Hockett v. Trees Oil Co.

Pursuant to an oil and gas lease with Appellee Trees Oil Company (Trees), Appellant Arthur Hockett had a 1/8-royalty interest in the production from a Haskell County well that produced natural gas. Trees operated the well, and sold the gas produced to âfirst purchasers.â Before paying Trees for production, the first purchasers deduct taxes and fees imposed by the state. Trees then pays Appellant 1/8 of the net sales proceeds. In 2009, Appellant filed a complaint against Trees, seeking recovery of the amount in tax deducted from the sales proceeds from the first purchasers. Trees moved to dismiss the suit, arguing that it could not be held liable for complying with state law by paying the sales taxes. The district court held that the taxes and fees were to be imposed on all owners in the venture, including royalty owners. Appellant appealed. The Supreme Court found that state law does not require royalty owners pay the oil and gas taxes and fees if they do not operate the well. The fees withheld by the first purchaser are an expense attributable to the oil company as the well operator. In computing Appellantâs royalties, Trees was not permitted to deduct the amount of its fees expenses from the gross sale price under contract with the first purchaser. Accordingly, the Court held that the district court erred in ruling in favor of Trees. The Court remanded the remanded the case for further proceedings.