## E ORNEY GENERAL

Honorable Price Daniel Governor Austin, Texas
Dear Governor Daniel: Opinion No. WW-1085 Be: Constitutionality ofthe 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 ofthe Eckhardt Bill, a copy ofwhich 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 3by adding anew article tobe 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 andwaters ofthis State shall be taxed at least at the rate of one cent per thousand cubic feet, including the seven per cent ofvalue 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 aproducer and a “dedicated reserve producer”, inwhich 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 awritten 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 afixed or determinable price. I’ and “dedicated reserve contract” is defined as follows:Honorable Price Daniel, page 2 (WW-1085)

” ’Dedicated reserve contract’ means awritten contract for a designated term specified therein, which confer8 upon adedicated 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 adesignated 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 afixed or determinable price. ” As this bill levies a gas production tax itdoes not violate the commerce clause ofthe United States Constitution. A tax is not a burden upon interstate commerce ifthe 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 tomultiple taxation.- See Coverdale v. Arkansas -~Louisiana, 303 U.S. 604 (1938). :

Dedication contracts between producers and “dedicated reserve producers, ‘Ias 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 tomake the gas conform to contract specifications for delivery to the “dedicated reserve producers. ” Support for the proposition that the “dedicated reserve producers” inthis 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, nowrit 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 ofthe Fourteenth Amendment oftM United States Constitution, or the equality and uniformity requirements embodied in Sections 1and 2ofArticle VIII ofthe Constitution of Texas.

The equal protection clause and the provisions ofa 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 tobe “extremely limited. ” Wisconsin~v. J. C. Penney Company, 311 U.S. 435, 61 S.Ct. 246 (1940). Itis recognized that absolute equality in taxation is impossible ofattainment. 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 awide range of choice in clasxifying and limiting the subjects oftaxation. Henneford, et al. V. Silas Mason, 300 U.S. 577, 57 S.Ct. 524 (1937), and cases there cited; see also Keeney v. Comptroller ofthe State ofNew 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 inthe 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 ofthis bill in light ofthe various provisions ofthe United States and Texas Constitu~: tions, and we are ofthe opinion that this bill is not violative ofany constitutional provision and is inall things constitutional. SUMMARY The Eckhardt bill, a copy ofwhich 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 PassmoreH.B. BY

A BILL TO BE ENTITLED
AN ACT amending Title 122A, Chapter 3, by adding anew Article 3.11 levying atax onthe occupation ofproducing gas as a severance beneficiary, which tax is in the amount ofthe difference between the present tax on producers levied under Article 3.01 and one cent per MCF, with certain exceptions; providing alternatively, ifthe same be held invalid, that atax of one-fourth cent per MCF shall be levied against severance beneficiaries, with certain exceptions; providing provisions incidental to the accomplishment ofthe above purposes; providing for the allocation ofthe 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 anew 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 ofthis State to obtain as near as may be, consistent with afair and equitable tax policy, atax return to the State ofnot less thanone cent per MCF on each MCF ofnatural gas produced and saved from the

earth andwaters ofthis 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 andwaters ofthe State each year, and

“II. to tax equitably all ofthose persons integrally engaged in the occupation of removing such gas, so that one associated group ofthem will not derive awindfall by virtue ofavery 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 ofthis State, in order to promote conservation and to distribute equitably the burden ofnatural resources taxation, to recognize and clarify fully by statute the relation between various persons engaged in the occupation ofproducing natural gas so that the taxpayer in each instance may be identified clearly, and so that all persons so engaged in the occupation ofproduction 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 ofnatural gas from the soil and all having such a direct andbeneficial interest inthe production of gas that for the purpose oftaxation they may ,beclassified as producers of gas. Itis the policy ofthe State of Texas to recognize that all such persons, integrally engaged in the occupation ofseverance ofnatural gas from the soil - producers, -2-severance producers and dedicated reserve producer8
_have ataxable interest

in production of gas in Texas.

“(2) Definitions. “The definitions contained in Article 3.04, insofar as applicable, shall govern the meanings ofthe terms used inthis Article. Inaddition, 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,sby taking itfrom the earth or waters ofthis 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 inhis 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 aninterest in gas inplace and thereby entitled to a fractional share ofthe valu~eof such gas in place, indirectly through the producer).

