Oil and gas ad valorem taxes are critical because they help local and state governments generate a significant source of revenue based on the value of the property, natural resources or equipment. The tax helps offset public service and infrastructure costs for roads, schools, health care facilities, emergency services and other government expenditures. The resulting revenue can be used to invest in these areas and benefit the communities where the industry operates.
Ad valorem taxes promote a fair and equitable distribution of the tax burden. By basing the tax on the assessed value of resources, companies and independent reserve owners pay taxes proportionate to the value they generate. This overarching concept prevents any particular company or group from bearing an unfair share of the burden.
What Is Ad Valorem Tax?
Ad valorem — a Latin phrase meaning “according to value” — is a flexible tax based on the assessed value of your assets, products and services. State, local or municipal governments often charge this tax for various items, including property, real estate and vehicles.
Minerals are classified as real property. Since oil and gas are considered minerals, their ad valorem taxes are the same as those for real property. Ad valorem taxes may also encompass other taxes like value-added (VAT) or sales taxes when oil and gas assets are bought and sold.
An ad valorem tax is levied as a percentage of your asset’s assessed fair market value. You can be charged either at the time of your transaction — as in sales tax — or as an annual fee. In the oil and gas industry, your ad valorem tax is often calculated based on the fair market value of your product, along with your production level from the previous year and current economic interest in the product.
Depending on the state and county, ad valorem taxes can involve property value, the fair market value of the extracted natural resources, the value of the equipment used or all three.
Ad Valorem Taxes by State
In the United States, all 43 states that produce oil or natural gas have enacted a tax or fee on their oil and gas production in varying degrees. Some states focus on severance taxes, while others rely on ad valorem property taxes, taxing a fraction of the volume produced and considering the current fair market value of the products.
Our home state of Wyoming is one of the nine largest oil and gas producers in the lower 48, alongside Oklahoma, Colorado, Texas, Kansas, New Mexico, Utah, Louisiana and California. Each state differs in how it imposes ad valorem, gross product and severance taxes. Read on to learn more about the taxes on the oil and gas industry in each of these states.
In Wyoming, ad valorem tax is applied as a county-level tax. The county where the oil and gas reserve is located determines the tax rate, which can vary depending on factors like production levels and market conditions. Wyoming also levies a severance tax with rates of about 6% of revenue.
These taxes are only due when there’s active production on a property. You aren’t expected to pay when you’re not actively producing and receiving revenue from your production.
The State of Oklahoma does not collect ad valorem taxes on oil and gas. Instead, producers must pay a gross production tax (GPT) based on the current value of gas, along with a severance tax. Oklahoma offers several exemptions, deductions and incentives that help keep rates low, with a top statutory rate of 7%.
Colorado is one of two states that tax the gross income from produced oil and gas instead of calculating the market value. This state levies a severance tax that generally varies from 2%-5% based on the total amount of revenue generated.
Each Colorado county assesses the ad valorem tax for gas and oil, though you can use paid ad valorem royalties as credits to reduce the statewide severance tax liability.
Texas ad valorem tax for oil and gas is levied at a county level, along with statewide severance and GPT taxes. Rates vary for oil, gas and other minerals. Texas also charges an Oilfield Cleanup Regulatory Fee when the fee’s funds drop below a certain amount.
Texas only charges ad valorem taxes when you’re actively producing oil or natural gas.
In Kansas, oil and gas producers must pay local ad valorem property and severance taxes. The tax rate is set by each county where the properties are located. Ad valorem in Kansas varies by year based on crude gravity and a market adjustment factor that reflects anticipated price changes throughout the year.
Ad valorem taxpayers in Kansas receive up to a 2.67% reduction to their severance taxes depending on when their production begins and ends.
New Mexico imposes multiple taxes on oil and gas produced within the state, including severance, conservation, emergency and school taxes. Local governments can charge ad valorem production taxes based on the assessed value of both the oil and gas produced and the used equipment. Companies that produce natural gas may be subject to a natural gas processor’s tax.
Oil and gas production in Utah is subject to a statewide severance tax and an oil and gas conservation fee. Each county establishes its tax rates independently. Local governments levy ad valorem property taxes based on the value of developed oil and gas reserves in the ground, equipment and facilities used for production.
A 2020 state constitutional amendment changed the methodology for calculating ad valorem property taxes for Louisiana oil and gas producers. In the past, the fair market value of each oil well was based on the value of the above-ground equipment but not on any below-ground equipment or oil and gas reserves held below ground.
With the new amendment, fair market value also includes the presence or production of oil and gas. Additionally, producers must pay natural resource severance taxes, processing taxes and an Oil Field Restoration fee per barrel of oil or each thousand cubic feet (MCF) of gas produced.
The State of California levies an Oil and Gas Production Assessment Fee adjusted annually based on the price of gas and oil. Local governments assess and administer ad valorem property taxes by county. However, the state constitution dictates that the ad valorem tax may not exceed 1% of the property’s full cash value as defined by the county’s valuation.
Get Help Determining Your Fair Market Value
Ad valorem taxes are calculated based on the fair market value of your oil and gas production and property. Luckily, technical mineral valuation is one of our specialties. We can help you determine the fair market value of your assets so that you know exactly what to expect come tax season.
Contact our team to learn more about ad valorem taxes and how we can help. Please fill out our free valuation form or call us at 307-429-0093 to speak directly with a team member.