Honorable George H. Sheppard 

Comptroller of Public Accounts 

Austin, Texas 

Dear Sir: Opinion No. O-4025 

Re: Gas Production Tax Claim 

against Canadian River Gas 

Company - determination of 

“:~-?arkct value” of natural 

I,&:; w~.~erArticle 7047b, 

l>rior to May I, 1941, 

We are in receipt of your I<:lt<:r ~1 S&~iilber 23, 1941, which 

reads as follows: 

“We have recently made an investigation of the 

books and records of the Canadian River Gas Company. 

This company is the producer of gas which supplies 

through affiliates the gas used in Amarillo and Dalhart, 

Texas; Denver and Colorado Sprin!;s, Colora~~l I; an(l., 

one-fourth of the requirements of tli<! gin:: ISI C;licago. 

“Reports to this office for the month of July 1941 

sho,w that eighty-nine per cent of all gas handled by 

pipelines in the Panhandle area was exported from Texas 

to other States; and that the owners of the pipelines produced eighty-=four per cent of all gas carried by said pipelines, buying only sixteen per cent of their requirements 

f,roio other producers. 

“This compnay admits a probable liability under 

Method I of about $28,000 without penalty and interest. 

“‘I am attaching copy of auditor’s report for your 

study and consideration. Please refer to your Opinion 

Non O-633 dated April 26, 1939 and advise me as to your 

opinion of tllc cool, c-i ~~~;~ti~~~~1.~) ‘ I::;.: in determining this 

co~~npany's liabiliry t,,,.J't Ai,tic It:, '!..47b prior LO May I, 

1941; also, t;le c,orrcc:t ,.,~~thwi to u:jc under this law as 

amended by House Jill NO. 6.” 

IlllClcr tlic facts :!rc:;cnt:~:r: in t?,i!;, Ir,i!::,r !~~:,;r~~r’,~:<!r ~.vit~;~~ the 

report of Mr J. I~!<:i::un Crvxil al!a<~I~,:~,~! t(l(:r~~:(,~, ;J:~J\~L a,,I: l~i:: l;~,c following 
. . 

Honorable George H. Sheppard, page 2 (No. o-4025) 

question: 

What is the correct method to use in determining 

this company’s liability under Article 704713 prior to 

May 1, 1941; also, the correct method to use under this 

law as amended by House Bill No. 8? 

Since receiving your letter of September 23 above set out, 

we have released Opinion No. O-3516 addressed to you written by Mr. 

Cecil C. Rotsch, October 16, 1941, wherein the determination of market 

value of natural gas under Article II of House Bill 8 as enacted by the 

47th Legislature, 1941, being Article 704713, as amended, is discussed 

at length. The writer is advised by Mr. Nelson Brown of your department that this opinion answers the question submitted by your letter 

above set forth with reference to the correct method to use in determining the liability of the Canadian River Gas Company subsequent to 

May 1, 1941, under House Bill No. 8, above mentioned. Therefore, this 

opinion will be confined to the correct method to use in determining 

the liability of Canadian River Gas Company prior to May 1, 1941. 

The material part of the statute in question, which is 

House Bill 547, Chapter 73, page 111, Acts 1931, 42nd Legislature, 

amended by House BiIl’8, Chapter 495, page 2040, Acts 1936, 3rd 

Called Session, 44th Legislature, all of which prior to its amendment by Article II of House Bill 8 as ehaeted by the 47th Legislature, was codified as Article 704713 of Vernon’s Annotated Civil 

Statutes of Texas, reads as follows: 

“Sec. 1 (a) That from and after the date herein 

fixed, every person engaging or continuing within this 

State, in the business of producing and saving in paying 

quantities, for sale or for profit, any natural gas, including casinghead gas, from the soil or waters of this 

State, and 

“(b) Every person who imports natural gas into 

this State and thereafter sells the same in intrastate 

commerce in this State, the tax to be imposed on the 

first sale; (provided, however, that if any gas is imported 

into this State from another state, in which latter State 

a severance, occupation or excise tax is imposed, the 

person importing such gas shall not be required to pay 

another~ tax thereon under the provisions of this Act), 

“(c) Are hereby declared to be ‘producers’ and 

engaged in the business of producing natural gas within this State and shall make quarterly on the 25th day 

of January, April, July and October each year, a report 

to the Comptroller, . . . .” 
Honorable George H. Sheppard, page 3 (NO. O-4025) 

“Set, 3, A tax shall be paid by each such producer 

on the amount of gas produced and saved within this State, 

and on gas imported into the State, upon the first sale thereof in intrastate commerce upon the following basis: 

“A tax equivalent to three per cent (3%) of the market 

value of the total amount of gas produced and saved within 

this State, or sold, if imported into this State, at the actual 

market value thereof, as and when produced. ,, . .” 

