                  EA             SEP      ENEiR!A&

                          OF    TEXAS
QERALDC.MANN             AUSTXNI~TEXAS



   Honorable George H. Sheppard
   Comptroller of Public Accounts
   Austin, Texas
   Dear Sir:
                                  Opinion No. O-3516
                                  Fe:* Rulesconcerning and
                                       construction of, Art, II,
                                       H. B. 8, 47th Leg., 1 41
                                       (Art,.7@+7b, V.A.C.S.P
                                       Bbmmonly known as the fiatural
                                       @as Production Tax Law.
   This is in answer to your request for ouropinion on a construc-
   tion of certain features of Article II of House Bill 8, ,Forty-
   seventh Legislature, 1941, (codified as Article 7047b of Vernon's
   Annotated Revised Civil Statutes of Texa$commonly   known asthe
   "natural gas production tax" law.
   Ordlnarlly in writing an opinion we first state the questions
   asked, and then we discuss the statutes and the rules of law
   concerning the questions and~conclude with our answers.  But,
   in this opinion there are twelve questions and the answer to
   each depends upon a lengthy analyzation of a statute, and there-
   fore we will first state the statute involved and analyze it to
   some extent and then state each question and follow it by an
   answer.
   The pertinent parts of said Article II of House Bill 8, Forty-
   seventh Legislature, 1941, (Art. 7047b, V.A.C.S.) reads-as
   follows:
   "Sec. 1 (1) Thereti:hereby levied an occupation tax on the-
   business or occupation oilproduoihg gas within this State,
   computed as follows:
   "A tax shall be paid by each producer,on the amount of gas
   produced within this State, and on the amount of gas produced
   in another State and Imported into this State upon the first
  sale thereof in intrastate commerce; equivalentsto five and two
  ~tenths (5.2) per cent of the market value of all gas Including
   caslnghead gas produced and saved within this State, and of
   all gas sold if produced In another State and imported into
   this State, at the market value thereof, as and when produced,
   or as and when imported.
                                                                 .




Honorable George H. Sheppard, Page 2, O-3516


"The market value of gas produced in another State and Imported
into this State shall be the average value at the mouth of the
well of like gas soldW.thin this State as revealed by reports
made to the Comptroller for the quarter immediately preceding
the quarter In which such gas was imported and sold. Provided,
however, that the amsunt of the tax on sweet and sour natural
 as shall never be less than eleven one hundred fiftieths
711/150) of one (1) cent per one thousand (1,000) cubic feet on
sweet and sour natural gas sold or produced and saved In this
State, and not thereafter lawfully injected into the earth in
the State of Texas, for the following purposes; (a) storage
thereof; (b) recycling; (c) repressuring; (d) lifting oil and
not thereafter; (e) lawfully vented or flared in connection
with the production of oil.
"The market value of gas produced in this State shall be the
value thereof plus any bonus, or premium, or anything of value
paid therefor, or any sum of money that such gas will reasonably
bring if produced and sold In accordanoe with the laws, rules
and regulations of this State, provided that notwit,hstandlng'any
other provision herein to the contrary, where gas is processed
for its liquid hydrocarbon content and the residue gas is returned
by recycling methods to the same gas-producing formation under-
lying the land from which the gas Is reduced, the taxable value
of such gas shall be three fifths (3P5) of the gross value of all
products extracted, separated and saved from such gas,
'In case gas is sold for cash the tax shall be computed on the
producers' gross receipts of such sale; and in case the whole
or a part of the consideration for the sale of gas is any por-
tion of the products extracted from such gas, the tax shall be
computed on the gross value of the products received plus all
other things of'val.uereceived by the producer, except in case
of gas processed by recycling operations.
'In determining the market value of gas for the purpose of
computing the tax due, there shall be excluded the value of
residue gas lawfully injected into the earth in the State of
Texas for the following purposes: (a) storage~thereof; (b)
represurrlng; (c) Lifting oil; and also (d) gas lawfully vented
or flared in connection with the production of oil,;save and
except however, if any g,as so injected into the 'earth is sold for
such purposes, then the market value of the gas so sold shall
not be excluded in computing the tax. All liquid hydrocarbons
that are recovered from gas by means of a separator or by other
nonmechanical methods shall be taxed at the same rate as oil as
levied by Article 1 of this Act.
"(2) The tax hereby levied shall be a liablltty of the producer
of gas and it shall be the duty of each such producer to keep
Honorable George H. Sheppard, Page 3,;O-3516


accurate records in Texas of all gas produced, making monthly
reports under oath as hereinafter provided.
 . . .
Y(6) .The tax herein levied shall be borne ratably by all
interested parties, including royalty interests; and produders
and/or purchasers of gas are hereby authorized and required to
withhold from any payment due interested parties the proportion-
ate tax duesnd remit the same to the Comptroller.
'Sec. 2 (1) For the purpose of this Act 'producer' shall mean
any person owning, controlling, mananging, or leasing 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
,includeany person owning 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.

