Texas Severance Taxes - Gross Sales vs Net Sales

Question was raised about the calculation of gas severance taxes. Here is what you need to know. Gas severance tax rate is 7.5%. If your gas is sold at the well, then the severance tax rate is 7.5% of gross revenues. This was most common when gas was sold to the pipeline company. For example using easy numbers. If the gross sales is $1,000, then the severance tax is $75. If your DOI is 0.0100, then your royalty is $100 (being $1,000 X 0.0100) and your share of the severance tax is $7.50 (being $75 X 0.0100). Therefore, your net royalty payment is $92.50 (being $100 less $7.50)

These days, most operators pay a transportation fee to the pipeline company and send the gas to a gas plant for processing. The gas is then sold at the tailgate for a higher price than the wellhead price. The Texas Comptroller allows the oil company to deduct "marketing costs" from the sales revenue at the tailgate (or other sales point far away from the well). This is to make the severance tax system more even between companies which sell at the well and those which sell at the plant. The Comptroller's Natural Gas Tax Guide of 2009 defines Marketing Costs as "allowable expenses incurred by the producer in getting the gas from the wellhead to market. They include the following:

(1) Cost for compressing the gas sold;

(2) Cost for dehydrating the gas sold;

(3) Cost for sweetening the gas sold; and

(4) Cost for delivering the gas sold.

To calculate the severance tax on gas sold at the plant. Assume that the oil company has gross sales of $1,300. It incurred gathering costs of $50; transportation costs of $50; compression costs of $50 and plant processing cost of $50. For severance tax, the $1,300 gross sales is reduced by $200 (the total of costs) to be $1,100 and the severance tax is $82.50. With DOI of 0.0100, the royalty is $110 (being $1,100 after costs X 0.0100) and the severance tax is $8.25 (being $82.50 X 0.0100) - your royalties will be $101.75.

So if the oil company is deducting costs against your gas royalties, then the severance tax should be calculated against the NET SALES REVENUE. If the oil company is charging the 7.5% severance tax against the GROSS SALES REVENUE, then you are being overcharged. You need to contact the oil company and ask for a refund. Many years ago, I found severance tax being charged against gross sales instead of net sales and called the major oil company to protest and get a refund. They told me that it was a programming problem, but did send a refund. However, the company was overcharging tens of thousands of royalty owners. At the same time, a different department was properly calculating and paying severance taxes on the lower net sales revenues.

As a royalty owner, you are responsible for reviewing your check detail to make sure that the correct DOI is being applied to the revenues and that the severance tax is correct. Learn to use the Texas Comptroller CONG website to see the gross sales for both oil and gas that is reported to the State of Texas and compare to your check. You can also look to see if the gas well has been granted a lower severance tax rate because it is a "high cost gas well" or is exempt from gas severance taxes because the well has very low production coupled with low prices. Another large oil company charged severance taxes on wells which were exempt from severance tax under the rationale that it averaged the total severance taxes for wells across the state and charged all wells at the same reduced rate. This did not average out for us as all of our wells were supposed to be at -0- rate. We got a refund of the overcharges.

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Thank you, Tennis! I have been looking at statements for the past 7 years and never knew about the netting. most of my payors charge me for gas costs, etc, and when i compute the severance tax, it is less than the 7.5%, so now i can check to see if they are actually charging me correctly. Does this apply to oil transportation costs as well? I see several of mine are Relinquishment properties and notwithstanding the contract, they charge costs and some hide them by inflating the severance taxes by the amount.
And many of my properties are older wells that I believe the State gives lower severance tax rates for. One or two operators are in Oklahoma and i have gotten refund checks when i challenged them about what they were actually paying as severance tax rates.
Thank you for this very clear explanation.