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How Ohio Stacks up on Taxation of Oil and Gas Operations

Posted in Ohio, Tax issues

This is the first in a series of blog entries regarding Ohio state and local taxes imposed on oil and gas operations.

Oil and gas operators in Ohio currently pay a variety of state and local taxes:

  • Commercial activity tax (CAT) which is a 0.26% excise tax on all Ohio-based gross receipts. The tax is paid by the recipient of the gross receipt—e.g., landowners on rent, drillers on drilling fees, and operators on mineral production. No deductions are permitted for costs. Some related-party exceptions apply.
  • Property (ad valorem) taxes. All real property in Ohio is subject to the real property tax administered by counties for the benefit of public schools, counties, cities, libraries, and other local governmental entities. In general, Ohio real property taxes average 2.25 to 2.75% of fair market value per year. Ohio counties do not use a consistent method for assessing oil and gas properties. In the future we expect to see some standardization for taxing severed mineral estates—for example, separate parcel numbers used and/or more efforts to tax minerals even if not being actively produced. We expect to provide a more detailed discussion about ad valorem property taxes and severed mineral interests in the near future.
  • State unemployment and workers’ compensation taxes like other employers.
  • State sales and use taxes on taxable purchases of goods and services.
  • Municipal income taxes on company’s taxable income in some locales.
  • Drillers’ and operators’ employees pay state and local income taxes like other employees.
  • Ohio severance taxes:
    - 20 cents per barrel of oil
    - 3 cents per MCF (thousand cubic feet) of natural gas
    - No tax on severance of “natural gas liquids” including benzene and butane

Comparison to peer states with shale gas potential and shale oil potential:

  • Most states impose a corporate income or franchise tax on corporations.
  • All states impose real property taxes.
  • All states impose some kind of unemployment and workers’ compensation taxes.
  • Almost all states impose sales and use taxes.

Severance Taxes by State

Gas Severance Tax Rates

  • Texas 7.5%
  • Oklahoma 7%
  • Arkansas 5%
  • Michigan 5%
  • West Virginia 5%
  • Kentucky 4%
  • Tennessee 3%
  • Indiana 1%
  • Louisiana $0.16/MCF
  • North Dakota $0.11/MCF
  • Ohio $0.03/MCF (assuming cost is $3.85/MCF, tax is 0.78%)
  • Illinois 0.1%
  • Missouri 0
  • Pennsylvania 0

Oil Severance Tax Rates

  • North Dakota 11.5%
  • Montana 9.26%
  • Kansas 8%
  • Oklahoma 7%
  • Wyoming 6%
  • Michigan 5%
  • Colorado 5%
  • Texas 4.5%
  • Nebraska 3%
  • Ohio $0.20/bbl (assuming cost is $85/bbl, tax is 0.24%)
  • California $0.11/bbl
  • Pennsylvania 0

Source: Society for Petroleum Evaluation Engineers

The taxation of severed mineral interests as well as oil and gas production is an important issue as governments hope to capitalize on this burgeoning industry, while maintaining an attractive environment for business expansion. Stay tuned for the next post in this series discussing Ohio state and local taxes that are applicable to oil and gas operations.