Untitled Texas Attorney General Opinion ( 1959 )

E ORNE GENERAL
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Awsniu 11. TExas
WILL WILSON
AITORNEY GENERAL
April 10, 1959
Hon. V. L. Ramsey, Chairman Opinion No, W-592:
Revenue & Taxation Committee
House of Representatives Re: Constftntionality of R.Bi
AyAAn, Texas No, 43, 56th Legi.slature:,
levying a tax to be known
as, the Weverance Benefi-
Dear Mr. Ramsey: ciary Tax. n
Your committee has reque.sted the opinion of this,
office as to, the constitutionality of House Bill: No, %j:,
levying a tax to be,known as a severance beneficiary tax,
particularly with reference to the const~ltutionality of the
bill insofar as it affe~ct,s ges transmis,aion lines, ,both~ long
lines and those involved in dnterstate commerce.
House Bill No, 43. is Xeng~thy, consisting of X-2
page,s, and most of t;he prov5sions therein cont~ained are WILL-
lar in form. to those contained ,fn Article 70&7b, Vernon%
Civil Statutes,, which provi,des for an occupation tax on the
production of,natural gas in Texas. Therefore,, the question
of the. constitutionality of House Bi,ll: No. 4-3, wfld be,con-
fined to those sections of th,e~act. providing for the taxati~on
of the production of dedicated ga.s to be. paid by the s,ever-
ante beneficiary.
Sectio~n l(1) of the act provides that’ in addition
to the, oc.cupation tax o,n ,producers of natural gas now levied
under the provisions of Article 704,7b, V.C,S. there~ fs lev-
ied an occupation tax on the oocupation or pr i vilege of ob-
taining the production of dedicated gas withinthis State, and
on the business or occupation of producing such gas, to, be
known as the “Severance, Beneficiary Tax, )I the tax being based
on a percentage of the market value of the gas, produced at the
well.
Section IL&) states that the tax herebv levied is
“an occupation tax on the occupation or privilege,of obtaining
the production of ‘dedicated gas” and on the business or occu-
pation of producing such gas as a ‘severance beneficiary,l as
those terms are defined herein.”
Section l(5) provides that the tax shall be a liabil-
ity of the producer of the gas, but if produced for or sold to.
Hon. V. L. Ramsey, page 2 (ww-5921
a severance beneficiary other than the producer, the tax
shall be naid bu the severance beneficiary. but that the
liability-of the producer shall end only Lion the payment
of the tax by the severance beneficiary, and until such
time both the producer and the severance beneficiary shall
be jointly Uable for payment of the tax. Where gas is
sold to a severance beneficiary and reported to the Comp-
troller of Public Accounts “as provided in ‘the act,: the’.pro-
ducer shall never be required to’ pay:the tax unless the
severance beneficiary fails to do’ so or is held~,,by ‘a ,final
court order notto be liable~ therefor. ,,
Section l(6) provides that the first purchaser
of gas shall pay the’tax on the gas so purchased,.and Un-
less he is the severance beneficiary, the tax so paid shall
be d,educted from the paynient due the’ producer.
Section 2 of. The act, defining terms, is identical
with the provisions of Section2, Article 7047b, with the
following exceptions: ”
“(1) For the purpose of thins Act, ‘producer’
shall mean any person (other.than a non-operating
royalty owner) owning, controlling, managing, or
leasing any gas well,or land,producing gas, and
any person who produces in any manner any gas by
taking it from the earth or waters in this State.
TV
(2) ‘First’ rurchaser I shall mean’any person
purchasing gas from the,,producer ,or from a sever-
ante beneficiary. In the event there is no’ ‘first
purchaser I or severance beneficiary, then the pro-
ducer shall, be deemed thepurchdser and pay the
tax levied by this Act.
“(3 1 ‘Dedicated, Gas ’ shall isxrraW all gas
produced and saved in this State’covered by any’
purchase contract, option, “ore agreement. by which’
gas is to be produced for, ‘sold to, or used by a
severance beneficiary; as herein, defined, OF gas
produced and saved by the producer thereon when-
there is no other severance beneficiary.
ll(4j ‘Severance ~Beneficiary’ ,shall mean ,any
‘person for’whom gas is produced and to whom it’is
first sold by the’ producer: under a ~dedication con-
tract or’ under any other agreement of sale made
prior to the production thereof under which a per-
son acquires dedicated,gds reserves in this State
or exclusive or beneficial rights in gas under the
Hon. V. L. Ramsey, page 3 (WW-592)
earth or waters of this State. A person purchas-
ing gas pursuant to such a contract shall be
deemed to be engaged in obtaining the production
of dedicated gas in this State, which is a valu-
able occupation or privilege for which this tax
is levied; provided, however that a producer pro-
ducing gas for his own use or for sale and not
subject to,a contract as described above, shall
be considered a severance ,beneficiary for the pur-
pose of this Act.".
