                                 April 26, 1939
Hon. George II,Sheppard
Comptroller of Public Accounts
Austin, Texas
Dear lelr.
         Sheppard!
                      Opinion No. O-633
                      Re: Place where "market value" should
                           be determined in taxing natural gas
                           under Art. 70&?-b
This is in answer to your inquiry of April 13, 1939, concerning
the "gross receipts tax" on natural gas provided for in Article
7049-b of the Revised Civil Statutes.
The facts involved in your inquiry are as follows: A certain
company, which we will refer to as the "producer", owns and oper-
ates some gas wells in Hutchison and Carson Counties, Texas, and
it sells its gas to a pipe line company,,which is another and
separate concern. The p,ipeline company maintains an eighteen
inch pipe line, conveying gas from that field, which line is
approximately seven miles from this producer's wells, and the
pressure in this eighteen inch pipe line averages 320 pounds per
square pinch. The pressure of most of the gas wells in this field
is greater than 320 pounds; but the pressure of this particular
producer's gas wells is less, being only 259 pounds persquare
inch. This producer made a contract to sell the gas produced by
its wells to this pipe line company and to deliver it to the pipe
line of the pipe line company, nt a price of three and one-half
(35).cent s per thousand cubic feet, and the contract provided!
WWThe   Seller agrees to sell anddeliver to the Buyer at the
points of delivery hereinafter designated (which is the Buyer's
pipe line).****Deliveries of gas hereunder shall be made by
Buyer to Seller at a pressure sufficient to enter the pipe lines
of the Buyer against the varied working ressures therein."
It is agreed that three land one-half (3;;
                                        4 cents per thousand
cubic feet is "the actual market value" of this gas at the pipe
line company's eighteen inch pipe line seven miles from the wells,
where it is sold and delivered. Under this contract,it was
necessary for this producer to build its own pipe line from its
wells to the pipe line company's eighteen inch pipe line, a
distance of seven miles, and it was also necessary for this pro-
ducer to install "compressor stations", which consist of machin-
ery that raises the pressure of its gas, in order that its gas
                                                                -     .




Hon. Ceo. H. Sheppard, Page 2       O-633


would go into the pipe line company's eighteen inch line. By
virtue of building this seven mile line and these "compressor
stations",it costs the producer one-half (&#) cent per thousand
cubic feet to transport its gas from its wells to the place of
delivery where it is sold at the pipe line company(s eighteen
inch line seven miles away.
The question you want us to answer is whether you should charge
the natural gas tax, provided for in Article 7047-b on the basis
of the "actual market value" at the place of sale seven miles
from the well (which is j$,per 1000 cubic feet) or on the basis
of the "the actual market value" at the well (which is only 3#
per 1000 cubic feet).
The material part of the statute in question which is House
Bill 547, Ch. 73, p. 111, Acts 1931, 42nd. Leg. amended by
House Bill 8, Ch. 495 p. 495, p. 2040, Acts 1936, 3rd. Called
Session 44th. Leg., a11 of which is now codified as Article
7047-b of Vernon's Annotated Revised Civil'Statutes of Texas,
reads as follotis:
     "Sec. 1 (a). That from and after the date herein fixed,
     every person engaging or continuing~within this State, in
     the business of producing and saving in paying.quantities,
     for sale or for profit, any natural gas, including casing-
     head gas, from the soil or waters of this State, and
     "(b) Every person who imports natural gas intothis State
     and thereafter sells the same in.intrastate commerce in this
     State, the tax to be imposed on the first sale; (provided,
     ho.wever,that if any gas is imported into this State from
     another State, in which latter State a severance, occupation
     or excise tax is imposed, the person importing such gas
     shall not be required to pay another tax thereon under the
     provisions of this Act),
     'I(c) Are hereby declared to be,"producers" and engaged in
     the business of producing natural gas within this State and
     shall make quarterly on the 25th day of January, April,
     July and October each year, a report to the Comnroller,**"
     "Sec. 3. A tax shall be paid by each such producer on the
     amount of gas produced and saved within this State.,and on
     gas imported into the State, upon the first sale thereof
     in intrastate commerce upon'the following basis:
     "A tax   equivalent to three per cent (3%) of the market value
     of the   total amount of gas produced and sarad~within this
     State,   or sold, if imported into this State, at the actual
     market   value thereof, as andwhen produced.*****"
Hon. Geo. H. Sheppard, Page 3       O-633