 . . .
"(12) For the purpose of this Article, by the term "cubic feet
of gas' is meant volume of gas expressed in cubic feet and
computed at a base p,ressureof four (4) ounces per square inch
above the average barometric pressure of fourteen and four tenths
(14.4) pounds per square inch, a standard base and flowing
temperature of sfxty (60) degrees Fahrenheit; correction to be
made for pressure according to Boyle's Law, and for specific
gravity according to test made by,the balance method.
'Sec. 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 producerthereof
and taking delivery thereof at or near the premises where
produce,d,
         shall collect said tax imposed by this Article from the
producer. Every purchase including the first purchaser and the
subsequent purchaser, required to collect any tax under this
Article, shall make such collection by deducting and withholding
the ammount of such tax from any payments made by such purchaser
to the producer, and remit same as herein provided.
"Sec. 3. The Comptroller shall employ auditors and/or other
technical assistants for the purpose of verifying reports and
investigating the affairs of producers and/or purchasers to
determine whether the tax is being properly reported and paid.
He shall have the power to enter upon the premise,sof any tax-
payer liable for a tax under this Article, and any other premises
necessary in determining the correct tax liability, and to
examine, or cause to be exsmined, any books, or records of any
person, subject to a tax under this Article, and to secure any
  Honorable George H. Sheppard, Page 4, O-3516


  other information
               - . .directly
                       _ . _ or indirectly
                                  _         concerned
                                            _         in the
  enforcement of'this Article, and to promulgate and enforce,
  according to law, rules and regulations pertinent to the
  enforcement of this Article, which shall have the full force
  and effect of law. Before any division or allotment of the
  occupation tsxcollected under the provisions of this Article
  is made, one half (l/2) of the one (1) per cent of the gross
  amount of said tax shall be set &de In the Treasury for the
 use of the Comptroller in the administration and enforcement
  of the provisionsof this Article; and so much of the said
  proceeds of one ,half (l/2) of one (1) per cent of the occupation
  tax paid monthly as may,be needed in such administration and
  enforcement is hereby appropriated for such Rurposes, subject
 ,however to appropriation by the Legislature.
  'I A statute' says Bish. Cr. Law, 1 291, 'is simply a fresh
  particle of,legal matter dropped Into the previously existing
  oceap of law'" State v. Rechnitz, 20 Mont. 488. To our way of
  thinking, this particular particle, to-wit, said Article 704713,
  even though it be fresh, has certainly muddied the waters of the
  ocean of law with its ramifications and complications on market
  value. The plain term "market value" has been the subject'of
  controversy and discussion by the courts for many years, but we
  ,are,not confronted with'a lain form of "market 'value!here
  because the definition of berm     in this case is adorned with
  an intricate set'of provisos and qualifications that excel all
 'previous legislative Ingenuity. In this opinion we will attempt
  to unrave~land explain the Legislature's involved phraseology
  that goes to make up the definition of 'market'value' and that
  levies a tax calcuiated onthe same.
  We are,only going to deal In this opinion with gas produced in the
  State of Texas.~
  #This statute levies an oocupation tax on the business of produe=
   ing gas. (See the recent ,caseof Canadian RIverGas Co. v.
   Bivins, No. 7657, decided June 11, 1941, by the Supreme Court of
, Texas, construing the former natural gas production,tcyclaw;
   and see also the case of Trustees of Cook's Estate v. Sheppard,
  .8g S. W. (2d) 1026, construing the gross production oil tax law.)
  The'smount of the tax is a sum equivalent to,5.2 per,cent of the
  ,Jmarket value" of,the gas "as'and when produced."
   "Market value" is deflned'inthe statute by a definition, with
  various;kinds 'of provisos, qualifications, exceptions; and
  ,exc,eptionsto the exceptlons;,and in order,to give us a clearer
   set of rules by which to decide your questions we have analyzed
   the 'mamvalue'     provisions of the statute and are stating
Honorable George Ii.Sheppard, Page 5, O-3516


them in rules, in somewhat different order from that In which
they arexed     in the statute, as follows:

1. GENERAL DEFINITION OF MARKET VALUE. "The market value of gas
. . .shall be the value thereof plus any bonus, or premium, or
anything of value paid therefor,-or any sum of-money 'that such
gas will reasonably bring if produced and sold in accordance
with the laws, rules and regulations of this State, . .'

                                                PT WHEN GAS IS
                                                The amount of
                                                r be less than
                                                weet and sour
natural gas .     produ,cedand saved in this State, and not
thereafter lawfully injected into'the earth in the State of
Texas for the following purposes; (a),storage thereof; (b)
recycling; (c) represurrlng; (d) lifting oil,and not thereafter;
(c) lawfully vented or flared in connectiqn with the production
of oil."

3. PROVISO WHEN GAS IS SOLD FOR CASH. ,"In case (gas is sold
for cash the tax shall be cfmputed on the producer's gross
receipts of such sale . . .
4.  PROVISO WREN CONSIDERATION IS PART OF EXTRACTED PRODUCTS,
           GAS-Y                                        . "fn
case the whole or a part of the consideration for the sale of
gas is any portion of the produets extcact,edfrom such gas,
the tsx shall be computed on the gross value of the products
received ~1~s all other thinns.of value received'by the
producer,*EXCEPT in case of gas processed by,recyciing opera-
tions ."

