Court Opinion

ID: 4133667
Source: CourtListenerOpinion
Date Created: 2017-02-18 01:40:38.035979+00
Date Added: 2024-06-11T14:36:07.046515
License: Public Domain

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    Honorable   Robert S. Calvert                 Opinion   Ho. M-1002
    Comptroller    of Public Accounts
    Austin,   Texas                              Re:    Application    of Natural
                                                        Gas Production    tax on
                                                        deficiency   payments
                                                        under "take or pay"
                                                        provisions   of purchase
    Dear Mr. Calvert:                                   contracts.

          We have rece~lved your request    for an official    opinion   in
    regard to the proper application      of Chapter 3, Title     122A,
    Taxation-General,    Vernon's Civil   Statutes,  in calculating     the
    tax on producers   of natural  gas receiving    deficiency    payments
    under "take or pay" provisions      of certain  gas purchase
    contracts,

           In connection   with your request      you submit a detailed
    description    of these special    provisions    which we may assume
    adequately    presents  the taxation    problems   Inquired   about.
    The terms of such contract      are restated     in substance   as
    follows:

           The"take    or pay" provision      thereof    requires   the buyer to
    purchase    from the seller      and pay for,     whether or not received
    during each year,      a determined      minimum dally quantity        of gas
    per month or per year as the case may be, at a price                 stated
    in terms of so many cents per 1,000 cubic feet                (MCP).    In
    case of failure      of buyer to purchase        during any year the
    minimum quantity      contracted    for,   under contracts      providing
    for annual minimum purchases,          then within 30 days after
    such year he Is required         to pay seller     for the amount of
    the deficiency,      but he may at any time during the succeeding
    four years take and receive         such deficiency       at the market
    price   then in effect,     by paying therefor        only the difference
    between the price      in effect    at delivery      and the price     actually
    paid for such deficiency         under the contract.         Under some
    contracts     which provide    monthly minimum gas purchases,           even
    if buyer does not take the minimum amount during the month,

                                        -4887-
Honorable   Robert   S.   Calvert,     page 2      (M-1002)

he is required    to pay for it but has the right     to take
the gas In succeeding     months.  These latter   provisions
are referred   to as “make-up” periods.     The typical    contract
In question   expressly   provides for the provisions     and
obligations   thereof   to go into effect  upon the first     deliveries
of gas thereunder.      However, some of the contracts     require
the buyer to make minimum payments before       any gas is produced,
or purchased.

      In connection  with the foregoing     described “take or pay”
contracts  you have informed     us that for many years your office
has taken the uniform position      that the producer  was liable
for tax on the entire    amount received    under such contracts,
whether or not the deficiencies,       if any, were “made-up”.

      The specific    questions       submitted   by you are   as follows:

            “1 * I would like your official       opinion   as to
            whether the tax levied     by Article    3.01 is required
            to be reported    and paid to Comptroller     at the time
            the producer   receives   the minimum prepayment or
            at the time the gas is actually       taken by the
            purchaser  during the make-up period?

            “2 . If your answer to question         one is that the
            tax is required     to be reported     and paid at the time
            the gas is actually       taken by the purchaser     during
            the make-up period,       and for some reason all or
            a part of the deficiencies        in gas are not made up
            during the contractual        make-up period   and the
            purchaser     has to forfeit    any of the minimum pre-
            payments,     Is the production     tax due on the for-
            feited    prepayments.     If the production    tax is
            due, should the tax be computed at the tax rate
            in effect     at the time the contractual      make-up
            period    expired?

            “3 .   If your answer to question     one is that the
            tax is required    to be reported    and paid at the time
            the producer   receives    the minimum payment, please
            advise when the tax Is due in those instances
            where the producer      has received  prepayments for a
            period   of time before    there was any gas produced
            or taken by the purchaser       under the terms of the
            contract?”