It will be noticed that in Section 3 it 'says: 'A tax shall be
paid***u on the following basis: A tax equivalent to three per
cent (3;;
        *T of the market value***at the actuzl market value ther‘::of,
as and when produced." Je think these are the controlling words,
and thqt,the phrase "as
                      --- and.when p reduced" refera to all of the
gas, both that produced.in the State and that imported into the
State.
It might be oontencledthat'the'phrase "upon the first sale'there-
of" controls, and if that phrase was standink alone we think it
would controi,.but~we must-look at the statute as a whole and
when we do that we conclude that it must yield and give way to
the phrase in the next senten.ce,towit, "as
                                          ---andwhen produced."
 It might also be contended thatthe phrase "as and when produced"
applies .only.to~thatpart of the sentence set off in commas, towit,
~"if imported into.this State"; that is, it might be said that the
phrase applies only to imported gas; but we think that phrase
applies to and modifies the whole sentence. The Legislature was
talking aboutthe taxing of all gas "as and when produced".
What does the word"produoe mean? Webster's frewInternational
Di.ctionary,2nd Ed:, gives a definition of'the word nproduce"
as follows:
       ."To bring forth, as .young,or as a natural product or growth;
        to give birth'to; .to~.bear;
                                   generate; yield; furnish; as, the'.
       .earth:.producesgrass;~trees produce fruit.~"
.We'think that natural gas is produced when it comes out of the
ground. The mouth of the well is thefiace where it is produced.
We frankly admit, and anyone else, regardless of which side of
this question they urge, must admit, that the words of this
statute are doubtful; The.Supreme Court of the United States in
the case of United States v. Merriam, 263 U. S. 179, 44'S; Ct.
69, 68 L. Ed. 240, 29 A. .L. R. 1547, said:

      "*****in statutes levying taxes the literal meaning of the
      words employed is most important, for such statutes are not
      to ge extended,b implication beyond,the clear import of the
      language.used. ff the words are doubtful, the doubt must
      be resolved.against the.Government and in favor of the tax-
      payer."
                              .
 The same rule has been'adopted by the courts in Texas. Franklin
 Fire Ins; Co. v. Hall, .(Tex..Sup.Ct.) 112 Tex. 332, 247 S. ~1.
 822; Western Public Service Co; v. Meharg, (Tex. Comm. App.)
 116 Tex. 193, 292 S. W. 168% and Daniel v. Life Ins. Co. of
.Virginia, (Tex. Civ. App.) 102 S. W. 2nd 256. Applying that
 rule to the case in question we would be compelled to hold that
 the tax should be charged on the basis of the market value of
                                                                  -




