Honorable Robert S. Calvert

Comptroller of Publie Accounts State of Texas ,! Austin, Texas Opinion No. M-109 Rer Uhether oil andgas produced under an011 andgas lease eKeouted by the United States to a private party leasee and covering lands over which the United State8 has ex%2uSive jurisdiction are subject to the gae and oil production taxee levied by Articles 3.01 and 4.02, respectively, Title 122A, Taxation-General, V.C.S.,

~and the regulation pipeline tax Dear Mr. Calvert: imposed by Article 6032, P;b.S.

Youask myopinion ai to whether the o%i and-gas btioduced from land within the Federal enclave, commonlyknown as the Corpus Chrlstf, Texas, Naval ASPStatfon, are subject to the Texas gas andoil produotion taxes and the regulation plpellng tax.

Thegross production taxes in question are Imposed by Articles 3.01 and 4.02, respectively, Title 122A, TaxationGeneral, Vernon's Civil Statutes; the regulation pipeline tax In question is imposed by Article 6032,, Vernon's Civil Statutes.

Our opinion Is that the of1 andgas produced, other than the 16-2/3 per cent thereof whfch is payable as royalty to the lessor, the United States, .%;ssubject to these taxes.

Theland in questfon,was.?aequlred by the United States by condemnation purauant to'APtfsles 5242, 5247 and 5248, Vernon's Civil Statutes, byjudgment dated July 5, P940, in

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. Calvert, Page’.2 (R-109)

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the Dietriot Court of the Unlted Statesfor the Southern District of Texas, Corpus Christ1 Dlvislon. Weassumethe fee simple title wasacquired.

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Subsequently 5242, 5247 and 524g> on December 12, 1940, pursuant to Articles Vernon’s Civil Statutes, the Governor of Texas aeded to the kited States exclusive jurisdiction over said land for so long as the land should remain the property of the Uni’J;ed,States,cprovlded however that, the State retained concurrent jurladlction forexecution of all civil and criminal processes upon any~pereon upon sa$d land. Thedeed further provides that,

n TheUnited States of America @hall be*e&ure in Its possession andenjoylsnt o? all said lands, andsaid lands and

Jurisdiction dver~said land wasformally accepted on behalf of the United States.

Thereafter,~ on Decembe; 1, 1962, the‘United States~of America executed’ to Humble,0116t’Refining Co. ,an:‘.oll?.and gas lease covering the.land ,underconsideration.. Thelessee has,informed us that all of the lands under consideration from ,whlchproduction is hadare on the mainland, thatnone of themare submerged lands or tidelands. r’

Thepertinent provlslons.of this lease are as follows:

Theform used Is styled a ‘Protective Gal and GasLeas&.* hir’ 2. Thelease, at its Inception, ‘reads ,a? follows: n,,;;.
“TRISL?%ASE,

entered into

. . . by;and between the United States of America,

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.Honorable Robert S. Calvert, Page,3 (M-W)

hereinafter called the leasoy, andHumble ;Oll andRefining Company,

. e Ohereinafter called the lessee,

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. "WITNESSE!lW: "Sec. 1. Rights of lessee. In consideration of rents and royalties to be paid, andthe conditions and covenants to be obsdrved as herein set forth, the lessor does hereby grant to the lessee the exclusive right andprivilege to drill for, mine, extract, remove, and dispose of all the oil,and gas deposits ownedby the lessor, except helium gas,, in 6r under the following described land

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3. Theterm of the lease is stated as: 11 for aperiod of five y&Fs and so long thdreafter as oil or gas Is $roduced In paying quantities:

. . ." 4. Thelease contains the further graqt:

n subject toExcept as otherwise provided and

the conditions herein specified, the lessee shall have the,right to construct andmaintain upop the leased lands all works, buildings, plant$; waterways, roads, telegraph or telephone lines, pipe lines, reservofrs, tanks, pumpingstations. or other structures as ma?be necessary to this lease," ihe ~f&l enjoyment of

5. Section 2, styled "Th&lessee hereby agrees:" contains the following relevant provisions: "(d) Rentals and royalties. (1) Topay annual rentals androyal:ties on production

