PRICE DASIEL AmORNEY GE)IERAL

Hon. George H. Sheppard Comptroller of Public Account6 ..,” Austin, Texas Opinion No, V-555 Re: Gas production tax liabilv ity on royalty interest owned by DunnEstate under submitted facts. Dear Mr. 6heppard:

Itappears from your letter request thatyou have made a gas productien tax audit onthe royalty interest of the DunnEstate, covering the period from July, 1935, to January 1. 1948. The copy ofyour audit discloses thatyou have foundadditional taxes due from theDunnEstate as follows:

(1) For the period through the month of October 1936, the sum of $704.19, accruing under the 1931gas production tax act. (2) For the period through the month ofApril, 1941, the sum of $2.395.52 accruing under the 1936 amendment of said act. (3) For the period through the month ofMay, 1945, the sum of $3,044.79 accruing under the 1941 amendment of said act. (4) For the period through the month of December, 1947, the sum of $1,275.73 accruing under the 1945 amendment ofsaid act. Itfurther appears thatduring all the time covered by the audit, the DunnEstate paid production taxes based on one-eighth of the gross receipts ofthe lessee who sold thefull production from the Dunnlease.

The gas in question was produced under an oil and gas lease wherein the lessee agreed to purchase from the lessor all its Wpply ofnatural gas used in Nueces Ceunty and topay lessor for Ohegas produced under the lease, one-eighth of the amounts received by lesree from the sale of gas to parties using the same in Nueces Countywhether produced from lands covered by the. .~:’ : ; f.‘,l, ,~ ,I

Hon. George H. Sheppard, Page 2 (V-555)

lease or from wells situated on lands not included inthe lease. In 1930, this lease was bywritten contract amended, and, as amended, provided that, in lieu of the above-stated method of payment for the one-eighth royalty, the lessor was to pay lessee for oneyear on thebasis of a minimum of 4,000,OOO cubic feet of gas per day andfor the next twenty-one year6 on the basis ofa minimum of 5,000,OOOcubic feet of gas per day. Such contract provided thatthe lessee would pay to lessor on the basis ofthe minimum stated whether that amount was produced from the leased premises or not. The only condition was thatthe total production from all leases held by lessee be sufficient to supply the minimum. There was a further proviso to the effect that if more than the minimum was produced from the leased premises, the lessee would pay lessor one-eighth of the additional proceeds received for such additional production. This contract aleo provided that lessor would be paid onthe basis of the sale price per thousand cubic feet as set forth in a contract between lessee and the City of Corpus Christi, andthat if such city contract terminated, then onthebasis of thehighest price received by lessee, but in POevent less than 5 cents per thousand cubic feet. Your summary ofthe gas audit discloses thatthe minimum amount of gas was never produced from the leased premises, and that during themonths ofMay, June, and August through December, 1939, and January through April, 1940, andMay 1941through December 1941, no gas was produced from the Dunnlease.

The DunnEstate contends that it does not owe the additional taxwhich is set upin the audit onthe basis of the amount actually received for its one-eighth royalty for the following reasons:

(1) That the 1931act does not make a royalty owner a producer. (2) That the term “market value” a6 used in the 1931act is tobe given its ordinary meaning. (3) That the term “market value” as used in the 1936amendment is to be given its ordinary meaning. (4) That under the 1945 amendment the definition given the term “market value” does not warrant basing the production tax on the actual amount received by a royalty owner producer. (5) That the amount received **by the**  Dunns, under the amended contract, in addition to the..

Hon. George H. Sheppard, Page 3 (V-559)

**amount** actually received by the lessee for the oneeighth royalty, was in consideration of the cancellatlon of a previous contract, andwas not received by the Dunn6for the sale to lessee of its one-eighth royalty. This last contention covers ~11four taxing periods as set outinyour audit. The rpplicablo provisions of.the 1931Act, H. B. No, 547, Ch. 73, p. 111.Acts 42nd Leg., read, in part, as follows:

Y

. . . every person engaging or continuing within this State, inthebusiness of producing and saving in paying quantities. for sale or for profit, any natural gas, including caoinghead gas, frem the .soil or waters of this State l . . .

