E ORNEY GENERAL 

Honorable Price Daniel 

Governor 

Austin, Texas 

Dear Governor Daniel: 

Opinion No. WW-1085 

Be: Constitutionality of the Eckhardt 

Bill levying a gas production tax 

on Severance producers and dedicated reserve producers. 

You have requested the opinion of this office regarding the 

constitutionality of the Eckhardt Bill, a copy of which is attached to 

this opinion for reference purposes. 

This bill levies a gas production tax in addition to the tax 

levied by Article 3.01 of Chapter 3, Title 122A, Taxation General 

V. A. T. S. and amends said Chapter 3 by adding a new article to be 

designated Article 3. 11. The tax is levied on the “residue gas”‘,as that 

term is defined in the bill and the rate is on an M. C. F. basis, and 

calculated so that all gas severed from the earth and waters of this 

State shall be taxed at least at the rate of one cent per thousand cubic 

feet, including the seven per cent of value taxed by Article 3. 01. The 

additional tax (which applies only when gas is not being taxed at a rate 

equal to or greater than one cent per M. C. F. ) is levied against the 

producer, except where there is a “dedicated reserve contract” be - 

tween a producer and a “dedicated reserve producer”, in which event 

the additional tax is levied against the “dedicated reserve producer. I’ 

“Dedicated reserve producer” is defined as follows: 

‘I ’ Dedicated reserve producer’ means any person holding a written contract for a designated term specified 

therein, which confers upon such person the right to take 

title to gas from particular lands, leases and reservoirs 

in this State and imposes upon a severance producer the 

duty to supply all or a designated quantity or portion of 

gas produced by that Severance producer (or by that 

severance producer in conjunction with other severance 

producers) to the dedicated reserve producer at a fixed 

or determinable price. I’ 

and “dedicated reserve contract” is defined as follows: 
Honorable Price Daniel, page 2 (WW-1085) 

” ’ Dedicated reserve contract’ means a written contract 

for a designated term specified therein, which confer8 

upon a dedicated reserve producer the right to take title 

to gas from particular lands, leases and reservoirs in 

this State, and imposes upon a severance producer the 

duty to supply all or a designated quantity or portion of 

gas produced by that severance producer (or by that 

severance producer in conjunction with others) to a~dedicated reserve producer at a fixed or determinable price. ” 

As this bill levies a gas production tax it does not violate the 

commerce clause of the United States Constitution. A tax is not a 

burden upon interstate commerce if the taxed ~incident is separable and 

attributable to a local activity, even though such incident or activity 

arises exclusively from transactions in interstate co-erce. 

of Chicago v. Willett Co., 

See city 

344 U.S. 574, (1953), and Pacific T. & T. 

v. Tax Commission, 297 U.S. 403, (1936). Production is strictly a 

local activity. A tax on production or, severance, doea not violate the, 

commerce clause even though the article or commodity produced or 

severed is immediately destined for transportation in interstate commerce. Oliver Iron Mining Company v. Lord, “262 U. S. 172, (1923); 

Hope Natural Gas Co. v. Hall, 274 U.S. 284, (1927); Utah v. Pfost, 

286 U.S. 165 (1932); Toomer v. Witsell, 334 U. S. 385, (1948); 

Michigan-Wisconsin v. Calvert, 347~U. S. 157 (1954). 

As Texas gas can only be praduced in Texas, the taxabk incident, which is production, cannot be levied by any other state and 

thereby subject interstate commerce to multiple taxation.- See Coverdale v. Arkansas -~Louisiana, 303 U.S. 604 (1938). : 

Dedication contracts between producers and “dedicated reserve 

producers, ‘I as they exist in the ~industry, definitely appear to create 

substantial and beneficial interests in the “dedicated reserve producers” 

which will sustain the tax. Such contracts dedicate and set aside prior 

to production certain gas under particular lands, leases or within certain 

reservoirs, confer upon the “dedicated reserve producers” the preferential and exclusive right to take title to the gas when it is produced under 

the contract, and obligates the producers to .sever the gas and do all 

other acts necessary to make the gas conform to contract specifications 

for delivery to the “dedicated reserve producers. ” Support for the proposition that the “dedicated reserve producers” in this situation acquire 

a taxable interest in production is found in the following cases: 
. 