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under this&ease as provided i';tAttachment Bwhich is madeapart hereof. Attachment Bprovides for a~royalty of 16-2/3 per cent of the produ6tion to the lessor: "(k) ~Taxesandwages, freedom of'purchase. Topay whendue, all taxes lawfully assessed andlevied under the laws of the State or the United States upon improvements, oil, andgas produced from the lands hereunder or other right:, property, or assets of the Lessee;

. . . Articles 3.01 and 4.02 impose anoccupation tax.on the business of producing;gas andoil, respectively, within this State. Article 6032,:commonly knownas the Regulation Pipeline Tax, imposes a tax,,upon each~barrel,of crude petroleum produced within this State which shall be in addition to and collected in the samer&&r as the,present gross, receipts production tax on crude petroleum. 1( These taxes are occupation taxes. GroupNo. 1,0&l Corpo~ab& v. Sheppard, 89S.W.2d 1021

A :::X&%:::App. i942).

1935 error ref )* St

; ' ate v. Humphrey, 159 S.W.2d

The011 andgas lease 'conveyed to Humble, the lessee, apresent determinable fee estate an all of the 011 and gas (except helium gas) In and under the lands covered by It. The above quoted provisions of the lease, and Its other relevant orovlslons. are analonous in law to the provisions of the oil and gas lease considered in v. Rid-Kansas 011 &GasCo., 113 Tex. 160, 254 29ALR bob

. . . This case and the unbroken 1 &ent decisions*of our Texas courts following It are unequivocal to the effect that this type of oil an8.gas lease 1s apresent sale or conveyance of real property and operates to.transfer thetoll andgas in place In the premises described therein andto sever those minerals from the surface. 42Tex.Jur.24 368, Oil and Gas, Sec. 175, and the pages and sections following*and;particularly the cases cited at page 369, note.1.

Decisions of our State SupremeCourt have established that an Interest in minerals In place,,and an interest in royalty are separate anddistinct estates in land. 335, 302 S.W.2d 645 (1957). Pith v. Lankford, 157Tex..

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Underboth the relevant constitutional provisions land the three tax statutes underconsideration the royalty payable to the United States Is exemnt from the taxes under consldera1Oil Corporation v. Sh 4m 6SW2d b4b , supra; Thelson T a::*283 6.s. 275 (1931). ; GroupNo. 1Oil

It 1s the conclusion of this office that the oil andgas produced which is allocable to the lessee la subject to the taxes under consideration. Under the cession deed by the State of Texas, the lands~remalned tax exempt only "so.long a.8the sameare held, owned, used, and occupied by the United States of America." It is clear from the lease by the Federal government to Humble the mineral lands are not in legal'contemplation of law either 'held" or 'owned" or "used" or 'occupied" by the government, whose m interestis in theroyalty aforesaid. Whenthe mineral Iands are no longer used for a,~federal purpose or there has been an occurrence of the circumstances specified In the state cession, exclusive jurisdiction is terminated.

In S.R.A. Inc. v. Minnesota, 327U.S. 558 (lg46), the Supreme Court held that whenapurchaser entered Into possession of real estate under Its contract of purchase of the fee title that the property became subject to the terrltorlal jurlsdlction of the state wherein it waslocated andwassubject to a direct tax by the state on the realty. Under the contract of sale, legal title wasretained In the United States until payment of the balance of the purchase price in InstalIments. Thecontract contained no express provision re,taining sovereignty in the United States; there wasno express retrocesslon by Congress to the atate ; and the original act of cession of sovereignty over the property to the United States contained no requirement for return of sovereignty to the state whenthe property wasno longer used for federal purposes. This case cites and follows NewBrunswick v. United States, 276 U.S. 547 (1928). In both cases, the Court held that the equity situation wasone wherein the United States had conveyed title to the purchasers, as,owners, andthey hadmortgaged the real estate to.,~theUnited States to r secure the unpaid purchase money.