‘l(b), ‘Dedicated reserve producer’ means any person holding awritten 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 aseverance producer the duty to supply all or a designated quantity or portion of gas produced by that severance producer -3-(or by that severance producer in conjunction with other severance producers)

to the dedicated reserve producer at afixed or determinable price.

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

“I. Inthe 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. Inthe 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 adedicated reserve producer the right to take title to gas from particular lands, leases and reservoirs inthis State, and imposes upon a severance producer the duty to supply all or adesignated quantity or portion ofgas produced by that severance producer (or by that severance producer in conjunction with~~others) to the dedicated reserve producer at afixed 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 ofthe whole quantity of gas removed from the earth andwaters ofthis State which eventually constitutes the residue. The tax is applicable under the terms ofthis Article to such constituent part ofthe whole quantity of gas at the time when it, along with the associated gasoline or other liquefiable hydrocarbons, is actually severed from the earth andwaters ofthis State. -4-“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 aplant by scrubbing, absorption, compression, or any other process) which is left after the application ofsuch process andwhich flows through the outlet of such plant. Inthe event that such gas is processed ..;1 in more than one such plant, the residue gas content shall be measured as that portion ofthe gas which flows through the outlet ofthe first plant.

“As to that gas which passes through aseparator andwhich is not processed in aplant to remove or ,extract the gasoline or other liquefiable hydrocarbons, the residue gas content shall be measured as that portion ofthe 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 andwhich does not pass through a separator andwhich is not processed in aplant to remove or
-5-extract gasoline or other liquefiable hydrocarbons, the residue gas content

shall be measured as that portion ofthe gas remaining after passage through such drip or trap. Inthe event that such gas passes through more than one drip
or trap, then the residue gas content shall be measured as that portion ofthe gas remaining after its passage through the last drip or trap.

“As to that gas which passes through ameter andwhich does not pass through a drip or trap andwhich does not pass through a separator andwhich is not processed in aplant to remove or,extract the gasoline or other liquefiable hydrocarbons, the residue gas content shall be measured as that portion ofthe gas remaining after it passes through such meter. Inthe 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
onthe occupation ofproducing gas in Texas, an occupation tax onthe busin,ess
or occupation ofproducing gas within this State a,8aSeverance beneficiary at the rate of one cent per thousand cubic feet,of residue gas produced, applicable atthe time the said gas is severed from the earth or waters ofthis State, less the amount oftax paid per MCF under the provisions ofArticle 3.01 of this Chapter, computed inthe following manner:



## -6-“In the case of all gas subject to the tax imposed by Article 2. 01 ther,e

shall be ascertained the amount oftax 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 ofthe seven per cent ofvalue tax provided inthat Article. Ifsuch 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 ofthe residue gas in question shall constitute the tax obligation ofthe severance beneficiary of such residue gas.

‘l(b) The above is subject to the following exception: “Without regard to any other provision ofthis Chapter no producer producing natural gas from anewly discovered field shall be required to pay more than the seven per cent ofthe market value of gas therefrom produced until establishment ofthe first field rules for such field by the Railroad Commission
or until the passage of six months from the date ofthe first discovery ofnatural gas in such field, whichever time shall~be the shorter.

“(4) Alternative Computation of Tax.

“(a) Ifthe method oflevy ofthe tax as set out in Par. (3) above is held unconstitutional after application ofthe severability clause hereinafter set forth, or ifthe same is held not tobe effective to levy atax based onthe difference between the seven per cent ofvalue tax levied in Title 122A, Chapter 3, Article 3.01, and one cent per thousand cubic feet, which tax is to be paid
-7-by dedicated reserve producers and/or producers under the terms ofthis 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 ofproducing gas in Texas an occupation tax onthe business
or occupation ofproducing gas within this State a.8a 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 ofthis Chapter no producer producing natural gas from anewly discovered field shall be required to pay more than the seven per cent ofthe market value of gas therefrom produced until establishment ofthe first field rules for such field by the Railroad Commission
or until the passage of six months from the date ofthe first discovery ofnatural gas in such field, whichever time shall be the ~shorter.

“(5) Collection of Tax.

