJ&g ylthin the 's Area' as defined For the same consideration, City covenants

and agrees tint it vi11 in good faith continuously cooperate

with Companies

in assisting

Companies

to promptlyobtain from the respective mineralouner8, owning 3.ands within the corporate limits of City, without the payment of any bonus,valid oil, gas and mineral lease8, on term8 identicalviththose contained in aforesaid lease form 8Ubmitted t0 City stnued bv suchther itiathin the m I 01 Companies agree that they vi11 accept all such leasestendered end that they will vithin a reasonable time unitiae and pool all such leases so obtained by them insofar as they cover landswithin the said %kAllen General Area' so that the 8ew will be a part of the particular gas operating

and production

unit coveringsaid area vhich is identified as Canpaniea V+lcAllenFieldwide lJn1t.tCompanies recogniae

that any drilling and produotion

operatione~

oonducted

by.themon leases ' covering

landswithin the corporate limits of the City of b&Allen

vill be governed

by valid term8 of the oil and gas ordinance of the City, eitheras nw existingor as may hereafter be amended." supplied

throughout.)I (FJnphasis
Specifically

the question

we must decidemay besimply stated a8 follows: Is City a producer, as definedby the statute, of the gas purchased from Companies under the contract? If City is a producerof gas, it must be admitted the tax is not due, this for the reason that anoccupation tax may not be constitutionally imposedupon City. FArticle VIII, Section 1, Constitution of Texas. If, hoverer,Cwpsnies are the produoer8,the tax is valid even though City 18 the purchaser. Under the contract,

City doe8 not produceone cubic foot of the gae. The produc' tion fall8 entirely upon Comxaniea

and 80 does the tax. As said by the Supreme Court in the &se of-w v. Stat+ l@ Tex. 637, 

### 180 S.W.2d 429:

"The provisions

of the Act in no uncertain language levies the tax againstthe producerof gas and not the purchaser

thereof.w The lease and the Gas Sales Contract were executedcontemporan8oU¶ly and must therefore be construed

together

as one instrument. City, aa part of the consideration for executingthe lease,requiredthat Cornpan188 contract

to 8811 to City the amount of gas mentionedin the oontWr on certaint8rmS. The usual provision in an oil and gas lease is that tbs lessee psy a bonus and an additionalconsideration or paymentnf a roPlty. J

$ori. Robert S. Calvert, page 3 (W&Se)

to t&O ~18SSOl-i

But in this case the consideration is that Companies

will sell to City a certainamount of gas. Ths contract recites that because of the agreement

by Companies

to sell gas to City, it would execute a leaseto ColPpanies

without the paymentof any cash bonus. It 18 therefore quiteapplrent

that City reservesno royaltyand the transaction.is in effect a sale of,allmineralsby City to Companies. The Gas Sales Contract so states. It is clear that the gas which is deliveredt0 City iS not a deliveryof gas as royalty in kind but is in truth en actual sale. The contract

makesmany references to the faotthrt COU@ni8s will Sell and that City will pay, thus -negativing the idea of delivery of a gas ,I royaltyin kind Or a royaltyreservation. The net reeult of the lease. and tb Gas Sales Contract, when considered

and construed

together,is that City conveyed

the~mineral

estate to Companiesin consideration of Compnies' agreement to sell the specified amount of gas to City for the yric8 specified

in Section3 of the contract which is.Tater specifically. set out in this opinion. ,.

That City is the purcbrwr is wholly dmnmterial. Stat&a y. Citv of El w, 135 Tex. 359, 143 S.W.2d 366. This.case involves the motor fuel salas tax, but it holds that it is immaterial that a City is the pWOhILSer

of the mOtOr fuel; so it is her8 as t0 this gas. III this case the aourt said:

.In this instance

we think that beyond any. ,I i (I doubt z motor fuel tax lava tax the first actual sale of motor fuel in this State,regardless of whether Or not it is sold to a city.

