Severance Tax- All you need to know

Various taxes like sales tax, income tax, capital gains tax, etc on commodities and finances owned and used by us. Similarly, a severance tax is imposed on commodities used by tax payers involved in businesses dealing with natural resources. These “severance” taxes—taxes applied to materials severed from the ground—tax the extraction or production of oil, gas and other natural resources.
·What is Severance Tax?
Severance tax is a state tax imposed on the extraction of non-renewable natural resources that are intended for consumption in other states. These natural resources include such as crude oil, condensate and natural gas, coal bed methane, timber, uranium, and carbon dioxide.
Severance tax is charged to resource producers, or anyone with a working or royalty interest in oil, gas, or mineral operations in the imposing states. The tax is calculated based on either the value or volume of production, though sometimes states use a combination of both. The severance tax is imposed to compensate the states for the loss or “severance” of the non-renewable source and also to cover the costs associated with extracting these resources.
·How do different states calculate Severance Tax?
States differ in how to impose taxes on oil and gas, generally taxing a fraction of the market value, the volume produced or some combination thereof. Most states have enacted tax incentives, credits and exemptions to encourage or discourage production from certain well types. Many states impose oil and gas conservation fees, levies or assessments in addition to or instead of a traditional production or severance tax.
Thirty-four states currently produce natural gas. Of the 31 crude oil-producing U.S. states, the five highest producing states included Texas, North Dakota, New Mexico, Oklahoma and Alaska. In total, 34 states have enacted fees or taxes on oil and gas production.
Severance taxes are set and collected at the state level. States usually calculate the tax based on the value and/or volume produced; sometimes the method differs for oil, natural gas, and condensates
·Incentives for Severance Tax
Over the past several years, many states have considered measures to benefit from these newly accessible resources and to ensure that communities are reimbursed for the impact that oil and natural gas development may have on infrastructure.
Several tax incentives in the form of credits or lower tax rates are often allowed in situations where the tax rate might be burdensome enough for extractors to plug and abandon the wells.Thus; these tax breaks are provided to encourage the production and expansion of oil and gas operations.
·Conclusion
Severance taxes are primarily imposed because of the damages done to the environment by oil and natural gas extraction. Other taxes imposed to benefit the environment and the tax payers in some form or the other. Taxation is hence an important duty and needs to be dealt with tact and precision. These skills are provided by our tax experts at National Tax Preparers of America (NTPA) to help your duty in an accurate and hassle free manner.