                           April 24, 1957


Hon. Robed s. Calvert             GpinlonHo. WI+68
Cmnptrollerof Publio,
                    Accounts
Callit Station                    Re: W&her or not the gas reflerred
                                                                   to
&h.n, Texas                           aa “free”pa receivedby’theCity
                                      of &Allen is exempt from the
                                      oocupationtax providedfor by
Dsar Mr. Calvert:                     Article 7CJ47b,
                                                    V.C.S.

         You requestthe opinion, of this officeupon the applicationof
the occupationtax upon the businessor occupationof producinggas within
this State imposedby Artiole 7G47b, Vernon’8Civil.Statutes, under the
conditionshereinafterstated.

         Gn February1, 1952, Taylor RefiningCompanyand RayfairsMinerals,
Inc.,both Texas corporatione,and the city of &Allen, a municipaloorpora-
tion,enteredinto a Gas Sales Contract. In this contractthey designated
themselves%nnpaniea” and “City”and we shall 80 refer to them in this
opinion..

          Ry the terma of the contractCompaniesacquiredfrom City all the
mineralsunder certainland owned by City for the purposeof oil, gas and
mineraldevelopment. For the same purposeCompaniesacquiredall the
mineralsin land owned by privateprtiee, the total of which the oontraot-
ing partiesdesignatedvI+AllenGeneralArea”. The net result is that
Companiesacquiredall the gas in place in the McAllenGeneralArea. City
agreedto cooperateand assist Companiesin acquiringfor mineral develop-
ment the land wned by privatepartieswithin the corpbratelimits of City.

          ParagraphII of the Gas Sales Contract,which ve deem most impor-
tant, is,aa follows:

          “In considerationof the City’8 right hereunderto
    purohasegas for a nominalprice,which is practically
    tantamountto receivingpa free of any cost to it, and
    ‘in considerationof the City’8 unconditionalright here-
    under to assign this agreementor to resell to any party
    the gas purchasedby it hereunderat a eubetantialmone-
    tary profit to City, City covenantsand agrees to forth-
    with, a8 Iesaor,executeand deliverto Companfes,as
     Leaeee,without the paymentof any bonus to City, valid
     oil, gas and mineral leaaes on terms identicalwith
    thoae.contained  in lease form submittedby Companiesto
Hon. Robert S. Calvert,page 2 (WW-68)



    city, -                              citv u&rJ&g
    ylthin the 's               Area' as defined          For
    the same consideration, City covenantsand agrees tint
    it vi11 in good faith continuouslycooperatewith
    Companiesin assistingCompaniesto promptlyobtain
    from the respectivemineralouner8, owning 3.ands
    within the corporatelimits of City, without the pay-
    ment of any bonus, valid oil, gas and mineral lease8,
    on term8 identicalviththose containedin aforesaid
    lease form 8Ubmittedt0 City
    stnuedbv suchther           iti-
    athin the m     I                    01 Companies
    agree that they vi11 accept all such leasestendered
    end that they will vithin a reasonabletime unitiae
    and pool all such leases so obtainedby them insofar
    as they cover lands within the said %kAllen General
    Area' so that the 8ew will be a part of the particu-
    lar gas operatingand productionunit coveringsaid
    area vhich is identifiedas Canpaniea V+lcAllen Field-
    wide lJn1t.tCompaniesrecogniaethat any drilling
    and produotionoperatione~ oonductedby.themon leases '
    coveringlandswithin the corporatelimits of the
    City of b&Allenvill be governedby valid term8 of
    the oil and gas ordinanceof the City, eitheras nw
    existingor as may hereafterbe amended." (FJnphasis
    suppliedthroughout.)I

          Specificallythe questionwe must decide may besimply stateda8
follows: Is City a producer,as defined by the statute,of the gas pur-
chased from Companiesunder the contract? If City is a producerof gas,
it must be admittedthe tax is not due, this for the reason that anoccu-
pation tax may not be constitutionallyimposedupon City. FArticleVIII,
Section 1, Constitutionof Texas. If, hoverer,Cwpsnies are the pro-
duoer8,the tax is valid even though City 18 the purchaser. Under the
contract,City doe8 not produceone cubic foot of the gae. The produc'
tion fall8 entirelyupon Comxanieaand 80 does the tax. As said by the
Supreme Court in the &se of-w                 v. Stat+ l@ Tex. 637,
180 S.W.2d 429:
        "The provisionsof the Act in no uncertainlanguage
    levies the tax againstthe producerof gas and not the
    purchaserthereof.w

          The lease and the Gas Sales Contractwere executedcontemporan-
8oU¶ly and must thereforebe construedtogetheras one instrument. City,
aa part of the consideration for executingthe lease,requiredthat Corn-
pan188 contractto 8811 to City the amount of gas mentionedin the oontWr
on certaint8rmS. The usual provisionin an oil and gas lease is that tbs
lessee psy a bonus and an additionalconsiderationor payment nf a roPlty
.       J




    $ori.
        Robert S. Calvert,page 3 (W&Se)



to t&O ~18SSOl-iBut in this case the considerationis that Companieswill
sell to City a certainamount of gas. Ths contractrecites that because
of the agreementby Companiesto sell gas to City, it would execute a
leaseto ColPpanies without the payment of any cash bonus. It 18 therefore
quite applrentthat City reservesno royaltyand the transaction.isin
effecta sale of,allmineralsby City to Companies. The Gas Sales Con-
tract so states. It is clear that the gas which is deliveredt0 City iS
not a deliveryof gas as royalty in kind but is in truth en actual sale.
The contractmakes many referencesto the faotthrt COU@ni8s will Sell
and that City will pay, thus -negativingthe idea of delivery of a gas ,I
royaltyin kind Or a royaltyreservation. The net reeult of the lease.
and tb Gas Sales Contract,when consideredand construedtogether,is
that City conveyedthe~mineralestate to Companiesin considerationof
Compnies' agreementto sell the specifiedamount of gas to City for the
yric8 specifiedin Section3 of the contractwhich is.Tater specifically.
set out in this opinion.                      ,.

