Hon. Robert S. Calvert Opinion No. V-879 Comptroller ofPublic Accounts Austin, Texas Re: The basis for computation ofthe occupation tax on business ofproducing 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. Ifthe tax under Article 7047b should be computed at 5;2% ofthe total amount of money paid to the producers as set out in sub-sections 1and 2 ofSection 1.
B. br ifthe condensate recovered should be taxed at the same’rate as oil, as set outin sub-section 3 ofSection 1.

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‘“Also advise me if**~your** answer is the same under the terms ofthe Processing Contract of Chicago Corporation. ” The pertinent provisions ofArticle 7047b, V.C.S., are as follows:

“Section 1. (1) There is hereby levied an occupation tax onthe business or occupation ofproducing gas within this State, computed as follows:
A Tax shall be paid by each producer onthe amount of gas produced and saved within this State equivalent to five .andtwo-tenths (5.2) per cent of the market value thereof as andwhen produced

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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 ofthe well; however, in case gas is sold for cash only, the tax shall be computed onthe producer’s gross-cash receipts. In all cases where the whole or apart ofthe consideration for the sale of gas is aportion ofthe products extracted from the producer’s gas or aportion ofthe residue gas, or both, the tax shall be computed on the gross value ofall things ofvalue received by the producer, including any bonus or premium;

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“(3) All liquid hydrocarbons that are recovered from gas by means ofa 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 1ofArticle 7047b, V.C.S., with regard to the taxation ofliquid 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 ofthe meaning tobe 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 tobe taxed at the same rate as oil (4 l/8%) they must be recovered as an incident to, or pertaining to, or inconnection with, the actual production ofthe natural gas by the producer.

After careful study ofthe contract in question (Skelly No. 1002) it is clear that under the contract the various producers own, operate, and equip the gas wells. Production ofthe 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 ofthe contract, at page 9, provides inpart:

“In addition to the above equipment tobe 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 awell shall be a delivery point hereunder, at which point the title and possession ofSeller in and to the natural gas Xiid-other products sold to Buyer under this contract shall pass to and vest inBuyer.”Hon. Robert S. Calvert, Page 3 (V-879)

The taxpayer (United Gas Pipe Line Company) makes the following statement at page 5of the memorandum submitted to the Comptroller:

YJnited Gas Pipe Line Company purchases the entire production of gas and liquid hydrocarbons at the mouth ofthe 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 atwell-head and title passes at that point. The production ofthe gas is completed upon delivery by the producer into the lines ofthe purchaser. The separators, meters and other equipment located near the wells are owned and operated by the purchaser. The separation ofthe~condensate at the well location is made for the purposes ofmeasuring 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 tobe paid the producers under the formula set out in the contract. After this initial separation ofthe condensate and the measurement ofthe gas produced from each well, the condensate is again commingled with the gas and transported with the gas through the gathering lines ofthe purchaser to the plant proper for separation ofthe condensate and extraction and processing ofthe natural gasoline.

Inanswering this question, we assume that the producer, in consideration for the sale ofthe natural gas, has been allocated a fair share ofthe 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 ofa contract for the sale ofthe natural gas based on any sort ofa formula as long as it is an “arm’s length” transaction and the contract sales price includes everything ofvalue 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 ofdetermining the amount tobe paid the producer. Itis expressed in the terms ofapercentage of the value ofthe liquids separated and processed from the total natural gas produced by each well. Inthis case (Skelly Oil Company’s W. F. Beall Unit No. 1T) approximately 59% ofthe 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 ofthe g,as should be computed on the producer’s gross cash receipts. Thus the taxable value ofthe gas as produced will be the sum ofthe following .items:.f-.

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

(I) The amount received 

### for the sale ofthe gas at the well-head at 4$ per m.c.f. (2) The amount received by the producer or seller for the sale ofthe 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% ofthe total “value” received for the sale ofhis product.

**Your** second question concerns the computation ofthe tax under the terms ofthe submitted Processing Agreement between the Chicago Corporation and the producers ofnatural gas in the Carthage Field. Under the terms ofthe submitted Processing Agreement, the producer drills, equips, and operates thewell. 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 aportion ofthe total plant products based on aformula which has as its basis the percentage which the producer’s total theoretical production bears to the total theoretical liquid hydrocarbon content ofall the gas delivered to theplant. The theoretical liquid content ofthe 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 inprocessing the gas, the producer assigns the agent apercentage ofthe products extracted from the gas produced. This percentage ofthe products becomes~the absolute property bfthe processing agent when actually separated and extracted. Ifthe producer &es not elect totake his share of the prodacts inkind, theprocessing agent is authorieed to sell the producer’s portion onthe same terms and for 

### the same price as it sells its own share, deducting the leading oosts and other actual costs incurred inmarketing the products.

The contract does not provide for any separation ofthe liquids except at the plant (with the exception ofthe 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 abona fide sale at “arm’s length,“ that the taxable value of the gas is the total amount ofmoney received by the producer for the sale ofthe gas computed at the rate offive 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 ofnatural gas under the submitted, contracts are liable for gas production taxes computed at the rate of 5.2 per cent ofthe gross cash receipts, since none ofthe 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