DAN MORALES

ATTORNEY GENERAL 

## QBffice

of t&zRlttornep Qkterat State of QLexae

The Honorable C. E. “Mike” Thomas III Howard County Attorney P.O. Box 2096 Big Spring, Texas 7972 1 May 2, 1997 Opinion No. DM-438 Re: Ad valorem taxation of equipment used to produce.minerals on mineral leasehold estate, and related questions (RQ-918)

Dear Mr. Willcerson: You haverequested our opinion regarding the proper method of assessing and collecting ad valorem taxes’ on “casing, tubing, pumpjacks, tanks, surf&e pipe” and other equipment used to produce minerals on a mineral leasehold estate. As you know, both real and personal property are subjectto ad valorem taxation in Texasunlessexemptedby law corn taxation. Tax Code 6 11.01(a). Because certain tax statutes and tax provisions of the Texas Constitution treat real and personal property differently, property must be classified as one or the other for certain ad valorem taxation purposes. You statethat the Howard County TaxAppraisal District* and “most, ifnot all, tax appraisal districts around the state, include in their appraisal of oil and gas mineral leasehold interests the production equipmentnecessBfyto produce the oil and gas.” You explain that a property owner has challenged the district’s appraisal method, as follows:

A delinquent taxpayer has attempted to break out the portion of the account attributable to the production equipment and claim the four year statute of limitation applies to that portion of the account. The Howard County Tax Appraisal District has taken the position that the prod&on equipment is indispensable to the production of oil and gas on the leasehold estate, and istherefore taxable as an improvement, tixture or appurtenance to the realty and may be included inthe value ofthe leasehold interest. You first ask whether the appraisal district may include the value ofproduction equipment as part of the value of the mineral leasehold for which the equipment is used. We conclude that irrespective of whether production equipment is real or personal property, it must be appraised

‘Ad valomn taxes are taxes imposed on the value ofpropxly.&&x’s LAWDICTIONARY5l(6th ed. 1990)

‘Appraisal dish&s are respomible for appraising pmpmty for taxing units that impose ad v&mu taxes cm property located io tbe appmisd districi Tax code $6.01; Tex. Comt art. VIII, $ IS@). Taxing units include cities. counties. s&o01 districts, and other political s&divisions of the state that are authorized to impose and are imposing ad vd~taxesanpropaty. TaxCode§ 1.04(12).The Honorable C. E. “‘Mike”Thomas III - Page 2 @M-438)

separately from its correspondiig mineral leasehold interest. The Tax Code specifically designates land,improvements, interests inrealproperty, andpersonal property as separate taxable entities. See TaxCode $5 l.04,2S.02,.04.r Thus courts have held that land, improvements to land, and interests in land must be appraised separately, even though they are all included within the code’s definition of “real property.” See Cameron County Appraisal Review Bd v. Credirbanc Sm. Ass’n, 763 S.W.2d577,579-80 (Tex. App.-Corpus Christi 1988,writ denied) (“This specific enumeration by the legislature appears to show the legislative intent that land and improvements are separate entities.“); see ah Waker v.Appraisal Review Bd, 846 S.WSd 14, 16(Tex. App.-San Antonio 1992, writ denied) (“lR]equiring the Tax Appraisal District to maintain the separate listing ofboth land and improvement is more than a mere bookkeeping requirement.“). The appraisals may be combmedinto one taxpayer account, butthe account mustretlect separate valuations for each taxable property. See Tax Code $Q1.04,25.02, .04. You next askwhich statute of limitations period applies to the collection of a delinquent tax account ifthe values of the production equipment and the mineral leasehold interest are combined into one account. As your question suggests, the classification of property as real or personal is materialto the statute oflimitations because the statute treats real and personal property ditTerently. It provides: (a) Personal property may not be seized and a suit may not be tiled:

(1) to collect a tax on personal property that has been delinquent more than four years; or (2) to collect a tax on real ~propertythat has been delinquent more than 20years. Id 533.05. Smcean account may include taxes on several taxable properties, a different limitations period may apply to diierent parts of the account. Determination of the appropriate statute of hmitationsturnsupon whether the property is real or personal. Ifthe property is personal, taxes on itmaynotbecollected by suitor seizureifthey havebeen delinquent for more than four years. Ifthe property is real, the twenty-year limitations period applies. You have asked about the property classification of equipment used to produce minerals on a mineral leasehold estate.

