The severance tax is a state tax imposed on the extraction of non-renewable natural resources that are intended for consumption in other states. These natural resources include petroleum, condensate and gas, coalbed methane, timber, uranium, and CO2. Not all states have a severance tax. Some jurisdictions use terms like “gross production tax” like Oklahoma.
Severance tax is charged to resource producers, or anyone with a working or royalty interest in oil, gas, or mineral operations within the imposing states. The tax is calculated based on either the worth or volume of production, utilizing the physical value method, they often calculate the rate by the quantity of oil or gas produced, typically by barrels of oil or per cubic feet of gas. This method is far easier to implement, however, pricing isn’t taken under consideration with this approach. In some cases, the state will use both.
The severance tax is imposed to compensate the states for the loss or “severance” of the non-renewable source and also to cover the prices related to extracting them. However, it’s only imposed when a drilling well can produce above a precise level of natural resources, as determined by the individual state government.
States across the country differ in how severance taxes are imposed are operators, hence the importance of getting advice from the right severance tax services. A state or local jurisdiction is funded in a variety of ways, whether by property tax, income tax, or during this case, a severance tax on oil and gas production.
However, there are many deductions and exemptions that states will allow an operator to “gross down” from their revenues against the tax. This, in turn, lowers their effective severance rate by allowing certain items to be deducted. These credits and deductions can create significant differences in effective severance tax.
These credits and incentives are often hard to discern and it takes a review of the state tax code besides as an operator’s unique process to ascertain what deductions are available. These deductions and exemptions are created to supply incentives for operators to drill in certain areas that usually wouldn’t be economically viable to drill.
Royalty owners must pay their pro rata share of oil severance taxes. This deduction is captured on their monthly royalty owner revenue statement. These owners could also be charged severance tax even though they do not realize a net profit on their investment. However, state severance taxes are deductible against federal corporate income tax liabilities. It’s vital to notice that severance tax is different from income tax, and royalty owners and producers still need to pay all federal and state income taxes on oil and gas income additionally to severance tax.
Organizations must aggressively pursue all available production incentives to make sure they pay the minimum amount of tax. This process begins within the field by identifying properties that will qualify for an incentive and ends with documenting the incentive on the income tax return, where the real value is realized by choosing the right severance tax services for your needs.