                                    The Attorney          General of Texas
                                                       May 2, 1984
    JIM MAlTOX
    Attorney General


    Supreme Cowl Building          Honorable Bob Bullock                  Opinion No. JR-150
    P. 0. Box 12546                Comptroller of Public Accounts
    Austin, TX. 76711. 2546        P. 0. Box 2243                         Re:   Taxability of sales of
    5121475.2501
                                   Austin, Texas   70767                  natural gas by a company to
    Telex 9101674-1367
    Telecopier   5121475-0266
                                                                          industrial consumers within a
                                                                          city under chapter 182 of the
                                                                          Tax Code
    714 Jackson, Suite 700
    Dallas, TX. 75202.4506
                                   Dear Mr. Bullock:
    2141742-6944

                                        You ask whether certain sales of natural gas by a company to
    4624 Alberta Ave., Suite 160   industrial consumers within a city should be taxed pursuant to chapter
    El Paso, TX. 799052793         182 of the Tax Code. The determination as to whether the sales at
    9151533-3484
                                   issue are taxable is a factual one. On the .basis of the facts which
                                   you have submitted to us, we conclude'that they should be taxed.
    -1001 Texas, Suite 700
     Houston, TX. 77002-3111            Section 182.022 of the Tax Code imposes a gross receipts tax on
    7131223-5666                   each utility company located inan incorporated city or town having a
                                   population of more than 1,000, according to the last federal census
    608 Broadway, Suite 312
                                   next preceding the filing of the report. Section 182.021 of the Tax
    Lubbock. TX. 79401.3479        Code defines "utility company" and "business" for purposes of this
    6061747-5236                   chapter:

    4309 N. Tenth. Suite S
                                                (1) 'Utility company' means a person who owns
    McAllen, TX. 76501-1665
                                             or OperateS a gas, SlsCtriC light, SlsCtriC power,
    512/662-4547                             or water works, or water and light plant used for
                                             local sale and distribution located within an
                                             Incorporated city or town in this state.
    200 Main Plaza. Suite 400
    San Antonio, TX. 76205.2797
    5121225-4191                                (2)  'Business' means the providing of gas,
                                             electric light, electric power,      or water.
                                             (Emphasis added).
     An Equal Opportunity/
     Affirmative Action Employer
                                        You have provided us with the following facts:

                                                A division of a larger division of the company
                                             in question (1) transports natural gas by a
                                             high-pressure pipeline into the Houston Ship
                                             Channel; (2) has a system of meters and lateral
P                                            lines off this pipeline, which it uses to deliver
                                             the gas under reduced pressure to industrial


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                                                                         ,


Honorable Bob Bullock - Page 2 (JM-150)




          consumers in Houston; (3) odorizes the gas under
          requirement of the Texas Railroad Commission; (4)
          has an industrial franchise agreement with the
          city of Houston to.sell gas to the city of Houston
          and industrial users within the city; (5) agrees
          as part of obtaining the Houston franchise that
          'It is understood that lawful power vested by law
          in the city to regulate all public utilities
          within the city within the limits of the
          constitution and laws and to require all persons
          or corporations to discharge the duties and
          undertakings for the performance of which this
          franchise was made, is preserved . . .'; (6) makes
          the sales under negotiated contracts rather than
          by published rate schedules but files rates with
          the city of Houston in accordance with the Public
          Utility Regulatory Act; (7) does not hold itself
          out as selling gas to residential consumers within
          the city of Houston: (8) sells gas to more than
          twenty '(20) industrial consumers in the city of
          Houston. In addition, the larger division sells
          gas in Texas to residential consumers in other
          incorporated cities and towns having populations
          of more than 1,000 and reports and remits tax
          under chapter 182 for these cities and towns.

