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
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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 …
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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.…
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