5.                                     IQUID HYDROCARBONS AND
                                       DS   'Wheregas is
processed for itsliquid hydrocarbon con&t    and the residue
gas is returned by'recycling methods to the ssme gas-producing
formation underlying the land from which the gas is produced,
the taxable value of such gas shall be 3/5th of the gross valu$
of all products extracted, separated, and saved from such gas.


    mCERTAIN:'In            determining the market value of gas
_ _ .. there shall be excluded the value,of residue gas lawfully
injected into the earth in the State of Texas for the following
purposes: (a) storage thereof;,(b) represurring; (c) lifting
oil; and also (d) gas lawfully vented or flared in connection
with the production of oil; save and except however, if any gas
Honorable ffeorgeH. Sheppard, page 6, O-3.516


50 Injected Into the earth is sold for such purposes, then the
market value of the gas so sold shall not be excluded In com-
puting the tax.

7’.   QUALIFICATION TO THE AFFECT THAT LIQUID HYDROCARBONS




We will now proceed to state and answer each of your twelve
questions.
Your first question is as follows:
"A producer, 'A', also owns the pipeline to which a well Is
connected, and his payment for royalty is on a long term con-
tract for l/8 at a set price per MGF. Does this contract
constitute a sale of the l/8? Is the taxable market value of
the 8/8 t,o~becomputed as eight times such pay for l/8?"
It appears to us that the taxable value of this gas is con-
trolled by rule 1 (General Definition of Market Value) and
rule 3 (Proviso When Gas is Sold for Cash), stated above.
Rule 3 (Proviso When Gas is Sold for Cash) states clearly that
itapplies when gas is sold for cahh. However, we believe it
would only apply to bona fide;cash sales, that is, it would not
apply;if the sale was made at a price lower than usual in order
to de,fraudthe State or for any other unfair purpose. For
ex&le,   If a sale was between two affiliated corporations con-
trolled by the same interests through stock ownership, or between
parties of any kind actiq in collusion, and the sale was not an
 arm's length transaction , rule 3 would not apply. If the
producer's gross receipts derived from a bona fide cash sale are
either more or less than the market value as defined in rule 1
(General Deflnitioribf Market Value); nevertheless the value
prescribed in said rule 3, to-wit, the gross receipts from the
cash sale, would be the value upon which,the tsx should be based.
We also believe that rule 3 (Proviso When Gas is Sold for Cash)
would only apply to cash sales of gas made as and when said gas
is produced, that is, at the,time and at or near the place of
production.
Is any of the gas sold for cash in this case, that is, Is there
any gas to which rule 3 (Proviso When Gas is Sold for Cash)
applies? We think that the 1/8th royalty gas Is sold for cas.h
as and when said gas is produced, and that the taxable value
Honorable George H. Sheppard, Page 7, O-3516