On April 26, 1939, we released Opinion No. O-633 addressed to 

you and written by Cecil Rotsch, a member of this department, wherein we 

discussed the “place where market value should be determined in taxing natural gas under Article 704713” prior to its amendment by the 47th Legislature. 

We held in this opinion that the tax levied by Article 704713 was a “severance 

tax”. We quote from said opinion as follows: 

“We believe that this tax is what is soiiletimes referred 

to as a ‘severance tax,’ and if that is true it is reasonable to 

believe that the legislature intended to charge the tax immediately 

upon the gas being severed from the earth. The Louisiana Natural 

gas tax act, which is almost identical with the Texas statute we 

are considering, was held to be a ‘severance tax’ in the case of 

Gulf Refining Co. v. McFarland, 154 La. 251, 97 SOU. 433. In 57 

Corpus Juris 538 ‘severance tax’ is defined as follows: 

” ‘Severance tax. An excise tax upon the privilege of 

severing, or upon the right to sever the natural resources 

from the soil; a tax upon the natural resources from the soil.’ 

“We should look at this tax from a practical,standpoint, and see how it operates. If we charge this tax on 

the basis of the higher market value at the place of sale 

seven miles away instead of on the basis of the lower 

market value at the well, then all the operator has to do 

in order to escape the higher tax would be to sell and convey its ‘compressor stations’ and seven mile pipe line to 

another concern, and sell its gas to this other concern at 

3 cents at the mouth of the well, and let this other concern 

compress the gas and transport it seven miles and resell 

it at 3; cents. The legislature is presumed to have known 

the actual conditions the act was to apply to when it passed 

it; and it intended for the law to operate in a practical 

manner. We think it intended for the tax to be paid on the 

basis of the market value at the well.” 

Further quoting from Opinion No. O-633: 
- . 

Honorable George H. Sheppard, page 4 (No. o-4025) 

“Usually the price paid by the purchasing pipe 

line company is a proper criterion on which to figure 

market value, but it could be a producer and a purchaser would enter into a contract for a price less 

than the market value or more than the market value 

for reasons known only to themselves, and such a 

price in those cases should not be taken by the 

Comptroller as market value. He should be governed 

by ‘the actual market value,’ which may change from 

time to time. 

“Our answer to your inquiry is that under the 

facts of the case in question you should charge the 

natural gas tax, provided for in Article 7047&b, on 

the basis of the actual market value at the well, and 

not on the basis of the actual market value at the place 

of the :firtst?s&i+e lif~~tKat’~‘p~ce i$&wtiy from the~we&l;!~ and you 

are advised.;th&.if .M,~il~s~.ha,~..~~io;:.l~t.~alue gt:~.t@we.te:ll 

‘y& .my d+=rrrpi,w- +~gk:e‘L’ &l&&+;;f:(t~ we:~~~~<~&j&g the 

actual m&rk&%&+& ~~ere,3he+e! is ‘$rmn.rke t~~aa&,:$educ ting 

the;;c~~t-,of,,t~~,th~‘*~S:~t~mr$r~k,t. : > ~,~,; :,~: 

We believe that this opinion, which we expressly approve, 

fully answers the question submitted by you. You will note that in the 

last four lines of the above quotation from the opinion we advise you as 

follows: “and you are advised that if the gas has no market value at 

the well you may determine its market value at the well by taking the 

actual market value where there 1s a market and deducting the cost of 

taking the gas to that market.” 

We believe from the facts set forth in your letter and the 

attached report of Mr. Brown that acting under this opinion method six 

as set forth on page 2 of the report of Mr. Brown would be the proper 

i-?BthorI to follow in determining the tax liability of Canadian River Gas 

C~...>any under Article 704713 prior to May 1, 1941, however we will 

discuss the proposition further. 