‘Are hereby declared to **be** ‘producers’ and engaged in the **business** ofproducing natural gas within this state.
. . . “A tax shall be paid quarterly by each such producer on the amount of gas produced and saved within this State.

. . upon the fiist sale thereof in intrastate **com** merce upon the following basis: A tax equivalent’to two (,2%) per cent ofthe market value of the total amount of **gas produced**  and saved within this State. , .* The applicable provisions of the 1936 amendment, H. B. No. 8, Ch. 495, Acts 44th Leg., **3rd** Called Session, read, **in part,**  as follows:

‘A tax shall **be** paidby each such producer onthe amount of gas produced and saved within this State, s. . upon the following basis: A tax equivalent to three per cent (3%) of the market **value** of the total amount of gas produced and saved within this State, , I

. at the actual market value thereof, as andwhen produced.

. . “The purchaser of gas shall pay the tax on all gas purchased and deduct tax so paid from payment due producer or other interest holder. o.making such payments so deducted to the Comptroller of Public Accounts by legal tender or cashier ‘a check payable to the State Treasury. (Emphasis added). This 1936 amendment doer not define the term *market value.* The 1941amendment, H. B. No. 8, ch. 184, p; 269, Acts 47th Leg., reads, in part, as fellows:I

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Hon. George H. Sheppard, **Page** 4 (V-555)

‘A tax shall be paid by each producer en the amount of gas produced within this State.

. , eguivalent te five and @votenUta~5.2) per cent of themarket value of all gas including casinghead gas produced and saved within this State. , . “The market value of gas produced in this State shall be the value thereof plus any bonus, or premium, or anything of value paid therefor, or any sum ofmeney that such gas will reasonably bring if produced and sold in accordance with the laws, rules and regulations of this state.
. .

‘In case gas is sold for cash the tax shall be cemputed onthe producers’ gross receipts of such sale;

. . . “For the purpose of this Act ‘producer’ shall mean **any** person ownin

P’ controlling, managing, or leasing any gas well **and** or any person who produces in any manner any gas by taking it from the earth or waters in this State, and shall include any person owning any royalty lr other interest in any gas lr its value whether produced by him, or by **some** other person or.his behalf, either by lease, contract, or otherwise, , .

‘Royalty owners shall mean and **include** all per EONS owning any mineral rights under any producing leasehold within this State, ether than theworking interest, which working interest is that of the person having themanrgement and operation of the well.” The 1945 Amendment, H. B. No. 62g, Ch. 269, p. 423, Acts 49th Leg., reads, in part, as follows:

“There is hereby levied an occupation tax onthe business lr occupation of producing gas within this State, computed as fallows:

“‘A tax shall be paid by each producer onthe ameunt of pas produced and saved within this Stare equivalent to five and two-tenths (5.2) per cent of the market value thereof .as andwhen produced.

. . .’ “The market value of gas produced in this State shall be the value thereof at themouth of thewell; however, in case gas is sold for cash only, the tax shall be computed onthe producer’s grass cash receipts. ~. .” .Hrr. George H. Sheppard, Page 5 (V-555)

The definition of ‘producer* as contained in the 1941 un&ndment was not changed by the 1945 amendment. This gas production tax act, with amendments is codified aa Article 7047b, V.C.S. Your audit also discloses thatyou foundadditional tare8 due by virtue ofthe amourtr paid lessor under theamended contract during those months in which there was no production,

A determination of brrror% Bve ColltenMowaaa above aamrrmrimed will determine %c bu liabfllty oflossn fou tie additlonal tax as showmin your audit. We will discuss them ip the order stated. FIRST CONTENTION