Honorable Price Daniel, page 3 (WW-1085) 

Barwise V. Sheppard, 299 U.S. 33 (1936); 

Canadian River Gas Company v. Bivins, 137 Tex. 

347, 153 S. W. 2d 432 (1941); 

Cities Service Oil Company v. McCrory, 191 S. W. 

2d 791 (Tex. Civ. App., 1941, no writ hist. ); 

Sheppard V. Stanolind Oil & Gas Company, 125 

S. W. 2d 643 (Tex. Civ. App. 1939, err. ref. ); 

Southwest Pipeline Company V. Empire Natural 

Gas Company, 33 F. 2d 248 (C. C. A., 8th Cir., 1929); 

Greenshield v. Warren Petroleum Corporation, 248 

F. 2d 61 (C. C. A., 10th Cir., 1957); 

Graham v. Omar Gasoline Company, 253 S. W. 896; 

American Refining Co., et al. V. Tidal Western Oil 

Corporation, 264 S. W. 335 (Tex. Civ. App., 1924, 

error ref. ). 

See also 

Tennessee Gas Transmission Company v. Martin, 

331 S. W. 2d 947 (Tex. Civ. App. I 1960). 

As the tax is equal and uniform against all persons similarly 

circumstanced and all taxpayers are treated alike, this bill does not 

violate the equal protection clause of the Fourteenth Amendment of tM 

United States Constitution, or the equality and uniformity requirements 

embodied in Sections 1 and 2 of Article VIII of the Constitution of Texas. 

The equal protection clause and the provisions of a state constitution requiring equality and uniformity of taxation impose identical 

restrictions upon the State. National Tea Co. V. State, 286 N. W. 360 

(Minn. Sup. Ct. s 1939); and see Union Bank and Trust Co. V. Phelps, 

288 U.S. 181, 53 S. Ct. 321 (1933); and Brown County, Texas V. Atlantic Pipe Line Co. , 91 F. 2d 394 (C. C. A., 5th Cir., 1937). These 

restrictions have been said to be “extremely limited. ” Wisconsin~v. 

J. C. Penney Company, 311 U.S. 435, 61 S. Ct. 246 (1940). It is 

recognized that absolute equality in taxation is impossible of attainment. 

Atchison, T. & S. F. Ry. Co. v. Collins, et al., 294 F. 742, 745 (II. S. 

D. C., N. D. Cal., 1923), appeal dis. 267 U.S. 609. Hence, it is well 

settled that a state legislature has a wide range of choice in clasxifying 

and limiting the subjects of taxation. Henneford, et al. V. Silas Mason, 

300 U. S. 577, 57 S. Ct. 524 (1937), and cases there cited; see also 

Keeney v. Comptroller of the State of New York, 222 U. S. 525, 32 S. Ct. 

105 (1912); Rivera v. Buscaglia, 146 F. 2d 461 (C. C.A., 1st Cir., 1941). 
Honorable Price Daniel, page 4 (WW-1085) 

This bill also provides for an alternative tax at the rate of onefourth of one cent per thousand cubic feet. This bill provides that this 

alternative tax shall only be levied in the event that the tax above discussed is unconstitutional. For the reasons above discussed, this 

alternative tax is also constitutional. 

We have carefully examined all the provisions of this bill in 

light of the various provisions of the United States and Texas Constitu~: 

tions, and we are of the opinion that this bill is not violative of any 

constitutional provision and is in all things constitutional. 

SUMMARY 

The Eckhardt bill, a copy of which is attached hereto, 

is constitutional. 