Twoother cases by the SupremeCourt of the United States have directly held that the estates granted by 011 andgas leases were subject to taxation by.the states. Commission v. Texas Company 336 U.S. 342 Thefirst, OklahomaTax (1949). considered whether a lessee of minerar'rlghts ln,certaln Indian lands in theHonorable Robert S. Calvert, Page6 (M-%09)

State of Oklahomawassubject to %hepayment of nondiscriminatory state gross production taxes and state excise taxes onpetroleum produced from such lands. Theexcise tax wasvery similar to the Texas gross production taxes under consideration. It wasat the rate of one mill per barrel on every barrel of petroleum produced In Oklahoma. TheOklahomaSupremeCourt construed it as an excise tax on the prodtiction~ of oil. TheCourt held that under Oklahoma law the lessees became the owners of all the right, title and interest in the minerals in theireases, subJect only to the royalty interest reserved to the Indian lessors andthat they were liable for the taxes. TheCourt said:

II it is well established that property p&h&ed by aprivate person from the Federal Government becomes a;part of the general mass of property in the state andmust bear its ,falr share of the expenses of local government.

. . ." (at page 353). In the second case, GroupNo. 1Oil Corporation v. &SB, supra, the Court hadunder consideration oil andgas leases granted by the State of Texas to aprivate corporation for a term of years, with the right to enter on the lands of the state public domain for the purpose of drilling andoperating for oil andgas andto erect andmaintain all necessary structures for the production, transportation and storage of these products, andwhich required the lessee or owner of these rights conveyed to pay the State the value of a certain percentage of the oil andgas produced and,sold, TheSupremeCourt reoognlzed and followed the construction of the Texas SupremeCourt bo~:Che;effe~t that such leases had effected present sales to the lessee of the oil and gas in place. TheCourt held:

"This Court has consistently held that whereproperty or any interest lnit has completely passed from the gcvemment to Y: the purchaser, he can claim no immunity from taxation with respect to it, merely because it wasonce government-owned or becan$e the sale of it effected someg@ernment purpose. NewBrunswick v, ,Unfted Shkes, supraj Forbes v. Gracey, supra; Tucker v* Fergnson, supra,? see Gromerv. Standard Dredging Co., 224 U.S. 362, 3718..Choctaw, 0. &G, R, Co, v. Maokeg, 256 U.S. 531, 537; Central Pacific R. Co. v. California, 162 U,S, 91, 125; Railroad Co. v. Peniston, 3.8Wall. .5 35-37; Weston v. Charleston, sipra. p. 46s.

d

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"Property which has thus passed from either the national or a state:. government to private owner&&p becomes a part of the commonmass of property. and subject to its commonburdens. Denial to either government of the power to tax it, or income derived from it, in order to insure someremote and indirect antecedent benefit to :the .' other, would be an encroachment of:'the sovereign power to tax, not justified by the implied constitutional restriction. Q. 468.See Weston v. Charleston, supra.,

Theinterest which passed to::'. petitioner here, as defined by the J.aws of the State, is not distinguishable : from the mining claims, acquired in lands of the United States under its statutes, which, together with minerals andores derived from them, were held subject to sta;e taxation in Forbes v. Gracey, supra. (at pages 2.82-283) Humble, as lessee, has accepted from the Federal government the conveyance of apresent determinable fee in the oil and gas andmineral estate in the lands. Under the foregoing cases, the sovereign power of the State of Texas to impose the taxes under consideration seems to be established.

Thecase of OklahomaTax Commission v. Texas Company supra, fs conclusive agalnst any immunity of the lessee. in that case, the Court said,

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. Thetaxes here are nondfscriminatory. Therespondents are 'private persons' whoseek immunfty 'for their property or gains because they are engaged in operatfona under a government contract or lease.' Thefunctions they perform in operating the leases are hardly more governmental fin character than those performed by lessees of school lands or, indeed, by manycontractors with the Government. n*'*' (at page 363)

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Honorable Robert S. Calvert:,Page 8 (?&lo?)

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. . . ” But, so far aa concern8 private person8 claiming immunityfor their ordinary business operations (even though in connection with governmental activities), no implied constitutional immunity can rest on the merely hypothetical interferences with governmental functfons here asserted to sustain~exemption.

. . . (at page 365) It is also pertinent that the Court .could find no statutory immunity to imposition of the taxes.

