Understanding Royalty Taxes – Part 1 Oil Severance!
April 3, 2019
Selling oil and gas royalties can be confusing at times, especially when it comes to taxes.
There are numerous financial factors that affect the income generated from the sale of oil and gas royalties, the taxes that apply to this income, and how they are levied.
Starting with this first in a series of 6 articles about the taxation of gas and oil royalties, learn about the oil severance tax and how it is applied.
What is the Oil Severance Tax?
A severance tax is one the government imposes when natural resources such as oil, gas, uranium, coal, and timber are removed from the ground or the land within a tax jurisdiction.
The oil severance tax is one that all oil-producing states levy on oil produced within a state and is paid by those with Working Interest in a well and those selling oil and gas royalties.
How Is Oil Severance Tax Paid When Selling Royalties?
As oil severance taxes are applied and collected on the state level, each oil-producing state may have a different taxation rate.
In Texas, the rate deducted from oil royalties is currently 4.6% of the market value of the oil produced; the gas severance tax in Texas is 7.5% of the gas produced and saved.
Calculations on taxation can vary widely from state-to-state and usually consider ;multiple details including the amount of oil produced at a site, the market value of that production, and other related factors.
The tax is applied monthly to oil and gas royalties statements and shows up as a deduction from the monthly production amount.
What is the Severance Tax Balancing Act?
The taxes collected from oil and gas royalties and working interests through oil and gas severance taxes are used to run each state’s government.
The severance tax balancing act allows states to decide how much severance tax should be charged to the oil and gas industry as well as how to balance it so that taxation does not hamper production.
In this vein, there are frequently different tax credits and incentives available to those paying the severance tax to make exploration and production less costly or prevent the capping of smaller, less productive wells due to the additional burden of the severance tax.
Oil Severance Tax - A Fact of Selling Oil Royalties
As with many other taxes, the Texas oil severance tax deducted from oil royalties is one that provides essential funds to keep the state running smoothly.
Based on production amounts and market value, anyone selling oil and gas royalties should expect to see this deduction on their monthly statement and is taken off the top of their generated income.
To learn about any available incentives or credits, owners selling their oil and gas royalties should contact a knowledgeable royalties company that can advise them about this and other oil and gas production taxes.
Now that you understand the oil severance tax, move on to Understanding Royalty Taxes - Part 2 Depletion Allowance of this series and learn about depletion allowances!
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