          That City is the purcbrwr is wholly dmnmterial. Stat&a
y. Citv of El w,    135 Tex. 359, 143 S.W.2d 366. This.caseinvolvesthe
motor fuel salas tax, but it holds that it is immaterialthat a City is
the pWOhILSerof the mOtOr fuel; so it is her8 as t0 this gas. IIIthis
case the aourt said:
                                                               ,Ii
          (I .In this instancewe think that beyond any.
     doubt z motor fuel tax lava tax the first actual sale
     of motor fuel in this State,regardlessof whether Or
     not it is sold to a city. . . ."

          The only obligationimposedupon Companiesby the contractis to
se11 to City forthe considerationspecified,in the amount specifiedand
for the time specified,gas which it produoesfrom the McAllen GeneralArea,
observingthe obligationto give City priorityto purchase.overother pur-
chasersof the gas. This doss not render City a producerunder the contract
or the statute. Nor does it render it a royalty ovner or interested.party
vithlnthe purviewof the statute, The contractin no manner restricts,
by reservation,carvingout, or othervise,th8 completeOvnershipby Corn-
panicsover all the gas under the McAllen General Area. of aourse,the
Whole of all the gas is depletedby sales made by Companies,but it still
remainsthe Ovner of all that is left, and so it will continueunder the
contractas long as it is in effeot.

             Section2 of,Article7G47b,V.C.S., defines produceras follows:

             qor th8 purpose of this Act 'prodUC8r'shall mean "
        s          Ovning,controlling,xwaging; Or leasing any
        gas well and/or any person who produces in any manner any
        gas by taking it.fromthe earth or waters in this State, .'
        and shall includeany person ovning any royalty or other
        interestin any gae 6r its value whether produced by him,
        or by some other person on his behalf, either by leaS8, :
        oontraot,or othervise."                                   ,. ;   ',
-.       .




             Bon. Robert 9. Calvert,     page 4 (R+&)
     .


             Royalty Ownersare definedas follow:

                       "'Royaltyovnerstshall mean and includem
                  owing any mineralrights under any producingleasehold
                  within thisState, other than the working interest,which
                  working interestis that of the person having the manage-
                  ment end opsrationof the well."

                       Ccmpaniesfall squarelywithin the definitionof a producerand
             royalty wner under the statute. City is exemptfrom the statutebecanse
             not embracedwithin its terms, and Companiesare subjectto the tax be-
             cause et&racedwithin the terms of the statuteand Compani88have no
             exemption. Companieshape acquiredall the gas under the MeAllenGeneral
             Area and have a right under the contract,to produceit all and the oor-
             relative obligationto pay the tax on all that it produces. That City is
             the purchaserof sow of the gasproduced, in no manneralters this obliga-
             tion.

                      It is importantto~note hov City is to pay for ths gas and the
             amount. Itis obsewed that the contra& says:
                       II
                            .   .   .,
                  Companiesforvdto
                                all gas
                  shall be the aggregate'of(1) an
                  equal to all bssorle and landowner'sroyalty
                  payableby Companieson the quantityof gas so'
                  8old end deliVeredhereunder,and (2) m
                  m        equal to all production,severance,sales,
                  gathering,transmissionand other taxes of similar .'
                  nature,18Vi8d and aseessedin respeot of or appli-
                  cable to the quantityof gas so eold,enddelivered
                  hereunder."

             This is nothingmore than a measurementin money of what City rekeives
             from Companiesfor the privilegeof produoingend sellingall the gas
             which Ccdnpaniesmay sell not only to City but to othersunder long term
             contracts,if deeired,so long a8 it observesthe requirementsof the
             amount of gas to be sold and deliveredto City from the total of an gas
             producedfrcm the &Allen GeneralArea.
 I
                       It ie apparentto us in construingthe lease and gas salesCon'
             tract togetherand as one instrumentthat the right to purchasegas by City
             is in lieu of the right to receiVe a royaltyas pesoribed in the lecrse*

                       This tax has been properlylaid againstCcmyanies,the prodPr"
             After the deliveryof the gas to City, it may use it or sell it to other8
             but the taxliability of Companiesas produoerareIminsthe same.

                       ha8reth8Mfm8     NISpeotfullyadVi88dtbatCompani88~e m*'
             for the tax as the producersof the gas sold and deliVeredto City under
             tb oontraot.
.   .    .




Bon. Robert S. CalPert,page 5 (tJw-68)


        .~
                                   s[IMMBRy’

                 A producerof gas, which is sold and delivered
                 to a City, a municipalcorporation,under a
                 contractwith the City, is liable for the occu-
                 pation tax imposedby Article 70&7b, V. C. S.
                 That a City is the purchaserof the gas, is
                 wholly immaterial. The tax liabilityagainst
                 the produceris the same under the contracthere
                 involvedand under the statute. The City is not
                 the producer;hence, it la not liable for the tax.
                 But Cwpaniee are the producersand are, therefore,
                 liable for the tax. City is neithera royalty
                 wner md8r the contractor the StStUte.
                                       Yours very truly,

                                       WILL WILSON
                                       AttorneyGeneral



                                           #qy+.d
                                           L. P. Lollar
                                            Assistant

LPL:gs

APPROVED:

OPINIONCC%lMITTE
H. Grady Cixmdler,Chairman

C. K. Richards

Ed. Homer

Ralph Rash

John Uinton

BEVIEWEDFORTREATTORNJ3YGENEML
BY:

             Geo. P. Blackburn