Weare aware of that line of! decisione.represented by the case of HumblePipeline Co. v.lWaggoner,:-376 U.S. 369~(1964), which would denv imoosltion of the taxes because of the continuing;exclusive jurisdiction of the United States over the lands covered by this oil andgas lease. This last mentioned case considered an oil and gas lease on lands in Louisiana. It denied authority to the State of Louisiana to levy advalorem taxes upon pipelines and other pers.onal property equipment used by a private person whowaslessee under an oil and gas lease covering lands on which Barksdale Air Force Base waslocated and on which lands the State of Louisiana had:ceded to the United States exclusive jurisdiction, except for right to execute certain civil'and criminal processes. Thedeed to ,theUnited States wasfor a fee simple estate in the lands. This ease andour holding in this opinion are distinguished on the basis of the nature of th&estate granted to amineral lessee under anoil andgas lease in Louisiana and in Texas. In Louisiana, amineral lease is held to bemerely a con-' tract which permits theme lessee to~explore for minerals on the land of the lessor in consideration of the payment of a rental and/or bonuses. It is well settled that it is not in essence a real rimht: it does not create substantive real ri8ht8 in the land leased.- Tinsley v. Seismic Fxploratidns', Inc., Sup. 1960 ; see also Summers,Oil' d G 117 So.2d 897, (La, Permanent Edition lo, p. 470-485, set, 167, also at p"tgesa286g-303, sec. 132-136. Vol.

Thedistinction between the eases relied upon to support ouropd.ntnl'on

and the ease of HumblePipeline Co, v. Waggoner, supra, is well stated in Kingwood Oil Companyv. Henderson County&ard of Supervisors, 367 S.W,2d 129 (Ky. Ct. of App. -- Court of last. .

Honorable Robert S. Calve&,' Page 9 (M-109)

resort -: 1963), wherein the Court in'~oonsiderlng S.R.A., Inc. v. Minnesota, supra, sald:,~

'Wethink there is sound,reason for saying that if the United States conveys awaya portion of the territor over which it has juris-:, diction therd '~ e noreason for the jurisdiction to continue over that portion. But the sameis not true where the United States conveys someright less than a fee. In that case valid reason mayexist for a continued exercise of federal jurisdiction overthe territory," 132) (Emphasis by the court.) (at p.
In that case, the mineral lease under the law of Kentucky is held not to convey the equivalent of a fee to the minerals with a complete severance as in Texas. Sec. 160. See lA, Summers,011 andGas,410,

Thedistinction above drawn seems to be the basis on which the United States SupremeCourt distlngulshed its holding In S:R;.A:,:.,Incl,~'~v: Minnesota; 'supr$,'and, ite~~holdtn$~:in Humble Pipeline Co. v. Waggoner; supra, madeInthe latter case-pages 2 d 373 h i the court distinguished between a sale of landa&er whi~he~~enUnited States had exclusive jurisdiction and the lease of that property fo,r commercial purposes, or for farming, or for the conveyance of amere right of way.

Therecent case of Adamsv. Calvert, 396S.W.28 948 (Tex. SUD. 1965) is also distinguishable in that the government had in

- -. no-way terminated its jur?sdlct~ion over the reai estate, andunder the terms of the cession deed by the State, the State remained powerless to impose the taxes there involved.

SUMMARY Theoil andgas lease executed by the United States covering lands over which it had exclusive jurisdiction, except, forthe right of Texas to execute civil and criminal process,toa private party lessee, subjected the oil andgas produced, other than the royalty payable to the United States as lessor, to the oil and $as production taxes Imposed by Articles 3.01 and 4.02,

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Honorable Robert S. Calvert, Page 10 (M-109) *'

respectively, Title 122A, Taxation-Qeneral, Vernon's Civil Statutes, andthe regulation pipeline tax Imposed by Article 6032 of said statutes. -'~ :Theroyalty interest payable to the United States is exempt from these taxes.

,:' ey General of Texas Prepared .byW.E. Allen Assistant Attorney General APPROVED: O~IMIOHCCMHIT'TBE Hawthorne Phillips, Chairman Kern&B. Taylor, Co-chairman Houghton Brownlee Linward Shivers Jack Goodman Lewis Berry STAFFLEGAL

ASSISTART A. J. Carubbi, Jr. .I

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