Construing the foregoing definitions with the pro-
visions of Section 1, sub-sections (1) through (81, it is
apparent that House Bill No. 43 is an act levying an occupa-
tion tax upon the occupation or privilege of obtaining the
production of'gas produced and saved in Texas, which is sub-
ject to any purchase contract, option, or agreement, under
the terms of which the gas is to be produced for, sold to, or
,used by any person for whom the gas is produced and to whom
it is f1rs.t sold by the producer under the contract or agree-
ment of sale made prior to .the production of the gas, and by
which such person acquires gas reserves or the exclusive or
beneficial rights in gas under the earth or waters of this
State.
Under the terms of House Bill No. 43 a person for
whom such,gas is produced, or who has the' right to produce
or acquire such gas, is engaged in a valuable occupation or
privilege which constitutes the basis for the levy of the tax
upon such occupation or privilege. If the severance benefi-
ciary upon whom the tax is primarily levied is also the pro-
ducer, then the tax so levied is a tax levied upon the produc-
tion of such gas in addition to the original production or
severance tax levied under the provisions of Article 7047b,
V.C.S.
The tax levied under House Bill No. 43 is a privi-
lege or occupation tax upon the producer of natural gas cal-
culated according to,the value of the gas so produced at'the
well HoDe Natural Gas C . Hall 274 U.S. 284 '(1926) and
sinci it does not enter y&t: interitate commerce until It has
been produced and the tax imposed, thereon is only in respect
to the uroduc Eion. no discrimination against interstate com-
merce is involved: Oliver Iron Co. v. -Lord 262 U.S. 172
I;;;;;; Utah Power & Light Co. v. Pfost? 288 U.S. 165, 182
. The tax is an occupation or privilege tax which falls
alike on those engaged in interstate commerce or in intrastate
commerce, or both, and therefore does not violate the Commerce
clause of the Constitution of the United States. Coverdale v.
Piueline Co., 303 u.s._604, 610 (1938).
Hon. V. L. Ramsey, page 4 (W- 592)
Since the incidence of the tax is based solely upon
the occupation or privilege of the production of “dedicated
gas” from the earth or waters of this State by a %everance
beneficiary,” as those terms are defined, irrespective of the
ultimate disposal of the gas so produced--whether in intra-
state or interstate commerce--it is purely local in nature and
therefore not violative of the Commerce clause of the Federal
Constitution, Hone Natural Gas’Co. v. Hall, suora.
House Bill No. 43 is not subject to the constitutional
objections raised in Michigan-Wisconsin Pipeline Co. v. Calvert,
347 U.S. 157 (1953), wherein the Supreme Court of the United
States held that the “gas gathering” tax was violative of the
Commerce clause of the Federal Constitution for the reason that
the taxable event or incident which formed the basis for the
tax was “not levied on the capture or production of the gas but
rather on its taking into interstate commerce after production,
gathering, and processing. . .I’ Nor is the tax levied by House
Bill No. 43 subject to the additional objection stated by the
Court in the “gas gathering” case that it would permit a multi-
ple burden upon interstate ~commerce,~ since the taxable incident,
i.e. the production of the gas, is a purely local incident
which cannot be the subject of repeated tax exactions in other
states, Coverdale v. Pipeline Co., 303 U.S. 612.
