                                   QBfficeof t&z Rlttornep Qkterat
                                                   State of QLexae
DAN MORALES                                             May 2, 1997
 ATTORNEY
       GENERAL

   The Honorable C. E. “Mike” Thomas III                        Opinion No. DM-438
   Howard County Attorney
   P.O. Box 2096                                                Re: Ad valorem taxation of equipment used to
   Big Spring, Texas 7972 1                                     produce. minerals on mineral leasehold estate, and
                                                                related questions (RQ-918)


   Dear Mr. Willcerson:

            You have requested our opinion regarding the proper method of assessing and collecting ad
   valorem taxes’ on “casing, tubing, pump jacks, tanks, surf&e pipe” and other equipment used to
   produce minerals on a mineral leasehold estate. As you know, both real and personal property are
   subject to ad valorem taxation in Texas unless exempted by law corn taxation. Tax Code 6 11.01(a).
   Because certain tax statutes and tax provisions of the Texas Constitution treat real and personal
   property differently, property must be classified as one or the other for certain ad valorem taxation
   purposes.

            You state that the Howard County Tax Appraisal District* and “most, if not all, tax appraisal
   districts around the state, include in their appraisal of oil and gas mineral leasehold interests the
   production equipment necessBfy to produce the oil and gas.” You explain that a property owner has
   challenged the district’s appraisal method, as follows:

                     A delinquent taxpayer has attempted to break out the portion of the
                 account attributable to the production equipment and claim the four year
                 statute of limitation applies to that portion of the account. The Howard
                 County Tax Appraisal District has taken the position that the prod&on
                 equipment is indispensable to the production of oil and gas on the leasehold
                 estate, and is therefore taxable as an improvement, tixture or appurtenance to
                 the realty and may be included in the value of the leasehold interest.

           You first ask whether the appraisal district may include the value of production equipment
   as part of the value of the mineral leasehold for which the equipment is used. We conclude that
   irrespective of whether production equipment is real or personal property, it must be appraised


            ‘Ad valomn   taxes are taxes imposed on the value of propxly. &&x’s LAW DICTIONARY5 l(6th           ed. 1990)

             ‘Appraisal dish&s are respomible for appraising pmpmty for taxing units that impose ad v&mu             taxes cm
   property located io tbe appmisd districi Tax code $6.01; Tex. Comt art. VIII, $ IS@). Taxing units include cities.
   counties. s&o01 districts, and other political s&divisions of the state that are authorized to impose and are imposing ad
   vd~taxesanpropaty.          TaxCode§      1.04(12).
 The Honorable C. E. “‘Mike”Thomas III - Page 2 @M-438)




separately from its correspondiig mineral leasehold interest. The Tax Code specifically designates
land, improvements, interests in real property, and personal property as separate taxable entities. See
Tax Code $5 l.04,2S.02,.04.r Thus courts have held that land, improvements to land, and interests
in land must be appraised separately, even though they are all included within the code’s definition
of “real property.” See Cameron County Appraisal Review Bd v. Credirbanc Sm. Ass’n, 763
S.W.2d 577,579-80 (Tex. App.-Corpus Christi 1988, writ denied) (“This specific enumeration by
the legislature appears to show the legislative intent that land and improvements are separate
entities.“); see ah Waker v. Appraisal Review Bd, 846 S.WSd 14, 16 (Tex. App.-San Antonio
1992, writ denied) (“lR]equiring the Tax Appraisal District to maintain the separate listing of both
land and improvement is more than a mere bookkeeping requirement.“). The appraisals may be
combmed into one taxpayer account, but the account must retlect separate valuations for each taxable
property. See Tax Code $Q 1.04,25.02, .04.

        You next ask which statute of limitations period applies to the collection of a delinquent tax
account if the values of the production equipment and the mineral leasehold interest are combined
into one account. As your question suggests, the classification of property as real or personal is
material to the statute of limitations because the statute treats real and personal property ditTerently.
It provides:

                  (a) Personal property may not be seized and a suit may not be tiled:

                    (1) to collect a tax on personal property that has been delinquent
             more than four years; or

                    (2) to collect a tax on real ~property that has been delinquent more
             than 20 years.

Id 5 33.05. Smce an account may include taxes on several taxable properties, a different limitations
period may apply to diierent parts of the account. Determination of the appropriate statute of
hmitations turns upon whether the property is real or personal. Ifthe property is personal, taxes on
it may not be collected by suit or seizure ifthey have been delinquent for more than four years. Ifthe
property is real, the twenty-year limitations period applies. You have asked about the property
classification of equipment used to produce minerals on a mineral leasehold estate.