thereof should be determined under rule 3. (We assume that
the lessee is paying a cash royalty as the gas is produced.)
Our conclusion is based on the theory that under the terms of
the contract, which we assume is an ordinary gas lease of the
type containing the provisions you describe, the lessor has
title to 1/8th of the gas in the ground , and the lessee has
title to 7/8ths of the gas in the ground. Sheffield v. Hogg,
124 Tex. 290, 77 S.W. (26) 1021. When said gas is produced
title passes in said 1/8th royaltygrom the lessor to the lessee,
and the lessee pays for the same at an agreed price per M.C.F.,
regardless of the market price of other gas in the same vicinity.
In other words the lessee has contracted to purchase the lessor's
1/8th royalty gas at a set price, instead of merely selling
said 1/8th royalty gas alongwtth h3.s.7/8thsof the gas to a
third person at a fluctuating market price and accounting to
the lessor for the price received from the third person.
Rule 3 (Proviso When Gas is Sold for Cash) can only be used to
compute the tax on that part of the gas that is actually sold
for cash. If only l/&h of a given quantity of gas is sold for
cash, 'andrule 3 is applicable, as in the case under consideration,
said rule 3 can only be used to compute ~the tax on said 1/8th of
the gas, and the tax on the remaining 7/8ths should be computed
by some other rule.
In the<case you ask about there is no sale of the leasee's
original 7/8ths of the gas for cash at the time and place of
production, but we understand that said gas Is put in the pro-
ducer's pipe line and sent away, and therefore said rule 3
(Proviso When Gas is Sold for Cash) should not be applied,to
said 7/8ths. We believe that the only one of the above stated
rules that is applicable to the lessee's original 7/8ths of the
gas is rule 1 (General Definition of Market Value).
Said rule 1 (General Definition of Market Value) consists of
two measures as to what'"market value' shall be. The flrat
measure s'ayithat 'market value . ~.~   -,&all be the valuZ%it?reof
PIUS'    e.nybonus, or premium, or,anything of value";'and the
 sec,ondmeasure says that "market value . s      shall be .     any
 sumof money that such gas will reasonably bring if :prod;ced
 and sold in accordance with the laws, rules and regulations of
-khin’
 --_-- . '~tn~te
         ---_-   _ .I"
               . _ ~   Of course. both measures cannot be aoplied
   t the same time     We believe that the Legislature intended
 Ehat when rule l'is applicable the first measure of said rule 1
 ~~~'Sfld~~p~~,,'ff~~a~~t~~~s~~d,a~i~~~ ;;$iz;AE;=&the
unde&tood, or sold~and ~paid,'fo$at its value pIus a bonus,
premium, or anything of vaiue; and that the second measure of
said 'rule 1,should apply if itwas not sold, for example, used,
                                                                  L




Honorable George h. Sheppard, Page 8, O-3516


or if it was sold at a price less than the amount prescribed
in the first measure. If the gas is sold away from the well,
and rule 1 is applied, the cost of transportation to the place
of sale must be taken into consideration in determining value at
the well, because the tax is based on the value of the gas as
and when produced.
 Of course, an,application of said rule 1 (General Definition of
 MarketValue) calls for a determination by the Comptroller of
'Public Accounts of "market value" that is, the Comptroller of
 Public Accounts must examine all &ailable evidence including
 sales of other gas in the same gas field, that show'or tend to
 show 'market value" and,from that evidence make a findin of
 fact as to whether or not the gas has been sold for Its f?
                                                          value"
 or what the gas,would reasonably bring if it had been produced
 and sold in accordance with the laws, rules and regulations of
 this State,.
Our answer to your first question is that under the (lease)
contract there is a sale of the 1/8th royalty gas at the time
and place of production from the lessor to the lessee; and the
taxable value of said 1/8th royalty gas, which was sold for
cash, should be computed under rule 3 (Proviso When Gas is Sold
for Cash) on the basis that the gross receipts derived from such
sale constitute the taxable value. The taxable value of the
7/8th of the gas originally belonging to the lessee (producer)
should be computed under rule 1 (General Definitionof Market
Value) as stated above.
                _'
Your second questionis as follows:
"Facts the same as in the first question, but the contract
price advances l/2 cent per MCG every five years. Does
taxable value increase the same?"
The same reasons that we have given abqve in answering your
first question apply in giving an answer to this,question. We
assume,in this question, the same as we assumed~in answering the
first question, that the lessee ispaying a cash royalty as the
gas is produced. In the first question the'cash paymentsper
M.C.F. for the royalty gas were the same throughout the term of
the contract, but in this case the cash,payments for the royalty
gas advance 1 2 cent per M.C.F. every five,years under the terms
of the (leasei contract.
We believe that the 1/8th royalty gas in this case, the same &s
in the first question, is sold for cash as and when produced,
and that the taxable value thereof should be determined under
rule 3 (Proviso When Gas is Sold for Cash), As in the first
Honorable George H. Sheppard, Page 9, O-3516


case, the cash sale is from the lessor to the lessee,
(producer) :~';at the price agreed on in the (lease) contract,
which #price in this;case advances l/2 cent each five years.:
It,.maybe that market value, as that term is,commonly understood
or as that term is defined in rule 1 above, is higher or lower
than the (lease) contract price, but nevertheless, the contract
price being a cash sale, said rule 3 (Proviso:When Gas is Sold
for Cash) controls. Therefore, when the l/2 cent increase per
M. C. F. on royalty payments goes into effe&t,,it being a cash
sale under our interpretation, the gross receipts of said sale
likewise increase by that amount and the tax also increases to
that extent.
Our answer to your second question is 'yes'.
Your third question ,is as follows:
"Facts the same as in the first question but "A" actually buys
a small smount'of gas from outsiders at 3#   at a time when
his royalty contract is 4+#, and the average values in the same
field are about 46."