     You wish to know whether, under these facts, such sales are
taxable.   At the outset we note that the gas industry is
conventionally divided into three distinct occupations: (1) severance
(Or production) and gathering; (2) transporting or transmission by
pipeline, and (3) local distribution. See Thompson v. United Gas
Corporation, 190 S.W.2d 504, 506 (Tex. Civ. App. - Austin 1945, writ
ref'd); Attorney General Opinion WW-1111 (1961).

     In Edd,ins-WalcherButane Company v. Calvert, 298 S.W.2d 93, 96
(Tex. 1957). the Texas Supreme Court declared that "gas works" for
purposes of article 7060, V.T.C.S., (the predecessor to chapter 182,
Tax Code) refers to ,either: "(1) an establishment in which gas is
manufactured, produced, or processed, or (2) a distribution system
Consisting of pipes through which the gas flows and is delivered to
the premises of consumers," (Emphasis added). The court held that a
butane distributor, delivering butane to the premises of its customers
inside the city limits by means of trucks, was not subject to the tax.

     In setting forth the scope of the statute, the Texas Supreme
Court declared:

          [ilt is expressly provided that the tax shall be
          levied only once on the same commodity, and that



                                p. 651
Honorable Bob Bullock - Page 3   (JM-150)




         where the commodity is produced by one person and
         distributed by another, the tax shall be paid by
         the distributor alone.      This indicates that
         facilities for the distribution of gas may
         constitute a gas works within the meaning of the
         statute even though the commodity is manufactured
         or produced by another.

Eddins-Walcher Butane Company v. Calvert, supra, at 95.

     Clearly, the operation at issue is not "an establishment in which
gas Is manufactured, produced or processed;" the issue is whether it
is "a distribution system consisting of pipes through which the gas
flows and is delivered to the premises of consumers." Specifically,
the issue to be resolved is whether the operation at issue is a local
gas distribution system and therefore subject to the tax or whether it
is a gas transmission system incidentally making industrial sales of
gas along its line. In our opinion, the operation at issue, while
bearing some of the usual indicia of a gas transmission system, can
more fairly be described as a gas distribution system for purposes of
this tax. It is therefore subject to the tax.

     In briefs submitted on behalf of the operation sought to be
taxed, it is stated that, while a substantial part of the operation's
business consists of selling gas in large quantities to industrial and
chemical plants located along Its lines, the majority of its business
consists of picking up and transmitting natural gas from the wellhead
and from gas gathering systems to the parent corporation's main system
transportation division. Further, it Is urged that, under the given
facts, the operation is substantially similar to the operation which
was held to be non-taxable in Attorney General Opinion WW-1111 (1961).
We disagree. We conclude that Attorney General Opinion WW-1111 was,
in part, incorrectly decided.

      In that opinion, this office concluded that a company engaged in
certain activities was not operating a "gas works . . . for local sale
and distribution" and was therefore not taxable. Those activities
were : (1) maintaining high pressure pipelines crossing into the city
to the point of delivery; (2) having no network of mains and laterals
by means of which the gas Is delivered; (3) not odorizing the gas; (4)
obtaining no franchise from the city; (5) submitting to no local
regulation of its rates and policies; (6) making the sales at issue
competitively upon negotiated contracts rather than by published rate
schedules; and (7) in no manner holding itself out as a public utility
to serve individual consumers.

     The operation at issue here does bear some of the indicia of a
transmission company.    It too makes its sales under negotiated
contracts, rather than by regulated rates. It transports gas into the



                           p. 652
Honorable Bob Bullock - Page 4   (JM-150)




Houston Ship Channel by means of a high pressure pipeline and sells
gas at reduced pressure to industrial consumers. It does not hold
 itself out as selling gas to residential consumers within the city; it
 is not a "public utility" in the sense in which the phrase is commonly
understood. On the other hand, it bears several features of a
distribution system. It has a system of meters and lateral lines off
 the pipeline which it uses to deliver gas , although it does not have
an extensive grid network which is characteristic of a distribution
 company delivering gas to residential consumers. The "industrial
 franchise agreement" by means of which the city granted to the company
 the authority to lay mains and laterals under city-owned and
 controlled right-of-way provides that the company sell gas to the city
and to industrial users within the city. The agreement does not
purport to require the company to sell gas to anyone who wants it, but
.the agreement contains no limitations on the number of industrial
 consumers to which it sells. The company sells gas under contract to
more than twenty industrial consumers within the city.

