BACK OFFICE ADMINISTRATION FOR OIL & GAS PURCHASERS

Severance Tax Reporting

 

Severance Tax Reporting For Oil And Gas Companies

To schedule a free consultation, please call (303) 463-8799 or fill out our contact form.

As part of our back office oil and gas accounting services, we regularly file state severance tax returns.

Below is more information about severance tax.

Importance Of Accurate Severance Tax Reporting
When it comes to division order accounting, accurate severance tax reporting is extremely important. For starters, severance tax has to be correctly calculated for each production month, and it directly impacts the net revenue that is paid out to owners.

Also, incorrect severance tax reporting can trigger audits from the state, penalties and interest, and the need to submit amended returns.

What Is Severance Tax In Oil And Gas
When oil and gas or other natural resources are “severed” (extracted) from the ground, many states charge a severance tax.

Who Pays Severance Tax
Typically, severance tax is paid to the state by the purchaser. The cost of the tax is shared across all interest owners, according to their ownership percentage:

  • royalty owners
  • working interest owners
  • overriding royalty owners

Severance tax is deducted from revenue before proceeds are distributed.

How Does Severance Tax Work
Calculating and remitting severance tax is a multi-step process that varies by state.

Production Volume Measurement: The oil and gas operator measures the total number of oil barrels that are produced from a well during the month.

Taxable Value: Each state has its own rules. To determine the taxable value of the oil production, states use gross value (sales price x volume).

State’s Tax Rate: States use different tax structures, including flat rate (a % of the value), volume-based (an amount per barrel), or a multi-tiered tax rate (based on price or production level). Some states offer reduced rates for: stripper wells, high-cost wells, horizontal wells, enhanced recovery, and new development incentives.

Severance Tax Return: Oil and gas severance tax returns are typically filed monthly or quarterly, and tax payments are submitted to the state. Information on the severance tax returns include the volume of oil, the value of the oil, and a calculation of the tax that is owed.

States That Charge Severance Tax
States that charge severance tax on oil and gas include:

  • Alabama
  • Arkansas
  • Colorado
  • Kansas
  • Kentucky
  • Louisiana
  • Mississippi
  • Montana
  • New Mexico
  • North Dakota
  • Oklahoma
  • Texas
  • Utah
  • West Virginia
  • Wyoming

Other states tax oil and gas production, but instead of “severance tax,” the tax might be called a production tax, gross production tax, or mineral production tax.

At ExTex, We’ve Got You Covered
With oil and gas severance tax, there are significant consequences for late filings, miscalculated volumes or values, missing state registrations, and more. Penalties, audits, and interest can pile up, with no end in sight. Fortunately, we’ve got you covered!

We have the experience and expertise to comply with complex state-by-state severance tax rules.

Whether your internal division order team is stretched, or you are operating in multiple states with different tax and regulatory requirements, we can step in and relieve you of the burden of filing accurate and on-time severance tax reports and payments.

Back Office Efficiency, Cost Savings, And Peace Of Mind
Instead of hiring, training, and maintaining an internal team that can stay up-to-date on severance tax and other regulatory reporting in every state, you can outsource that function to us. This can be especially helpful if you are entering new states, acquiring a number of properties at once, or experiencing rapid growth overall.

You can outsource some or all of your division order tasks to us, including: tax accounting, revenue accounting, title services, and well services.

For more information about severance tax or other types of division order reporting, or to schedule a free consultation, call (303) 463-8799 or fill out our contact form.

ExTex Division Order Services, LLC is located in the Denver metro area (in Golden, Colorado), and we provide back office outsourcing services for oil and gas companies across the U.S. and Canada.

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“Each member of the ExTex family is a subject matter expert who can provide quick solutions to the often complex details of revenue distribution and severance tax reporting.”

Mark B, VP of Finance, Texas

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