Hon. Geo. H. Sheppard, Page 4   O-633


the gas at the well, which is the construction most favorable
to the taxpayer.
We have been unable to find,any tax cases on this question in
this State or any other jurisdiction. However, we have found
where a similiar question has arisen in several states in rega.rd
to whether the producer, who operates the well, should pay the
royalty owners their share of the proceeds from the sale of the
oil or gas several miles from the well to where it is piped
by the producer and sold to a pipe line company, or should pay
the royalty owners on the basis of the lower market value at
the mouth of the well. This question of the amount to be paid
to the royalty owners has arisen where the lease contract is
ambiguous or silent on the question; and in those cases the
courts have held that the payment should be on the basis of the
market value at the well. In 3 Summers Oil and Gas 415, it is
said:
    "One of the principal questions arising in connection with
    gas royalty clauses of the types above mentioned is whether
    the lessor is entitled to be paid on the basis of the value
    of the gas at the well, upon the basis of the price actually
    received at the point, where'the gas is delivered into the
    pipe line of a purchasing company, or at the price received
    by the lessee where it delivers gas to consumers directly
    through its own lines. Where leases provide for the payment
    of one-~eighthroyalty, the value of one-eighth of the'gas,
    or the market value thereof, most courts hold that the
    lessor's royalty should be computed upon the basis of the
    ~marketvalue actually exists, and if it does not, upon the
    basis of the reasonable value of such gas as established by
    competent evidence."
This question of the basis on which a producer should pay royalty,
where the lease contract is not clear, has been acted on by
courts in Kansas Kentucky and Louisiana.. In the case of Scott
v. Steinberger, fKan. Sup. Ct.) 113 Kani 67, 213 Pac.646, the
court said:
     "***the dispute arises whether the plaintiff was entitled to
     the value of ,the gas at the wells or at the price at which
     it was sold at the end of the pipe line,***
     "The terms of the lease are somewhat ambiguous as to the
     point where the gaswas to.be measured and its price fixed.
     There was no pipe line in the vicinity when the contract
     was.made. Evidently the'parties contemplated that, if oil
     or gas in paying quantities was found, some pipe,line com-
     pany would build into the field and transport it to places
     of consumption.*****
Hon. Geo. H. Sheppard, Page 5   O-633



     "We think the parties contemplated and the provision should
     be construed that gas, if produced, should be measured and
     and the price determined at the place where the wells were
     connected with pipe lines, and not at some distant market
     that might be found at the end of a pipe line remote from
     the field and where the cost of transportation might equal
     or exceed the value of the gas produced. If the pipe line
     had been built by defendants to Kansas City or Chicago,
     and the gas transported and marketed there at four or five
     timesits value at the place of production, would it be
     contended that the price received at either of these distant
     markets should be the measure of defendants liability?***"
In the case of~warfield Natural Gas Co, v. Allen, (Ky. Ct. App.)
261 Ky. 840, 88 S. W. (2d) 989, the Court said:
    "The .lease recited, TThat the Lessee isto deliver to the
    Lessor in tanks, .tank cars, or pipe lines a royalty-on one-
    eighth. (l/8) of all.oil produced and,saved from the premises,
    and to pay for each gaswell from the time and while the
    gas is marketed the sum of one-eighth of,pre~ceedsreceived
    from,the sale thereof, payable each three months'***"
    PDefendant had the-exclusive right to produce the gas and
    to market the gas. Itwas as much its duty to find the
    market as to find,the~gas.***
     "The lease is silent as 'to where this market must be found.
     In.such cases, it is usually held to be at the'place of pro-
     duction.*+*
    "So we cantsay the defendant took this gas at the well, and
    the question is what must itpay for it. Must it pay its
    value there or must it pay what it may'ultimately have got
    :for it?
    "The testimony of the.plaintiff J. H..Allen shows gas is
    usually sold at the well in the~locality where these wells
    are situated and the 12 cents per thousand feet is the usual
    pr.icein that locality, and thatthis price and custom pre-
    vailed there when these.leaseswere made. Then that must
    have .'beenwhat the partiescontemplated when they made this
    ,lease.***
     "Nothing.was said in the :Iease about a sale elsewhere'and
     this lease must be held to mean one-eighth of the gross
     proceeds of a'sale ,of the gas at the well side, and that is
     all for which defendant must a.ccounteven though it may mar-
     ket the gas elsewhere and get a much greater sum for it.***"
In the case of Wall v. .United GasPublic Service CO., (La sup. ct.1
178 La. go$, 152 SOU. 561, the Court said:
                                          1




