Honorable Robert S. Calvert
Comptroller of Publie Accounts            ,!
State of Texas
Austin, Texas
                            Opinion     No. M-109
                            Rer     Uhether oil and gas produced
                                    under an 011 and gas lease
                                    eKeouted by the United States
                                    to a private party leasee and
                                    covering lands over which the
                                    United State8 has ex%2uSive
                                    jurisdiction  are subject to
                                    the gae and oil production
                                    taxee levied by Articles        3.01
                                    and 4.02, respectively,        Title
                                    122A, Taxation-General,       V.C.S.,
                                  ~ and the regulation      pipeline     tax
Dear Mr. Calvert:                   imposed by Article      6032, P;b.S.
         You ask my opinion ai to whether the o%i and-gas btio-
duced from land within the Federal enclave, commonly known
as the Corpus Chrlstf,    Texas, Naval ASP Statfon, are subject
to the Texas gas and oil produotion taxes and the regulation
plpellng   tax.
         The gross production  taxes in question are Imposed by
Articles   3.01 and 4.02, respectively,     Title 122A, Taxation-
General, Vernon's Civil Statutes;       the regulation  pipeline  tax
In question is imposed by Article       6032,, Vernon's Civil Statutes.
       Our opinion Is that the of1 and gas produced, other
than the 16-2/3 per cent thereof whfch is payable as royalty
to the lessor,  the United States, .%;s subject to these taxes.
        The land in questfon,was.?aequlred   by the United States
by condemnation purauant to'APtfsles     5242, 5247 and 5248,
Vernon's Civil Statutes,   by judgment dated July 5, P940, in

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Honorable   Roberts S’. Calvert,   Page’.2 (R-109)                 .’


the Dietriot  Court of the Unlted Statesfor  the Southern District
of Texas, Corpus Christ1 Dlvislon.   We assume the fee simple title
was acquired.
                                              *
         Subsequently g> on December
                               -”’       12, 1940, pursuant to Articles
5242, 5247 and 524         Vernon’s Civil Statutes,     the Governor of
Texas aeded to the kited         States exclusive   jurisdiction  over said
land for so long as the land should remain the property of the
Uni’J;ed,States,cprovlded      however that, the State retained concurrent
jurladlction     forexecution      of all civil  and criminal processes  upon
any~pereon upon sa$d land.          The deed further provides that,
                    n         The United States of America
             @hall be*e&ure in Its possession        and enjoy-
             lsnt o? all said lands, and said lands and




Jurisdiction dver~ said     land was formally        accepted    on behalf     of
the United States.
        Thereafter,~ on Decembe; 1, 1962, the ‘United States~of
America executed’ to Humble ,011 6t’Refining Co. ,an:‘.oll?.and gas lease
covering the.land ,under consideration..    The lessee has, informed
us that all of the lands under consideration      from ,whlch production
is had are on the mainland, thatnone      of them are submerged lands
or tidelands.                      r’
        The pertinent    provlslons.of       this   lease    are as follows:


        The form used Is styled          a ‘Protective      Gal and
        Gas Leas&.*      h ir’
                                     2.
        The lease,    at its   Inception,
                                      ‘reads ,a? follows:
                                                n,,;;.
            “TRIS L?%ASE,entered into . . . by;and
        between the United States of America, . e .
     Honorable   Robert S. Calvert,     Page, 3 (M-W)


             hereinafter  called the leasoy, and Humble
           ;Oll and Refining Company, . e O hereinafter
             called the lessee,  . * .
                 "WITNESSE!lW:
                 "Sec. 1. Rights of lessee.     In considera-
            tion of rents and royalties     to be paid, and the
            conditions    and covenants to be obsdrved as herein
            set forth,    the lessor does hereby grant to the
            lessee the exclusive     right and privilege     to drill
            for, mine, extract,     remove, and dispose of all the
            oil,and    gas deposits owned by the lessor,      except
            helium gas,, in 6r under the following       described
            land . . .                              i

                                             3.
            The term of the lease is stated as:
                11      for a period of five y&Fs and so
            long thdreafter    as oil or gas Is $roduced In
            paying quantities:    . . ."
                                             4.
            The lease   contains     the further   graqt:
                                as otherwise   provided and
                 n
                        Except
            subject to the conditions     herein specified,
            the lessee shall have the, right to construct
            and maintain upop the leased lands all works,
            buildings,   plant$; waterways, roads, telegraph
            or telephone lines,    pipe lines,   reservofrs,
            tanks, pumping stations.     or other structures
            as ma? be necessary to ihe ~f&l enjoyment of
            this lease,"

                                             5.
            Section 2, styled "Th& lessee hereby agrees:"
            contains the following relevant provisions:
               "(d)  Rentals and royalties.     (1)   To pay
            annual rentals and royal:ties   on production

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Honorable   Robert S. Calvert,~Page     4 (M-$09)


        under this&ease  as provided i';t Attachment
        B which is made a part hereof.
        Attachment B provides for a~royalty of 16-2/3
        per cent of the produ6tion to the lessor:
            "(k)  ~Taxes and wages, freedom of'purchase.
        To pay when due, all taxes lawfully assessed
        and levied under the laws of the State or the
        United States upon improvements, oil, and gas
        produced from the lands hereunder or other
        right:,  property,  or assets of the Lessee;
        . . .

