Source: http://supreme.nolo.com/us/299/33/case.html
Timestamp: 2019-04-24 03:03:50+00:00

Document:
1. A state excise on the production of oil which extends to the royalty interest of the lessor in the oil produced under an oil lease as well as to the interest of the lessee engaged in the active work of production, the tax being apportioned between these parties according to their respective interests in the common venture, held not arbitrary as regards the lessor, but consistent with due process. P. 299 U. S. 36.
made in subordination to the power of the State to impose such taxes and to apportion them between the parties in proportion to their respective interests. P. 299 U. S. 40.
3. The State's power thus to direct the incidence of the production tax and shift part of its burden from lessee to lessor is not affected by the fact that, by the law in force when the lease contract was made, and for some years thereafter, the entire tax was on the lessee. P. 299 U. S. 41.
Appeal from a judgment affirming a judgment in favor of the Comptroller and the Treasurer of the Texas, appellees herein, in a suit brought by the appellants to secure a refund of taxes paid under protest together with an injunction against collection of further taxes in respect of the interests of the appellants, as lessors, in the production of oil under an oil lease. The Supreme Court of the State had declined to take the case on a writ of error before it was appealed to this Court.
fixes the lessor's proportion, or royalty interest at "the equal 1/8 part of all oil produced;" and requires the lessee to deliver that proportion to the lessor's credit, "free of cost, in the pipeline" to which the wells are connected.
When the lease was given and up to 1933, a law of the State imposed on the lessee alone, as the active producer, a tax on all oil produced, [Footnote 1] and that tax was paid and borne by the lessee so long as that law remained in force.
For about a year after the act of 1933 became effective, the purchaser of the oil produced under the lease paid the full tax and deducted the appellants' proportion from what was due to them on the purchase of their share of the oil. The payment of this part of the tax was accompanied by written protests of the appellants and the purchaser.
The present suit was brought by the appellants against the Comptroller and Treasurer of the State to secure a refund of the taxes paid under protest and an injunction against the collection of further taxes in respect to appellants' interest in the production. In the court of first instance, there was a decree for the defendants, which the Court of Civil Appeals affirmed after sustaining the taxing act against appellants' before mentioned challenge to its validity. [Footnote 4] The Supreme Court of the State declined to take the case on writ of error, and an appeal to this Court was sought and allowed.
"the legislature may validly declare the owners of royalty or other interests in the oil produced to be engaged in the occupation or business of producing oil."
The designations applied to the tax and the view just noticed are stressed by counsel for the appellants and relied upon as supporting the contention that the taxing act is essentially an arbitrary fiat.
"The legislative intent to levy the tax ratably against all interested parties in the oil produced is also clearly evidenced by the language that 'the purchaser of oil shall pay the tax on all oil purchased and deduct tax so paid from payment due producer or other interest holder,' and 'withhold from any payment due interested parties, the proportionate tax due.' These provisions do not levy the tax against the purchaser. He is merely made the agent of the state to collect from the producer or other interest holders the total amount of the tax due, and he is authorized to charge their respective accounts with 'the proportionate tax due.'"
each is also defined or measured by the extent of interest in the oil produced, or the amount paid because it was produced.
"It is also manifest that the tax is not dependent upon the character of title under which the producer produces the oil. Nor is the tax levied on the oil in place. The tax is levied on the business or occupation of producing the oil."
"The ordinary form of oil lease has a dual character or purpose: (1) the conveyance of an estate in the land for development purposes, and (2) the future development and operation of the lease for oil in accordance with the terms, express and implied, of the contract for the mutual benefit of the parties, their respective benefit being measured by the extent of their interests in the oil produced, or its value. The law is settled that the primary objective or purpose of the oil lease is the production of oil for the mutual profit of the parties. The consideration moving to the lessor is an interest in the oil or its value in money. Thus, he has a direct interest in the success of the business. As the holder of the royalty interest the lessor or royalty owner is not only entitled to share in the gross production of the oil, but may, under the terms of the lease, expressed or implied, require proper, prudent, and diligent management and development of the business, and has reserved and is entitled to both legal and equitable remedies necessary to enforce the obligations of the lease, and, under some circumstances, may forfeit the lease for nondevelopment."
"Our minds do not reject the idea that the lessee and the royalty owner, considered as participating in a joint enterprise, are both engaged in the business of producing or severing oil, and that the tax is therefore essentially occupational. Such a view, however, is not indispensable to sustaining the tax. For it may be considered occupational as to the lessee and another kind of tax as to the royalty owner. Unless found, as to one or the other, to be a tax upon tangible property, it need not be levied ad valorem, and is an excise."
In view of this exposition of the purpose and meaning of the act, we are of opinion that it is not an arbitrary fiat, and does not infringe the due process of law clause of the Fourteenth Amendment.
While operations under the lease are carried on by the lessee, and not by the lessors, they nevertheless are carried on in virtue of the lease -- that is to say, under stipulations made between the lessors and the lessee. The lease shows that the parties to it are, in a very practical sense, committed to and engaged in a common venture for their mutual benefit. The lessors have put into the venture their right to explore for and to extract the oil under their lands, and the lessee has put into it various drilling and pumping appliances and much expense, labor, and time. All that has been put in is devoted to the common purpose of producing oil in which the lessors and the lessee are to have stated interests. It is this production that is taxed against the lessors and the lessee according to their respective interests.
Without question, the State has power to lay an excise on the production of oil. Here it is laid, admissibly we think, on those having a direct and beneficial interest in the oil produced, and is apportioned between them according to their interests. The apportionment is reasonable, not arbitrary, and is as reasonable to the lessors as to the lessee.
of 1933, a part of the tax is imposed on the lessors, and the part imposed on the lessee is less than what would fall on him under the earlier law. But the State's power in the matter was in no way circumscribed by the earlier law. That law was subject to change at any time through a further exertion of the taxing power, and the lease presented no obstacle to such a change.
It follows that appellants' reliance on the contract clause of the Constitution is ill grounded.
Act 1933, Reg.Sess., c. 162, § 2, as amended by Act 1933, 1st Called Sess., c. 12.
Section 2(3) provides: "The purchaser of oil shall pay the tax on all oil purchased and deduct tax so paid from payment due producer or other interest holder."
"The tax herein levied shall be borne ratably by all interested parties, including royalty interests, and producers and/or purchaser of oil are hereby authorized and required to withhold from any payment due interested parties, the proportionate tax due."
Group No. 1 Oil Corp. v. Sheppard, 89 S.W.2d 1021, 1023.
Flynn, Welch & Yates v. State Tax Comm'n, 38 N.M. 131, 28 P.2d 889, 892.
Providence Bank v. Billings, 4 Pet. 514, 29 U. S. 562; North Missouri R. Co. v. Maguire, 20 Wall. 46, 87 U. S. 61; Moffit v. Kelly, 218 U. S. 400, 218 U. S. 403; Henderson Bridge Co. v. Henderson City, 173 U. S. 592, 173 U. S. 619-620; Chanler v. Kelsey, 205 U. S. 466, 205 U. S. 478; Kehrer v. Stewart, 197 U. S. 60, 197 U. S. 70; Clement National Bank v. Vermont, 231 U. S. 120, 231 U. S. 143; Lake Superior Consolidated Iron Mines v. Lord, 271 U. S. 577, 271 U. S. 581.

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