Hon. Robert S. Calvert Opinion No. V-879 

Comptroller of Public Accounts 

Austin, Texas Re: The basis for computation 

of the occupation tax on 

business of producing gas 

by Union Producing Comp-y. 

Dear Sir: 

Your opinion request dated May 19, 1949, is as follows: 

“Please advise me with reference to United Gas 

Pipe Line Co.- 

A. If the tax under Article 7047b should be computed at 5;2% of the total amount of money paid 

to the producers as set out in sub-sections 1 and 

2 of Section 1. 

B. br if the condensate recovered should be taxed 

at the same’rate as oil, as set out in sub-section 3 

of Section 1. 

. . . 

. . 0 

‘“Also advise me if ~your answer is the same under 

the terms of the Processing Contract of Chicago Corporation. ” 

The pertinent provisions of Article 7047b, V.C.S., are 

as follows: 

“Section 1. (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 

five .and two-tenths (5.2) per cent of the market value 

thereof as and when produced . . . 
. 

. 

Hon. Robert S. Calvert, Page 2 (V-879) 

“(2) The market value of gas produced in this 

State shall be the value thereof at the mouth of the well; 

however, in case gas is sold for cash only, the tax shall 

be computed on the producer’s gross-cash receipts. In 

all cases where the whole or a part of the consideration 

for the sale of gas is a portion of the products extracted 

from the producer’s gas or a portion of the residue gas, 

or both, the tax shall be computed on the gross value 

of all things of value received by the producer, including any bonus or premium; . . . 

“(3) All liquid hydrocarbons that are recovered 

from gas by means of a separator or by other nonmechanical methods, incidental to the production of 

said gas, shall be taxed at the same rate as oil as levied by Acts 1941 Forty-Seventh Legislature Chapter 184, 

Article I, Section 1.” (Emphasis added.) 

In 1945, Section 1 of Article 7047b, V.C.S., with regard 

to the taxation of liquid hydrocarbons recovered by non-mechanical 

means, was amended by adding the words “incidental to the production of said gas. ” Acts 45th Leg. 1945, Ch. 269, p. 423. Although 

the Legislature gave no indication of the meaning to be accorded 

this wording, we cannot assume that the Legislature would do a usesless thing. Therefore, giving the words used their usual and common meaning, in order for liquid hydrocarbons to be taxed at the 

same rate as oil (4 l/8%) they must be recovered as an incident to, 

or pertaining to, or in connection with, the actual production of the 

natural gas by the producer. 

After careful study of the contract in question (Skelly 

No. 1002) it is clear that under the contract the various producers 

own, operate, and equip the gas wells. Production of the natural gas 

is completed, the sale is consummated, and the title to the natural 

gas and all products passes to the buyer at the well-head. Paragraph 

4 of the contract, at page 9, provides in part: 

“In addition to the above equipment to be installed 

by Seller, Seller agrees, at its expense, to make such 

other necessary and reasonable connections or changes 

in connections as may be required to enable Buyer to 

connect its gathering lines and equipment to each well 

covered by this contract, and each such point of connection to a well shall be a delivery point hereunder, at 

which point the title and possession of Seller in and to 

the natural gas Xiid-other products sold to Buyer under 

this contract shall pass to and vest in Buyer.” 
Hon. Robert S. Calvert, Page 3 (V-879) 

The taxpayer (United Gas Pipe Line Company) makes 

the following statement at page 5 of the memorandum submitted to 

the Comptroller: 

YJnited Gas Pipe Line Company purchases the 

entire production of gas and liquid hydrocarbons at the 

mouth of the well from the producers. Title passes at 

that point and the ownership is thereafter the United 

Gas Pipe Line Company who has bought the production.” 

Under the facts presented, the sale is made at well-head 

and title passes at that point. The production of the gas is completed 

upon delivery by the producer into the lines of the purchaser. The 

separators, meters and other equipment located near the wells are 

owned and operated by the purchaser. The separation of the ~condensate at the well location is made for the purposes of measuring the 

number of cubic feet of gas produced and determining the content of 

condensate in the natural gas in order to arrive at the consideration 

to be paid the producers under the formula set out in the contract. 