                                     -4888-
.    :

    Honorable   Robert      S.   Calvert,     page   3   (M-1002)

           Chapter 3, Title     L22A, Taxation-General,          Vernon's
    Civil   Statutes,   insofar    as pertinent  to the       foregoing
    questions,    provides    as follows:

                "Article    3.01
                (1)    There is hereby levied    an occupation   tax         on
                the business     or occupation  of producing   gas
                within this State,      computed as follows:

                "A tax shall be paid by each producer     on the
                amount of gas produced-and    saved within this
                State equivalent    to seven and one-half  per
                cent (7-s)    of the market value thereof   as and
                when produced.

                . . .   .

                "Article    3.03
                (3)    The tax herein levied       shall   be due and
                payable at the'office      of the Comptroller        at
                Austin on the last day of the calendar             month,
                based on the amount of gas oroduced            and saved
                during the oreceding      calendar     month, and on or
                before   said date each such producer          shall make
                and deliver      to the Comptroller      a report   on forms
                prescribed      by the Comptroller     showing the
                amount of gas produced,       . . . ." (Emphasis

          The recent    decision    of our SupremaCourt in Mobil Oil
    Corporation    v. Calvert;    451 S.W.2d 889       (Tex.Sup.    1970),
    held,  in substance,      that the proper method of determining
    the tax due on production         of natural    gas under Chapter 3,
    Title  122A, Taxation-General,         V.C.S.,   is to compute the
    tax on the market value of the gas at the mouth of the
    well measured by the total         proceeds    of sale.     Article
    3.02  provides   for this measure.

         It also has been held that the term "market value" as
    used in a former statute     (of identical    tenor and effect  as
    our present  statute,   Art. 3.02)   "means the price   for which
    the producer  sells   the gas".    Calvert   v. Union Producing
    Co., 258 S.W.2d 176, (C.A.1953-No       writ history).

          Thus, according   to the plain import of Chapter 3,
    Title  122A, Taxation-General,    the tax therein  levied is to
    be computed on the amount of gas produced      and saved at the

                                            -4889-
Honorable    Robert   S.   Calvert,     page   4    (M-1002)

rate of 7-l/2$         of the market value of such gas as and when
produced.         Consequently,    until    such gas Is i;;d;T;a;oi;ax
can be computed thereon under the statute,
thereby assessed          until  production     and a sale or other
disposition        thereof    has occurred.      Mindful of the foregoing,
we conclude        that the tax levied       by Article   3.01 Is not due
until    actual     production    of the gas has occurred       and such
tax Is then measured by Its "market value"                as provided   in
Article     3.02.      Attorney   General Opinion No. WW-554(1959).

       Hence, our answer to your question  1 is that the time
such gas is actually    produced during the make-up period,
rather   than the time of the minimum prepayment,   is the
taxable   event with regard to the “make-up” gas.

        Your question    2 concerns     a situation      where the deficiencies
under the contract       are not received       during the make-up period
and the minimum prepayments made under the contract                  are
forfeited.      We assume that a substantial           amount of gas was
produced and sold under the contract,              although   less than the
minimum on which the price         was computed.         This default    by
the buyer under the typical          contract     described   by you brings
about an effect      analogous    to one that might be produced by
a similar    default   of the buyer under a “take or pay” contract
having no provision       allowing     the "make-up" of any deficiency
below the minimum daily quantity            of gas contracted      for a
specified    time at a total      price    calculated     on the basis of
so many cents per 1,000 cubic feet             (MCF).     This latter     type
of “no-makeup” contract        has been called        to our attention      as
being one of “the several         different     fact situations”
arising    under "take or pay" provisions           of gas purchase
contracts    mentioned    in your inquiry       but not described       in
detail.