W.ehave carefully read the 1931act in its entirety and do not find any language therein which in our opinion makes a royalty ow8er a “producer.’ The Supreme Court of Texas in Canadfan River Gas Co. v. Bivirs. 153S.W. (Zd) 432, inanswering a certified question aato the status of gas royalty holder under the act as amended in 1936, stated that *the gas royalty holder is an ‘interest holder’ within themeaning of this statute.” The 1931Act did not contain the words “or other interest holder,” It is. therefore, our opinion that the DunnEstate is not liable for the additional gas production tax in the amount of $704.19 for the period from July, 1935. through October, 1936. SECOND CONTENTION Our holding onthe proposition prosentad by your first contention makes it unnecessary to diecuss this contention. THIRD CONTENTION We have read the 1936Amendment in conjunction with the 1931Act; and, in light of the opinion of the Supreme Court in W. R. Davis, Inc. v. State, 180S.W. (td) 429 (which construed the term -market value” as defined inthe 1941amendment), have arrived at the conclusion thatthe term “market value” as used in the 1936Amendment should be given its ordinary meaning. Itis, therefore, our opinion that the DunnEstate is not liable for the additional gas production tax intheamount of $2.395.52 for the period from November, 1936. throughApril, 1941. FOURTH CONTENTION The following excerpts from the 1945Amendment, previously quoted in part, are relevant portions of the statutory definition of “market value “:

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Hon. George H. Sheppard, Page 6 (V-555)

“The market value of gas produced in this State shall be the value thereof at the mouth of thewell; however, in case gas is sold for cash only, the tax shall be computed on theproducer’s gross cash receipts.

. . ,” The 1941amendment, which was construed in the Davis case (supra), among others, gave the following definition:

“In case pas is sold for cash the tax shall be computed on ahe producer’s gross receipts of such sale:

. . .” Although the Supreme Court in the Davis case was primarily concerned with that part ofthe definition of “market value.~which relates to cases inwhich the gas was processed for its liquid hydror carbon content, the following significant language appears: “When we view this Act as a whole, and especially whenwe consider the definition of ‘market value’ therein contained, we are convinced that it demonstrates a clear legislative intent tomake the pood faith sale rice by the producer to the initial purchaser the standard of value 5-c onw ich the purchaser’s liability to the State for taxes must be computed.” (Underscoring ours)

The one-eighth royalty gas was sold tothe lessee under the amended contract for cash only. Itis, therefore, our opir:ion that the additional taxes demanded ofthe DunnEstate covering *beperiods after the 1941and 1945amendments, as set up in your audit are due and owing, unless theamount paid in cash, or a: least a part thereof, was not paid for the gas butfor the coosidera:ior of the cancellation of a prior contract. This brings us to a cor.;ideratiqn of the fifth contention. FIFTH CONTENTION We do not agree with this contention. Lessor did notat any time sell or agree to sell anything tothe lessee except its oneeighth of the gas produced, either under the first contract or the amended contract. Although thefirst agreement turned out to be

“onerous” tothe lessee, itwas an agreement providing for a “good faith sale price” for the one-eighth royalty. When lessor **azd** lessee in their contract, provided thatlessee was to pay to lessor **fer** his one-eighth royalty, inaddition to the amount received therefer by lessee, one-eighth ofthe amount received by lessee from the sale of gas to parties using same inNueces County from wells situated onlands not covered by thelease, they were contracting for the

“sale price” of the Dunn’s one-eighth royalty. Likewise they contract for a “sale price” in the amended contract. The amended contract merely provided for a different method of computing the

“sale price.”I

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Hon. George H. Sheppard, Page 7 (V-555)

As stated above, there was no actual production of gas from the leased premises from May, 1941, through December, 1941. The leroee paid the DunnEstate during this period on the minimum basis according tothe amended contract, It is true that before there can be a gas production tax, there must be gas produced; butthese payments were made to lessor as additional consideration for gas that hadbeen andwas tobe produced thereafter under the contract. This same question was considered in Attorney General’s Opinion O-6355, and we are enclosing a copy thereof.

Itis, therefore, our opinion that theDunnEstate is liable for an additional gas production tax as set up in the Comptroller’s audit in the amount of $3,044.79 accruing under the 1941 amendment toArticle 7047b. V.C.S.. and is liable for the additional gas production tax as set up fn said audit in the amount of $1,275.73 accruing under the 1945 amendment to Article 7047b. V.C.S. SUMMARY

Under the facts stated the DunnEstate is not liable for the additional gas production taxes set up in the Comptroller’s Audit for the period of time from the beginning of the audit to the effective date of the 1941amendment ofArt. 7047b, V.C.S., but is liable for the additional gas production taxes as disclosed by such audit for the period oftime since the effective date of said 1941amendment. Yours very truly ATTORNEYGENERALOFTEXAS

W. V. Geppert Assistant WVG/egt/lh/JCP

APPROVED