The taxable value of this as is controlled by rule 1 (General
Definition of Market Value7 and rule 3 (Proviso When Gas is Sold
for Cash), the same as under your first question. The fact that
the producer is buying a small amount of extra gas at a price
one cent lower than his royalty contract requires him to pay, and
one half cent lower than the average value of gas In the field,
does not within itself mean that he is entitled to pay taxes on
a lower taxable value. The price for which a person sells gas
is not alwaysits "market value" as that term is commonly under-
stood or as it is defined in rule 1 (General Definition of
Market Value); and likewise for the same reasons, the price for
which a person buys gas is not always its "market value". Of
course, every sale that is made is admissible for oonsideration as
evidence on the question of market value in that vicinity, but
the market value under rule 1 is not controlled by one, or even
two or three, isolated sales. In the case you ask about, the
producer might be buying the gas below the marketvalue defined
in rule 1 and payingthe royalty owners more than the market
value defined in said rule.
Our answer to your third question is the same as our answer to
your firs& question. The taxable value of the 7/8ths of the
  as belonging to the producer should be computed under rule,1
7 General Definition of Market Value). The taxable value of the
1/8th royalty gas, which was sold for cash, should be computed
under rule 3 (Proviso When Gas ,is Sold for'cash). Th;,,foregolng
answer is in regard to the gas produced by producer     , and
                                                                  .




Honorable George Hi.Sheppard, Page 10, O-3516


we are not concerned in this question with the tax on the gas
purchased by "A".
Your fourth question is as follows:
"Facts the ssme as in the first question, but the producer pays
l/8 royalty at 4# and actually sells the gas produced at 3-$#.
Is 7/8ths taxable at 334 and l/8 at,4#?"
 We assume that the sale for 33 cents,was 34 cents per M.C.F. for
 cash as or when produced. The discussion under the three pre-
 vious questions applies to the answer to this question. How'ever,
 under the facts in the previous questions only 1/8th of the gas
,was sold for cash and the remaining 7/8ths was put into the
 producer's,pipeline; but, under this question all of,the gas is
 sold for'cash as and,:when produced,,l/8th by the royalty owner
 at 4 cents per M.C.F. (the sale being from the lessor to the
 leassee), and,7/8ths by the producer at 3% cents per M.C.F. We
 think that the taxable value of allof the gas in this case is
 controlled by rule,3 (Proviso When Gas is Sold for Cash).
 Therefore, the taxable value of said gas is an amount equal to
'the gross receipt-sreceived for said cash sales of the same, 4
 cents per M.C.F.~forthe 1/8th royalty and 3+ cents perM.C.F.
 for the producer's 7/8ths.
Cur answer to your fourth questi.on,is'yes'.
Your 'fifth question is as follows:
!A pipeline operator gave (1) one-half interest ,in forty acres
surrounding each of ten wells; (2) and one-half interest In each
well to a party who blocked up the acreage, who In turn contracted
with the pipeline to settle on all gas produced for the life of
;thewells at one-half of 2$?per MCF; and (3) the pipeline opera-
tor also advanced the money to drill the wells and (4) agreed
not to connect any~wells other than the ones in this deal, there-
by insuring the taking of larger amounts of gas than Is being
taken per well by surrounding pipelines, who all pay royalty at
4# per MCF, while land owners'in the vicinity are paid royalty of
l/8 of 4#, or l/2$ per MCF.,In the case mentioned, the royalty
figures l/2 of 2# or 1Q flat rate per MCF. This results in
actual payment of twice as much per MCF as royalty, but one-half
as much per MCF claimed taxable value. How should the value
be computed in this case, assuming that the contracts mentioned
herein were all entered into about ten years ago; also, that
 since that date no other wells have been connected? Does any
of the foregoing constitute a bonus or premium as of and after
May 1, 19411"
Honorable George H. Sheppard, Page 11, C-3516


It is clear that the facts stated in connection with this
question do not bring it within rule 4, rule 5, rule 6 or
rule 7, stated above. ~Rule 2 (Provise for Minimum Value)
providing that the tax must not be less than 11/150ths of'1 cent
per M.C.F. in certain cases, applies here. Dc'esrule 1 (General
Definition of Market Value) or rule 3 (Proviso When Gas is Sold
for Cash) also apply?
We will first consider whether or not rule 3 applies. Is this
a cash sale?, No. We will not,go into the intricate details of
this transac,tion,because it will suffice to say that it is
apparent that the owner of the act in the ground is disposing
of his gas forconsiderations that are not entirely cash. His
interest in the gas was given to him in the first place, and
no doubt in considerationof that gift he is selling his gas for
a lesser price to t,hepipeline operator who gave him his royalty
and/or leasehold interest than he would have sold and said gas
for to a stranger. This brings us to the conclusion that rule
1 (General Definition of Market Value) controls the value to
be placed on the gas involved in this question.
Our answer to your fifth question is that the taxable value of
all of the gas involved in this question should be computed
under rule l,(General Definition of Market Value). We do not
believe that any of the factors you mention constitute a bonus
or premium of sufficient certainty that you can consider them
such fbr the purpose of calculating value under rule 1; and
 robabl you should use the second measure ,in rule 1 in dzter-
*market        value'   This of course will involve a finding
of fact by you, that is, 'a finding as to what 'sum of money .
such gas will reasonably bring if produced and sold in accord-' *
ante with the laws, rules and regulations of this State."
Your sixth question is as follows:
"A producer's contract with a purchaser is on~l6.4 lbs.
pressure base. Should he,report this badto 'the Comptroller or
correct same to'l4.65 lbs?"
Psragraph'(l2) of Section 2. provides as follows:
YFor the purpose of this Article, ,by the term 'cubic feet of
gas' is _meant volume of gas expressed,.;n
                              - -         cubic feet and
computed at a base pressure OS sour (g),punces 'per square Inch