          Tiia to the 1919 codification of the Property Tax Code, the definition of”real prow       includedimpruvements
tberem, and no provision required the improvements to be valued separstely. Thus prior to enactment of the new code,
improvements were appraised as pm of the value of the real estate. See Attorney General Opinion H-370 (1974) at 2
(referring to definition of reel property in former V.T.C.S. article 7146 and conchding that value ofiixtum     and otta
impma          on ld ?sbdd be inchled in the value assigned to the realty”); c/: Comerun CountyAppmtsaiReview         Bd
Y. Creditbanc Sm. Ass%. 763 S.W.2d 577.579-80           (Tex. App.-Capus       Christi 1988, writ denied) (TJn&r the new
provisions of the Prop&y Tax Code tbe legislature has spe&cally designated land and impmvemmts and other taxable
in-       as separate entities of real proper@.“).




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The Honorable C. E. “Mike” Thomas III - Page 3 @M-438)




        We begin with the relevant statutory definitions. “‘Personal property” is property that is not
real property. ZG!$1.04(4). “Real property” is:

                       (A)   land;

                       (B)   an improvement;

                       (C)   a mine or quarry;

                       (D)   a mineral in place;

                       (E)   standing timber; or

                       (F) an estate or interest, other than a mortgage deed of trust
                   creating a hen on property or an interest securing payment or
                   performance of an obligation in a property enumerated in Paragraphs
                   (A) through (E) of this subdivision.

Id 3 1.04(2). Since oil and gas and other mineral leaseholds are “estates or interests” in minerals in
place, they are taxable as real property. Prince Bras Drilling Co. v. FArman Petroleum Cop., 150
S.W.2d 314 (Tex. Civ. App.-El Paso 1941, writ refd); Attorney General Opinion MW- 402 (1981).
Thus the twenty-year limitations period applies to the collection of delinquent taxes on mineral
leaseholds.

        With respect to minerrd production equipment used on a leasehold, you state that the Howard
County Appraisal District and other districts around the state appraise production equipment as real
property along with the corresponding oil and gas leasehold interests because the equipment is
“indispen&le to the production of oil and gas on the leasehold estate, and is therefore taxable as an
improvement, fixture, or appurtenance to the realty.” We found no authority to support your view
that property is considered an improvement, fixture, or appurtenance to real property if it is
“indispensable” to the property. Furthermore, since a mineral interest is taxable whether it is
“producing” or not, we decline to link the tax classiication of equipment to the production status of
the interest. See Attorney General Opinion MW-402 (1981) at 2; Tax Code § 23.17.

       Instead, an “improvement” taxable as real property is de&d      by the Tax Code as:

                       (A) a building, structure, tixture, or fence erected on or atlixed
                   to land; or

                        (B) a transportable structure that is designed to be occupied for
                   residential or business purposes, whether or not it is atIixed to land,
                   if the owner of the structure owns the land on which it is located,
                   unless the structure is unoccupied and held for sale or normally is
                   located at a particular place only temporarily.




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The Honorable C. E. ‘Mike” Thomas III - Page 4 (DM-438)




Tax Code $1.04(3). Courts have long considered three factors in determining whether an article of
property affixed to real property’ is an improvement:5

                 (1) the mode and sufliciency of the annexation of the article to the realty,
              whether real or constructive;

                  (2) the adaptation of the article to the uses or purposes of the realty; and

                  (3) the intention of the party making the annexation.

The third factor, intention, is the preeminent factor, and the first two are evidence of intention. See
Sormier v. Chisholm-Ryder Co., 909 S.W.2d 475,479 (Tex. 1995); Logan v. Mullis, 686 S.W.2d
605, 607-08 (Tex. 1985); Hutchins v. Masterson &Street, 46 Tex. 551, 554 (1877).

       In Attorney General Opinion H-370 (1974) this office considered the three factors with
respect to the classification of a water pump and irrigation casing used with a water well. We
concluded that the classitication of property as real or personal requires the consideration of facts
unique to each piece of property.

                 ~]eaolution of the question of whether or not certain property is a fixture
             depends on the circumstances surrounding its placement on the land with
             particular emphasis being accorded to the intention of the party, or parties,
             who has placed it there. Since the same article or structure may in one set of
             circumstances be considered realty and in another be considered personal@
             no categorical rules applicable to particular properties can be stated.

Attorney General Opiion H-370 (1974) at 3; see aIsoMeIe?r& v. State, 902 S.W.2d 132,137 (Tex.
App.--Houston [lst Dist.] 1995, no writ) (“Generally, whether a particular item is a Sxture or
personalty is a question of fact, and should be determined by the factfinder.“). We similarly are of
the opinion that neither this office nor county appraisal districts can categorically classify mineral
production equipment as either real or personal property. Determinations of the proper tax
classitication of production equipment must be made on a case-by-case basis.

