Untitled Texas Attorney General Opinion ( 1984 )

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
p. 650
,
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
p. 656