     Attorney General Opinion WW-1111, cites Dallas Gas Company v.
State, 261 S.W. 1063, 1069 (Tex. Civ. App. - Austin 1924, writ ref'd),
in support of the proposition that the sort of business sought to be
taxed "is usually recognized as a public utility over which
municipalities . . . exercise powers of regulations." Such reliance
is misplaced. The language from the Dallas Gas case upon which
Attorney General Opinion WW-1111 relies did not define the scope of
the statute.    It was argued in the Dallas Gas case that the
predecessor statute to chapter 182 of the Tax Code violated article
VIII, sections 1 and 2 of the Texas Constitution because the statute
imposed one rate of taxation upon businesses operating in cities of
over 25,000 population and a lesser rate in cities of population of
10,000 to 25,000. Section 1 of article VIII of the Texas Constitution
requires, in pertinent part, that "[tlaxation shall be equal and
uniform." Section 2 provides in pertinent part that "[a]11 occupation
taxes shall be equal and uniform upon the same class of subjects
within the limits of the authority levying the tax." In support of
the proposition that sections 1 and 2 were violated, appellant cited a
Kentucky case in which the Supreme Court of Kentucky struck down an
occupation tax imposed upon real estate agents classified on the basis
of the population size of the cities in which they engaged in
business. The language from the Dallas Gas case upon which Attorney
General Opinion WW-1111 relied was employed by the court for the sole
purpose of distinguishing the occupations of real estate agent and
operator of a gas works.       Citing the "peculiar nature of the
occupation involved" and the principle that acts of the legislature
should be upheld unless in clear violation of the state or federal
constitution, the court upheld the tax.

     While it is certainly the case that the tax reaches distributors
engaging in business properly characterized as a public utility, it



                            p. 653
Honorable Bob Bullock - Page 5   (JM-150)




does not follow that such tax can be imposed on only those
distributors who sell to residential consumers. The act itself
defines "utility company" to refer to, inter alia, a "gas . . . works
used for local sale and distribution." Tax Code 1182.021. The
definition imposes no restriction on the imposition of the tax, which
would limit it only to those distributors selling to residential
consumers.    Moreover,   the   Texas  Supreme Court    has   defined
"distribution" in the following way, and clearly did not limit its
reach to those selling gas to residential consumers:

          This term as used does not mean the transfer of
          the possession of gas, by means of the pipe line,
          to a single purchaser where such purchaser is the
          only customer to whom the gas company sells gas In
          the city. It means the transfer of oossession of
          gas to- various individuals or concerns in the
          city. Any other construction of the term would,
          in our opinion, involve a departure from the
          legislative intent. (Emphasis added).

Utilities Natural Gas Co. v. State, 128 S.W.2d 1153, 1155 (Tex. 1939).

     The operation here sought to be taxed clearly transfers the
possession of gas to various individuals or concerns but without
selling gas to residential consumers. However, were we to hold that
it is necessary, for the imposition of this tax, that the business
taxed be a "public utility," we can say that the operation sought here
to be taxed may properly be so characterized. See Tax Code
9182.021(l) (definition of "utility company").         The so-called
"franchise agreement" which the company executed with the city clearly
provides that

         it is understood that lawful power vested by law
         in the city to regulate all public utilities
         within the city 3 within the limits of the
         constitution and laws, and to require all persons
         or corporations to discharge the duties and
         undertakings for the performance of which this
         franchise was made, is reserved . . . .