         Articles   3.01 and 4.02 impose an occupation      tax.on the
business of producing;gas      and oil,  respectively,   within this
State.    Article   6032,:commonly known as the Regulation Pipeline
Tax, imposes a tax,,upon each~ barrel,of      crude petroleum produced
within this State             which shall be in addition to and col-
lected in the same r&&r        as the, present gross, receipts    produc-
tion tax on crude petroleum.            1( These taxes are occupation
taxes.    Group No. 1,0&l Corpo~ab&        v. Sheppard, 89 S.W.2d 1021
           A      1935 error ref )* St ate v. Humphrey, 159 S.W.2d
:::X&%:::App.          i942).      ; '
         The 011 and gas lease 'conveyed to Humble, the lessee,
a present determinable fee estate an all of the 011 and gas
(except helium gas) In and under the lands covered by It.                 The
above quoted provisions    of the lease, and Its other relevant
orovlslons.   are analonous in law to the provisions          of the oil
and gas lease considered in                          v. Rid-Kansas 011
& Gas Co., 113 Tex. 160, 254                           29 A . L . R . bob
This case and the unbroken 1                         &ent decisions*of
our Texas courts following      It are unequivocal to the effect           that
this type of oil an8. gas lease 1s a present sale or conveyance
of real property and operates to.transfer        thetoll   and gas in
place In the premises described therein and to sever those minerals
from the surface.    42 Tex.Jur.24 368, Oil and Gas, Sec. 175, and
the pages and sections    following*and;particularly        the cases cited
at page 369, note.1.
        Decisions of our State Supreme Court have established   that
an Interest   in minerals In place,,and an interest in royalty are
separate and distinct    estates in land.  Pith v. Lankford, 157 Tex..
335, 302 S.W.2d 645 (1957).

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Honorable   Robert   S. Calve&,   Rage 5 (n-%09)'


       Under both the relevant constitutional    provisions land
the three tax statutes underconsideration     the royalty payable
to the United States Is exemnt from the taxes under consldera-
                  1 Oil Corporation v. Sh        , supra; Thelson
                  T      4m 6 S W 2d b4b         ; Group No. 1 Oil
                  a::*283 6.s. 275 (1931).
         It 1s the conclusion    of this office    that the oil and gas
produced which is allocable      to the lessee la subject to the taxes
under consideration.      Under the cession deed by the State of Texas,
the lands~remalned tax exempt only "so.long         a.8 the same are held,
owned, used, and occupied by the United States of America."           It
is clear from the lease by the Federal government to Humble the
mineral lands are not in legal'contemplation         of law either 'held"
or 'owned" or "used" or 'occupied"        by the government, whose m
interestis    in theroyalty    aforesaid.      When the mineral Iands
are no longer used for a,~federal purpose or there has been an
occurrence   of the circumstances    specified   In the state cession,
exclusive   jurisdiction   is terminated.
         In S.R.A. Inc. v. Minnesota, 327 U.S. 558 (lg46),      the Supreme
Court held that when a purchaser entered Into possession        of real
estate under Its contract of purchase of the fee title        that the
property became subject to the terrltorlal     jurlsdlction    of the state
wherein it was located and was subject to a direct tax by the state
on the realty.    Under the contract of sale, legal title      was retained
In the United States until payment of the balance of the purchase
price in InstalIments.     The contract contained no express provision
re,taining sovereignty   in the United States; there was no express
retrocesslon   by Congress to the atate ; and the original     act of ces-
sion of sovereignty    over the property to the United States contained
no requirement for return of sovereignty     to the state when the prop-
erty was no longer used for federal purposes.       This case cites and
follows New Brunswick v. United States, 276 U.S. 547 (1928).          In
both cases, the Court held that the equity situation        was one wherein
the United States had conveyed title     to the purchasers, as,owners,
and they had mortgaged the real estate to.,~the United States to r
secure the unpaid purchase money.
        Two other cases by the Supreme Court of the United States
have directly   held that the estates granted by 011 and gas leases
were subject to taxation by.the states.       The first,  Oklahoma Tax
Commission v. Texas Company 336 U.S. 342 (1949). considered
whether a lessee of minerar'rlghts    ln,certaln    Indian lands in the
Honorable   Robert S. Calvert,   Page 6 (M-%09)


