Overview of Texas Oil and Gas Severance Tax

According to Investopedia, severance tax is a select type of tax levied by a state on the extraction of naturally occurring non-renewable resources for sale to consumers living outside the state.

Virtually every U.S state has its on-severance tax guideline set by its legislature. It dictates the rate of charge levied on the extraction of resources such as natural gas, crude oil, uranium, timber, and more. According to Roman McAllen, Denton’s county historic preservation officer, this tax is compensation to the state for the loss of non-renewable resources -hence severance.

The state severance tax legislation may also include incentives (credits and exemptions). This is where the legislature recommends the reduction or elimination of severance tax by the state. Severance tax incentives are used to encourage the exploration of non-renewable resources that would otherwise go undiscovered. Studies on the Texas state economy, for example, show that each dollar invested in the oil and gas industry has a positive effect on the state’s economy.

Severance tax and severance tax incentives, therefore, mean the difference between shutting down an oil well, keeping it in production, or bringing it back into production as well. They also determine how much you, as a consumer get charged at the filling station too.

Information on Texas Oil & Gas Severance Tax

Current Texas Oil and Gas Production Tax Rates:

This is the tax levied by the state for the extraction of non-renewable crude oil or gas in Texas. Usually, the rate is calculated based on the market value of the non-renewable resource. The current breakdown of the crude oil production tax rates and incentives is as follows:

For Oil

• An oil production tax of 4.6 percent of the produced oil volume value. The rate has remained at the same level since 1951, and legislators still see it as suitable.
• Additional charges include an Oil Field Clean-Up fee of 5/8 of a cent per barrel for reports beginning Sept 2015 to the present.

For Natural Gas

• The current rate stands at 7.7 percent of the market value of the produced gas.
• Additional charges include 4.6 percent of the market value in the case of Condensate production.
• A regulatory fee of .000667 per thousand cubic feet of natural gas produced.

Who is Responsible for Paying the Tax?

For oil production, the Texas state levies the tax on the first purchaser, while for natural gas, the producer is the one responsible for it. However, depending on the agreement between the producer and purchaser, the purchaser can end up in charge of the gas severance tax.

• The first purchaser is responsible for the tax in case of oil extraction
• For gas, the tax gets levied on the producer, but depending on agreements, the purchaser may assume the tax responsibility

Reporting Dates and Penalties:

The due date for oil severance tax reports is on the 25th of the following month immediately after the production month. All the details and reporting methods to use will be found on the website. You are also required to report on EOR projects eligible for tax exemptions.

The due date for the natural gas production tax report depends on whether the operator is a monthly or yearly filler. For monthly filers, the report is due on the 20th day of the second month proceeding the production month. For yearly fillers, the 20th of February of the following year.

In case you delay filing the tax reports, you incur penalties. A 1-30-day delay incurs a 5 percent penalty while delays exceeding a month incur double the penalty. Past due taxes also accrue interest charges. Usually, delays exceeding two months are charged interest. 

Refund Request:

Crude oil taxpayers are eligible for refunds. All refund requests must be submitted before the 4-year statute of limitations of a reporting period expires. Make sure to fully state and detail the reason for each claim and include a signed power of attorney form. Here’s a breakdown of reasons for filing for refunds and what you need to do.

Reasons for Asking for Refund

• In case you’ve been approved for legislative exemptions
• In case you realize you overpaid taxes previously
• In the case of erroneous penalties and interests
• Reduction in the value of gas or oil
• In case you get waivers on penalties

Requirements When Filing a Refund Request

All refund requests are to be submitted to the state comptroller’s office for verification. Make sure to include:

• A postmark
• A refund request letter detailing the reason you are asking for a refund.
• Detailed summary spreadsheets
• A signed power of attorney form
• A signed Assignment of Rights to Refund form

Texas Crude Oil Severance Tax Incentives:

Current tax incentives include the Enhanced Oil Recovery Incentive. Here the standard 4.6 percent rate gets halved to 2.3 percent under EOR. That is in case the oil gets produced from an approved new oil project or an expansion of an already existing drilling project.

The next one is the EOR Anthropogenic CO2 Incentive. In case you make use of CO2 that would otherwise get released into the atmosphere to extract the oil, you are up for a 50 percent reduction on your severance tax.

High-Cost Gas Incentive is where under section 107 of the Federal Natural Gas Policy, some gas wells are categorized as expensive and eligible for severance tax reduction. The amount reduced depends on drilling costs upon completion.

Other incentives include the Two Year Inactive Well severance tax exemption in case the well hasn’t produced any gas or oil within two years of applying for the tax incentive. There’s also an incentive to use energy-conserving equipment and recycle water.

To apply for the incentives, you need to file the ST-1 form requesting Texas oil and Gas Tax Incentive Certification. Submit the form online to the Railroad Commission of Texas (RRC). It is the agency that oversees oil and gas production in Texas.
What to do if Credit is disallowed?

If the comptroller has made an assessment and disallowed credit and tax exemptions, the taxpayer can challenge the decision by filing a hearing request within 60 days of the decision.