April 24, 1957 

Hon. Robed s. Calvert 

Cmnptroller of Publio, Accounts 

Callit Station 

&h.n, Texas 

Gpinlon Ho. WI+68 

Re: W&her or not the gas reflerred to 

aa “free” pa received by’the City 

of &Allen is exempt from the 

oocupation tax provided for by 

Dsar Mr. Calvert: Article 7CJ47b, V.C.S. 

You request the opinion, of 

the occupation tax upon the business 

this State imposed by Artiole 7G47b, 

conditions hereinafter stated. 

this office upon the application of 

or occupation of producing gas within 

Vernon’8 Civil.Statutes, under the 

Gn February 1, 1952, Taylor Refining Company and Rayfairs Minerals, 

Inc., both Texas corporatione, and the city of &Allen, a municipal oorporation, 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 acquired from City all the 

minerals under certain land owned by City for the purpose of oil, gas and 

mineral development. For the same purpose Companies acquired all the 

minerals in land owned by private prtiee, the total of which the oontraoting parties designated vI+Allen General Area”. The net result is that 

Companies acquired all the gas in place in the McAllen General Area. City 

agreed to cooperate and assist Companies in acquiring for mineral development the land wned by private parties within the corpbrate limits of City. 

Paragraph II 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 nominal price, which is practically 

tantamount to receiving pa free of any cost to it, and 

‘in consideration of the City’8 unconditional 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, execute and deliver to Companfes, as 

Leaeee, without the payment of any bonus to City, valid 

oil, gas and mineral leaaes on terms identical with 

thoae.contained in lease form submitted by Companies to 
Hon. 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 promptly obtain 

from the respective mineral ouner8, owning 3.ands 

within the corporate limits of City, without the payment of any bonus, valid oil, gas and mineral lease8, 

on term8 identicalvith those contained in aforesaid 

lease form 8Ubmitted t0 City 

stnued bv suchther itiathin the m I 0 1 Companies 

agree that they vi11 accept all such leases tendered 

end that they will vithin a reasonable time unitiae 

and pool all such leases so obtained by them insofar 

as they cover lands within the said %kAllen General 

Area' so that the 8ew will be a part of the particular gas operating and production unit covering said 

area vhich is identified as Canpaniea V+lcAllen Fieldwide lJn1t.t Companies recogniae that any drilling 

and produotion operatione~ oonducted by.them on leases ' 

covering lands within the corporate limits of the 

City of b&Allen vill be governed by valid term8 of 

the oil and gas ordinance of the City, either as nw 

existing or as may hereafter be amended." 

supplied throughout.) I 

(FJnphasis 

Specifically the question we must decide may besimply stated a8 

follows: Is City a producer, as defined by the statute, of the gas purchased from Companies under the contract? If City is a producer of gas, 

it must be admitted the tax is not due, this for the reason that anoccupation tax may not be constitutionally imposed upon 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 produce one 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 against the producer of gas and not the 

purchaser thereof.w 

The lease and the Gas Sales Contract were executed contemporan8oU¶ly and must therefore be construed together as one instrument. City, 

aa part of the consideration for executing the lease, required that Cornpan188 contract to 8811 to City the amount of gas mentioned in the oontWr 

on certain t8rmS. The usual provision in an oil and gas lease is that tbs 

lessee psy a bonus and an additional consideration or payment nf 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 certain amount of gas. Ths contract recites that because 

of the agreement by Companies to sell gas to City, it would execute a 

lease to ColPpanies without the payment of any cash bonus. It 18 therefore 

quite applrent that City reserves no royalty and the transaction.is in 

effect a sale of,allminerals by City to Companies. The Gas Sales Contract so states. It is clear that the gas which is delivered t0 City iS 

not a delivery of gas as royalty in kind but is in truth en actual sale. 

The contract makes many references to the faotthrt COU@ni8s will Sell 

and that City will pay, thus -negativing the idea of delivery of a gas ,I 

royalty in kind Or a royalty reservation. The net reeult of the lease. 

and tb Gas Sales Contract, when considered and construed together, is 

that City conveyed the~mineral estate to Companies in consideration of 

Compnies' agreement to sell the specified amount of gas to City for the 

yric8 specified in Section 3 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 contract is to 

se11 to City forthe consideration specified, in the amount specified and 

for the time specified, gas which it produoes from the McAllen General Area, 

observing the obligation to give City priority to purchase .over other purchasers of the gas. This doss not render City a producer under the contract 

or the statute. Nor does it render it a royalty ovner or interested.party 

vithln the purview of the statute, The contract in no manner restricts, 

by reservation, carving out, or othervise, th8 complete Ovnership by Cornpanics over all the gas under the McAllen General Area. of aourse, the 

Whole of all the gas is depleted by sales made by Companies, but it still 

remains the Ovner of all that is left, and so it will continue under the 

contract as long as it is in effeot. 

Section 2 of,Article 7G47b, V.C.S., defines producer as follows: 

qor th8 purpose of this Act 'prodUC8r' shall mean " 

s Ovning, controlling, xwaging; Or leasing any 

gas well and/or any person who produces in any manner any 

gas by taking it.from the earth or waters in this State, .' 

and shall include any person ovning any royalty or other 

interest in 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 Owners are defined as follow: 

"'Royalty ovnerst shall mean and include m 

owing any mineral rights under any producing leasehold 

within thisState, other than the working interest, which 

working interest is that of the person having the management end opsration of the well." 

Ccmpanies fall squarely within the definition of a producer and 

royalty wner 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 statute and Compani88 have no 

exemption. Companies hape acquired all the gas under the MeAllen General 

Area and have a right under the contract, to produce it all and the oorrelative obligation to pay the tax on all that it produces. That City is 

the purchaser of sow of the gasproduced, in no manner alters this obligation. 

It is important to~note hov City is to pay for ths gas and the 

amount. Itis obsewed that the contra& says: 

II 

. . ., 

Companies for vdto all gas 

shall be the aggregate'of (1) an 

equal to all bssorle and landowner's royalty 

payable by Companies on the quantity of gas so' 

8old end deliVered hereunder, and (2) m 

m equal to all production, severance, sales, 

gathering, transmission and other taxes of similar .' 

nature, 18Vi8d and aseessed in respeot of or applicable to the quantity of 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 others under 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 

produced frcm the &Allen General Area. 

It ie apparent to us in construing the lease and gas sales Con' 

tract together and as one instrument that the right to purchase gas by City 

is in lieu of the right to receiVe a royalty as pesoribed in the lecrse* 

This tax has been properly laid against Ccmyanies, the prodPr" 

After the delivery of the gas to City, it may use it or sell it to other8 

but the taxliability of Companies as produoera reImins the 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 producer of gas, which is sold and delivered 

to a City, a municipal corporation, under a 

contract with the City, is liable for the occupation tax imposed by 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 neither a 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 

Attorney General