In Section l(5), which provides that the tax levied
upon the occupation or privilege of obtaining the production of
dedicated gas should be paid by the severance beneficiary, it
is further provided that:
II. . . In no event shall the severance-bene-
ficiary deduct, charge or collect the tax hereby
levied from his payment s to the producer, and no
contract or agreement heretofore or hereafter made
shall be Interpreted as requiring the producer to
pay any portion of the tax which is the liability
of the severance beneficiary under the provisions
of this Act. It is hereby declared to be against
the public policy of this State, and to contribute
to economic and actual..waste ,and to,~be an unlawful
limitation upon the conserva i,ion and taxing powers
of the State of Texas, for any contract to require
the producer to pay the severance beneficiary tax
hereby levied when there is a severance beneficiary
as defined herein other than the producer himself j
it being the intention of this Act that the pro-
ducer shall be required to pay the tax hereby lev-
ied only if the gas is produced for his own use or
independent sale and not under any prior contract
to produce for sale to another, or if the severance
. -
Hon. V. L. Ramsey, page 5 (WrJ-592)
beneficiary is declared by final court judgment
not to be liable for the tax hereby levied. . .~ .I1
Based upon, the above quoted provisions of Section
l(5), declaring it to be the public policy of this State and
to contribute to economic or actual waste and a limitation
upon the conservation powers of the State for any contract to
require the produce,r to pay the tax leviedupon the severance
beneficiary the power of the State to enact legislation for
the prevent I on of economic and physical waste of natural gas
as against the contention thatsuch legislation violated the
due nrocess and eaual Drotection clauses of the Fourteenth
zndment of the Con;t$Mon of the United States, was upheld
Cities Service Ga v. Peerless Oil & Gas Co.
35, 220 P.2d 279. 289 (19501,aff'd 340 U.S. 179. 1852?:9$::*
The Oklahoma statute provided that the .Oklahoma Corporation
Commission was empowered to fix the price paid to the produc-
ers for gas taken at the well, because the taking of gas at
the prevailing price resulted in both economic and physical
waste of gas and loss to the producers and loss to the State
in gross production taxes and the constitutionality of such
statute was sustained by the Supreme Court of Oklahoma and the
Supreme Court of the United States.
The provision that the severance beneficiary may
neither deduct, charge, or collect the tax from his payment to
the producer, and that no contract or agreement heretofore or
hereafter made shall be interpreted to as to require the pro-
ducer to pay all or any part of the tax for which the severance
beneficiary is primarily liable under the provisions of the act,
does not impair the obligation of a contract in violation of
Article I. Section 16. Constitution of Texas. or Article I.
Section 16 Constitution of the United States, Henderson Co. v.
Thomuson, 300 U.S. 258, 266 (1936).
The tax imposed~ by House Bill No. 43 is a production
or severance tax based upon the occupation of producing gas
from the earth and waters of this State prior to its entry into
either intrastate or interstate commerce, and irrespective of
the ultimate destination of the gas so produced, the fact that
it may be subsequently transported through pipelines which are
engaged in either interstate or intrastate commerce, or both,
does not affect the constitutionality of the act itself.
It is the opinion of this office that the provisions
of House Bill No. 43 which levy an occupation tax upon the occu-
pation or privilege of obtaining the production of dedicated gas
within this State, and on the busi-less and occupation of produc-
ing such gas to be paid by the severance beneficiary or the
Hon. V. L. Ramsey, page 6 (WW-592)
producer thereof, do not violate the due process and equal pro-
tection clauses-of Article I, Sections 16 and.19, Constitution
of Texas,and Section I of the Fourteenth Amendment to the Con-
stitution of the United States, or impair the obligation of
contracts in violation of Article I, Section 16, Constitution
of Texas, and Article I Section 10,' Constitution of the United
States. Since the tax i s levied upon the production of gas
'within the State of Texas, the fact that when produced such gas
may be transmitted through nieelines for final disuosition in
either interstate or intFas%aie commerce does not Violate Arti-
cle I, Section 8, Clause 3, the Commerce clause of the Consti-
tution of the United States.
SUMMARY
House Bill No. 43 which levies an occupation
tax on the occupation or privilege of obtaining
the production of dedicated gas within this State,
and on the business and occupation of producing
such gas to be paid by~the severance beneficiary
or the producer thereof, does not violate the due
process and equal protection clauses or impair the
obligations of contracts under the provisions of
the Constitution of Texas and the Constitution of
the United States, nor does it violate the provi-
sions of the "Commerce clause" of the U.S. Consti-
tution.
Yours very truly,
WILL WILSON
;;-&$JJofy=&
C. K. Richards
CKR:wb Assistant
APPROVED:
OPINIONCOMMITTEE
Geo. P. Blackburn, Chairman,
Fred Werkenthin
John Reeves
Jack Price
PEVIEWED
FOR THEATTORNEY
GENERAL
BY: W. V. Geppert