Yours very truly, 

WILL WILSON 

Attorney General of Texas 

APPROVED: 

OPINION COMMITTEE: 

By: 

Assistant Attorney General 

Morgan Nesbitt, Chairman 

.I. C. Davis 

Riley Eugene Fletcher 

Jack Goodman 

Bob E. Shannon 

REVIEWED FOR THE ATTORNEY GENERAL 

BY. Leonard Passmore 
H.B. BY 

A BILL 

TO BE ENTITLED 

AN ACT amending Title 122A, Chapter 3, by adding a new 

Article 3.11 levying a tax on the occupation of producing gas as a severance beneficiary, which tax is in the 

amount of the difference between the present tax on 

producers levied under Article 3.01 and one cent per 

MCF, with certain exceptions; providing alternatively, 

if the same be held invalid, that a tax of one-fourth 

cent per MCF shall be levied against severance beneficiaries, with certain exceptions; providing provisions 

incidental to the accomplishment of the above purposes; 

providing for the allocation of the proceeds; repealing 

Chapter 22 of Title 122A and all laws in conflict with 

this Act; providing for severability; and declaring an 

emergency. 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 

Section 1. That Title 122A, Chapter 3, Vernon’s Revised Civil 

Statutes of Texas be amended by inserting a new article after Article 3. 10, 

denominated Article 3. 11, to read as follows: 

‘Section 3. 11 Dedicated Reserve Tax. 

“(I) Declaration of Policy. 

“It is the policy of this State to obtain as near as may be, consistent 

with a fair and equitable tax policy, a tax return to the State of not less than 
one cent per MCF on each MCF of natural gas produced and saved from the 

earth and waters of this State. The same is deemed necessary 

“1. to derive a reasonable State revenue from the trillions 

of cubic feet of gas removed from the earth and waters 

of the State each year, and 

“II. to tax equitably all of those persons integrally engaged 

in the occupation of removing such gas, so that one 

associated group of them will not derive a windfall by 

virtue of a very small tax burden on each thousand cubic 

feet of gas produced by them, and others will not be discriminated against because of a comparatively large 

tax burden on each thousand cubic feet of gas produced 

by such others. 

“It is further the policy of this State, in order to promote conservation 

and to distribute equitably the burden of natural resources taxation, to recognize and clarify fully by statute the relation between various persons engaged 

in the occupation of producing natural gas so that the taxpayer in each instance 

may be identified clearly, and so that all persons so engaged in the occupation 

of production will bear equitably the taxes imposed in connection with the severance of gas from Texas soil. 

“Pursuant to this policy it is recognized that contractual relations 

exist in such natural gas production occupation between several definable groups, 

all engaged integrally in such occupation of severance of natural gas from the 

soil and all having such a direct and beneficial interest in the production of gas 

that for the purpose of taxation they may ,be classified as producers of gas. 

It is the policy of the State of Texas to recognize that all such persons, integrally 

engaged in the occupation of severance of natural gas from the soil - producers, 

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severance producers and dedicated reserve producer8 _ have a taxable interest 

in production of gas in Texas. 

“(2) Definitions. 

“The definitions contained in Article 3.04, insofar as applicable, 

shall govern the meanings of the terms used in this Article. In addition, the 

following definitions are specifically applicable to this Article: 

“(a) ‘Severance producer’ means any person owning, controlling, 

managing, or leasing any gas well and/or ,any person who produces in any 

manner any ga,s by taking it from the earth or waters of this State, and shall 

include any person owning any royalty or other interest in gas or its value, 

whether produced by him, or by some other person in his behalf, either by 

lease or contract or otherwise, when such person producing gas is in contractual relation with the dedicated reserve producer (either directly, or, if a 

royalty or other holder of an interest in gas in place and thereby entitled to a 

fractional share of the valu~e of such gas in place, indirectly through the producer). 