Hon. Geo. H. Sheppard, Page 6     O-633



     "In the lease contract here involved, the lessee was re-
     quired to pay to the lessor one-eighth of the value of the
     gas sold off the premises, calculated at the "market price"
     thereof. The price to be paid was left open or made to
     depend upon the 'market price' at the time the gas was
     produced. The lessee settled with the lessors for the gas
     at 4 cents per thousand cubic feet, which it contends was
     the 'market price' at the well, its theory being that the
     market price there is the proper basis for the settlement.
     It admits that it sold the gas ata place two miles from
     the field at 5.8 cents per thousand cubic feet. The plain-
     tiffs demand settlement on the basis of the sale price of
     the gas where sold.
     "There is nothing in the contract itself nor in the testi-
     mony to show the intent of the parties touching the question
     whether the term 'market price' meant the price at the well
     or the price the.gas would bring in a market remote from
     the well. rJethink it reasonable to assume that the parties
     intended that,~'ifthere'was a market .forgas in the field,
     the current market price there should be paid. There is
     where the gas was reduced to.possession and there is where
     ownership of.it.sprang into existence. The result of bring-
     ing the 'gas to .the'surface'of,
                                    the ground 'in the field was
     to reduce to ownership~'there~to a commercial commodity.***n
In considering this rule as applied to the payment of royalties,
we are not unmindful of the Texas case of,Ladd v. Upham,~ (Tex.
Ct. Civ. App.) 58 S.W. (2d) lO37, .inwhich the Court of Civil
Appeals at Fort Worth, with only the pleadings of the case before
it by virtue of a demurrer having been‘sustained, held that the
lessee (producer) should pay the royalties on the basis of the
higher price received for the gas at a distant ooint from the
well where the gas was produced, instea~dof:paying the lower
market price at the well; but, that decision was based solely
on the working of the lease in which it,was expressly provided
that the lessee was"***to pay lessor as royalty one-eighth of the
proceeds from the sale of gas*'**. There was no ambiguity in
the lease in that case, and the co,urtheld that that language
required payment of one-eighth of the proceeds from the first sale;
and in that connection the court recpgnized the rule in Scott
v. Steinberger, sunra, and said that the rule insthe Scott case
would not be applied because of the specific words in the lease
in the Ladd case. The Ladd case.was affirmed by the Supreme
Court of Texas (Upham v; Ladd, 12$ Tex. 14, ,95 S.L'~.
                                                     2nd 3651,
but it based its opinion on a different ground than that relied
on by the Court of Civil'Appeals, and onthe question of "the
amount due to the lessor" it said: *That no view on that ques-
tion can properly be expressed here should.be apparent. The
contract sued upon is such as to require that it be construed
in the light of the facts and circumstances surrounding the par-
Bon. Geo. Ii.Sheppard, Page 7    C-633


ties when it was made." We think by that language that the
Supreme Court cast a doubt on the Court of Civil Appeals opinion
distinguishing its holding from the Scott v. Stein~bcrgerholding.
tiebelieve that the rule that where the lease does not provide
otherwise royalties should be paid on the basis of the market
value at the well sheds some light on the question as to what
basis this tax should be paid on. It should likewise be paid on
the basis of the market value at the well.
 An objection has been raised to charging this tax on the basis
 of "the actual market value" at the well, the ground of the
 objection being that there is really no market at the well and
 the only market is some distance away at the nearest pipe line
‘(7 miles in this case); but the Courts of this State have already
 answered this objection by giving a rule by which market value
 in such cases can be found, and that rule is expressed in A.T.
 & S.F. Ry. v. Nation 6cSlavens, 92 S. U. 823 (market value of
 cattle) as follows:
     "***The rule is well settled that where the question his
     what was the value of-property~at a particular place, and
     there was no market value there, proof may be given of such
     value at other places with~the .cost of transportation in
     order to *** deduce the value at the place in question.
     Suth. on Damages (2d Ed.) Sec. 445.***"
This rule was adhered to in the case of Dale Oil & Refining Co.
v. City of Tulia, 25, S. W. 2nd. 671 (market value of oil); and
Kerr v. Blaer, 106 S.W. 549 (market value of rice).
We believe that this tax is what is sometimes referred to as a
"severance tax", and if that is true it is reasonable to believe
that the legislature intended to charge the tax immediately
upon the gas being severed from the earth. The Louisiana Natural
gas tax act, which is almost identical with the Texas statute
we are considering, was held to be a 'tseverancetax" in the ca.s;
of Bulf Refining Co. v. McFarland, 154 La. 251, 97 Sou. 433.
 57 Corpus Juris 538 "severance tax" is defined as follows:
     Veverance tax. An excise tax upon the privilege of severing,
     or upon the right to sever the natural resources from the
     soil; a tax upon the natural resources severed from the soil."
We should look at this tax from a practical standpoint, and see
how it operates. If we charge this tax on the basis of the higher
market value at the place of sale seven miles away instead of on
the basis of the lower market value at the well, then all the
operator has to do in order to escape the higher tax would be to
sell and convey its ltcompressorstations" and seven mile pipe
line to another concern, and sell its gas to this other concern at
Hon. Geo. H. Sheppard, Page 8     o-633