above the average barometric pressure of fourteen and four
tenths (14.4) pounds per square inch, a standard base and
flowing temperature of sixty (60) degrees Fahrenheit; correction
to be made'for pressure according to Boyle"s Law, and for
specific gravity according to test made by the balance method."
Honorable George H. Sheppard, Page 12, 0-351.6


We believe that said paragraph (12) of Section 2, contemplates
that a cubic foot o'fgas shall be considered as having "a
pressure of four ounces per square inch above the average baro-
metric pressure of 14.4 pounds per square inch," which is the
same as a pressure,:of 14.65 pounds per square inch. Four ounces
equals .25 pounds, and therefore .25 pounds above 14.40 pounds
equtils14.65 pounds.
Our answer to your sixth question is that the producer should
report the cubic feet of gas produced on the basis of a pressure
of 14.65 pounds per square Inch.
Your seventh question is as follows:
"A producer also owns the ipeline connected to a well. His '
royalty contract is on 16.8 lb., but at some distant point he
sells gas at a pressure base of 14.65,resultingin the sale of
about 1200 cu. ,,ft.for every 1000 cu. ft. paid as per royalty
contract. Should he report on 16.4 lbs. or on 14.65 lbs., and
is said gain taxable?"
 The reasoning and the answer in connection with this question
 is the same ,as in the sixth question. As this tax is based on
 the value of gas, we do not see how the amount of tax would be
 changed by changing the method of measurement. If a given
 quantity of gas consists of nine hundred billion molecules it
 seems to us that the value of that gas would be 'the same whether
 it was in a larger tank under a pressure of 14.65 pounds per
 square inch or in a smaller tank under a (greater and more
 condensed) pressure of 16.4 pounds per square inch. If a bale of
cotton weighs 500 pounds when it comes from the gin its contents
-and value still remain the same if it ,is later compressed at a
 commercial compress into a smaller bale.
The tax under this statute is levied 'at the market value
thereof (of the gas), as and when produced."Therefore, the
producer should make his report to the Comptroller, showing
the amount produced, that is, the cubic feet,produced, calcu-
lated at a pressure of 14.65 pounds; and he should:pay the tax
on its value at the moment it was produced. If the amount of
gas produced is reported at the time of production as 1000
cubic feet on a basis of a pressure of 16.4 pounds per square
inch, and its taxable value (as determined under rule 1 above
or whichever rule is applicable) per cubic foot at the time
,of production is "y"; and later if that same gas is allowed
to expand into a larger container of approximately 1200 cubic
'feet so that its pressure is less and its taxable value per
cubic foot is also less, to-wit 'z", we see no reason why the
taxable value of the whole quantity each time is not the same.
Honorable George H. Sheppard, page 13, O-3516


p$s  formula in such a case is true; 1000 x' "y" = 1200 x
      In other words 1000 x "y" equals the value of that
p&icular   gas when l!reduced and 1200 x '2" equals the
value of that particular gas'later, and they both equal each
other.
Our answer to your seventh question,is the same as to the sixth
question, that is, the producer should report the cubic feet of
gas produced on a basis of a pressye of 14.65 pounds per square
inch. In answer to your question;         is said gain taxable?"
We reply that there Is no gain In vaiu;t,'andvalue is what the
tax is based on.
Your eighthquestion is as follows:
'In this last case, if the final sale was in another state,
would the answer be aifferent?"
This is a tax on the business of producing gas. It is a tax
on production. The tax acarues when the $85 is produced, and
the tax is measured by its "market value, as defined in the
statute, 'as and when produced." This is not a sales tax or a
proceeds tax, although the definition of market value in the
statute makes the market value of the gas as 'and when produced
depend in some instances on the manner of disposal of the gas.
The tex accrues as and when the gas is produced, and If the gas
Is produced in Texas it does not make any difference whether
said gas is finally sold in Texas or finally sold in another
state. Of course, the Comptroller can look at and consider
the ultimate sale and transportation costs in another state,
if necessary, in determining the market value,of the gas as
and when produced in Texas.
Cur answer to your eightiquestion is "no."
Your ninth question is as follows:
"A producer delivers all of the.gas from a well to a recycling
plant under a contract whereby the producer is paid 50 per
c<nt of the value of the products recovered. The operator of
the recycll&lant   does not return all of the residue to the
same formation, but part of it is sold to a pipeline. Is said
sale taxable? If so, is it taxable at 60 per cent or 100 per
cent of the,value?"
This is nota sales tax. It is an occupation tax on the busi-
ness of producing gas, calculated on the "market value' of the
 as 'a,sand when produced" under a statutory definition of
f+
 market value." Therefore, the sale of the gas:you ask about
is not taxable, but the productimsaid      gas is taxable In an
                                                               ‘




Honorable George Ii.Sheppard, Page 14, O-3516


amount calculated under one or more,_ofthe seven statutory
rules outlined above.
Which of the above stated rules apply in this case?, We think
that rule 5 (Proviso When Gas is Processed for Llqu~idHydro-
carbons and Residue Returned by Recycling Methods) applies to
that proportion of the gas (as it comes out of the ground) the
residue of which Is returned by recycling  methods to the ssme
producing formation underlying the land from which the gas Is
produced; but we do hot think that said rule 5 applies to the
remaining proportion of the gas, that is, the proportion of the
gas (as it comes out of the ground) the residue of which is
sold and delivered to a pipeline and not returned to the forma-
tion. We assume that all of this gas is first processed for
its liquid hydrocarbon content. Said rule 5, after describing
the gas to which it applies, to-wit, said gas processed~for
liquid hydrocarbons and returned to the formation, says: "the
taxable value of such gas shall be 3/5ths of the gross value
of all products extracted separated, and saved from such gas."
We believe that the word 'such" in said rule 5 clearlnits