‘l(b), ‘Dedicated reserve producer’ means any person holding a written 

contract for a designated term specified therein which confers upon such person the right to take title to gas from particular lands, leases and reservoirs 

in this State and imposes upon a severance producer the duty to supply all or a 

designated quantity or portion of gas produced by that severance producer 

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(or by that severance producer in conjunction with other severance producers) 

to the dedicated reserve producer at a fixed or determinable price. 

l’(c) ‘Severance beneficiary’ has the following meaning,: 

“I. In the case where there is in effect a dedicated reserve 

contract as to the gas in question, the term ‘severance 

beneficiary’ refers to the dedicated reserve producer 

“II. In the case where there is no dedicated reserve contract in effect as to the gas in question, the term 

‘severance beneficiary’ refers to the producer. 

‘l(d) ‘Dedicated reserve contract’ means any written contract for a 

designated term specified therein which confers upon a dedicated reserve producer the right to take title to gas from particular lands, leases and reservoirs in this State, and imposes upon a severance producer the duty to supply 

all or a designated quantity or portion of gas produced by that severance producer (or by that severance producer in conjunction with~~others) to the dedicated reserve producer at a fixed or determinable price. 

‘l(e) I. Meaning of Residue Gas. 

“A. As to gas from which liquefiable hydrocarbons are removed 

‘residue gas’ means that constituent pa,rt of the whole quantity of gas removed from 

the earth and waters of this State which eventually constitutes the residue. The 

tax is applicable under the terms of this Article to such constituent part of the 

whole quantity of gas at the time when it, along with the associated gasoline or 

other liquefiable hydrocarbons, is actually severed from the earth and waters 

of this State. 

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“B. As to gas from~which liquefiable hydrocarbons are not removed 

‘residue gas’ means the entire quantity except that gas which is 

W injecte,d into the earth, unless sold for such purpose; 

(ii) produced from oil wells with oil and lawfully vented 

or flared; or 

(iii) used for lifting oil, unless sold for such purpose. 

“II. How Measured 

“Such residue gas shall be measured by determining that portion of 

gas containing gasoline or other liquefiable hydrocarbons (that are to be removed or extracted at a plant by scrubbing, absorption, compression, or any 

other process) which is left after the application of such process and which 

flows through the outlet of such plant. In the event that such gas is processed 

..;1 

in more than one such plant, the residue gas content shall be measured as that 

portion of the gas which flows through the outlet of the first plant. 

“As to that gas which passes through a separator and which is not processed in a plant to remove or ,extract the gasoline or other liquefiable hydrocarbons, the residue gas content shall be measured as that portion of the gas 

remaining after its passage through such separator. In C&he event that such 

gas passes through more than one separator, the residue gas content shall be 

measured as that gas remaining after the passage through the first separator. 

“As to that gas which passes through a drip or trap and which does not 

pass through a separator and which is not processed in a plant to remove or 

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extract gasoline or other liquefiable hydrocarbons, the residue gas content 

shall be measured as that portion of the gas remaining after passage through 

such drip or trap. In the event that such gas passes through more than one drip 

or trap, then the residue gas content shall be measured as that portion of the 

gas remaining after its passage through the last drip or trap. 

“As to that gas which passes through a meter and which does not pass 

through a drip or trap and which does not pass through a separator and which 

is not processed in a plant to remove or ,extract the gasoline or other liquefiable 

hydrocarbons, the residue gas content shall be measured as that portion of the 

gas remaining after it passes through such meter. In the event that such gas 

passes through more than one meter, then the residue gas content shall be 

measured as that gas which passes through the first meter. 

‘j(f) ‘MCF’ means thousand cubic feet. 

“(3) The Tax Herein Levied. 

“(a) There is hereby levied, in addition to all other occupation taxes 

on the occupation of producing gas in Texas, an occupation tax on the busin,ess 

or occupation of producing gas within this State a,8 a Severance beneficiary at 

the rate of one cent per thousand cubic feet,of residue gas produced, applicable 

at the time the said gas is severed from the earth or waters of this State, 

less the amount of tax paid per MCF under the provisions of Article 3.01 of 

this Chapter, computed in the following manner: 

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“In the case of all gas subject to the tax imposed by Article 2. 01 ther,e 

shall be ascertained the amount of tax in cents and fra.ctions of a cent per 

thousand cubic feet paid to the State with respect to each quantity of such ga,s 

by virtue of the seven per cent of value tax provided in that Article. If such 

amount is less than one cent per MCF, then there shall~be determined the 

difference between such amount and one cent per MCF. Such amount multiplied 

by the quantity of the residue gas in question shall constitute the tax obligation 

of the severance beneficiary of such residue gas. 

