                            AumIN   11.   .l-ExAs
PRICE   DANIEL
ATTORNEY GENERAL




                             August 17, 1950

 Hon. Robert S. Calvert              Opinion No. V-1086
 Comptrollerof Public Accounts
 Austin, Texas                       Re:       Applicability of production
                                               taxes to cycled residue gas
.Dear Mr. Calvert:                             when reproduced for sale or
                                               use.
               Your request for an opinion reads as follows:
            "We desire an Opinion from your Office as
      to whether or not tax levied under Article 7047b,
      R.C.S. 1925 applies to residue gas remaining after
      the gas has been cycled when such residue gas is
      later reproduced and sold or used, assuming that
      the particular sand has been completely cycled."
           We assume that in using the expression, "assuming
that the particular sand has been completely cycled," you mean
'that all of the gas originally contained in a particular sand
'has been produced and run through a cycling plant which re-~
moved the liquid hydrocarbon content and that the residue or
~dry gas has been reinjected into the gas producing formation so
that all the gas now contained in the sand has been theretofore
produced. We deslre to point out to you that these facts nM3t
necessarily be assumed In that we know of no way in which such
facts could be satisfactorily established or proved.
           Subsections (1) and (2) of Section 1 of Article 7047b,
 V. C. S., provide:
            "Section 1. (1) There Is hereby levied an occu-
      pation tax on the business or occupation of producing
      gas within this State, computed as follows:
            "A tax shall be pald by each producer on the
      amount of gas produced and saved within this State
      equivalent to five and two-tenths (5.2) per cent of
      the market value thereof as and when produced; pro-
      vided that the amount of such tax on sweet and sour
      natural gas shall never be less than eleven-one
      hundred.fiftieths (U/150) of one (1) cent per one
      thousand (1,000) cubic feet.
               "In calculating the tax herein levied, there
Hon. Robert S. Calvert, page 2         V-1086


    shall be excluded: (a) gas injected Into the earth
    In this State, unless sold for such DurDose: (b)m
    produced from oil wells with oil and lawfully vented
    or flared; and. ( ) gas used for lifting 011. unless
    sold for such Dur"Dose.
          "(2) The market value of gas produced in
    this State shall be the value thereof at the mouth
    of the well; however, in case gas is sold for cash
    only, the tax shall be computed on the producer's
   gross cash receipts. In all cases where the whole
    or a part of the consideration for the sale of gas
    Is a portion of the products extracted from the
    producer's gas or a portion of the residue gas, or
   both, the tax shall be computed on the gross value
    of all things of value received by the producer,
    Including any bonus or premium; provided that not-
   withstanding anv other provision herein to the
   contrary where gas is Droceased for Its liquid
   hvdrocarion content and the residue rxasIs returned
   bv cscllnn methods, as dlstlnmzlshed from reures-
    surinn or Dressure maintenance methods to some
   gas Droducing formation, the taxable vilue of such
   gas shall be three-fifths (3/5) of the uross value
    of all liauids extracted, seDarated and saved from
    such gas, such value to be determined uDon seDa-
   ration and extraction and prior to absomtloh, refin-
    inn or Drocessinn of such hydrocarbons and the
   quantity of the production shall be measured by the
   i!otalfield of the orocessintzDlant from such aas.<
   @xphasis added.)
          With your opinion request you enclosed a letter from
an attorney representing the taxpayer. in which he contended that
no occupation tax is due upon the reproduction of the residue
gas on the ground that an occupation tax was paid on such gas
at the time of its original production. We agree that no tax
would be due on reproduced residue gas if in factsan occupation
tax was paid thereon at the time of its first production. We
so held In Opinion No. o-4100, dated December 3, 1941. However,
It Is our opinion that an occupation tax was not paid upon the
residue or dry gas at the time of Its original production.
          The production of gas that is processed by cycling
operations Is taxed under the statute on the basis of sixty per
cent of the gross value of the liquids extracted. This amounts
to a legislative declaration that, for tax purposes, the reason-
able cost of conducting cycling operations shall be presumed to
be equal to forty per cent of the value of the liquids extracted.
If the residue or dry gas is injected into a gas producing forma-
Hon. Robert 3. Calvert, page 3          V-1086


tlon In the earth, it not being sold for such purpose, the mar-
ket value thereof was not included by the Legislature in fixing
the amount of the tax, in that only three-fifths of the market
value of the liquid hydrocarbons extracted was provided for by
the Legislature in determining the amount of the tax. Natural
gas is either wet gas or dry gas. In cycling operations it
seems clear that the Legislature has not taxed the residue or
dry gas which has been injected back into the earth, thereby
resuming Its status as a natural resource of the State., Accord-
ing to the plain wording of Subdivision (2) of Section 1 of
said Article 7047b, If the gas in question, after being stripped
of Its hydrocarbon content, had not been injected back into the
earth, but had been either sole or used by the producer, the
tax due thereon would have been one hundred per cent of the value
of the liquid hydrocarbon content plus the market value of the
residue gas.
           You will note that under the taxing article in ques-
 tion a tax Is only levied "on the amount of gas produced and
 saved." You will further note that Section 1 provides, "In
 calculating t~hetax herein levied there shall be excluded: (a)
pas injected Into the earth in this State, unless sold for such
   roose; (b) gas produced from oil wells with oil and lawfully
?&ted or flared: and. (c) gas used for lifting oil. unless
 sold for such purpose:" . Each of the foregoing-exclusions relates
 to a use of the gas from which the producer has realized no
 profit. In Opinion No. V-335, dated August 13, 1947, we held
 that the provisions of Section 1 are In line with the other pro-
.vFsl.onsof Article 7047b, which, when read as a whole, reveal a
 legislative intent to tax the business of producing gas, i.e.,
 producing gas for profit. We are of the opinion that gas in
.order to be saved wlthln the meaning of Section 1 nest have been
 produced and used for profit and that gas that has been Injected
 into the earth, unless sold for such purpose, a profit thereon
being realized, Is not the production and saving of the gas which
 the Leglalature intended to tax.
           In our Opinion No. O-4100 we held that no tax was due
on gas which was reproduced after injection into the earth; how-
ever, the as there injected was "gas upon whLch a production
tax . . .BJhad already been paid." In the case of cycled gas,
we are of the opinion that no production tax has in fact been
paid on the dry portion of the wet gas and that upon reproduction
thereof, If produced for profit, that is, either sold or used
by the producer, the residue gas is taxable under one or more
of the statutory definitions of the term "market value" as con-
tained in Subsection (2) of Section 1 of Article 7047b. It Is
evident that the Legislature expressly excluded from the calcu-
lation of the gasproduction tax, gas injected into the earth
in this State, unless sold for such purpose, for the reason that
.     .



    Hon. Robert 3. Calvert, page 4           V-1086


    such gas was of no beneficial use to the producer and after in-
    jection resumes its status as a natural 'resourceand would be
    subject to the tax upon reproduction.
                                   SUMMARY
                ReslrJuegas, injected into a gas producing
          formation in the earth in cycling operations, upon
          being reproduced and saved Is subject to the gas
          production ta~xlevied under Article 7047b, V.C.S.
                                    Yours very truly,
                                   PRICE DANIIfL
                                   Attorney General
                                   By s/W. V. Geppert
                                        W. V.~Geppert
                                        Assistant

    m/mwb/amm/wc
           .

    APPROVED:
    Everett Hutchinstin
    Executive Assistant
    Charles 0. Mathews
    First Assistant