State of Oklahoma was subject to %he payment of nondiscriminatory
state gross production      taxes and state excise taxes on petroleum
produced from such lands.        The excise tax was very similar to the
Texas gross production     taxes under consideration.      It was at the
rate of one mill per barrel on every barrel of petroleum produced
In Oklahoma. The Oklahoma Supreme Court construed it as an excise
tax on the prodtiction~ of oil.      The Court held that under Oklahoma
law the lessees became the owners of all the right,          title and in-
terest in the minerals in theireases,         subJect only to the royalty
interest    reserved to the Indian lessors    and that they were liable
for the taxes.      The Court said:
              II     it is well established   that proper-
         ty p&h&ed      by a private person from the
         Federal Government becomes a; part of the gener-
         al mass of property in the state and must bear
         its ,falr share of the expenses of local govern-
         ment.    . . ." (at page 353).
         In the second case, Group No. 1 Oil Corporation v. &SB,
supra, the Court had under consideration       oil and gas leases grant-
ed by the State of Texas to a private corporation       for a term of
years, with the right to enter on the lands of the state public
domain for the purpose of drilling       and operating for oil and gas
and to erect and maintain all necessary structures        for the pro-
duction,   transportation    and storage of these products,   and which
required the lessee or owner of these rights conveyed to pay the
State the value of a certain percentage of the oil and gas pro-
duced and,sold,      The Supreme Court reoognlzed and followed the
construction    of the Texas Supreme Court bo~:Che;effe~t that such
leases had effected     present sales to the lessee of the oil and
gas in place.     The Court held:
            "This Court has consistently    held that
        where property or any interest     lnit   has
        completely passed from the gcvemment to Y:
        the purchaser,    he can claim no immunity from
        taxation with respect to it, merely because
        it was once government-owned or becan$e the
        sale of it effected     some g@ernment purpose.
        New Brunswick v, ,Unfted Shkes,     supraj Forbes
        v. Gracey, supra; Tucker v* Fergnson, supra,?
        see Gromer v. Standard Dredging Co., 224 U.S.
        362, 3718.. Choctaw, 0. & G, R, Co, v. Maokeg,
        256 U.S. 531, 537; Central Pacific      R. Co. v.
        California,   162 U,S, 91, 125; Railroad Co.
        v. Peniston, 3.8 Wall. .5 35-37; Weston v.
        Charleston,   sipra.   p. 46s.
                      d
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Honorable   Robert S. Calvert,    Page 7 (M-109)


           "Property which has thus passed
       from either the national or a state:.
       government to private owner&&p becomes
       a part of the common mass of property.
       and subject to its common burdens.
       Denial to either government of the
       power to tax it, or income derived
       from it, in order to insure some remote
       and indirect    antecedent benefit to :the .'
       other, would be an encroachment of:'the
       sovereign power to tax, not justified
       by the implied constitutional      restric-
       tion.     See Weston v. Charleston,    supra.,
       Q.  468.    The interest  which passed to::'.
       petitioner    here, as defined by the J.aws
       of the State, is not distinguishable           :
       from the mining claims, acquired in
       lands of the United States under its
       statutes,    which, together with minerals
       and ores derived from them, were held
       subject to sta;e taxation in Forbes v.
       Gracey, supra.       (at pages 2.82-283)
       Humble, as lessee,  has accepted from the Federal govern-
ment the conveyance of a present determinable fee in the oil and
gas and mineral estate in the lands.     Under the foregoing cases,
the sovereign power of the State of Texas to impose the taxes
under consideration  seems to be established.
       The case of Oklahoma Tax Commission v. Texas Company
supra, fs conclusive agalnst any immunity of the lessee. in
that case, the Court said,
            I,
                 a   The taxes here are nondfs-
                     e   .

       criminatory.     The respondents are 'private
       persons'   who seek immunfty 'for their prop-
       erty or gains because they are engaged in
       operatfona    under a government contract or
       lease.'    The functions   they perform in
       operating    the leases are hardly more govern-
       mental fin character than those performed
       by lessees of school lands or, indeed, by
       many contractors     with the Government. n *' *'
       (at page 363)


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Honorable   Robert S. Calvert:,Page    8 (?&lo?)