Tiia to the 1919 codification of the Property Tax Code, the definition of ”real prow included

impruvements tberem, and no provision required the improvements to be valued separstely. Thus prior to enactment of the new code, improvements were appraised as pm of the value of the real estate. See Attorney General Opinion H-370 (1974) at 2 (referring to definition of reel property in former V.T.C.S. article 7146 and conchding that value ofiixtum and otta impma on ld ?sbdd be inchled in the value assigned to the realty”); c/: Comerun CountyAppmtsaiReview Bd Y. Creditbanc Sm. Ass%. 763 S.W.2d 577.579-80 (Tex. App.-Capus Christi 1988, writ denied) (TJn&r the new provisions of the Prop&y Tax Code tbe legislature has spe&cally designated land and impmvemmts and other taxable in- as separate entities of real proper@.“).

p. 2443The Honorable C. E. “Mike” Thomas III - Page 3 @M-438)

Webeginwiththe relevant statutory definitions. “‘Personalproperty” isproperty that is not real property. ZG!

$1.04(4). “Real property” is: (A) land; (B) an improvement; (C) a mine or quarry; (D) a mineral in place; (E) standing timber; or (F) an estate or interest, other than a mortgage deed of trust creating a hen on property or an interest securing payment or performance ofan obligation in a property enumerated in Paragraphs (A) through (E) of this subdivision. Id 3 1.04(2). Sinceoil and gas and other mineral leaseholds are “estates or interests” in minerals in place,they aretaxable asrealproperty. Prince Bras Drilling Co. v.FArman Petroleum Cop., 150 S.W.2d 314 (Tex. Civ.App.-El Paso 1941,writ refd); Attorney General Opinion MW- 402 (1981). Thus the twenty-year limitations period applies to the collection of delinquent taxes on mineral leaseholds. With respectto minerrdproduction equipmentused on aleasehold, you state that the Howard County AppraisalDistrict and other districts around the state appraise production equipment as real property along with the corresponding oil and gas leasehold interests because the equipment is

“indispen&le to the production of oil and gas on the leasehold estate, and istherefore taxable as an improvement, fixture, or appurtenance to the realty.” We found no authority to support your view that property is considered an improvement, fixture, or appurtenance to real property if it is

“indispensable” to the property. Furthermore, since a mineral interest is taxable whether it is

“producing” or not,we declineto link the tax classiication of equipment to the production status of the interest. See Attorney General Opinion MW-402 (1981) at 2; Tax Code §23.17. Instead, an “improvement” taxable as real property isde&d by the Tax Code as:

(A) abuilding, structure, tixture, or fence erected on or atlixed to land; or (B) atransportable structure that is designed to be occupied for residential or business purposes, whether or not it is atIixed to land, if the owner of the structure owns the land on which it is located, unless the structure is unoccupied and held for sale or normally is located at a particular place only temporarily.

D. 2444The Honorable C. E. ‘Mike” Thomas III - Page 4 (DM-438)

TaxCode $1.04(3). Courts have long considered three factors in determining whether an article of property affixed to real property’ is an improvement:5

(1) the mode and sufliciency ofthe annexation ofthe article to the realty, whether real or constructive; (2) the adaptation ofthe article to the uses or purposes ofthe realty; and (3) the intention of the party making the annexation. Thethird factor, intention, isthe preeminent factor, and the first two are evidence of intention. See Sormierv. Chisholm-Ryder Co., 909 S.W.2d 475,479 (Tex. 1995);Logan v.Mullis, 686 S.W.2d 605, 607-08 (Tex. 1985);Hutchins v.Masterson &Street, 46 Tex. 551, 554 (1877). In Attorney General Opinion H-370 (1974) this office considered the three factors with respect to the classification of a water pump and irrigation casing used with a water well. We concluded that the classitication of property as real or personal requires the consideration of facts unique to each piece ofproperty.

~]eaolution ofthe question ofwhether or not certain property is a fixture depends on the circumstances surrounding its placement on the land with particular emphasis being accorded to the intention of the party, or parties, who hasplaceditthere. Since the same article or structure may in one set of circumstances be considered realty and in another be considered personal@ no categorical rules applicable to particular properties can be stated. Attorney General Opiion H-370 (1974) at 3;see aIsoMeIe?r& v.State, 902 S.W.2d 132,137 (Tex. App.--Houston [lst Dist.] 1995, no writ) (“Generally, whether a particular item is a Sxture or personalty is a question of fact, and should be determined by the factfinder.“). We similarly are of the opinion that neither this office nor county appraisal districts can categorically classify mineral production equipment as either real or personal property. Determinations of the proper tax classitication ofproduction equipment must be made on a case-by-case basis. Court opinions addressing the tax treatment of mineral production equipment offer some guidancefor districts in making these determinations. InMuro Co. v. State, 168 S.W.2d 510 (Tex. Cii. App.-Amarillo 1943,writ ref d),Wdbarger County argued that casing, rods, tubing, pumps, and

WbilCihCT.%XCOdCSCClU.5tOdCfbCllC”impWCUl en~“~inreIatioototheslnfaceofthelanduponwhichit is placed, courts have reoogniml that improvcmuI ts may be d&d in relation to lcasebold in-. See Shugurf v. Nomalndep. Sch Dist, 288 S.W.2d 243,241 (Tex Cii. App.-Fort Wotih 19%. no wit); Mar0 Co. v. State, 168 S.W.2d 510,512(Tcx Civ. App.--Amarillo 1943,wti~tv.fd).

