Written by Chloe Marie – Research Fellow
This series addresses severance taxes on oil and natural gas imposed by various states, and this seventh and last article will review the severance tax systems for the state of Florida, New York, Tennessee, Illinois, and Virginia. In six 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; for the states of North Dakota, Arkansas, New Mexico, and Colorado, for the states of Kansas, South Dakota, Montana, Utah; for the states of Indiana, Kentucky, Alabama, and Mississippi; and for the states of Michigan, Alaska, Nebraska, and California.
In Florida, there is a production tax imposed on oil and natural gas severed in the state (Fl. Code Chapter 211). Oil is taxed at a rate of 8% of the gross value at the point of production. Oil produced from wells capable of producing less than 100 barrels per day is taxed at a reduced rate of 5% at the point of production. For oil that has escaped from wells, the tax rate is set up at 12.5%. In addition, oil produced using tertiary methods is taxed based on the value or market price of a barrel of oil at the wellhead using tiered formulas, as follows: 1% is levied on the first $60 of gross value; 7% is levied on the gross value greater than $60 and less than $80; 9% is levied on the gross value greater than $80.
Natural gas is taxed at a rate determined annually by the Florida Department of Revenue and is based on the volume of gas produced and sold or used by a producer during the month. The tax rate is calculated based on the previous calendar year’s producer price indices published by the U.S. Bureau of Labor Statistics and, as of July 1, 2017, the natural gas production tax rate is $0.172 per Mcf.
Tax exemptions also are provided for oil or gas production used for lease operations on the lease or unit where produced; gas reinjected into the producing field; unsold gas vented or flared directly into the atmosphere; oil and gas produced from new field wells, completed after July 1, 1997, for a period of 60 months after the completion date; oil and gas produced from new wells in existing fields as well as from shut-in wells or temporarily abandoned wells or wellbores, completed after July 1, 1997, for a period of 48 months after the completion date; and oil and gas produced after July 1, 1997, for a period of 60 months after the completion date from any horizontal well or any well having a total measured depth in excess of 15,000 feet.
The revenue received from the severance tax is collected by the Florida Department of Revenue and deposited in the Oil and Gas Tax Trust Fund. From the balance of this fund, a “sufficient amount” must be appropriated to the Chief Financial Officer for refund purposes while the remainder must be distributed to the General Revenue Fund of the board of county commissioners of producing counties and to the Minerals Trust Fund.
In New York, there is no statewide severance tax on oil and gas production; however, the New York Real Property Tax law provides for an annual assessment of oil and gas rights in New York oil and gas producing properties based on the appropriate unit of production value and determined by the New York Office of Real Property Tax Services (ORPTS). Oil and gas producing properties include oil and gas wells, pipelines, reserves, etc.
According to the ORPTS’ Overview Manual, the unit of production value for oil is stated as a dollar amount per daily average of oil production or per barrel of oil produced while the unit of production value for natural gas is expressed in dollars per 1,000 cubic feet (Mcf) produced or dollar per daily average. In March 2017, the ORPTS issued a certificate providing for the Final 2017 Oil and Gas Unit of Production Values.
The Tennessee Code imposes a severance tax on producers removing oil and gas from the ground in Tennessee at a rate of 3% of the oil and gas sale price (T.C.A. § 60-1-301). In addition, the Tennessee Code provides that the revenue received from the severance tax is exclusively for the use and benefit of the state and local governments and must be distributed as follows: 1/3 of the revenue collected must be allocated to the county where the wellhead is located while the remaining 2/3 of the revenue must be allocated to the state general fund.
The Illinois Hydraulic Fracturing Tax Act (35 ILCS 450/2-15) levies a statewide severance tax on oil and natural gas produced on or after July 1, 2013, based on different rate formulas. During the first 24 months of initial production, the Illinois legislature provides for a 3% reduced tax rate of the value of the oil and gas severed within the state. The tax rate thereafter is determined as follows:
- A tax rate of 3% applies to the value of oil where the average daily production from the well is less than 25 barrels on a monthly basis;
- A tax rate of 4% applies to the value of oil where the average daily production from the well is 25 or more barrels but less than 50 barrels on a monthly basis;
- A rate 5% applies to the value of oil where the average daily production from the well is 50 or more barrels but less than 100 barrels on a monthly basis;
- For natural gas, a 6% tax rate applies to the value of natural gas.
The Illinois Hydraulic Fracturing Tax Act also provides for a tax exemption where the oil is produced from a well with average daily production of 15 barrels or less for the first 12 months of initial production. Tax exemptions also apply to gas injected into the ground 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 production unit where severed; gas lawfully vented or flared; and gas inadvertently lost on the production unit by reason of leaks, blowouts, or other accidental losses.
The Virginia Code § 58.1-3712 authorizes counties and cities to levy a severance tax at a rate that should not exceed 1% of the gross receipts from the sales of natural gas severed within the county or city. The counties concerned are Tazewell, Dickenson, Buchanan, and Wise counties as well as the City of Norton, and all impose a 1% tax rate of the gross receipts from the sale of natural gas severed.
The money received from the severance tax for each county and city must be paid into a special fund of such county or city called the Coal and Gas Road Improvement Fund, and this money must be used for the purpose of improving public roads (§ 58.1-3713).