       Court opinions addressing the tax treatment of mineral production equipment offer some
guidance for districts in making these determinations. InMuro Co. v. State, 168 S.W.2d 510 (Tex.
Cii. App.-Amarillo 1943, writ ref d), Wdbarger County argued that casing, rods, tubing, pumps, and


          WbilCihCT.%XCOdCSCClU.5tOdCfbCllC”impWCUl        en~“~inreIatioototheslnfaceofthelanduponwhichit
is placed, courts have reoogniml that improvcmuI ts may be d&d       in relation to lcasebold in-.         See Shugurf v.
Nomalndep.     Sch Dist, 288 S.W.2d 243,241 (Tex Cii. App.-Fort Wotih 19%. no wit); Mar0 Co. v. State, 168 S.W.2d
510,512(Tcx     Civ. App.--Amarillo 1943,wti~tv.fd).

        “‘FixRue” is included in the statutcsy dehition of “improvement”     Tax Code 0 1.04(3). “Apprtrtenancts” arc
dogons    to improvmts      and lixtwes. See Hamoxv. Peek, 355 S.W.Zd 568,569 (Tcx. Civ. App.-Fort Worth 1962.
wit r&d n.r.c.). Our rcsearc hshowsthstthesamefactorsare~bycorntstodeterminewhctherpropertyisim
improvcmcnt, cxlnre, or applntenancc.
The Honorable C. E. Yvlike” Thomas III - Page 5 (DM438)




other equipment used to produce oil on a leasehold estate was real property. Applying the three
factors discussed above, the court stated that “it stands to reason that the intention of the parties to
the original lease contract would be to place the casing, rods, tubing and even the pumps and tanks
on such a leasehold for temporary use only with the full intention of removing them onto other leases
if desired, and certainly in case production became unprofitable.” The court held that “the casing,
rods, tubing and other such property        was not a part of the realty.” Id at 5 13.

         In shugar v. Nocona Znakpendent School District, 288 S.W.2d 243,247 (Tex. Civ. App.-
Fort Worth 1956, no writ), a taxing unit argued that the casing, surface pipe, storage tanks, and ,other
production equipment located on leased premises were personal property that could be seized and
sold for payment of a tax debt. The court agreed citing Man, and applying the three factors, because
the record in the case showed that the oil field operator “reserved complete charge and possession
     [of the equipment] along with the right of removal, in case of abandonment, of all of it, even
including the salvageable pipe in the hole.” Id at 247.

        And in Lingleville Independent school Disbicr v. Valero Transmission Co., 763 S.W.2d 616
(Tex. App.-Eastland 1989, writ denied), taxing units tiled suit to collect delinquent taxes on a gas
pipeline buried beneath the ground. The pipeline owner argued that the suit was barred by the four-
year statute of limitations because the pipeline was personal property. The evidence in the case
showed that the pipeline company and the surlbce property owner expressly agreed that the company
could remove or replace the pipeline at any time. The court held that the pipeline was personal
property because the evidence showed that the parties never intended the pipeline to become a
permanent part of the realty. Id

         Armed with facts, this office determined in Attorney General Opinion O-5268 (1943) that
while pipeline located on an easement was personal property, the pumping equipment also located
there was real property. The instrument conveying the easement provided that the grantee “‘may
remove [the pipeline] . . . in whole or in part at will.“’ Id at 7. With respect to the pumping equip-
ment, however, the attorney general conchrded that “[w]e have been placed in possession of no facts
which indicate the pumping equipment was not intended by the parties to become a part of the
realty.” Id at 8. The Attorney General cited cases in support of classifying pumping equipment as
real property, but all of the cases were from states other than Texas. Id

         In sum, a determination of whether mineral production equipment is personal or real property
depends upon factors relating to the equipment’s placement on the mineral leasehold. If the
equipment is personal property, taxes on it may not be collected by suit or seizure if they have been
delinquent for more than four years. Ifthe equipment is an “improvement,” and thus “real property
as defined by the Tax Code, the twenty-year limitations period applies. Irrespective of whether the
equipment is real or personal, it must be appraised separately from the mineral interest for which it
is used.




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The Honorable C. E. “Mike” Thomas III - Page 6 @M-438)




                                       SUMMARY

               For purposes of ad valorem taxation, the value of mineral production
           equipment must be appraised separately .gom the vahre of the mineral
           leasehold interest for which the equipment is used. Determination of the ap-
           plicable statute of limitations period for collection of delinquent ad valorem
           taxes turns upon whether the property is real or personal. If the property is
           personal, taxes on it may not be coIlected by suit or seizure if they have been
           delinquent for more than four years. Ifthe property is real, the twenty-year
           limitations period applies. Mineral production equipment cannot be cate-
           gorically &ssi&d as either real or personal property. Instead, determinations
           of the proper tax classification of production equipment must be made on a
           case-by-case basis.




                                              DAN     MORALES
                                              Attorney General of Texas

JORGE VEGA
Fist Assistant Attorney General

SARAH J. SHIRLEY
Chair, Opinion Committee

Prepared by Barbara GrifIin
Assistant Attorney General




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