On August 20, 2015, the
Supreme Court of Kentucky held
that severance taxes cannot be deducted from royalty payments unless the lease
contains a specific provision apportioning severance taxes.
In 2008, Appalachian
Land Company (Appalachian) filed a lawsuit against EQT Production Company (EQT)
before the U.S. District Court for the Eastern District of Kentucky challenging
the measurement of the royalty. The lease at issue provided for a royalty
calculated based on the market price of gas at the well. This value was
obtained after deducting from the sale price all post-production processing
costs, transportation costs, and all severance taxes. Appalachian contended
that EQT should have not deducted the severance tax from the royalty payment. The U.S. District Court found for EQT, and Appalachian filed an
appeal in August 2013.
The Sixth Circuit Court
of Appeals certified a question to the Supreme Court of Kentucky addressing
whether “Kentucky’s 'at-the-well' rule allow a natural-gas processor to deduct
all severance taxes paid at market prior to calculating a contractual royalty
payment based on 'the market price of gas at the well'”, or whether “the
resource’s at-the-well price include a proportionate share of the severance
taxes owned such that a processor may deduct only that portion of the severance
taxes attributable to the gathering, compression and treatment of the resource
prior to calculating the appropriate royalty payment?”
The Supreme Court
rejected the two options presented by the Court of Appeal and reasoned that “the
natural gas-lessee may not deduct the severance tax attributable to the initial
severing or extraction of the gas because that is a true production cost which
the lessee assumes in lease premised on market value 'at the well'.”
Written by Chloe Marie - Research Fellow
08/24/2015
No comments:
Post a Comment