Hon. Robert S. Calvert                      Opinion   No. V-879
Comptroller   of Public Accounts
Austin, Texas                               Re:   The basis for computation
                                                  of the occupation tax on
                                                  business  of producing gas
                                                  by Union Producing Com-
                                                  p-y.

Dear Sir:

              Your opinion    request   dated May     19, 1949,      is as follows:

            “Please advise      me with reference          to United Gas
      Pipe Line Co.-

              A. If the tax under Article  7047b should be com-
              puted at 5;2% of the total amount of money paid
              to the producers  as set out in sub-sections 1 and
              2 of Section 1.

              B. br if the condensate recovered    should be taxed
              at the same’rate as oil, as set out in sub-section  3
              of Section 1.
              ...
                    . . 0

              ‘“Also advise me if ~your answer        is the same under
       the terms of the Processing    Contract        of Chicago Corpo-
       ration. ”

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

              “Section 1. (1) There is hereby levied an occupa-
       tion tax on the business  or occupation of producing gas
       within this State, computed as follows:

              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 . . .
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Hon. Robert   S. Calvert,   Page   2 (V-879)



             “(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
      all cases where the whole or a part of the consideration
      for the sale of gas is a portion of the products extracted
      from the producer’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,     includ-
      ing any bonus or premium;     . . .

             “(3) All liquid hydrocarbons   that are recovered
      from gas by means of a separator      or by other non-
      mechanical   methods, incidental to the production of
      said gas, shall be taxed at the same rate as oil as lev-
      ied by Acts 1941 Forty-Seventh    Legislature   Chapter 184,
      Article I, Section 1.” (Emphasis    added.)

              In 1945, Section 1 of Article   7047b, V.C.S.,  with regard
to the taxation of liquid hydrocarbons     recovered  by non-mechanical
means, was amended by adding the words “incidental to the produc-
tion of said gas. ” Acts 45th Leg. 1945, Ch. 269, p. 423. Although
the Legislature   gave no indication of the meaning to be accorded
this wording, we cannot assume that the Legislature         would do a uses-
less thing. Therefore,    giving the words used their usual and com-
mon meaning, in order for liquid hydrocarbons        to be taxed at the
same rate as oil (4 l/8%)     they must be recovered     as an incident to,
or pertaining to, or in connection with, the actual production       of the
natural gas by the producer.

              After careful study of the contract in question (Skelly
No. 1002) it is clear that under the contract the various producers
own, operate, and equip the gas wells.     Production    of the natural gas
is completed,    the sale is consummated,   and the title to the natural
gas and all products passes to the buyer at the well-head.        Paragraph
4 of the contract, at page 9, provides in part:

             “In addition to the above equipment to be installed
      by Seller, Seller agrees,   at its expense, to make such
      other necessary    and reasonable   connections   or changes
      in connections as may be required to enable Buyer to
      connect its gathering lines and equipment to each well
      covered by this contract, and each such point of connec-
      tion to a well shall be a delivery point hereunder,     at
      which point the title and possession    of Seller in and to
      the natural gas Xiid-other products sold to Buyer under
      this contract shall pass to and vest in Buyer.”
Hon. Robert   S. Calvert,   Page 3 (V-879)




             The taxpayer (United Gas Pipe Line Company) makes
the following statement at page 5 of the memorandum  submitted to
the Comptroller:

             YJnited Gas Pipe Line Company purchases       the
      entire production of gas and liquid hydrocarbons     at the
      mouth of the well from the producers.     Title passes at
      that point and the ownership is thereafter      the United
      Gas Pipe Line Company who has bought the production.”

             Under the facts presented,     the sale is made at well-head
and title passes at that point.    The production of the gas is completed
upon delivery by the producer into the lines of the purchaser.       The
separators,   meters and other equipment located near the wells are
owned and operated by the purchaser.        The separation of the ~conden-
sate at the well location is made for the purposes of measuring        the
number of cubic feet of gas produced and determining        the content of
condensate in the natural gas in order to arrive at the consideration
to be paid the producers    under the formula set out in the contract.
After this initial separation   of the condensate and the measurement
of the gas produced from each well, the condensate is again commin-
gled with the gas and transported     with the gas through the gathering
lines of the purchaser   to the plant proper for separation of the con-
densate and extraction and processing      of the natural gasoline.

