Court Opinion

ID: 4136387
Source: CourtListenerOpinion
Date Created: 2017-02-18 02:13:01.0591+00
Date Added: 2024-06-11T14:49:46.223633
License: Public Domain

E         ORNE            GENERAL
                                 0m-T13x~8

                                Awsniu   11. TExas
  WILL       WILSON
AITORNEY       GENERAL

                                 April 10, 1959

       Hon. V. L. Ramsey, Chairman           Opinion No, W-592:
       Revenue & Taxation Committee
       House of Representatives              Re:   Constftntionality   of R.Bi
       AyAAn, Texas                                No, 43, 56th Legi.slature:,
                                                   levying a tax to be known
                                                   as, the Weverance Benefi-
       Dear Mr. Ramsey:                            ciary Tax. n
                    Your committee has reque.sted the opinion of this,
       office   as to, the constitutionality    of House Bill: No, %j:,
       levying a tax to be,known as a severance beneficiary        tax,
       particularly    with reference    to the const~ltutionality of the
       bill insofar as it affe~ct,s ges transmis,aion lines, ,both~ long
       lines and those involved in dnterstate        commerce.
                  House Bill No, 43. is Xeng~thy, consisting      of X-2
       page,s, and most of t;he prov5sions therein cont~ained are WILL-
       lar in form. to those contained ,fn Article      70&7b, Vernon%
       Civil Statutes,, which provi,des for an occupation tax on the
       production of,natural     gas in Texas.    Therefore,, the question
       of the. constitutionality    of House Bi,ll: No. 4-3, wfld be,con-
       fined to those sections     of th,e~act. providing for the taxati~on
       of the production of dedicated ga.s to be. paid by the s,ever-
       ante beneficiary.
                   Sectio~n l(1) of the act provides that’ in addition
       to the, oc.cupation tax o,n ,producers of natural gas now levied
       under the provisions     of Article  704,7b, V.C,S.    there~ fs lev-
       ied an occupation tax on the oocupation or pr i vilege        of ob-
       taining the production of dedicated gas withinthis           State, and
       on the business or occupation of producing such gas, to, be
       known as the “Severance, Beneficiary      Tax, )I the tax being based
       on a percentage of the market value of the gas, produced at the
       well.
                  Section IL&) states that the tax herebv levied is
       “an occupation tax on the occupation or privilege,of    obtaining
       the production of ‘dedicated   gas” and on the business or occu-
       pation of producing such gas as a ‘severance beneficiary,l     as
       those terms are defined herein.”
                    Section l(5) provides      that the tax shall be a liabil-
       ity    of the producer of the gas,      but if produced for or sold to.
Hon. V. L. Ramsey, page 2      (ww-5921

a severance beneficiary      other than the producer, the tax
shall be naid bu the severance beneficiary.       but that the
liability-of     the producer shall end only Lion the payment
of the tax by the severance beneficiary,       and until such
time both the producer and the severance beneficiary          shall
be jointly     Uable for payment of the tax.     Where gas is
sold to a severance beneficiary      and reported to the Comp-
troller     of Public Accounts “as provided in ‘the act,: the’.pro-
ducer shall never be required to’ pay:the tax unless the
severance beneficiary     fails to do’ so or is held~,,by ‘a ,final
court order notto      be liable~ therefor.        ,,

           Section l(6) provides that the first   purchaser
of gas shall pay the’tax on the gas so purchased,.and     Un-
less he is the severance beneficiary,    the tax so paid shall
be d,educted from the paynient due the’ producer.
          Section 2 of. The act, defining      terms, is identical
with the provisions   of Section2, Article      7047b, with the
following exceptions:     ”
           “(1) For the purpose of thins Act, ‘producer’
     shall mean any person (other.than     a non-operating
     royalty owner) owning, controlling,     managing, or
     leasing any gas well,or   land,producing   gas, and
     any person who produces in any manner any gas by
     taking it from the earth or waters in this State.
           TV
            (2) ‘First’ rurchaser I shall mean’any person
     purchasing gas from the,,producer ,or from a sever-
     ante beneficiary.    In the event there is no’ ‘first
     purchaser I or severance beneficiary,   then the pro-
     ducer shall, be deemed thepurchdser    and pay the
     tax levied by this Act.

