Header graphic for print
Oil & Gas Law Report Reporting on recent legal developments and trends in the oil and gas industry.

Category Archives: Tax issues

Subscribe to Tax issues RSS Feed

Ohio severance tax is a point of ongoing negotiation

Posted in Exploration & Production, Ohio, Tax issues

Ohio Gov. John Kasich’s mid-biennium review plan calls for an increase in Ohio oil and gas severance taxes, as proposed in House Bill 472. These increased taxes would fund certain local governmental initiatives and the Ohio Department of Natural Resources. They also would help offset personal income tax cuts outlined in the mid-biennium plan.

The current production-based severance tax scheme does not distinguish between production generated by conventional oil and gas wells and production generated by horizontal wells. The current severance tax under R.C. § 5749.02 is levied at a rate of $0.10 per barrel of oil and $0.025 per thousand cubic feet (MCF) of natural gas.

For conventional oil and gas wells, the tax under H.B. 472 would remain a volume-based tax but the rates would increase to $0.20 per barrel of oil and $0.03 per MCF of natural gas. The tax would be imposed on the “severer,” defined for conventional wells as the person who actually removes the oil or gas from the ground. Other changes to the state’s regulatory scheme are intended to militate against this tax increase, however, resulting in no economic change to the costs of production for conventional wells.1 Moreover, low-producing conventional wells would be completely exempt from the severance tax.…


Continue Reading →

Ohio H.B. 59 — The Final Report: No New Severance Taxes But Operators May Have to Test for Radiation

Posted in Exploration & Production, Ohio, Regulatory, Tax issues

Whether oil and gas drilling poses a legitimate risk for exposure to radiation has been a hot topic of recent debate. Though we occasionally hear anecdotal evidence reported in the newspapers about radioactive drilling waste being rejected by landfills, there seems to be scant evidence that radiation is a common or serious oil and gas industry problem in Ohio. Nonetheless, the Ohio Legislature and Gov. Kasich recently passed new law that all horizontal well operators should understand.

On June 30, 2013, Gov. Kasich signed H.B. 59, the budget bill, into law. The bill created a new section of the Ohio Revised Code — R.C. 1509.074 — which imposes requirements for testing, transporting and disposing “material that results from the construction, operation or plugging of a horizontal well” that might contain unusual levels of radioactivity.

The new law generally requires operators to sample and test such material for Radium-226 and Radium-228, and to dispose of radioactive material “in accordance with all applicable laws.” However, the new law has several important exceptions. An operator of an oil and gas well is not required to perform sampling and testing if:…


Continue Reading →

House Bills 59 and 72 Propose Changes to Ohio Oil and Gas Law

Posted in Ohio, Real Estate, Regulatory, Tax issues

The Ohio 130th General Assembly is considering two new bills, House Bills 59 and 72. Each bill proposes changes to Ohio’s oil and gas law. Following is a summary of the proposed changes relevant to Ohio’s oil and gas law in each bill.

House Bill 59

On Feb. 12, 2013, Rep. Amstutz (R-Dist 1) introduced House Bill 59, Gov. Kasich’s budget bill. The full Bill Analysis from the Ohio Legislative Service Commission is also available online. The following proposals affect Ohio oil and gas law:

1. New Taxes
The oil and gas tax changes proposed by the Kasich administration have been the most publicized part of H.B. 59. The bill would lower income taxes for all tax brackets by a total of 20% over the next three years, funded by increased oil and gas severance taxes. H.B. 59 also proposes to calculate property taxes from the true value of gas reserves based on the British thermal unit (Btu) content of the gas extracted and the true value of condensate reserves. Other tax provisions in H.B. 59 are differentiated based on whether production is from a horizontal or nonhorizontal well.

A.  Nonhorizontal Wells: H.B. 59 would change ORC §5749.02 to adjust the rate of severance tax on gas from the current 2.5 cents per MCF to the lesser of 3 cents per MCF or 1% of spot market value. It would also raise the tax rate on severance of oil from 10 cents per barrel to 20 cents per …


Continue Reading →

What Does 2012 Portend for the Oil and Gas Industry in Ohio?