As we understand the report sent to us by Mr. Brown, 

Canadian River Gas Company is a part of an intricate corporate structure consisting of a maze of corporations the ownership of all of which 

can ultimately be traced to the same interests and these interests substantially control the production, transportation and ultimate sale of the 

major portion of all gas taken from the Panhandle gas field. These 

inter-woven corporations operate under contracts with themselves resulting in the sale of gas from the Panhandle field at prices ranging 

from net cost to seven or eight cents per thousand cubic fee. We further understand from Mr. Brown’s report that the result of this control 

of the production, transportation and ultimate sale of practically all of 

the gas produced in the Panhandle field is that sc~me independent well 

operators must sell their gas for as low as one-half cent per thousand 
. - 

Honorable George H. Sheppard, page 5 (No. o-4025) 

cubic feet by virtue of the fact that they have no market and no transportation system to dispose of such gas. Assuming that these facts are 

true and could be sustained to the satisfaction of a jury we are constrained to the belief that same would justify a finding that there is 

actually no established market value at the well in this field as is 

usually the case in oil and gas fields in Texas. In fact such has been 

judicially determined in the case of Consolidated Gas Utilities Corporation v. Thompson and Texoma Natural Gas Company v. Thompson, reported in 14 Fed. Supp. 318, wherein the court in speaking of gas produced in the Panhandle gas field for light and fuel purposes says the 

following on page 324 of the opinion: 

“As to gas for these uses, there is not, there 

never has been, a real market in the field, for except 

for a small quantity consumed in operating wells and 

plants, gas for this use is not sold in the field, It is 

transported on contracts to distant points for delivery 

at the burner tips. The commission’s proration order 

was therefore based not upon market demand in the field, 

but upon the amount required by plaintiffs and other pipe 

lines for supplying their customers at distant points,” 

Therefore in view of the facts before us and in view of this 

decision, and, assuming that the fact that there is no market value for gas 

at the well in the field in question can be established, we will discuss the 

question presented from such standpoint. 

In the case of Atchison T. & S. F. Ry. Co, v. Nation and 

Slavens, 92 S. W. 823, the court of Civil Appeals sets out the rule for 

determining market value where there is no market value at the particular 

place in question. The following is a quotation from said case: 

“The rule is well settled that where the question 

is what was the value of property at a particular place 

and there was no market value there, proof may be given 

of such value at other places with the cost of transportation in order to enable the jury to deduce the value at the 

place in question.” Citing Sutherland on Damages (2nd 

Ed.), Section 445. 

Again in the case of Kerr v. Blair, 105 S. W. 548, the court 

in discussing the proposition of determing the market value of rice at a 

particular place when it was shown that there was no’market value at 

that place says the following: 

“The above testimony would show that the 

rice was in the shock to be threshed by defendant, and 

if they failed to thresh it as they contracted to do, plaintiff’s damages would be measured by reference to its market value as threshed at that place or at the nearest place 

where it had a market value. If the evidence showed it 

had a market value at Bay City, a few miles distant, it 

was sufficient to afford a basis for measuring damages.” 

8. 
- . 

Honorable George H. Sheppard, page 6 (No. O-4025 

In the case of Dale Oil & Refining Company v. the City of 

Tulia, 25 S. W. (2d) 671, the court in determining the market value of oil 

has the following to say: 

“Where there has been no sale of personal property or a commodity of a given kind in the particular 

place involved, then its mark& vlaue may be shown by 

proving such value at the nearest market and adding 

thereto the costs of transportation.” 

Having determined that there is no market value for gas at 

the well in the Panhandle gas field the gross receipts of the producer less 

the cost of getting the gas to market, whatever that ultimate market may 

be, seems to us to be the basis upon which to determine the market value 

of gas at the well for purposes of taxation under Article 7047b. Arriving 

at this conclusion the question is then presented whether or not the tax 

levied under Article 7047b would constitute a tax on property outside 

the State of Texas or wguld result in a burden on inter-state commerce 

and hence become repugnant to the Constitution of the United States. 

We do not believe that this would be the result simply because of the 

fact that the Comptroller in determining the market value at the well 

would have to ascertain the ultimate sale price of the gas in other states 

and the cost of its transportation thereto by virtue of the fact that a substantial portion of the gas produced is transported and ultimately sold in 

Northern and Eastern and in some cases Western States. 

In the case of American Manufacturing Company v. City of 

St. Louis, 250 U. S. 459, which was a case in which the taxpayer manufactured furniture in St. Louis part of which went into storage in New 

York before being s.old in that State. The court held that such sales in 

another state were exempt from the local occupation tax, and that that 

tax was not on sales, and that the tax did not consti~tute a burden on 

interstate commerce. 

In the case of Hope Natural Gas Company v, Hal~l, by the 

Supreme Court of Appeals of West Virginia, reported in 135 S. E. 582, 

the court, in construing an occupation tax on among other things the production of natural gas, the statute providing: 

“The meansure of this tax is the value of the 

entire production in this state, regardless of the place 

of sale or the fact that deliveries may be made to 

points outside the state.” 

held, that the sale price necessarily included the cost of delivery saying 

that such sale price would not reflect the worth of the commodity in the 

State, but the worth within the State plus the cost of transportation. 