            11
              .   *   .   .              .
            ”
                      But, so far aa concern8 private
        person8 claiming immunity for their ordinary
        business operations      (even though in connec-
        tion with governmental activities),        no implied
        constitutional     immunity can rest on the merely
        hypothetical    interferences    with governmental
        functfons here asserted       to sustain~exemption.
         . . .     (at page 365)
It is also pertinent   that the Court .could find     no statutory
immunity to imposition   of the taxes.
          We are aware of that line of! decisione.represented      by
the case of Humble Pipeline Co. v.lWaggoner,:-376        U.S. 369 ~(1964),
which would denv imoosltion        of the taxes because of the continu-
ing;exclusive     jurisdiction    of the United States over the lands
covered by this oil and gas lease.         This last mentioned case con-
sidered an oil and gas lease on lands in Louisiana.          It denied
authority     to the State of Louisiana to levy ad valorem taxes upon
pipelines     and other pers.onal property equipment used by a private
person who was lessee under an oil and gas lease covering lands
on which Barksdale Air Force Base was located and on which lands
the State of Louisiana had:ceded to the United States exclusive
jurisdiction,     except for right to execute    certain civil'and    crimi-
nal processes.      The deed to ,the United States was for a fee simple
estate in the lands.         This ease and our holding in this opinion
are distinguished      on the basis of the nature of th& estate granted
to a mineral lessee under an oil and gas lease in Louisiana and in
Texas.
         In Louisiana,  a mineral lease is held to be merely a con-'
tract which permits theme  lessee to ~explore for minerals on the
land of the lessor in consideration     of the payment of a rental
and/or bonuses.     It is well settled  that it is not in essence a
real rimht: it does not create substantive      real ri8ht8 in the land
leased.-   Tinsley v. Seismic Fxploratidns',   Inc., 117 So.2d 897, (La,
Sup. 1960 ; see also Summers, Oil'      d G     Permanent Edition   Vol.
lo, p. 470-485, set, 167, also at p"tgesa286g-303, sec. 132-136.
        The distinction   between the eases relied upon to support
our opd.ntnl'onand the ease of Humble Pipeline Co, v. Waggoner, supra,
is well stated in Kingwood Oil Company v. Henderson County &ard
of Supervisors,    367 S.W,2d 129 (Ky. Ct. of App. -- Court of last
       . .




Honorable    Robert   S. Calve&,'   Page 9 (M-109)


resort -: 1963), wherein the Court in'~oonsiderlng         S.R.A.,   Inc.
v. Minnesota, supra, sald:,~
            'We think there is sound, reason for saying
        that if the United States conveys away a por-
        tion of the territor       over which it has juris-:,
        diction     therd       e no'~reason for the juris-
        diction     to continue over that portion.      But
        the same is not true where the United States
        conveys some right less than a fee.          In that
        case valid reason may exist for a continued
        exercise     of federal  jurisdiction   overthe
        territory,"       (Emphasis by the court.)    (at p.
        132)
In that case, the mineral lease under the law of Kentucky is
held not to convey the equivalent        of a fee to the minerals with a
complete severance as in Texas.          See lA, Summers,011 and Gas,410,
Sec. 160.      The distinction    above drawn seems to be the basis on
which the United States Supreme Court distlngulshed            its holding
In S:R;.A:,:.,Incl,~'~v: Minnesota; 'supr$,'and, ite~~holdtn$~:in Humble
Pipeline Co. v. Waggoner; supra, made Inthe           latter   case-pages
   2   d 373       h    i the court distinguished     between a sale of
landa&er whi~he~~enUnited States had exclusive            jurisdiction    and
the lease of that property fo,r commercial purposes, or for farm-
ing, or for the conveyance of a mere right of way.
        The recent case of Adams v. Calvert,  396 S.W.28 948 (Tex.
SUD.  1965)
       - -. is also distinguishable in that the government had in
no-way terminated its jur?sdlct~ion over the reai estate,  and under
the terms of the cession deed by the State, the State remained
powerless to impose the taxes there involved.

                            SUMMARY
            The oil and gas lease executed by the United
        States covering lands over which it had exclus-
        ive jurisdiction,      except, forthe   right of Texas
        to execute civil      and criminal process,toa     pri-
        vate party    lessee,   subjected   the oil and gas
        produced,   other than the royalty payable to the
        United States as lessor,        to the oil and $as pro-
        duction   taxes Imposed by Articles       3.01 and 4.02,


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                                                                ,,;~..       .   *
                                                                (_       !




Honorable   Robert S. Calvert,       Page 10 (M-109)             *'


       respectively,  Title 122A, Taxation-Qeneral,
       Vernon's Civil Statutes,  and the regulation
       pipeline tax Imposed by Article  6032 of said
       statutes.
        -'~:The royalty interest payable to the United
       States is exempt from these taxes.




                         ,:'                           ey General of Texas
Prepared .by W. E. Allen
Assistant Attorney General
APPROVED:
O~IMIOH CCMHIT'TBE
Hawthorne Phillips, Chairman
Kern&B. Taylor, Co-chairman                  .I


Houghton Brownlee
Linward Shivers
Jack Goodman
Lewis Berry
STAFF LEGALASSISTART
A. J. Carubbi, Jr.




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