            “(3 1 ‘Dedicated, Gas ’ shall isxrraW all gas
      produced and saved in this State’covered       by any’
      purchase contract,    option, “ore agreement. by which’
      gas is to be produced for, ‘sold to, or used by a
      severance beneficiary;     as herein, defined,  OF gas
      produced and saved by the producer thereon when-
      there is no other severance beneficiary.
            ll(4j  ‘Severance ~Beneficiary’ ,shall mean ,any
     ‘person for’whom gas is produced and to whom it’is
      first   sold by the’ producer: under a ~dedication con-
      tract or’ under any other agreement of sale made
      prior to the production thereof under which a per-
      son acquires dedicated,gds     reserves in this State
      or exclusive   or beneficial   rights in gas under the
Hon. V. L. Ramsey, page 3      (WW-592)

     earth or waters of this State.     A person purchas-
     ing gas pursuant to such a contract shall be
     deemed to be engaged in obtaining the production
     of dedicated gas in this State, which is a valu-
     able occupation or privilege    for which this tax
     is levied;   provided, however that a producer pro-
     ducing gas for his own use or for sale and not
     subject to,a contract   as described above, shall
     be considered a severance ,beneficiary    for the pur-
     pose of this Act.".
             Construing the foregoing    definitions   with the pro-
visions    of Section 1, sub-sections    (1) through (81, it is
apparent that House Bill No. 43 is an act levying an occupa-
tion tax upon the occupation or privilege         of obtaining the
production of'gas     produced and saved in Texas, which is sub-
 ject to any purchase contract,     option,   or agreement, under
the terms of which the gas is to be produced for, sold to, or
,used by any person for whom the gas is produced and to whom
it is f1rs.t sold by the producer under the contract         or agree-
ment of sale made prior to .the production of the gas, and by
which such person acquires gas reserves or the exclusive          or
beneficial    rights in gas under the earth or waters of this
State.
           Under the terms of House Bill No. 43 a person for
whom such,gas is produced, or who has the' right to produce
or acquire such gas, is engaged in a valuable occupation or
privilege  which constitutes the basis for the levy of the tax
upon such occupation or privilege.    If the severance benefi-
ciary upon whom the tax is primarily levied is also the pro-
ducer, then the tax so levied is a tax levied upon the produc-
tion of such gas in addition to the original   production or
severance tax levied under the provisions   of Article  7047b,
V.C.S.
             The tax levied under House Bill No. 43 is a privi-
lege or occupation tax upon the producer of natural gas cal-
culated according to,the value of the gas so produced at'the
well     HoDe Natural Gas C     . Hall  274 U.S. 284 '(1926)   and
sinci it does not enter y&t: interitate      commerce until It has
been produced     and the tax imposed, thereon is only in respect
to the uroduc Eion. no discrimination    against interstate   com-
merce is involved:      Oliver Iron Co. v. -Lord 262 U.S. 172
 I;;;;;;   Utah Power & Light Co. v. Pfost? 288 U.S. 165, 182
         . The tax is an occupation or privilege     tax which falls
alike on those engaged in interstate     commerce or in intrastate
commerce, or both, and therefore     does not violate   the Commerce
clause of the Constitution     of the United States.    Coverdale v.
Piueline Co., 303 u.s._604, 610 (1938).
Hon. V. L. Ramsey, page 4       (W- 592)

             Since the incidence of the tax is based solely upon
the occupation     or privilege   of the production of “dedicated
gas” from the earth or waters of this State by a %everance
beneficiary,”     as those terms are defined,    irrespective     of the
ultimate disposal      of the gas so produced--whether      in intra-
state or interstate      commerce--it  is purely local in nature and
therefore    not violative    of the Commerce clause of the Federal
Constitution,     Hone Natural Gas’Co. v. Hall, suora.
             House Bill No. 43 is not subject to the constitutional
objections    raised in Michigan-Wisconsin     Pipeline Co. v. Calvert,
347 U.S. 157 (1953), wherein the Supreme Court of the United
States held that the “gas gathering” tax was violative          of the
Commerce clause of the Federal Constitution         for the reason that
the taxable event or incident which formed the basis for the
tax was “not levied on the capture or production of the gas but
rather on its taking into interstate       commerce after production,
gathering,    and processing.   . .I’ Nor is the tax levied by House
Bill No. 43 subject to the additional       objection   stated by the
Court in the “gas gathering” case that it would permit a multi-
ple burden upon interstate     ~commerce,~ since the taxable incident,
i.e.    the production of the gas, is a purely local incident
which cannot be the subject of repeated tax exactions          in other
states,    Coverdale v. Pipeline Co., 303 U.S. 612.
           In Section l(5), which provides that the tax levied
upon the occupation or privilege  of obtaining the production of
dedicated gas should be paid by the severance beneficiary,   it
is further provided that:
              II. . . In no event shall the severance-bene-
      ficiary     deduct, charge    or collect   the tax hereby
      levied from his payment s to the producer, and no
      contract or agreement heretofore         or hereafter  made
      shall be Interpreted      as requiring    the producer to
      pay any portion of the tax which is the liability
      of the severance beneficiary        under the provisions
      of this Act.       It is hereby declared to be against
      the public policy of this State, and to contribute
      to economic and actual..waste        ,and to,~be an unlawful
      limitation     upon the conserva i,ion and taxing powers
      of the State of Texas, for any contract to require
      the producer to pay the severance beneficiary           tax
      hereby levied when there is a severance beneficiary
      as defined herein other than the producer himself j
      it being the intention       of this Act that the pro-
      ducer shall be required to pay the tax hereby lev-
      ied only if the gas is produced for his own use or
      independent sale and not under any prior contract
      to produce for sale to another, or if the severance
.   -

