. . 

Honorable Robert S. Calvert Opinion Ho. M-1002 

Comptroller of Public Accounts 

Austin, Texas Re: Application of Natural 

Gas Production tax on 

deficiency payments 

under "take or pay" 

Dear Mr. Calvert: 

provisions of purchase 

contracts. 

We have rece~lved your request for an official opinion in 

regard to the proper application of Chapter 3, Title 122A, 

Taxation-General, Vernon's Civil Statutes, in calculating the 

tax on producers of natural gas receiving deficiency payments 

under "take or pay" provisions of certain gas purchase 

contracts, 

In connection with your request you submit a detailed 

description of these special provisions which we may assume 

adequately presents the taxation problems Inquired about. 

The terms of such contract are restated in substance as 

follows: 

The"take or pay" provision thereof requires the buyer to 

purchase from the seller and pay for, whether or not received 

during each year, a determined minimum dally quantity of gas 

per month or per year as the case may be, at a price stated 

in terms of so many cents per 1,000 cubic feet (MCP). In 

case of failure of buyer to purchase during any year the 

minimum quantity contracted for, 

for annual minimum purchases, 

under contracts providing 

then within 30 days after 

such year he Is required to pay seller for the amount of 

the deficiency, but he may at any time during the succeeding 

four years take and receive such deficiency at the market 

price then in effect, by paying therefor only the difference 

between the price in effect at delivery and the price actually 

paid for such deficiency under the contract. Under some 

contracts which provide monthly minimum gas purchases, even 

if buyer does not take the minimum amount during the month, 

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Honorable Robert S. Calvert, page 2 (M-1002) 

he is required to pay for it but has the right to take 

the gas In succeeding months. These latter provisions 

are referred to as “make-up” periods. The typical contract 

In question expressly provides for the provisions and 

obligations thereof to go into effect upon the first deliveries 

of gas thereunder. However, some of the contracts require 

the buyer to make minimum payments before any gas is produced, 

or purchased. 

In connection with the foregoing described “take or pay” 

contracts you have informed us that for many years your office 

has taken the uniform position that the producer was liable 

for tax on the entire amount received under such contracts, 

whether or not the deficiencies, if any, were “made-up”. 

The specific questions submitted by you are as follows: 

“1 * I would like your official opinion as to 

whether the tax levied by Article 3.01 is required 

to be reported and paid to Comptroller at the time 

the producer receives the minimum prepayment or 

at the time the gas is actually taken by the 

purchaser during the make-up period? 

“2 . If your answer to question one is that the 

tax is required to be reported and paid at the time 

the gas is actually taken by the purchaser during 

the make-up period, and for some reason all or 

a part of the deficiencies in gas are not made up 

during the contractual make-up period and the 

purchaser has to forfeit any of the minimum prepayments, Is the production tax due on the forfeited prepayments. If the production tax is 

due, should the tax be computed at the tax rate 

in effect at the time the contractual make-up 

period expired? 

“3 . If your answer to question one is that the 

tax is required to be reported and paid at the time 

the producer receives the minimum payment, please 

advise when the tax Is due in those instances 

where the producer has received prepayments for a 

period of time before there was any gas produced 

or taken by the purchaser under the terms of the 

contract?” 

-4888- 
. : 

Honorable Robert S. Calvert, page 3 (M-1002) 

Chapter 3, Title L22A, Taxation-General, Vernon's 

Civil Statutes, insofar as pertinent to the foregoing 

questions, provides as follows: 

"Article 3.01 

(1) There is hereby levied an occupation tax on 

the business or occupation of producing gas 

within this State, computed as follows: 

"A tax shall be paid by each producer on the 

amount of gas produced-and saved within this 

State equivalent to seven and one-half per 

cent (7-s) of the market value thereof as and 

when produced. 

. . . . 

"Article 3.03 

(3) The tax herein levied shall be due and 

payable at the'office of the Comptroller at 

Austin on the last day of the calendar month, 

based on the amount of gas oroduced and saved 

during the oreceding calendar month, and on or 

before said date each such producer shall make 

and deliver to the Comptroller a report on forms 

prescribed by the Comptroller showing the 

amount of gas produced, . . . ." (Emphasis 

The recent decision of our SupremaCourt in Mobil Oil 

Corporation v. Calvert; 451 S.W.2d 889 (Tex.Sup. 1970), 

held, in substance, that the proper method of determining 

the tax due on production of natural gas under Chapter 3, 

Title 122A, Taxation-General, V.C.S., is to compute the 

tax on the market value of the gas at the mouth of the 

well measured by the total proceeds of sale. Article 

3.02 provides for this measure. 

It also has been held that the term "market value" as 

used in a former statute (of identical tenor and effect as 

our present statute, Art. 3.02) "means the price for which 

the producer sells the gas". Calvert v. Union Producing 

Co., 258 S.W.2d 176, (C.A.1953-No writ history). 

Thus, according to the plain import of Chapter 3, 

Title 122A, Taxation-General, the tax therein levied is to 

be computed on the amount of gas produced and saved at the 

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Honorable Robert S. Calvert, page 4 (M-1002) 

rate of 7-l/2$ of the market value of such gas as and when 

produced. Consequently, until such gas Is 

can be computed thereon under the statute, 

i;;d;T;a;oi;ax 

thereby assessed until production and a sale or other 

disposition thereof has occurred. Mindful of the foregoing, 

we conclude that the tax levied by Article 3.01 Is not due 

until actual production of the gas has occurred and such 

tax Is then measured by Its "market value" as provided in 

Article 3.02. Attorney General Opinion No. WW-554(1959). 