              In answering this question, we assume that the producer,
in consideration    for the sale of the natural gas, has been allocated
a fair share of the total actual production which was marketed by
the buyer at its fair market value.       Admittedly,  for tax purposes,
the pr~oducer and purchaser      can make any sort of a contract for the
sale of the natural gas based on any sort of a formula as long as it
is an “arm’s    length” transaction    and the contract sales price includes
everything of value received by the producer including any bonus or
premium.     The formula adopted in the contract by the producer and
purchaser   has for its purpose that of determining       the amount to be
paid the producer.     It is expressed    in the terms of a percentage   of
the value of the liquids separated and processed        from the total nat-
ural gas produced by each well.        In this case (Skelly Oil Company’s
W. F. Beall Unit No. 1 T) approximately         59% of the total value of
the liquids allocated to the unit are paid as “royalty” to the producer
by United Gas Pipe Line Company.

              Since this is a sale for cash, the market value of the g,as
should be computed on the producer’s      gross cash receipts.  Thus
the taxable value of the gas as produced will be the sum of the fol-
lowing .items:
                      .f-.                                                       .




Hon. Robert   S. Calvert,    Page 4 (V-879)




              (I) The amount received for the sale        of the gas
       at the well-head at 4$ per m.c.f.

              (2) The amount received by the producer or
       seller for the sale of the liquid hydrocarbons extract-
       ed, processed  and sold by the buyer as determined by
       the contract formula.

             It is therefore our opinion that the producer should be
taxed at the rate of 5.2% of the total “value” received for the sale
of his product.

              Your second question concerns       the computation of the
tax under the terms of the submitted Processing          Agreement    be-
tween the Chicago Corporation       and the producers     of natural gas in
the Carthage Field.      Under the terms of the submitted Processing
Agreement,    the producer drills, equips, and operates the well.          The
producer measures       the volume of gas produced with his own equip-
ment and delivers     the gas to the processor’s     intake lines located at
the plant site designated the delivery point.      The producer is allo-
cated a portion of the total plant products based on a formula which
has as its basis the percentage     which the producer’s      total theoret-
ical production bears to the total theoretical      liquid hydrocarbon
content of all the gas delivered    to the plant.   The theoretical    liquid
content of the gas produced by each well, or unit, per thousand cu-
bic feet is determined     by tests made by the processor       every six
months,‘using    special testing apparatus,

               The processor    (Chicago Corporation),     acting as an agent
under the contract, processes       the natural gas for the producer.      In
consideratiorrfor    his services    in processing   the gas, the producer
assigns the agent a percentage        of the products extracted from the
gas produced.     This percentage      of the products becomes~the    absolute
property bf the processing      agent when actually separated and ex-
tracted.   If the producer &es      not elect to take his share of the prod-
acts in kind, the processing      agent is authorieed to sell the producer’s
portion on the same terms and for the same price as it sells its own
share, deducting the leading oosts and other actual costs incurred
in marketing the products.

              The contract does not provide for any separation      of the
liquids except at the plant (with the exception of the tests made peri-
odically to determine   liquid content).    Any non-mechanical   separa-
tion is made by the processor     at the plant. After careful considera-
tion.of this contract it is our opinion, assuming    a bona fide sale at
“arm’s   length,“ that the taxable value of the gas is the total amount
of money received by the producer for the sale of the gas computed
at the rate of five and two-tenths    (5.2) per cent of such value.
I       .


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                H4n.   Robert   S. Calvert,   Page   5 (V-879)



                                                      SUMMARY

                               The producers   of natural gas under the submitted,
                        contracts are liable for gas production taxes computed
                        at the rate of 5.2 per cent of the gross cash receipts,
                        since none of the liquid hydrocarbons   are recovered   by
                        non-mechanical    means incidental to the production ef
                        the gas. Art. 7047b, V.C.S.

                                                                 Yours    very   truly

                                                       ATTORNEY         GENERAL      OF TEXAS




                                                       BY        6-f&
                                                                  Frank Lake
                                                                   Assistant

                FL/mwb


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                                                       ATTORNEYGENERAL
