                             OFTEXAS
                         AIT~TXN.   ‘lhXA,+l         7@3’711


                                December        7,    1973



The Honorable Robert S. Calvert                              Opinion No.   H-   176
Comptroller   of Public Accounts
State Finance Building                                       Re:   Whether tax reimburse-
Austin,  Texas                                                     ments made by purchasers
                                                                   to producers   of gas for
                                                                   production tax in effect
                                                                   at the time the gas-sale
                                                                   contract is executed should
                                                                   be considered a part of the
                                                                   producer’s   gross cash
Dear   Mr.   Calvert:                                              receipts.

       You have requested an opinion of this office concerning a construction
of Article 3.02(l), V. T. C. S., Taxation-General,  defining “market value”
for computation of the natural gas tax established  in Article 3.01. V. T. C. S.,
Taxation-General.    The applicable portion of the statute is:

                     “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.
              Payments    made by purchasers   to producers  for the pur-
              pose of reimbursing   such producers for taxes due here-
              under shall not be considered   a part of the producer’s
              gross cash receipts. ” (emphasis added)

       You have advised    us of your departmental             construction:

                     “It has been the construction    of this department
             that the exclusion of a tax reimbursement       from a producer’s
             gross cash receipts for tax purposes applies        only to a tax
             reimbursement     for all or a part of an increase in the rate




                                           p.    804
                                                                                      .

The Honorable    Robert   S. Calvert,    page 2      (H-176)’




        of natural gas tax, which increase  becomes effective
        subsequent to the date of the contract and while such
        contract is in effect.

            “Most gas-sale    contracts are executed for a
        long period of time, and a tax reimbursement     provi-
        sion in the contract protects the producer from having
        his receipts from the sale of gas being reduced by
        increases   in the production tax.

             “It has been the position of this department
        that where a gas-sale     contract is executed,   including
        a reimbursement     for all or a part .of the production
        tax in effect at the time the contract is executed,     the
        tax reimbursement      becomes a part of the commodity
        price and, therefore,     should be included as a part of
        the producer’s   taxable receipts. I’

    We agree    with the construction        of your department.

     The tax is levied on the “market value” of the gas produced.           Article
3.01.   supra.   Presumably     a purchaser  will not pay more than the market
value, nor will a producer,      ordinarily, agree to accept less.       Thus, if a
purchaser    agrees to pay a price which includes the natural gas production
tax in existence at the time of the contract,     it can be assumed that the
purchaser    and the producer have determined       that total figure to be the
actual market value of the gas.       The contemplated     effect is that the pur-
chaser pays no more than the actual market value; the producer receives
the market value but hopes to pay less tax because he does not expect to
pay a tax upon that portion of the market value which he denominates
“reimbursement      for taxes”.    By the same token, the State of Texas receives
less tax revenue than it should were the tax based on the true market value.

    On the other hand, as you say, an agreement    by a purchaser   to pay
all or a part of tax increases during the contract period which in many cases
will be a long period of time, can be construed as a legitimate   effort to
protect the producer from having his receipts from the stale of gas ‘reduced
by increases  in the production tax.




                                        p.    805
The Honorable    Robert S.   Calvert,   page 3      ~(H-176)




     The exclusion in the second sentence of Article 3.02(l)   applies only
when the payments are made “for the purpose of reimbursing         such pro-
ducers for taxes. ” We believe that the only payments a purchaser       would
make for that purpose would be in connection with tax increases,       so that
the producer’s   future receipts would not be diminished by such tax increases.
Any other payments,      whether called:“‘tajr]reimbursement” or not,’ would be
part of the market value of the gas and would be for the sole purpose of
circumventing    a portion of the tax, and in no way for the purpose specified
by statute.

    Our interpretation    of the statutory language has’been greatly influenced
by the long established    interpretation   given it by your department.      Stanford
v. Butler,   181 S. W. 2d 269 (T~ex. 1944); Burroughs v. Lyles,       181 S. W. 2d 570
(Tex. 1944); Heaton v. Bristol,      317 S. W. 2d 86 (Tex. Civ. App.,    Waco, 1958,
err. ref’d.)  cert. denied, 359 U.S. 230.

    If the statute is not interpreted  as you have interpreted   it, and as
 we interpret it above, it is discriminatory,    in that it rewards with lower
taxes parties who are willing to semantically     assign a part of market value
to a fictiti’ous  “reimbursement    for taxes” while parties with non-fictional
contracts pay the full tax, a result we know the Legislature      did not intend.

                             SUMMARY

            The language in Article 3.02,    V. T. C. S., Taxation-
        General,  allowing deduction from taxable receipts of pay-
        ments made by the purchaser     for the purpose of reimbursing
        the producer for taxes does not allow deduction of payments
        made under an agreement     to pay the taxes in existence   at the
        time of the contract.

                                                    Very   truly yours,
                                               ‘n



                                           v        Attorney   General    of Texas




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The Honorable    Robert   S.   Calvert,        page 4 fHmn6)




Opinion   Committee




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