      As a consequence       of the absence of the production               and
the purchase      of the deficiency       by the buyer under either           of
the next foregoing       described     contracts,     there is no production
or sale thereof       on which a tax could be assessed             against    such
gas not produced       and sold.      However, the price       paid for the
substantial     amount actually       purchased    and received       was set
by the terms of such contracts            at the total     figure     determined
by the minimum amount of gas therein              contracted     for.      Whether
the difference      between the amount of gas agreed to be purchased
and the amount actually         received     under the contracts         is
termed a “deficiency”,         and a proportionate        part of the total
contract    price   is called     a “forfeiture”,      Is of no import
when considered       in relation     to the issue actually         involved.
                                      -4890-
.      .

    Honorable    Robert    S.   Calvert,    page 5        (M-1002)

     The paramount issue under each contract               is the determination
     of the total     proceeds   of the sale of the gross production
     under each of the contracts         in question.        There is no
     difficulty     in determining   the gross production.             This is
     the respective      amount actually     produced and ourchased            bv
     buyers under the contracts.          Thus, the total-proceeds             of the
    gas actually      produced under such contracts            is the total
    amount received       under the contracts,          includinn    the_ navn
                                                                           ,-,.nents
    -55 lculated    on the so-called     deflciencles~,         'he tax on the
    Gtal      amount of gas produced and purchased             under such
     contracts    is measured by such total         proceeds      of sale and
    based on the tax rate in effect            at the time such gas is
    actually     produced,   rather  than at the time of the minimum
    prepayments.

           We are cognizant      of the fact that a question        of
    contract     construction    may arise   Independent     of the proper
    construction      of the tax statute     and its application       to
    each contract.        Mobil Oil Corp. v. Calvert,        451 S.W.2d
889(Tex.Sup.1970).         However, we are here passing        only
    upon the construction        to be placed upon the tax statute.
    The prior     opinions    of this office   support    the above con-
    clusion    and would have to be overruled         if we concluded
    otherwise.       This same holding     and construction     was made in
    Attorney    General Opinion No. Q-6355 (1946);          and see also
    Opinion No. v-555(1948).

           It is the policy       of this office    to follow   earlier~
    opinions    on the same subject       where not patently      erroneous.
    Attorney    General Opinions Nos. O-1659 (1939);           c-69 (1963);
    and ~-605 (1970).         This Is likewise    the rule followed      by
    the courts     concerning     the meaning of a statute.        Thomas v.
    Groebl,   147 Tex.70,      212 S.W.2d 625 (1948).        Such a construction
    -is       entitled     to great weight where, as here,         it has been
    followed    over a period      of years by the state agency charged
    with the administration         and enforcement    of the statute.
    Thompson v. Calvert,        301 S.W.2d 496,(Tex.Civ.App.~~l9571          no
    writ),    Gaynor Construction        Co. v. Board of Trustees,       etc.,
    233 S.W.2d 472 (Tex.Civ.App.          1950, no writ).

          In view of the foregoing  considerations, you are advised
    that the total  price  paid under the contracts  in question
    is the measure of the market value of the actual    amount of
    gas produced and sold,   based on the tax rate in effect    at
    the time such gas is actually   produced.

                                           -4891-
Honorable    Robert   S.   Calvert,   page 6          (M-1002)

     Our foregoing   answers to question              1 and 2 preclude
the answering   of question 3.

                             -SUMMARY-

                   Under natural   gas purchase    contracts
             containing    "take or pay" provisions,      the
             time the gas is actually      produced is the
             event which actuates     the accrual    of the
             tax under Ch. 3, Title      122A, Taxation-
             General,   V.C.S.

                    The total  price paid       under any of such
             contracts   Is the measure        of the actual   amount
             of gas produced and sold          thereunder,   based on
             the tax rate in effect     at      the time such gas is
             actually   produced.

                                                Y{J      very    truly,

                                                            General       of   Texas

Prepared    by R. L. Lattimore
Assistant    Attorney General

APPROVED:
OPINION COMMITTEE

Kerns Taylor,   Chairman
W.E. Allen,   Co-Chairman

James Broadhurst
William Craig
Milton Richardson
Houghton Prownlee

SAMUELD. MCDANIEL
Staff Legal Assistant

NOLA WHITE
First Assistant

                                      -4892-