Houston, Texas Ordinance No. 69-1929, 613 (1969). Moreover, while the
operation does not serve residential consumers, the franchise
agreement arguably permits the operation to serve both the city and
any and every industrial consumer within the city. Such an operation
could fairly be denominated a "utility company" for purposes of this
tax.

     It is further urged, again in reliance upon Attorney General
Opinion Ww-1111 that the primary occupation of the taxpayer is the




                            p. 654
Honorable Bob Bullock - Page 6   (JM-150)




crucial test for application of the statute. In support of this
assertion, Attorney General Opinion Ww-1111 cites Attorney General
Opinion WW-909 (1960). Again, such reliance is misplaced.           In
Attorney General Opinion WW-909, the issue was whether an Air Force
base located within the limits of an incorporated city which purchased
gas through a single meter located at the base boundary and consumed
all of the gas except for a certain amount which was sold to private
concessionaires using gas on the base was in the business of operating
a "gas works" for purposes of the predecessor statutes to chapter 182
of the code. The opinion concluded that it was not:

         Construing   the    two   cases    together   [the
         Eddins-Walcher case and the Utilities Natural Gas
         co. case], it appears that to come within the
         6s     of [chapter 182 of the Tax Code], it is
         necessary that a tax payer be engaged in the
         business of operating, managing or controlling an
         establishment in which gas is manufactured,
         produced or processed for local sale and
         distribution, or in the business of owning,
         operating, controlling or managing a distribution
         system consisting of pipes through which gas flows              ?
         and is delivered to the premises of consumers.
         The Air Force Base is not in either such business.
         In all but a few instances, the Air Force, or one
         of its components, is the consumer of the gas.
         (Emphasis added).

Id. at 3. The opinion finally concluded that the tax liability should
rimposed,   not on the Air Force, but rather on the gas company which
sold the gas to the base.

     The opinion did not hold that, since the Air Force base is not
engaged in the primarybusiness of distributing gas, it cannot be
considered to be a "gas works" for purposes of the tax even though it
made incidental sales to concessionaires on base. Rather, the opinion
held that the gas company was the distributor and that the air base
was the ultimate consumer. A similar rationale was employed and
result reached in an earlier opinion, Attorney General Opinion ~~-810
(1960). In that opinion, it was held that a corporation distributing
gas to a gas distribution system   owned and operated by the city of
Houston, the latter being the final distributor of the gas that it
received, is  not liable for a tax on such sales. The opinion
concluded that the city, as final distributor and not as consumer,
would be liable for the tax were it not expressly exempted by the
statute by virtue of the fact that it is a political subdivision. The
gas company was not the actual final distributor; hence, it was not
liable for the tax. Likewise, in Attorney General Opinion WW-909 the     -.




                            p. 655
Eonorable Bob Bullock - Page 7 (JM-150)




Air Force base was held to be the consumer and not the distributor.
Accordingly, it was not liable for the tax.

     We therefore conclude that the tax does not, as Attorney General
Opinion WW-1111 suggests, reach only those whose primary business is
manufacturing and distributing gas. The tax reaches even incidental
sales by a company whose primary business is transporting the gas. To
the extent of conflict, Attorney General Opinion WW-1111 (1951) is
hereby overruled. Accordingly, we conclude that the operation sought
to be taxed can fairly be described as engaging in the distribution of
gas and receipts from the sale of its gas are therefore subject to the
tax imposed by chapter 182 of the Tax Code.

                             SUMMARY

             Under the facts presented, receipts from the
          sale of natural gas to industrial consumers in a
          city are subject to the tax imposed by chapter 182
          of the Tax Code.




                                       JIM     MATTOX
                                       Attorney General of Texas

TOM GREEN
First Assistant Attorney General

DAVID R. RICHARDS
Executive Assistant Attorney General

Prepared by Jim Moellinger
Assistant Attorney General

APPROVED:
OPINION COMMITTEE

Rick Gilpin, Chairman
Jon Bible
Colin Carl
Susan Garrison
Jim Moellinger
Nancy Sutton




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