        Hon. V. L. Ramsey, page 5      (WrJ-592)

             beneficiary  is declared by final court judgment
             not to be liable  for the tax hereby levied. . .~ .I1
                    Based upon, the above quoted provisions     of Section
        l(5), declaring   it to be the public policy of this State and
        to contribute   to economic or actual waste and a limitation
        upon the conservation    powers of the State for any contract to
        require the produce,r to pay the tax leviedupon        the severance
        beneficiary    the power of the State to enact legislation        for
        the prevent I on of economic and physical waste of natural gas
        as against the contention    thatsuch    legislation   violated   the
        due nrocess and eaual Drotection     clauses of the Fourteenth
        zndment     of the Con;t$Mon      of the United States, was upheld
            Cities Service Ga        v. Peerless Oil & Gas Co.
        35, 220 P.2d 279. 289 (19501,aff'd 340 U.S. 179. 1852?:9$::*
        The Oklahoma statute provided that the .Oklahoma Corporation
        Commission was empowered to fix the price paid to the produc-
        ers for gas taken at the well, because the taking of gas at
        the prevailing   price resulted in both economic and physical
        waste of gas and loss to the producers and loss to the State
        in gross production taxes     and the constitutionality       of such
        statute was sustained by the Supreme Court of Oklahoma and the
        Supreme Court of the United States.
                    The provision  that the severance beneficiary    may
        neither deduct, charge, or collect     the tax from his payment to
        the producer, and that no contract or agreement heretofore        or
        hereafter   made shall be interpreted   to as to require the pro-
        ducer to pay all or any part of the tax for which the severance
        beneficiary   is primarily liable   under the provisions   of the act,
        does not impair the obligation     of a contract in violation    of
        Article   I. Section 16. Constitution   of Texas. or Article   I.
        Section 16 Constitution     of the United States, Henderson Co. v.
        Thomuson, 300 U.S. 258, 266 (1936).
                   The tax imposed~ by House Bill No. 43 is a production
        or severance tax based upon the occupation of producing gas
        from the earth and waters of this State prior to its entry into
        either intrastate   or interstate     commerce, and irrespective    of
        the ultimate destination     of the gas so produced, the fact that
        it may be subsequently transported through pipelines          which are
        engaged in either interstate      or intrastate   commerce, or both,
        does not affect   the constitutionality      of the act itself.
                   It is the opinion of this office  that the provisions
        of House Bill No. 43 which levy an occupation tax upon the occu-
        pation or privilege  of obtaining the production of dedicated gas
        within this State, and on the busi-less and occupation of produc-
        ing such gas to be paid by the severance beneficiary   or the
Hon. V. L. Ramsey, page 6        (WW-592)

 producer thereof,      do not violate     the due process and equal pro-
 tection   clauses-of    Article    I, Sections 16 and.19, Constitution
 of Texas,and Section I of the Fourteenth Amendment to the Con-
 stitution    of the United States, or impair the obligation          of
 contracts    in violation    of Article I, Section 16, Constitution
 of Texas, and Article       I Section     10,' Constitution   of the United
 States.    Since   the  tax  i s levied  upon   the  production  of gas
'within the State of Texas, the fact that when produced such gas
 may be transmitted through nieelines           for final disuosition    in
 either interstate      or intFas%aie commerce does not Violate Arti-
 cle I, Section 8, Clause 3, the Commerce clause of the Consti-
 tution of the United States.
                                    SUMMARY
             House Bill No. 43 which levies an occupation
       tax on the occupation or privilege    of obtaining
       the production of dedicated gas within this State,
       and on the business and occupation of producing
       such gas to be paid by~the severance beneficiary
       or the producer thereof,   does not violate   the due
       process and equal protection   clauses or impair the
       obligations   of contracts under the provisions    of
       the Constitution   of Texas and the Constitution    of
       the United States, nor does it violate     the provi-
       sions of the "Commerce clause" of the U.S. Consti-
       tution.
                                     Yours very truly,
                                    WILL WILSON
                                    ;;-&$JJofy=&

                                        C. K. Richards
CKR:wb                                  Assistant
APPROVED:
OPINIONCOMMITTEE
Geo. P. Blackburn, Chairman,
Fred Werkenthin
John Reeves
Jack Price
 PEVIEWED
        FOR THEATTORNEY
                      GENERAL
 BY:    W. V. Geppert