In the Hope Natural Gas Company case, supra, the court 

in the opinion says the following: 
Honorable George H. Sheppard, page 7 (NO. O-4025 

“In Wallace v. Hines, 253 U. S. 66, 40 Sup. Ct. 435, 

(64 L. Ed. 782), the Supreme Court Said: 

“‘?~‘The only reason for allowing a state to look 

beyond its borders when it taxes the property of foreign 

corporations is that it may get the true value of the 

things within it; when they are a part of an organic 

system of wide extent, that giires them a value above 

what they otherwise would possess. The purpose is 

not to expose the heel of the system to a mortal dart -- 

not, in other words, to open to taxation what is not 

within the state.’ 

“By parity of reasoning, we can as well say that 

the only reason for permitting consideration of the price 

plaintiff receives for delivering gas through its transmission system to another state is to get the true value 

of the gas within the state before it enters into interstate commerce, and that purpose is not to open to 

taxation interstate commerce itself.” 

The Hope Natural Gas Company case, supra, involved a 

state of facts quite similar to the facts presented in this situation, that is, 

the chief business of the plaintiff in error was the productian and purchase 

of natural gas in West Virginia and the continuous and uninterrupted transportation of this through pipelines in Pennsylvania and Ohio, where it is 

sold, delivered and consumed. The corporation owned 3 178 producing 

wells located in 25 counties of West Virginia, from which it-took in the 

year ending June 30, 1925, more than twenty-five billion cubic feet of gas. 

Most of this passed into interstate commerce by continuous movement 

from the wells. We are confronted with practically the same situation 

here. Practically all of the production of gas from the Panhandle field 

is controlled by the intricate corporate structure as above set out and 

a major portion of this production is transmitted through transmission 

lines all controlled by the same interests to the various markets in other 

states. 

In the case of Cumberland Pipeline Company v, Commonwealth, by the Court of Appeals of Kentucky, reported in 15 S. W..(Zd) 280-286, 

which was a case involving a license or franchise tax on those engaged in 

the production of crude petroleum in the State of Kentucky which tax provided 

for the payment annually of one per cent of the market value of all crude 

petroleum produced and further provided in Section 1 thereof that the State 

Tax Commission must find the market value from monthly reports showing 

sales of such crude petroleum and from such other reports and information 

as it may secure and further providing that the Commission should make an 

appropriate allowance for the cost of transportation from the producing 

wells to the market. It was held that the value of petroleum at the wells 

should be ascertained from the evidence of the market value after the oil 
Honorable George H. Sheppard, page 8 (No. o-4025) 

had completed its journey through the channels of commerce and had 

been sold in the market. The following is a quotation from page 284 

of the opinion in this case: 

“It requires that the value at the wells should 

be ascertained from the evidence of the market value 

after the oil has completed its journey through the 

channels pf a c,ommerce and has been sold in the ,market. 

It is but a mea$g adopted and prescribed to find the mar- . 

ket value of the oil at the well where it was produced. 

There is seldom, if ever, a market at the place of producti~on. Thor product ~,:,lu:;t bc ca.rris::l to th:: :Ilarkct:i, T;le 

While Article 7047b does not provide a method for determining market value ,as was provided in the Kentucky statute as 

above shown, we believe that such method is but the adoption of the 

rule of !~a..~ to be used in determining the market value at a particular 

place W~ICZI Lh:rc is no market value at that place. In fact on page 284 

of the opinion in the Cumberland Pipeline case, supra, the court in 

effect lays down this rule as follows: 

“The act requires the state tax commission 

to resort to the same sources for evidence that would 

naturally and necessarily be selected to establish the 

fact of market value if the Act were silent upon that 

subject. The method is not a new one, but conforms to 

the legal rules of evidence for the ascertainment of 

market value. 22 C. J. 1 151, p, 187; 35 Cyc. 638; 

‘Woerman v. McKinney-Guedry Co., 174 Ky. 521, 192 

S. W. 684. 

“The market value of a commodity is its selling price in the usual and ordinary course of business, 

but, if there be no market at a particular place at 

which it is desired to fix the market value, then the 

market value is taken at the nearest point available, 

with adjustments to care for the cost of transportation 

to that market. Campbellsvllle Lumber Company v. 

