Hon. George H. Sheppard
Comptroller of Public Accounts
AustFn, Texas                    Opinion No. V-335
                                 Re:   Whether residue gas whfch
                                       is originally used by the
                                       first producer for IIft-
                                       ing oil and which is then
                                       reproducted and sold should
                                       be included in calculating
                                       the tax imposed by Article
Dear Sir:                              7047b, R.C.S.
        You have requested an opinion from this Department as
to whether or not the tax Imposed by Article 7047b, R.C.S.,
"accrues on that portion of the residue gas that was originally
used for lifting oil, then reproduced and reprocessed and part
of said residue sold." We quote the following detailed facts
from the data which accompanied your request:
        "A gas producer, 'A' delivers its gas as pro-
    duced to 'B' who owns a natural gasoline plant
    and the gathering lines and restdue return lines
    ?ncident thereto. The gas flows through the gas-
    oline plant owned by 'B' where the liquid hydrocarbons
    are extracted. A portion of the residue gas is re-
    turned to 'A' for use in lifting oil and a portion
    is sold to 'B' at the outlet side of the gasoline
    plant.
        'I
         IA', the producer, uses the returned residue
    gas for lifting 011 and upon its reemergence from
    the oil well flares a part of this gas and again
    delivers a part of the gas to '3' for transmission
    to and treatment in Its gasoline plant. This gas,
    which has been used for lifting oil and which
    again passes through the gasoline plant Is then
    sold to 'B' at the outlet side of the plant.
        "Mathematically the problem Is as follows:
    "Disposition of Gas When Produced:

    "Formation Gas Produced by 'A', the producer, from
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Hon.   George R. Sheppard, page 2,         V-335


       his wells which is gathered by 'B', the
       processor, (Gasoline Plant Operator)        1,000 M.C.F.
       "Residue Gas returned to Producer 'A'
       and used by 'A' for lifting oil.                 600 M.C.F.
       (Taxpayer contends that done of this
       600 M.C.F. is taxable as it is exclud-
       ed from the gas subject to tax by Law).     -
       "Residue from original production sold
       by PrOdUC8r 'A' to Producer IBt                  400 M.C.F.
       (Taxpayer contends that this 400 M.C.F.
       is the amount sub'ect to tax at well-
       head market pricef .
       'Disposition of Residue Gas Returned to Producer:
       "Residue Gas Returned to Producer 'A'
       and used for lifting oil as above               600   M.C.F.
       "Reproduced and separated from oil as
       it Is lifted (Same amount as Injected
       into well, as above).                            60~ N.C.F.
       'Gas flared as it is reproduced                  250 M.C.F.
       "Returned to 'B' and to Gasoline Plant
       vhere liquid hydrocarbons are extracted
       and the gas then Is sold to 'B' (State
       contends that this 350 M.C.F. also is sub-
       ject to tax).                             3           M.C.F.
       "(Shrinkage or line loss and value of liquid hydro-
       carbons extracted are not taken into account in this
       statement; nor is the theoretical sale of royalty
       interest to the producer considered as these points
       are not here in iSSUs.)
       "The specific questlon is whether or not this re-
       maining gas, 350 M.C.F., referred to above, which
       after its use for liftlng oil and again passing
       through the Gasoline Plant and then sold, is sub-
       ject to a production tax under Article 7047 (b),
       Revised Civil Statutes."
        The occupation tax on th8 business of producing gas is
levied against the producerand not the purchaser thereof who
merely acts as withholding agent for the State and collects the
tax from the producer by deducting the amount thereof from the
purchase price. W.R. Davis, Inc. v. State, 142 T. 637, 180 S.W.
Hon. George H. Sheppard, page 3, V-335


2d 429. Section 2a of Article 7047b, R.C.S., makes the tax
the primary liability of the producer although it is also a
liability upon the first purchaser and/or subsequent pur-
chaser.
        The tax thus ultimately paid by the groducer, IS, by
Section 1 of Article 704?b, "on the amount of gas oroduced and
saved equivalent to five and two-tenths (5.2) per cent of the
market value thereof as --
                        and when produced.!' (Emphasis added
throughout this opiniq Section 1 also provides as follows:
        "In calculating the tax herein levied, there
    should be excluded: (a) gas injected Into the
    earth in this state, unless sold for such purpose;
    (b) gas produced from 011 wells with oil and law-
    fully vented or flared; and, (c) gas used for llft-
    ing oil, unless sold for such purpose."
         It is noteworthy that each of the foregoing exclusions
relate to a use from which the producer has realized no Lmmed-
iate profit. This is In line with the other provisions of
Article 7047b, which, when read as a whole, reveals a legisla-
tive Intent to tax the business of producing gas, i.e., pro-
ducing gas for profit. The tax so Imposed is not levied on
the value of the amount of gas produced and used only for pur-
poses which are incidental tothe ultimate production of &as for
profit; but is levied on the gross receipts of the business
in accordance with the appropriate provision of the statute.
        Reference was made in your request to Opinion O-4100
of this Department. That opinion held no tax was due on gas
which was reproduced after injection into the well; however,
the gas there Injected was "derived from gas upon which a pro-
ductlon tax . . . . bag    already been paid." We think this
fact differentiates the facts of that case from the one present-
ed by your request and necessitates a contra holding. Let us
assume that it would be theoritically possible to use the srame
gas over and over, without exhaustion, for lifting oil. If,
as In Opinion o-4100, the tax had originally been paid on such
gas because It was purchased by the second producer, a tax on
each subsequent reproduction and sale of the same gas for lift-
ing oil would ultimately result In payments totaling more than
the valuel~ofthe gas itself. It would, in effect, be a tax on
each sale of Ras rather than one on the business or occunatlon
of producing=     measured by the producer's receipts. Obvi-
xslv this result was not intended brs the statute and is pre-
cluded by the holding in Opinion 0-4iO0. On the other hand to
hold that the value of the gas involved in th?s case nag be
excluded from the total receipts on which the tax is computed
would result in thenexclusion of gas produced for profit sim-
Hon. George H. Sheppard, page 4,   v-335


ply because it was originally used for a purpose which the
statute excludes from the !neasureof the tax. Under this
theory it is obvious that a great amount of gas might be pro-
duced, and sold, and the receipts therefor excluded from the
tax by the simple device of an initlal tax free use before It
Is produced and sold for profit. Such a result Is equally at
variance with the announced legislative intent to tax the
business of producing gas.
        The fact that gas is being reproduced does not prevent
the inclusion of the proper measure of its value as part of
producer's receipts. "Reproduce" is defined in Webster's New
International Dictionary (2nd Ed.) as meaning "to produce
again". Reproduction is therefore none the less production.
Moreover the reproduction in this case constitutes the first
"production" in the sense in which the statute measures the
tax for the reason that the reproduction constitutes the
first production for profit 1n the business of producing gas.
                         SUMMARY
        Residue gas which on initial production was
    excluded in calculating the tax levied by Article
    7047b, R.C.S., because it was used by the first
    producer for lifting oil should be included in
    calculating the tax when it is reproduced and sold.
                               Yours very truly,
                            ATTORNEY GENERAL OF TEXAS
                               By s/Marietta Creel
                                    Mrs. Marietta Creel
                                    Assistant

APPROVED
s/Price Daniel
ATTORNEY GENERAL
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