                                                                             v           R-927




                                                    OFFICE            OF

                                THE A~ToHNE~T                            GE=-
                                                 Ausrm.          TEXAS,
          PRICE  DANIEL
          *TTORNEY GENERAL                     January 6, 1948


                      Hon. Geo. H. Sheppard                    Opinion No. V-471
                      Comptroller of Public Accounts
                      Austin, Texas                            -Re:    Liability for gas production
                                                                       tax under Article 7047b,
                      Dear Mr. Sheppard:                               V;C.S., by virtue of submitted
                                                                      .contract between Chicago Cor-
                                                                       poration and the Process Oil
                                                                       co.

                                      Accordfng to your letter request, the.P;ocess   Oil Com-
                         pany, the owner of a~gas producing oil and gas lease, entered into
                         a,written contract with the Chicago Corporation, a processor of
                        natural gas, whereby the possession of the leasehold ‘estate was
                         turned over to the Chicago’Corporation to ‘develop, maintain and
                         operate.- This contract, provides in great detail the various duties
                         and obligations of the contracting parties and covers eighteen type-
                         written pages. The Chicago Corporation obligated itself not only
                         to operate the lease and produce the gas but agreed to process the
                          gas and market the liquid hydrocarbons recovered therefrom and
                         to market the rea&iue gas or return same “to a gas reseryoirun-
                         derlying or co-on       to.the leased premises.”   The contract pro-
                         vides that the Chicago CZorporation sball own 55 per cent of the
       i
y!:!ii::: ‘,              liquid hydrocarbons recovered and that the Process Company shall
                          own the other   45 per cent: that the proceeds from the sale of resi-
:c:~,y\\I.t b   v
                        .due gas shall be divided one-half to Chicago Corporation and one-
~.,:                ;;:.half toProcess      Dil Company. In your written opinion request you
                          specifically ask three questions, but in a conference ,with your Di-
‘:.                      erector and A~ssistant Director of the Gross Receipts Tax Division,
.,.”                   :we find that you desire our-opinion as to who is primarily liable
                        ‘for ~thepayment of .tbe occupationtaxes due’the State while such
                         -lease is operated under the contract, and theproper tax to be
                         paid. Your letter iequest and other enclosures reveal that the
                         Chicago Corporation returns a part of the residue gas to a gas
                         formation other than the one from which the gas was produced,
                          and which gas formation is in a gas field in which Chicago Cor-
                         poration owns an interest, but the Process Oil Company does not.

                                    The pertinent provisions    of Article   7047b, V.C.S.   read
                      as follows:

                                  ‘Sec. 1. (1) There is hereby levied an occupa-
                           tion tax on the business or occupation of producing
                           gas within this State, computed as follows:
                                                                    -.
‘.                                                                       , III/
     Hon. Geo. H. Sheppard, Page 2 (V-471)



               ‘A tax shall be paid 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;,
         provided that the amount of such tax on sweet and
         aour natural gas shall never be less than eleven-
         one hundred fiftieths (11/150) of one (1) cent per one
         thousand (1,000) cubic feet,

                   “In calculating the tax herein levied, there
         .. shall be excluded:    (a) gas injected into the earth
            in this State, unless ,sold for such purpose; (b) gas
        .’ ~produced from oil wells with oil and lawfully vent-
            ed or flared; and, (c) gas used for lifting oil, un-
      :, less sold for such purpose.

                  “(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 ail cases where the whole
           or a part of the consideration for the sale of gas
           is a portion of the products extracted from the pro-
           ducer’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 notwithstand-
           ing any other provision herein to the contrary,
           where gas is processed for its liquid hydrocarbon
          .content and the residue gas is returned by-cycling     .,
       ~. methods, as distinguished from repressuring or
           pressure maintenance methods, to some~ gas producing
     .,~~‘.formation, the taxable value of such gas shall be
       ,. thr,ee-fifths (3/5) of the gross value of all liquids
           extracted, separated and saved from such gas, such
      ., value to be determined upon separation and extraction
           and prior to absorption, refining or processing of such
         ~,hydrocarbons and the quantity of the products shall be
          ~measured by the total yield of the processing plant
           from such gas.
                                                 ,,,_
                  “(4) The tax hereby levied shall be a liability
           of the producer of gas and it shall be the duty of each
           such producer to keep accurate records in Texas of
           all gas produced, making monthly reports under oath as
           hereinafter provided.”