After this initial separation of the condensate and the measurement 

of the gas produced from each well, the condensate is again commingled with the gas and transported with the gas through the gathering 

lines of the purchaser to the plant proper for separation of the condensate and extraction and processing of the natural gasoline. 

In answering this question, we assume that the producer, 

in consideration for the sale of the natural gas, has been allocated 

a fair share of the total actual production which was marketed by 

the buyer at its fair market value. Admittedly, for tax purposes, 

the pr~oducer and purchaser can make any sort of a contract for the 

sale of the natural gas based on any sort of a formula as long as it 

is an “arm’s length” transaction and the contract sales price includes 

everything of value received by the producer including any bonus or 

premium. The formula adopted in the contract by the producer and 

purchaser has for its purpose that of determining the amount to be 

paid the producer. It is expressed in the terms of a percentage of 

the value of the liquids separated and processed from the total natural gas produced by each well. In this case (Skelly Oil Company’s 

W. F. Beall Unit No. 1 T) approximately 59% of the total value of 

the liquids allocated to the unit are paid as “royalty” to the producer 

by United Gas Pipe Line Company. 

Since this is a sale for cash, the market value of the g,as 

should be computed on the producer’s gross cash receipts. Thus 

the taxable value of the gas as produced will be the sum of the following .items: 
.f-. 

Hon. Robert S. Calvert, Page 4 (V-879) 

(I) The amount received for the sale of the gas 

at the well-head at 4$ per m.c.f. 

(2) The amount received by the producer or 

seller for the sale of the liquid hydrocarbons extracted, processed and sold by the buyer as determined by 

the contract formula. 

It is therefore our opinion that the producer should be 

taxed at the rate of 5.2% of the total “value” received for the sale 

of his product. 

Your second question concerns the computation of the 

tax under the terms of the submitted Processing Agreement between the Chicago Corporation and the producers of natural gas in 

the Carthage Field. Under the terms of the submitted Processing 

Agreement, the producer drills, equips, and operates the well. The 

producer measures the volume of gas produced with his own equipment and delivers the gas to the processor’s intake lines located at 

the plant site designated the delivery point. The producer is allocated a portion of the total plant products based on a formula which 

has as its basis the percentage which the producer’s total theoretical production bears to the total theoretical liquid hydrocarbon 

content of all the gas delivered to the plant. The theoretical liquid 

content of the gas produced by each well, or unit, per thousand cubic feet is determined by tests made by the processor every six 

months,‘using special testing apparatus, 

The processor (Chicago Corporation), acting as an agent 

under the contract, processes the natural gas for the producer. In 

consideratiorrfor his services in processing the gas, the producer 

assigns the agent a percentage of the products extracted from the 

gas produced. This percentage of the products becomes~the absolute 

property bf the processing agent when actually separated and extracted. If the producer &es not elect to take his share of the prodacts in kind, the processing agent is authorieed to sell the producer’s 

portion on the same terms and for the same price as it sells its own 

share, deducting the leading oosts and other actual costs incurred 

in marketing the products. 

The contract does not provide for any separation of the 

liquids except at the plant (with the exception of the tests made periodically to determine liquid content). Any non-mechanical separation is made by the processor at the plant. After careful consideration.of this contract it is our opinion, assuming a bona fide sale at 

“arm’s length,“ that the taxable value of the gas is the total amount 

of money received by the producer for the sale of the gas computed 

at the rate of five and two-tenths (5.2) per cent of such value. 

. 
I . 

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H4n. Robert S. Calvert, Page 5 (V-879) 

SUMMARY 

The producers of natural gas under the submitted, 

contracts are liable for gas production taxes computed 

at the rate of 5.2 per cent of the gross cash receipts, 

since none of the liquid hydrocarbons are recovered by 

non-mechanical means incidental to the production ef 

the gas. Art. 7047b, V.C.S. 

Yours very truly 

ATTORNEY GENERAL OF TEXAS 

BY 6-f& 

Frank Lake 

Assistant 

FL/mwb 

KJi 

ATTORNEYGENERAL