‘l(b) The above is subject to the following exception: 

“Without regard to any other provision of this Chapter no producer producing natural gas from a newly discovered field shall be required to pay more 

than the seven per cent of the market value of gas therefrom produced until 

establishment of the first field rules for such field by the Railroad Commission 

or until the passage of six months from the date of the first discovery of natural 

gas in such field, whichever time shall~be the shorter. 

“(4) Alternative Computation of Tax. 

“(a) If the method of levy of the tax as set out in Par. (3) above is held 

unconstitutional after application of the severability clause hereinafter set 

forth, or if the same is held not to be effective to levy a tax based on the difference between the seven per cent of value tax levied in Title 122A, Chapter 3, 

Article 3.01, and one cent per thousand cubic feet, which tax is to be paid 

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by dedicated reserve producers and/or producers under the terms of this Act 

as the same may finally be interpreted, then the following additional tax (above 

the said seven per cent tax) shall apply: 

“There is hereby levied in addition to all other occupation taxes on 

the occupation of producing gas in Texas an occupation tax on the business 

or occupation of producing gas within this State a.8 a severance beneficiary, 

at the rate of one-fourth cent per MCF of residue gas produced. 

‘l(b) The above is subject totthe following exception: 

“Without regard to any other provision of this Chapter no producer producing natural gas from a newly discovered field shall be required to pay more 

than the seven per cent of the market value of gas therefrom produced until 

establishment of the first field rules for such field by the Railroad Commission 

or until the passage of six months from the date of the first discovery of natural 

gas in such field, whichever time shall be the ~shorter. 

“(5) Collection of Tax. 

“(a) The tax hereby levied shall be a liability of the severance beneficiary. 

It shall be his duty to keep accurate records of all gas produced and all matters 

reasonably necessary or pertinent, a.8 determined by the Comptroller, for the 

calculation and collection of the tax. The severance beneficiary shall remit the 

tax additionally levied by this Article. The tax levied herein shall be due and 

payable at the Office of the Comptrolle~r ,of Public Accounts at Austin on the last 

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day of the calendar month. Each person liable for the tax imposed herein shall 

make and deliver to the Comptroller a verified report on forms furnished by 

the Comptr~oller showing such information as the Comptroller may deem necessary for the administration and enforcement of this Article. Such report shall 

Abe accompanied by legal tender or cashier’s check payable to the State Treasurer 

for the proper amount of taxes herein levied. 

‘l(b) The Comptroller shall employ auditors and/or other technical 

assistants for the purpose of verifying reports and investigating the affairs of 

producers, including severance producers and dedicated reserve producers, 

to determine whether the tax is being properly reported and paid. He or ,they 

shall have the power to enter on the premises of any taxpayer liable for a 

tax under this Act and any other premises necessary in determining the correct 

tax liability, and to examine any books or records and to secure any information directly or indirectly concerned, according to law, and to promulgate 

rules pertinent to the enforcement of this Article which rules shall have the 

effect of law. Before any division or allotment of the tax collected hereunder 

is made, . 5% of the gross amount of that tax shall be set aside in the State 

Treasury for the use of the Comptroller in the administration and enforcement 

of this Article; and so much of the said proceeds of .5’$ of the occupation tax 

paid monthly as may be needed in such administration and enforcement is 

hereby set aside for such purposes, subject to appropriation by the Legislature. 

‘l(c) In the event that any taxpayer liable for a tax under this Act shall 

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not file a report, the ,Attorney General shall .have the right to enjoin such person 

until the delinquent tax is paid or ,said reports are filed,, and venue is hereby 

fixed in Travis County. 

