Shale Law in the Spotlight: Oil and Natural Gas Severance Taxes in the United States (Kansas, South Dakota, Montana, and Utah)

Written by Chloe Marie – Research Fellow

This series addresses severance taxes on oil and natural gas imposed by various states, and this fourth article will review the severance tax systems for the states of Kansas, South Dakota, Montana, and Utah. In three prior articles, we addressed the severance tax systems for the states of Pennsylvania, Ohio, and West Virginia; for the states of Texas, Oklahoma, Louisiana, and Wyoming, and for the states of North Dakota, Arkansas, New Mexico, and Colorado.

Kansas

The state of Kansas imposes a severance tax at a rate of 8% of the gross value of all oil or gas severed from the earth or water in the state (K.S.A. 79-4217). Interestingly, the Kansas law allows operators to claim a tax credit against the severance tax paid (K.S.A. 79-4219). In case of natural gas severance and production, the taxpayer is entitled to a tax credit in the amount of 3.67% of the gross value of oil and gas produced in the state.

The Kansas legislation also provides that the following severance and production of gas is exempt from the payment of a natural gas severance tax as follows: gas injected underground for the purpose of lifting oil, recycling, or repressuring; gas used for fuel in connection with the operation and development for, or production of, oil or gas in the lease or production unit where severed; gas lawfully vented or flared; gas severed from a well with a gross value of production not exceeding $87 per day; gas inadvertently lost due to accidental reasons; gas used or consumed for domestic or agricultural purposes; and gas placed in underground storage for later recovery and which was either originally severed outside of the state of Kansas, or as to which the severance tax has been paid (K.S.A. 79-4217(b)(1)).

Those exemptions are valid for a period of two years and application for such exemptions must be made every two years to the Kansas Director of Taxation. Exemptions also apply to the severance and production of gas from an inactive well for a period of 10 years and to the incremental severance and production of gas resulting from a production enhancement project for a period of 7 years.

South Dakota

South Dakota imposes a severance tax on energy minerals severed in the state at a rate of 4.5% of the taxable value of any energy minerals (SDCL 10-39A-1). Energy minerals include coal, lignite, petroleum, oil, natural gas, uranium, and thorium, and any combination of minerals used in the production of energy.

According to the legislation, the proceeds from the tax levied on the energy minerals must be distributed as follows: 50% of the proceeds must be allocated to the county in which the energy minerals or mineral products were severed while the other 50% must be paid into the state treasury and credited to the general fund (SDCL 10-39A-8).

Montana

Montana law provides for the imposition of a severance tax on the gross value of oil and natural gas production; however, tax rates differ depending on the type of well and production, date of initial start of production, and whether it is a working or non-working interest.

For primary recovery production, Montana law allows reduced tax rates on production for the first 12 months of natural gas production, and as of October 1, 2016, the tax rate for the first 12 months of natural gas production is established at 0.80% for a working interest and at 15.10% for a non-working interest. At the end of the incentive period, a tax rate of 15.10% will be imposed on either a working or non-working interest for wells drilled prior to 1999. For wells drilled after 1999, the tax rate is set at 9.30% for a working interest and at 15.10% for a non-working interest.  

For stripper wells, a tax rate of 11.30% applies to working interest holders for wells drilled prior to 1999 while a rate of 15.10% applies to non-working interest holders as of October 1, 2016.

For horizontally completed well production, Montana law provides a tax incentive for such wells with a reduced tax rate set up at 0.80% for working interest holders and 15.10% for non-working interest holders as of October 1, 2016, during the first 18 months of qualifying natural gas production.

The proceeds obtained from the oil and gas severance tax must be more or less equally allocated between local and state governments (MCA 15-36-331).

Utah

The Utah Code provides for the payment of a severance tax on the taxable value of oil and natural gas produced, saved and sold, or transported from the field where the natural gas was produced (Utah Code 59-5-102). For oil, the tax rate is at 3% of the taxable value of the oil up to and including the first $13 per barrel for oil and 5% of the taxable value of the oil above $13.01 per barrel of oil. For natural gas, the tax rate is set up at 3% of the taxable value of the natural gas up to and including the first $1.50 per MCF for gas and 5% of the taxable value of the natural gas above $1.51 per MCF for gas. The legislation also provides that the tax rate for natural gas liquids is at 4% of the taxable value of the natural gas liquids. Furthermore, the Utah Code provides some tax incentives on incremental production for enhanced recovery projects with a tax reduction of 50% and a tax credit on gas used for the production of hydrogen fuel for use in zero emission motor vehicles.

Where a public entity has ownership rights in oil and gas or interests in the proceeds of oil and gas production, they are exempted from the severance tax imposition. In addition, the payment of this severance tax does not apply to the value of oil and gas produced from stripper wells, or produced in the first 12 months of production for wildcat wells after January 1, 1990, or produced in the first 6 months of production for development wells after January 1, 1990. The Utah legislation also provides that the severance tax does not apply when the natural gas produced, saved, sold or transported is derived from coal-to-liquids technology, oil shale, or oil sands (Utah Code 59-5-120).

The proceeds from the oil and gas severance tax must be collected and paid to the state treasurer, and then credited to the state General Fund (Utah Code 59-5-114).