“(a) The tax hereby levied shall be aliability ofthe severance beneficiary. It shall be his duty to keep accurate records of all gas produced and all matters reasonably necessary or pertinent, a.8determined by the Comptroller, for the calculation and collection ofthe 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 ofthe Comptrolle~r ,ofPublic Accounts atAustin onthe last -8-day ofthe calendar month. Each person liable for the tax imposed herein shall

make and deliver to the Comptroller averified report onforms furnished by the Comptr~oller showing such information as the Comptroller may deem necessary for the administration and enforcement ofthis Article. Such report shall Abeaccompanied by legal tender or cashier’s check payable to the State Treasurer for the proper amount oftaxes herein levied.

‘l(b) The Comptroller shall employ auditors and/or other technical assistants for the purpose ofverifying 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 ofany 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 andto secure any information directly or indirectly concerned, according to law, and to promulgate rules pertinent to the enforcement ofthis Article which rules shall have the effect oflaw. Before any division or allotment ofthe tax collected hereunder is made, .5% ofthe gross amount ofthat tax shall be set aside in the State Treasury for the use ofthe Comptroller in the administration and enforcement ofthis Article; and so much ofthe said proceeds of .5’$ ofthe 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) Inthe event that any taxpayer liable for atax under this Act shall -9-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,, andvenue is hereby fixed in Travis County.

‘l(d) All persons having an obligation imposed by this Article shall be subject to apenalty ofnot less than $100 or ,more than $l~,.OOOfor violation hereof, each day’s violation constituting a separate offense. The State shall have aprior lien for all delinquent taxes, penalties and interest on all property used by them or in their business ofproducing or purchasing gas, and if any ofthem 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 ofthe provisions ofthis Article shall be liable,
as additional penalty, for the reasonable expenses or the reasonable value of such services of representatives ofthe Comptrollers, incurred in,such investigation and audit. The Attorney,General shall file suit,,in the name ofthe State of Texas for all delinquent taxes,. penalties, ‘and other amounts duefor the enforcement of all liens under ,this Article.

‘l(e) The provisions ofArticle 3. 09 ofthis Chapter shall also be applicable to the enforcement ofthe provisions ofthis Article, andwhere 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 ofRevenue.

“(a) The revenue derived under the provisions ofthis Article shall be allocated in the following manner:

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

“II. One-fourth ofthe 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 oftransfer and allocation from the Omnibus Tax Clearance ,I?undto the Medical Assistance Fund
as provided by~section 2 ofArticle XX of Chapter 184, Acts, ofthe FortySeventh Legislature, Regular.Session, 1941, as amended, it being specifically provided that no portion ofthe revenues deposite,d to the Omnibus Clearance Fund byvirtue ofthis Act shall be distributed or allocated to any other fund under the provisions governing the Omnibus Clearance Fund unless the needs ofthe Medical Assistance Fund have been met fully.

‘l(b) ‘Revenue derived.under the provisions ofthis Act’ as used in this section means such revenue as may be added byvir,tue ofthe provisions ofthis Article 3. 11to that revenue which would otherwise be obtained under other provisions oflaw.

“(7) In case two or more persons pay under protest challenging the constitutionality ofany portion ofthis Article, the Attorney General shall, within thirty days after the filing ofthe second protest, ,institute a suit for .~~ :- -11-. . -

declaratory judgment in the District Court of Travis County, Texas. In order to expedite the decision in such case o,rcases, and also in suits filed by taxpayers under Article ,7057b, Vernon’s Revised Civil Statutes, any such
cases involving the constitutionality, of any portion ofthis Act shall be advanced to the top ofthe docket of any~,Dietrict or Appellate Court inwhich the cases might be filed or appealed. ‘I

Sec. 2. Repealer ‘. All laws or parts oflaws in conflict with this Act ar~ehereby repealed to the extent of such conflict only. Specifically, Chapter 22, Title 122A, is hereby repealed.

Sec. 3. Severability Clause. Ifany article, section, subsection, sentence. clause, 

### orphrase ofthis Act ,isfor any~reason held to be invalid or unconstitutional such decision shall not affect the remaining portion8 or.eectione ofthis Act. The Legislature hereby declares that itwould have passed such portions ofthis Act as may,be held valid and constitutional,independently of such section, SUbSeCtiOn, sentence, clause, phrase or portion ofthis Act as may.be held unconstitutional and invalid.

Sec. 4. Emergency Clause. The reasons set for.th inthe declaration ~ofpolicy and the fact ,that additional revenue is urgently needed to meet the budgetary requirements ofthe State, creates an emergency and animperative public necessity that -12-. , ,

the constitutional rule requiring bills to be read onthree 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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