the gas, on which the valuxall     be calculated under the 3/5ths
of the value of the products method, to that proportion of.the
gas (as it comes out of the ground) the residue of which is
 returned by recycling methods to the same gas-producing forma-
tion."
Of course, in applying rule 5 (Proviso When Gas Is Processed
for Liquid Hydrocarbons'and Residue Returned by Recycling
Methods) to that gas, the residue of which is returned by
recyc.lingmethods to the same producing .formationunderlying
the land from which the gas is produced, the Comptroller again
must become a fact finder and ascertain the gross value of all
products (such as methane, ethane, propane, butane, pentane,
hexane and heptane, which make up gasoline,,kerosene, liquified
gas, etc.) extracted, separated, and saved from such gas,*
because the woads of the statute provide that market value In
such a case is 3/5ths of the gross value of said products.
(At this point we cannot refrain from saying paranthetlcally

        We are advised that the following chemical products can
be obtained from natural gas:
1. Through oxidation: water gas, hydrogen, methly alcohol,
    acetone, ormalde de, and bakelite.
2.  Through p&ol;;i,s~cracking): acetylene, acetalde;~~~harin,
    butadiene, ru er, benzene, resorcinol, toluene,
sylene carbon black, ink, hydrogen, ammonia, ethylene, ethyl
alcohol ethylene chloride, ethylene glycol, propylene, propyl
alcohol: butylene, butyl alcohol, anthracene, alizarin, nap-
thalene, indigo.
3,. Through chlorination: methyl~chloride, methylene chloride,
chloroform, carbon tetrachloride;
.




    Honorable George H. Sheppard, ,Page-15, O-3516


    that it was an enormous task under the former "natural gas
    production tax" law, passed by a former Legislature, for the
    Comptroller to ascertain the 'market value of every foot of
    gas produced from over 48,ooo.gas producing wells in Texas, but
    the Legislature is no longer content with him merely ascertain-
    'ing "market value" of each cubic foot of the gas produced, but
    he must now ascertain it under an involved rule, and in many
    instances he must extend-his energies and ability and ascertain
    the gross value of the methane, ethane, propane, butane, pentane,
    hexane and heptane, making up the produced gas. We are.reminded
    of this statement of Rehoboem in the Bible: "And now whereas
    my father hath chastised you with whips, but I will chastise you
    with scorpions." I Kings,  12:ll)
    'What about the remaining proportion of the gas, that Is, that
    proportion of the gas (as it comes out of the ground) the
    residue of which is sold and delivered to a pipeline and not
    returned to the formation? We believe the taxable value of
    that proportion of the,gas should be ascertained under rule 4
     (Proviso When Consideration is Part of Extracted Products, if
    the Gas is not Processed by a Recycling Operation), because
    this proportion of the gas (as it comes out of the ground), the
    residue of which is sold to a pipeline, clearly comes within
     said rule because the consideration for its sale is the value of
    a portion of the products extracted from such gas. Although
    the producer receives.50 per cent of the value of the product
     extracted instead of the product itself, mink     that it was
     intended that rule 4 should include cases of this kind.
    Our answer to your ninth question Is "no", that is, said sale
    is not taxable. No sale is taxable under this statute. The
    production of that proportion of the gas the residue of which,
    is sold to the pipeline is taxab1.eunder rule 4; and the pro-
    duction of that proportion of the gas the residue of which is
    returned by recycling methods to the formation is taxable under
    rule 5.
    Your tenth question Is as follows:
    "The facts are the same as in the ninth question, except that
    part of the residue is used to drill another well. If taxable,
    how valued?"
    We assume that said gas is used as fuel in the drilling operations
    of the other well. ,It is our belief that the same reasons and
    the same answer applies In this case as in the case involved in
    the ninth question. We see no difference in the gas the residue
    of which is sold to a pipeline, as in the above question, and
    the gas the residue of which is used in drilling another well,
    as in thisquestion.   This gas was clearly "produced and saved,"
                                                                .




Honorable George H. Sheppard, Page.16, O-3516


' and a tax on the production thereof, based on the "market
value" (as defined by statute)'"as and when produced," is due.
That means a "market value" before the hydrocarbons are extracted.
Our answer to your tenth question is that the production of that
proportion of the gas the residue OS?which is used to drill
another well is taxable under rule 4.
Your eleventh question is as follows:
"A producer delivers all of the gas from a well to a recycling
plant under a contract whereby he is paid 50 per cent of the
value of the liquid hydrocarbons extracted. Is residue gas
used as fuel in the operation of the recycling plant taxable if
the producer is paid nothing by the operator? If so, to whom?"
We are advised by you that the residue gas which is not used as
fuel in the recycling plant is returned to the same gas-producing
formation underlying the land from which the gas is produced.
For the reasons stated in answering the ninth and tenth questions
above, rule 5,(Proviso When Gas is Processed for Liquid Hydro-
carbons and Residue Returned by Recycling Methods) applies to
that-proportion of the gas (as it comes;out of the ground) the
residue of which is returned by recycling methods to the same
producing formation underlying the land from which the gas Is
produced.
Which rule applies to that proportion of the gas (as it comes
out of the ground) theresidue of which isused as fuel in the
operation of the recycling plant? You ask if the residue gas so
used is taxable. Of course the residue alone Is not taxable,
because the tax is on the production of the gas 'as and when
produced," that Is, at the time of production. The tax is not
on a residue that is obtained by processing after production,
but the tex is on the production of the gas in its natural state
as it comes from the ground, calculated on its "market value"