               “Sec. 2. (1) For the purpose of this Act ‘producer’
         shall mean any person owning, controlling, managing, or
Hon. Geo. H. Sheppard, Page 3 (V-471)



    pleasing any gas well and/or any person who produces
    ,in any manner any gas by taking it from the earth or
     waters in this State, and shall include any person own-
     ing any royalty or other interest in any gas or its
     value whether produced by him, or by some other
     person on his behalf, either by lease, contract, or
     otherwise.”

           “Section 2a. (1) The tax herein imposed on the
    producing of gas shall be the primary liability of the
    producer as hereinbefore defined, and every person
    purchasing gas from producer thereof and taking de-
    livery thereof at OF near the premises where produced
    shall collect said tax imposed by this Article from the
    producer. . .

          “(3)’ The tax hereby levied shall be a liability
    upon the producer, the first purchaser, and/or subse-
    quent purchaser or purchasers as herein provided.”

          Chicago Corporation will be hereinafter referred     to as
Chicago, and the Process Oil Company, as Process.

            After careful study of the contract in question, it is our
opinion that Chicago and Process are joint producers and processors
of the gas in question in that the whole operation as disclosed by the
contract is.in the nature of a joint venture. Each furnishes a part
of the physical properties in which each retains the title to its prop-
erty, but ‘share in the profits derived from such operations.    Both
Chicago and Process are producers as defined by Section 2 (1) of
Article 7047b, V.C.S. quoted above.

           It is therefore our opinion that both Chicago and Process
are primarily liable for the occupation taxes accruing by virtue of
the production of gas from the gas wells in question. Of course, the
royalty owners, if any, are primarily liable as gas producers of
their pro rata part of the production.

           .The market value of the gas produced at the mouth of the
well is determined as follows:

          1st. In the event that part of the gas (in its original state
as produced at the mouth of the well) is sold for cash by Chicago
and Process and is not re-cycled by the purchase-&%?a subsequent
purchaser, the market value of such gas should be computed on the
gross cash receipts.

           2nd. In the event that Chicago and Process sell a part of
the gas (in its original state as produced at the mouth of the well)
     Hon. Gee. H. Sheppard, Page 4 (V-471)



      and the purchaser or a subsequent purchaser does not re;cycle such
      gas, and ~Chicago and Process receive as a consideration therefor
      a portion of the products extracted or a portion of the residue gas,
      or both, the market value of such gas should be computed on the
      gross ~value of all things of value received by Chicago and Process
      including any bonus or premium.
     ,,,.~----
                 3rd. The market value of that portion of the gas that is
      processed, under the terms of the contract, for its liquid hydrocarbon
      content and the residue gas returned by cycling methods to a gas-
     ~producing formation, whether such formation is the same as that
      from which produced or not, should be computed on three-fifths of
      the gross value of all liquids extracted, separated and saved from
      such gas.

                 4th. The market value of that portion of the gas that is
     processed for its liquid hydrocarbon content and the residue gas
     not re-cycled, shall be determined by the gross value of the liquid
     hydrocarbons recovered and the gross valw of the residue gas, less
     the cost of processing the gas and marketing the residue gas and
     the recovered liquid hydrocarbons.   .


                                SUMMARY,.

                 .The Chicago Corporation and the Process Oil Com-
          pany, under the ,facts submitted, are joint producers and
          processors of the gas in question and are both primarily
          liable for the gas production taxes accruing by virtue of
          Art. 7047b. V.C.S.         is.

                                               Yours yery truly
                                                      ‘,. .
                                        ATT&NEY   .GENERAL OF TEXAS
                                                     :.”     ,.   .,:;::        .‘.S   .I~:




_.

                                                  ~W. V. Geppert
                                                           Assistant.                         ~,
     WVG/J CP

                                                                           ‘,      ,:, ‘.      ~:
                                         APPROVED:



                                         ATTORNEYGENERAL