‘l(d) All persons having an obligation imposed by this Article shall be 

subject to a penalty of not less than $100 or ,more than $l~,.OOO for violation 

hereof, each day’s violation constituting a separate offense. The State shall 

have a prior lien for all delinquent taxes, penalties and interest on all property 

used by them or in their business of producing or purchasing gas, and if any 

of them shall fail to remit the proper taxes, penalties and/or interest due, 

the Comptroller may employ personnel to ascertain the correct amount due, 

and the person violating any of the provisions of this Article shall be liable, 

as additional penalty, for the reasonable expenses or the reasonable value of 

such services of representatives of the Comptrollers, incurred in, such investigation and audit. The Attorney,General shall file suit,,in the name of the 

State of Texas for all delinquent taxes,. penalties, ‘and other amounts due for 

the enforcement of all liens under ,this Article. 

‘l(e) The provisions of Article 3. 09 of this Chapter shall also be applicable to the enforcement of the provisions of this Article, and where the terms 

‘producer’ or ‘purchaser’ are used in that Article, ,they shall be construed to be 

broad enough to include ‘severance producer’~ and ‘dedicated reserve producer’, 

as the case may be. 

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“(6) Allocation of Revenue. 

“(a) The revenue derived under the provisions of this Article shall be 

allocated in the following manner: 

“I. . 5% for administration and enforcement as hereinabove provided; 

“II. One-fourth of the net revenue shall be allocated to the Available 

School Fund; 

“III. The remaining three-fourths shall be deposited in the Omnibus 

Tax Clearance Fund and shall be ,set aside for the purpose of transfer and allocation from the Omnibus Tax Clearance ,I?und to the Medical Assistance Fund 

as provided by~section 2 of Article XX of Chapter 184, Acts, of the FortySeventh Legislature, Regular.Session, 1941, as amended, it being specifically 

provided that no portion of the revenues deposite,d to the Omnibus Clearance 

Fund by virtue of this Act shall be distributed or allocated to any other fund 

under the provisions governing the Omnibus Clearance Fund unless the needs 

of the Medical Assistance Fund have been met fully. 

‘l(b) ‘Revenue derived.under the provisions of this Act’ as used in this 

section means such revenue as may be added by vir,tue of the provisions of this 

Article 3. 11 to that revenue which would otherwise be obtained under other 

provisions of law. 

“(7) In case two or more persons pay under protest challenging the 

constitutionality of any portion of this Article, the Attorney General shall, 

within thirty days after the filing of the second protest, ,institute a suit for .~~ :-

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. . - 

declaratory judgment in the District Court of Travis County, Texas. In 

order to expedite the decision in such case o,r cases, and also in suits filed 

by taxpayers under Article ,7057b, Vernon’s Revised Civil Statutes, any such 

cases involving the constitutionality, of any portion of this Act shall be advanced to the top of the docket of any~,Dietrict or Appellate Court in which 

the cases might be filed or appealed. ‘I 

Sec. 2. Repealer ‘. 

All laws or parts of laws in conflict with this Act ar~e hereby repealed to 

the extent of such conflict only. Specifically, Chapter 22, Title 122A, is hereby 

repealed. 

Sec. 3. Severability Clause. 

If any article, section, subsection, sentence. clause, or phrase of this 

Act ,is for any~reason held to be invalid or unconstitutional such decision shall 

not affect the remaining portion8 or .eectione of this Act. The Legislature 

hereby declares that it would have passed such portions of this Act as may,be 

held valid and constitutional,independently of such section, SUbSeCtiOn, sentence, 

clause, phrase or portion of this Act as may.be held unconstitutional and invalid. 

Sec. 4. Emergency Clause. 

The reasons set for.th in the declaration ~of policy and the fact ,that 

additional revenue is urgently needed to meet the budgetary requirements 

of the State, creates an emergency and an imperative public necessity that 

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. , , 

the constitutional rule requiring bills to be read on three several days in 

each House be suspended, and this rule is hereby suspended, and that this 

Act take effect and be in force from and after its passage, and it is so 

enacted. 

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