under the market value rule stated in the statute which rule in
some instances takes into consideration the value of the products.
Under the same reasons we have given in answering the ninth and
tenth questions :above, we see no reason why rule 4 (Proviso
When Consideration is Part of Extracted Products, if Gas is not
Processed by a Recycling Operation) does not apply to that pro-
portion of the gas you ask about, to-wit, that proportion of the
gas the residue of which is used as fuel in the operation of the
recycling plant. Said gas is clearly "produced and saved"; and
part of the consideration for the sale of the ssme is a portion;
or the value of the portion, of the products extracted.
Our answer to your eleventh.questio'nis that residue gas used
I   :




        Honorable George H. Sheppard, Page 17, O-3516


         as fuel in a recycling'plant is not taxable; but, under the
         facts you give,,the production of that proportion of the gas
         that comes outof the ground the residue of which is so used
         as fuel I taxable, and its market value as and when produced is
         calculate: under rule 4.
        Your twelfth question is as follows:
        ,"A producer sells and delivers all of the casinghead gas from a
        well to the ,operatorof a gasoline plant under a contract whereby
        the producer is paid 20 per cent of the value of the gasoline
        extracted, plus.5 per cent of the net proceeds from the sale of
        residue gas. Is residue gas used as fuel in the operation of
        the gasoline plant taxable if the producer is paid nothing by
        the operator? If so, to whom?"
        ,You have advised us that none of the gas in this case is returned
         to the ground, that Is, no recycling takes place.
        We believe that the answer to this'question is controlled
        entirely by rule 4. (Proviso When Consideration is Part of
        Extracted Products, if the Gas is not Processed by a Recycling
        Operation). Again we wish to,point out that this is not a sales
        tax or a transfer tax, butthis is a tax on production; and
        therefore~the statute does not tax gas after it has been processd
        or tax residue gas, but it taxes the,production of gas at its
        market value,'as and when produced,' that is, when it comes out
        of the ground; and market value "as and when produced" is
        determined by the rules prescribed in the statute, which rules
        in some instances take 'into consideration the value of the
        products. The statute gives us rules for ascertaining "market
        value," providing that different rules shall be applied under
        different circumstances. Rule 4 applies : when "the whole or a
        part of the consideration for the sale of gas is any portion of
        the products extracted from such gas,        except in case of
        . . . recycling operations." We think'said,rule 4 clearly
        applies in this case. Although the producer receives 20 per cent
        of the value of one of the products extracted, plus other
        proceed-     this case, instead of the product itself, we think
        it was intended that the rule should include cases of this kind.
        Rule 4 says that in this kind of a case "the tax shall be comput-
        ed on the gross value of the products received plus all other
        things of value received by the producer.~" What tax? The tsx
        on the production of all of the gas produced, that is, the total
        cubic feet that came out of the well.
         Our answer to your twelfth question is that residue gas used as
         fuel in a gasoline plant is not taxable; but, under the facts
         you give,'the production of all of the casinghead gas sold and
         delivered 30 the operator of a gasoline plant, under a contract
                                                               ?   ,   .




Honorable George Ii.Sheppard, Page 18,    O-3516


whereby the producer Is paid 20 per cent of the value of the
gasoline extracted, plus 50 per cent of the proceeds from the
sale of the residue gas, is'taxable, and the value of all r
saMgas   as and when produced should be computed under rul"e4~.
In conclusion we desire to say that we regret that we have been
unable in this opinion to answer each of your questions
categorically. We have.done our best, and that consists of give
ing you some general rules concerning this law. We feel that we
are compelled to advise you that under this statute it will be
necessary for you to decide in the.case of each of the 48,000
gas .produclngwells in Texas which of the provisos, qualiflca-
tlons and exceptions of this statute ~apply to the ,particular
well, and then you must ascertain the factsnece    ary to deter-
                                                 "a rule to be
mine market value In accordance with the particular
applied. It is difficult to administer accurately and with
equality any tax law, even though It is ,a clear,and concise tax
law; and therefore, we realize that in the administration of
this particular statute with all of its intricate complications
it will be almost humanly impossible to avoid imposing Injustices,
hardships and heavy burdens on some taxpayers, and 'at the same
time permit others to esc'apetheir just tax,llablllties, even
though you put:forth a super effort to enforce this law. ,It is
always the hope of the tax gathering official, the average tax- I
payer, and the citizen in general that the tax laws be clear,
concise and easy to understand; but such persons must be con-
tent with whatever tax statutes the legislative branch of the
government sees fit to impose upon them. Therefore it is the
duty of the proper taxing officials of this State to proceed
with the Herculean task'of administering and enforcing this
law. We hope this opinion will be of help tq'you, and we,
assure you that we,will assist you in construing this statute
in the future in every way pos~sible.
                                         Yours verytruly
                                  ATTORWEXGENRRAL OF TEXAS
                                  a/ Cecil C. Rotsch

CCR:LM:CGE                                   Cecil C. Rotsch
                                                   Assistant
APPROVED OCT. 16, 1941
s/ Grover Sellers'
FIRST ASSITANT
AlTOR@Y GENERAL
This opinion'considered and approved Jn limited conference
                                                  1