3 cents at the mouth of the well, and let this other concern
compress the gas and transport it seven miles and resell it at
3;:;cents. The legislature is presumed to have known the actual
conditions the act was to apply to when it passed it; and it
intended for the law to operate in a practical manner. Xe think
it intended for the tax to be paid on a basis of the market value
at the well.
The final consideration we wish to advance is that by virtue of
the fact that the Consituttion of the State of Texas (Sec. 1
Art. VIII) provides that "taxation shall be equal and uniform",
it is the duty of the courts to endeavor to place a construction
on a'.taxingstatute that will make the tax equal and uniform if
there is more than one constructionthat can be placed on the
statute. Such a rule has not been stated by a Texas court
but we think in view of what has been said in other jurisdictions
that such a rule can properly be applied in construing our
statutes. In the case in question if this tax is charged on the
basis of the market value atthewell   the tax will come nearer
being euqal and uniform than if it is charged on thebasis of
where itis sold,--in some instances at the well and in other
instances many miles away from the~well. In the case of Feather
River Power Co. v. State Board of Equalization (Cal. Sup. Ct.)
206 Ca. 486, 274 Pac. 962, it was said:
     "It is the policy of the law that all property.within the
     state should bear its fair andequalhlrden of taxation,
     and a liberal construction will be indulged to accomplish
     that end."
In the 'caseof City of Providence v. Hall (R. I. Sup. Ct.) 49
R. I. 230, 142 Atl. 156, it was said:
     "If two views are possible; of which one more equitably dis-
     tributes the burdens of taxation, the court should adopt
     that view, unless compelled to do otherwise by decisions or
     a long course of conduct which ought not to be altered."
The conclusion we have reached as to the basis on which to charge
this tax is contrary to an opinion dated March 8, 1938, addressed
to Hon. George H. Sheppard, by Mr. John McKay and Nr. E. N.
Avery Jr., assistants under Attorney General McGraw; and that
opinion is i%ergfone overruled.
The words "actual market value" must be given their literal mean-
ing. We have stated at thebeginning of this opinion that it is
agreed that three and one-half (346) cents per thousand cubic
feet is "the actual market value" of this gas at the pipe line
company's e.ighteeninch line. We made that statement because
the pipe line company is paying that price. Usually the price
paid by the purchasing pipe line company is a proper criterion
Ron. Geo. H. Sheppard,Page 9        O-633


on which to figure "market value", but it could be that a pro-
ducer and a purchaserwould enter into a contract for a price
less than the market value or more than the market value for
reasons known only to themselves,and such a price in those
cases should not be taken by the Comptrolleras market value.
He should be governed by'%he actual market value", which may
change from time to time.
Our answer to your Inquiry is that under the facts of the case
in question you should charge the natural gas tax, provided
for in Article 7047-b, on the basis of the .actualmarket value
at the y&1X; and not on the basis of the actual market value
at the place of the first sale if that place is away from the
well;.and you are advised that if the gas has no market value
at the well you may determine its market value at the well.by
taking the actual market value where there is a market and
deducting the cost of taking the gas to that market.
                                Youra very truly
                               ATTORNEY QENERAL bF TEXAS


                               BY
                                       Geoil,G. Botsch
                                            Aesirstant
OCR :jm

APPROVED:
  QBRALB ‘MANN

ATTORNEY GENERAL OF TEXAS