Bradlee & Wiggins, 96 Ky. 494, 29 S. W. 313; Log 

Mountain Coal Co. v. White Oak C. Co., 163 Ky. 842, 

174 S. W. 721. The plain mandate of the act of 1918 

is that the tax commission shall find the market value 

at the place of production by taking the actual sales 

as reported from the pipeline companiss, and such 

other evidence thereof as may be available, and deductlng therefrom the carriage charges. The result 

reached in that way is the market value of the oil 

at the well. (Underscoring ours) 
_. - 

Honorable George H. Sheppard, page 9 (No. o-4025) 

Further quoting from the opinion in the case of Cumberland 

Pipeline Company v. Commonwealth, supra, on page 285 thereof, we find the 

following: 

“In its final analysis, the tax is measured by 

the market value of the product at the places of production. 

It is quite true that the value is ascertained by taking 

evidence of sales in another state after the article has 

been carried in interstate commerce, but the use of such 

evidence is not forbidden. It is not put ‘apart in a kind of 

civil sanctuary,’ where the state may not venture for facts 

relevant and important in the administration of its tax laws. 

Davis v. C. C. C. &St. L. R. Co., 217 U.S. 157, 30 S. Ct. 

463, 54 L. Ed. 708, 27 L. R. A. (N. S.) 823, 18 Ann. Cas. 

907; Baltic Mining Co. v. Mass, 213 U. S. 68, 34 S. Ct. 15, 

58 L. Ed. 127. It is not possible to find the value of mineral 

products products at the mine where there is no market, market, except by 

taking the value at the neare,s.t neare,s.t market and deductine deducting the 

cost of transportation. transportation. Interstate Interstate commerce commerce j is not affected 

or burdened by the use thus made of evidence resulting from 

transactions transactions therein. therein, There is no basis for the contention contention 

that the tax on the producer producer is invalid invalid because because the amount 

of the investment investment is ascertained ascertained by considering considering incidents, incidents, 

facts, or results flowing from interstate commerce. American Mfg. C Go. v. St. Louis. 250 U. S. 460. 39 S. Ct. 522, 63 

L. Ed. Ipd84o*zthe Hall case, 102 W. Vi. 272, 135 S. E. 

582, affirmed 274 U.S. 285, 47 S. Ct. 639, 71 L. Ed. 1049, 

L. Ed. 1084. In the 

582, affirmed 274 U 

the producer and carrier of natural gas were the same 

corporation, and the act levied the tax at the well based on 

the entire porduction wherever sold. As the carrier was 

also the producer, the result was that the selling price 

corresponded closely to the gross receipts, and the act 

was susceptible to the construction that the gross receipts 

for the gas produced, including the interstate transportation, 

was subject to the tax. The Supreme Court of Appeals of 

West Virginia construed the act to exclude the cost of transportation by limiting the power to tax to the place of production. The kentucky Act of 1918 expressly required the cost 

of transportation to be given proper weight, and applies by 

its terms to the producer alone.” (Underscoring ours) 

Let us take by way of analogy a party in Texas who is desirous 

of selling a piece of antique furniture which he owns and let us assume for the 

purpose of this analogy that the only market for such an article is in New York 

City. The party in Texas is the owner of a moving van into which he places the 

piece of furniture and transports same to New York where it is ultimately sold. 

We believe that in determining the market value of this piece of furniture that 

same would be the ultimate sale price less the cost of transporting it to New 

York, taking into consideration all of the incidental costs of such transportation. 
Honorable George H. Sheppard, page lo (No. O-4025) 

From a thorough study of the cases hereinabove referred to 

and the report on the operations of Canadian River Gas Company which you 

have submitted to us, we are of the opinion and you are therefore advised 

that the correct method to use in determining the tax liability of Canadian 

River Gas Company under Article 704713 of the Revised Civil Statutes of 

Texas prior to May 1, 1941, is method six as contained in the report of 

Mr. Brown on page 2 thereof, which method as we understand it, is as 

follows: 

Take the gross receipts received for the gas 

at its ultimate wholesale destination, that is, at the 

first sale, where there is an established, bona fide, 

market, and subtract therefrom all costs of transportation and allow in addition thereto eight per cent 

return on invested capital the remaining figure being 

the value of the gas at the well. 

The eight per cent allowance above as we understand it, is 

an arbitrary figure set up by Mr. Brown, which he considers a reasonable 

return on the investment, but, of course, whether same is reasonable or not 

would be a matter for judicial determination. 

are 

Trustingthat theiforegtiing fully answers your;inq~utry,-we 

Yours very truly 

ATTORNEY GENERALOFTEXAS 

BY 

Douglas E. Bergman 

Assistant 

DEB:db:ps