Shale Law in the Spotlight: Oil and Natural Gas Severance Taxes in the United States (North Dakota, Arkansas, Colorado, and New Mexico)

Written by Chloe Marie – Research Fellow

This series will address severance taxes on oil and natural gas imposed by various states, and this third article will review the severance tax systems for the states of North Dakota, Arkansas, Colorado, and New Mexico. In prior articles, we addressed the severance tax systems for the states of Pennsylvania, Ohio, and West Virginia as well as for the states of Texas, Oklahoma, Louisiana, and Wyoming.

North Dakota

The North Dakota Century Code provides for an oil and natural gas gross production tax – also called a severance tax – using different formulas for oil and gas. Oil is taxed at a rate of five percent of the wellhead value while gas is taxed at an annual adjusted rate per thousand cubic feet (Mcf), which rate is calculated based upon the average producer price index for gas fuels. The Office of State Tax Commissioner has determined that the gross production tax rate for natural gas is $0.0555 per Mcf for the fiscal year beginning July 1, 2017 through June 30, 2018. The severance tax must be paid by operators on a monthly basis.

The North Dakota law provides for several exemptions from the severance tax: gas produced from a shallow gas zone during the first 24 months of production from and after the date of first sales of gas; gas produced during testing prior to well completion or connection to a pipeline; certain wells where gas is used for electrical generation at well site; and certain wells that utilize a system to avoid flaring.

According to the North Dakota Century Code, revenues collected from the oil and gas gross production tax must be distributed by the State Treasurer following a specific formula to hub cities and related school districts, oil and gas producing counties, oil and gas impact grant fund, abandoned well reclamation fund, and North Dakota heritage fund. In addition, the legislation provides that 30% of the revenues collected from the gross production tax must be deposited in the state Legacy Fund while the remainder is to be allocated to the state general fund.

Arkansas

Under Rule 2008-4, Arkansas levies a severance tax from natural gas producers based on the market value of the natural gas produced within the state and at different tax rates depending on the categories of natural gas and classification of natural gas wells. Those tax rates are as follows:

-          1.5% on new discovery gas for the first 24 consecutive calendar months beginning on the date of first production;

-          1.5% on high-cost gas for the first 36 consecutive calendar months beginning on the date of first production;

-          1.25% on marginal gas;

-          5% on all natural gas not defined as new discovery gas or marginal gas; and

-          5% on high-cost gas following the 36 month high-cost gas cost recovery period.

The Arkansas legislature does not provide for exemptions or tax incentives from the natural gas severance tax.

Under Arkansas Code § 26-58-124, the funds collected from the gas severance tax must be deposited into the State Treasury as follows: 5% of the funds must be deposited as general revenues while the 95% remaining funds must be classified as special revenues and distributed according to Arkansas Highway Distribution Law §27-70-201 following a specific formula.

Colorado

Section 29-105 of the Code of Colorado Regulations provides for the imposition of a severance tax on oil and natural gas production within the state of Colorado based on gross income based on wellhead value:

-          If the gross income is less than $25,000, the tax rate is set at 2%.

-          If the amount of gross income is between $25.000 and $99,999, the tax rate is set at 3%.

-          If the amount of gross income is between $100,000 and $299,999, the tax rate is set at 4%.

-          If the amount of gross income is over $300,000, the tax rate is set at 5%.

A tax exemption applies to oil wells producing up to 10 barrels or less per day; however, there is no exemption for gas. In addition, the Colorado legislature provides for a tax credit in the amount of 87.5% of all property taxes paid except those imposed on equipment and facilities used for production, transportation and storage.

As for the revenue distribution, the Colorado legislature provides that the first $1.5 million collected from the severance tax revenue is allocated to the Innovative Energy Fund; then the remaining revenue is equally divided between the Department of Natural Resources (DNR) and the Department of Local Affairs (DOLA). The DNR’s severance tax revenue is deposited into the Severance Tax Trust Fund to then be distributed evenly between the Severance Tax Perpetual Base Fund and the Severance Tax Operational Fund.

The DOLA’s severance tax revenue is credited to the Local Government Severance Tax Fund and then distributed to local governments – 70% of those funds are available for discretionary loans and grants to local governments impacted by the mineral extraction industry while the remaining 30% are distributed directly to local governments.

New Mexico

Under the New Mexico Statutes, a severance tax is imposed on a monthly basis at rates determined as follows:

-          3.75% of taxable value of oil and natural gas severed and sold;

-          2.45% of taxable value of oil and natural gas produced from well workover projects; and

-          1.875% or 2.8125% of taxable value of oil and natural gas produced from stripper wells, depending on the per barrel threshold.

There is a tax exemption applicable to oil and natural gas severed and sold from production restoration projects during the first ten years of production following the restoration of production.

The revenue collected from the severance tax must first pay the required debt service on severance tax bonds and thus be deposited in the severance tax bonding fund. The remaining severance tax revenue must be distributed in the severance tax permanent fund, which makes annual distributions to the state General Fund equal to 4.7% of the 5-year average market value.