Hence, our answer to your question 1 is that the time 

such gas is actually produced during the make-up period, 

rather than the time of the minimum prepayment, is the 

taxable event with regard to the “make-up” gas. 

Your question 2 concerns a situation where the deficiencies 

under the contract are not received during the make-up period 

and the minimum prepayments made under the contract are 

forfeited. We assume that a substantial amount of gas was 

produced and sold under the contract, although less than the 

minimum on which the price was computed. This default by 

the buyer under the typical contract described by you brings 

about an effect analogous to one that might be produced by 

a similar default of the buyer under a “take or pay” contract 

having no provision allowing the "make-up" of any deficiency 

below the minimum daily quantity of gas contracted for a 

specified time at a total price calculated on the basis of 

so many cents per 1,000 cubic feet (MCF). This latter type 

of “no-makeup” contract has been called to our attention as 

being one of “the several different fact situations” 

arising under "take or pay" provisions of gas purchase 

contracts mentioned in your inquiry but not described in 

detail. 

As a consequence of the absence of the production and 

the purchase of the deficiency by the buyer under either of 

the next foregoing described contracts, there is no production 

or sale thereof on which a tax could be assessed against such 

gas not produced and sold. However, the price paid for the 

substantial amount actually purchased and received was set 

by the terms of such contracts at the total figure determined 

by the minimum amount of gas therein contracted for. Whether 

the difference between the amount of gas agreed to be purchased 

and the amount actually received under the contracts is 

termed a “deficiency”, and a proportionate part of the total 

contract price is called a “forfeiture”, Is of no import 

when considered in relation to the issue actually involved. 

-4890- 
. . 

Honorable Robert S. Calvert, page 5 (M-1002) 

The paramount issue under each contract is the determination 

of the total proceeds of the sale of the gross production 

under each of the contracts in question. There is no 

difficulty in determining the gross production. This is 

the respective amount actually produced and ourchased bv 

buyers under the contracts. Thus, the total-proceeds of the 

gas actually produced under such contracts is the total 

amount received under the contracts, includinn the navn 

-55 lculated on the so-called deflciencles~, 

_ ,-,.nents 

'he tax on the 

Gtal amount of gas produced and purchased under such 

contracts is measured by such total proceeds of sale and 

based on the tax rate in effect at the time such gas is 

actually produced, rather than at the time of the minimum 

prepayments. 

We are cognizant of the fact that a question of 

contract construction may arise Independent of the proper 

construction of the tax statute and its application to 

each contract. Mobil Oil Corp. v. Calvert, 451 S.W.2d 

889(Tex.Sup.1970). However, we are here passing only 

upon the construction to be placed upon the tax statute. 

The prior opinions of this office support the above conclusion and would have to be overruled if we concluded 

otherwise. This same holding and construction was made in 

Attorney General Opinion No. Q-6355 (1946); and see also 

Opinion No. v-555(1948). 

It is the policy of this office to follow earlier~ 

opinions on the same subject where not patently erroneous. 

Attorney General Opinions Nos. O-1659 (1939); c-69 (1963); 

and ~-605 (1970). This Is likewise the rule followed by 

the courts concerning the meaning of a statute. Thomas v. 

Groebl, 147 Tex.70, 212 S.W.2d 625 (1948). Such a construction 

-is entitled to great weight where, as here, it has been 

followed over a period of years by the state agency charged 

with the administration and enforcement of the statute. 

Thompson v. 

writ), 

Calvert, 301 S.W.2d 496,(Tex.Civ.App.~~l9571 no 

Gaynor Construction Co. v. Board of Trustees, etc., 

233 S.W.2d 472 (Tex.Civ.App. 1950, no writ). 

In view of the foregoing considerations, you are advised 

that the total price paid under the contracts in question 

is the measure of the market value of the actual amount of 

gas produced and sold, based on the tax rate in effect at 

the time such gas is actually produced. 

-4891- 
Honorable Robert S. Calvert, page 6 (M-1002) 

Our foregoing answers to question 1 and 2 preclude 

the answering of question 3. 

-SUMMARYUnder natural gas purchase contracts 

containing "take or pay" provisions, the 

time the gas is actually produced is the 

event which actuates the accrual of the 

tax under Ch. 3, Title 122A, TaxationGeneral, V.C.S. 

The total price paid under any of such 

contracts Is the measure of the actual amount 

of gas produced and sold thereunder, based on 

the tax rate in effect at the time such gas is 

actually produced. 

Y{J very truly, 

General of Texas 

Prepared by R. L. Lattimore 

Assistant Attorney General 

APPROVED: 

OPINION COMMITTEE 

Kerns Taylor, Chairman 

W.E. Allen, Co-Chairman 

James Broadhurst 

William Craig 

Milton Richardson 

Houghton Prownlee 

SAMUEL D. MCDANIEL 

Staff Legal Assistant 

NOLA WHITE 

First Assistant 

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