“‘FixRue” is included in the statutcsy dehition of “improvement” Tax Code 0 1.04(3). “Apprtrtenancts” arc dogons to improvmts and lixtwes. See Hamoxv. Peek, 355 S.W.Zd 568,569 (Tcx. Civ. App.-Fort Worth 1962. wit r&d n.r.c.). Our rcsearc hshowsthstthesamefactorsare~bycorntstodeterminewhctherpropertyisim improvcmcnt, cxlnre, or applntenancc.The Honorable C. E. Yvlike” Thomas III - Page 5 (DM438)

other equipment used to produce oil on a leasehold estate was real property. Applying the three factors discussed above, the court stated that “it stands to reason that the intention ofthe parties to the original lease contract would be to place the casing, rods, tubing and even the pumps and tanks on suchaleaseholdfor temporary use only with the full intention of removing them onto other leases ifdesired, and certainly in case production became unprofitable.” The court held that “the casing, rods, tubing and other such property was not a part of the realty.” Id at 513. Inshugar v.NoconaZnakpendentSchoolDistrict, 288 S.W.2d 243,247 (Tex. Civ. App.- Fort Worth 1956,no writ), ataxingunit argued that the casing, surface pipe, storage tanks, and,other production equipment located on leased premises were personal property that could be seized and soldforpayment ofataxdebt. The court agreed citingMan, and applying the three factors, because the record in the case showed that the oil field operator “reserved complete charge and possession [of the equipment] along with the right of removal, in case of abandonment, of all of it, even including the salvageable pipe in the hole.” Id at 247. And inLinglevilleIndependentschoolDisbicr v. Valero TransmissionCo., 763 S.W.2d 616 (Tex. App.-Eastland 1989, writ denied), taxing units tiled suit to collect delinquent taxes on a gas pipelineburiedbeneaththe ground. The pipeline owner argued that the suit was barred by the fouryear statute of limitations because the pipeline was personal property. The evidence in the case showedthat the pipelinecompany andthe surlbceproperty owner expressly agreed that the company could remove or replace the pipeline at any time. The court held that the pipeline was personal property because the evidence showed that the parties never intended the pipeline to become a permanent part of the realty. Id Armed with facts, this office determined in Attorney General Opinion O-5268 (1943) that while pipeline located on an easement was personal property, the pumping equipment also located there was real property. The instrument conveying the easement provided that the grantee “‘may remove [thepipeline]

. . .inwhole or in part at will.“’ Id at 7. With respect to the pumping equipment,however, the attorney general conchrded that “[w]e have been placed in possession of no facts which indicate the pumping equipment was not intended by the parties to become a part of the realty.” Id at 8. The Attorney General cited cases in support of classifying pumping equipment as real property, but all ofthe cases werefrom states other than Texas. Id
In sum,adetermination ofwhether mineralproduction equipment ispersonal or real property depends upon factors relating to the equipment’s placement on the mineral leasehold. If the equipmentispersonal property, taxes on it may not be collected by suit or seizure ifthey have been delinquentformorethan fouryears. Ifthe equipment is an “improvement,” and thus “real property asdefinedby the Tax Code, the twenty-year limitations period applies. Irrespective of whether the equipment is real or personal, it must be appraised separately from the mineral interest for which it isused.

p. 2446The Honorable C. E. “Mike” Thomas III - Page 6 @M-438)

SUMMARY For purposes of ad valorem taxation, the value of mineral production equipment must be appraised separately .gom the vahre of the mineral leasehold interest for which the equipment isused. Determination ofthe applicable statute of limitations period for collection of delinquent ad valorem taxes turns upon whether the property is real or personal. Ifthe property is personal,taxes on it may not be coIlected by suit or seizure ifthey have been delinquent for more than four years. Ifthe property is real, the twenty-year limitations period applies. Mineral production equipment cannot be categorically &ssi&d as eitherreal orpersonal property. Instead, determinations ofthe proper tax classification of production equipment must be made on a case-by-case basis.

DAN MORALES Attorney General of Texas JORGE VEGA Fist Assistant Attorney General SARAH J. SHIRLEY Chair, Opinion Committee Prepared by Barbara GrifIin Assistant Attorney General

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