. . ." The only obligation imposed

upon Companies

by the contractis to se11 to City forthe consideration specified,

in the amount specified and for the time specified, gas which it produoesfrom the McAllen GeneralArea, observing

the obligation

to give City priorityto purchase.over otherpurchasers

of the gas. This doss not render City a producerunder the contract or the statute. Nor does it render it a royalty ovner or interested.party vithlnthe purviewof the statute, The contractin no manner restricts, by reservation,

carvingout, or othervise, th8 completeOvnership by Cornpanicsover all the gas under the McAllen GeneralArea. of aourse,the Whole of all the gas is depleted by sales made by Companies, but it still remainsthe Ovner of all that is left, and so it will continueunder the contract

as long as it is in effeot. Section2 of,Article 7G47b,V.C.S., defines produceras follows:
qor th8 purpose of this Act 'prodUC8r' shall mean " s Ovning,controlling, xwaging; Or leasing any gas well and/or any personwho produces in any manner any gas by taking it.fromthe earth or waters in this State, .' and shall includeany person ovning any royalty or other interestin any gae 6r its value whether produced by him, or by some other person on his behalf,either by leaS8, : oontraot,

or othervise." ,. ; ',-. .

Bon. Robert 9. **Calvert,** page 4 (R+&)

. Royalty Ownersare definedas follow:

"'Royalty

ovnerstshallmean and include m owing any mineralrights under any producing leasehold within thisState, other than the working interest, which working interestis that of the personhaving the management end opsration of the well." Ccmpanies

fall squarely

within the definition of a producer

and royaltywner under the statute. City is exempt from the statute becanse not embraced

within its terms, and Companies are subject

to the tax because et&raced

within the terms of the statuteand Compani88 have no exemption. Companies hape acquiredall the gas under the MeAllen General Area and have a right under the contract, to produceit all and the oorrelativeobligation to pay the tax on all that it produces. That City is the purchaser

of sow of the gasproduced, in no manneralters this obligation.
It is important to~notehov City is to pay for ths gas and the amount. Itis obsewed that the contra& says:

II

. . ., vdto Companies

for all gas shall be the aggregate'of (1)an equal to all bssorle and landowner's royalty payableby Companies on the quantityof gas so' 8old end deliVered

hereunder,

and (2)m m equal to all production, severance,

sales, gathering,

transmission

and other taxes of similar .' nature, 18Vi8dand aseessedin respeot of or applicable to the quantityof gas so eold,end delivered hereunder." This is nothing

more than a measurement in money of what City rekeives from Companies

for the privilege

of produoing

end selling

all the gas which Ccdnpanies

may sell not only to City but to othersunder long term contracts,

if deeired,so long a8 it observes the requirements

of the amount of gas to be sold and delivered to City **from** the total of **an** gas I producedfrcm the &Allen General 

### Area.
It ie apparentto us in construing the lease and gas salesCon' tract together

and as one instrument that the right to purchase gas by City is in lieu of the right to receiVea royaltyas pesoribed in the lecrse*

This tax has been properlylaid againstCcmyanies, the prodPr" After the deliveryof the gas to City, it may use it or sell it to other8 but the taxliability of Companies as produoera

reIminsthe same.

ha8reth8Mfm8 NISpeotfullyadVi88dtbatCompani88~e m*' for the tax as the producers of the gas sold and deliVered to City under tb oontraot.. . .

Bon. Robert S. CalPert, page 5 (tJw-68)

.~ s[IMMBRy’
A producerof gas, which is sold and delivered to a City, a municipalcorporation, under a contract

with the City, is liable for the occupation tax imposedby Article 70&7b,V. C. S. That a City is the purchaser of the gas, is wholly immaterial. The tax liability against the producer is the same under the contract here involved

and under the statute. The City is not the producer;

hence, it la not liable for the tax. But Cwpaniee are the producers and are, therefore, liable for the tax. City is neithera royalty 

### wner md8r the contract or the 

### StStUte.

LPL:gs
APPROVED:
OPINION

CC%lMITTE H. Grady Cixmdler, Chairman
C. K. Richards Ed. Homer Ralph Rash John Uinton BEVIEWEDFORTREATTORNJ3YGENEML BY:
Geo. P. Blackburn 

# #qy+.d

L. P. Lollar Assistant Yours very truly,
WILL WILSON AttorneyGeneral