Posted in Ohio, Regulatory, Tax issues

The start of a new year leads to annual reflection, prediction and resolution. Let’s do some of it.

Public Relations

The oil business finds itself in a public relations battle because, after all, perception is reality. This is remarkably reminiscent of the impact of nascent environmental laws on the business in the early 1980s.  Fracking, pipeline construction, brine disposal, water usage, increased severance taxes — all face resistance at every turn. While these topics are certainly deserving of discussion, our sense is that much of the resistance is fueled by mis-information or just plain NIMBYism. But unlike the 1980s, in our opinion, this time the oil business  is determined to educate the public. The movie “Gasland” was followed by the movie “Truthland.” Now Hollywood enters the fray with the movie “Promised Land.” Energy In Depth does an excellent job of promulgating information on behalf of the industry. The Ohio Oil and Gas Association  also deserves credit for trying to add balance. Hardly a day goes by that there isn’t something in the news about the promise or the threat posed by the on-coming oil and gas boom and certainly the trend will continue through 2013.


Continue Reading →

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

Continue Reading →

Life Estates: Oil and Gas Law Implications

Posted in Contracts and Leases, Mineral Interest, Ohio, Real Estate, Tax issues

Life estates have been recognized as an interest in land at common law since the Middle Ages. Even so, how they relate to the ownership of and payment for oil and gas can result in outcomes that may not be intuitive.

According to common law and statute, there can be no gap in the perpetual ownership of land. For instance, if the owner of a piece of property dies intestate, state statute (in Ohio, R.C. 2105.06) often states to whom the land will be distributed. For this reason and others, land ownership often is divided between a “present” interest and a “future” interest. Frequently, that division takes the form of a life estate and a remainder.

Life Estates Generally
A life estate is an estate that its holder, the “life tenant,” holds only for the duration of a specified person’s (usually the life tenant’s) life. At the death of the life tenant (or, if the life estate is one “for the duration of another person’s life, upon that person’s death), the property passes automatically to one or more individuals or organizations called “remaindermen.” A life estate can be created by deed, by devise in a will, or, if a will is unclear or ambiguous, by judicial implication.

Both the life tenant and the remaindermen have real interests in the property, but they do not have rights to the property at the same time. Instead, their interests in the property are “stacked in time;” the life tenant has a current, exclusive …


Continue Reading →

Ohio’s Oil Boom – Why It Will Be Different This Time

Posted in Exploration & Production, Mineral Interest, Ohio, Real Estate, Regulatory, Tax issues

This is not Ohio’s first oil and gas boom. There has been a series of them. I think it is fair to say that in the past the oil and gas business had a freer rein (some would say reign). But this time things are likely to be different. With the internet, higher land prices, higher cost wells, financially-strapped governments, more laws and regulations, and environmental awareness — fundamentally, people’s expectations are different. As a result, the relationships between oil companies, mineral owners and regulators, who represent the public in general, are changing.

As in the past, the cost and availability of energy will have a major impact on Ohio. Energy independence is apparently within our grasp and Ohio needs the economic development that comes with energy resources more than ever. Do we have the will to realize it? Surely, as any “fracktivist” will tell you, whatever is realized will be the product of a new and different process.…


Continue Reading →

Favorable review of Kasich severance tax proposal

Posted in Tax issues

The Opinion column of The Wall Street Journal, Wednesday, July 25, 2012, (click here for the source of the original article; in order to read the full text of the Wall Street Journal article you must be a Wall Street Journal subscriber)  contains a favorable assessment of Governor Kasich’s severance tax proposal, which it describes as a “tax swap.”
“Mr. Kasich wants to modernize the tax structure now that Ohio is becoming an energy producer, but without enlarging government.” Ohio has 3,300 taxing jurisdictions.
“This system led to a combined state-local tax burden that for most of the 2000′s was among the country’s highest, according to the Tax Foundation.
The article goes on to summarize a study by Ernst & Young for the Ohio Business Roundtable comparing the proposed severance tax with those in seven other states. Ohio’s would be lower for both oil and gas. “Another virtue of the Kasich plan is to increase public confidence in energy exploration by giving voters a stake in, and a direct share of, its economic benefits.”

 …


Continue Reading →