Oil Severance Tax Overview

Most (but not all) oil producing states levy a severance tax on its oil production. This tax is based on either the volume or value of the production. Royalty and mineral owners pay their pro rata share of these oil severance taxes. You’ll notice these severance taxes

deducted on your monthly royalty revenue statements.

There's No Standard Oil Severance Tax

The vast majority of law affecting oil and gas production emanates from the state level. In keeping with this, oil severance taxes also are designed and collected by each individual state. There are as many rate schemes and methodologies as there are oil producing states. States generally base their calculations on the value of the oil produced, the volume of oil produced, or some combination of these.

Various incentives through credits or lower tax rates are often allowed in situations where the tax rate might be burdensome enough such that wells might be plugged and abandoned. Examples might be: periods of low commodity prices, low production stripper wells, or with fields deemed as enhanced oil recovery projects.

Royalty Owners Pay Their Share of the Oil Severance Tax

Just as the Working Interest parties within a well must pay their pro rata share of oil severance taxes, so must the royalty owners. Royalty owners will notice this deduction shown on their monthly royalty owner revenue statement. For further reading on your royalty owner revenue statement, see Oil and Gas Royalty Statement.

State Oil Severance Taxes

Click on the links below to locate oil severance tax by state. Iowa, New York, and Pennsylvania do not currently have an oil severance tax.

The Severance Tax Balancing Act

Each state attempts to balance its need for revenue to run state government with the off putting of the oil industry by placing yet another tax upon its operations within that state. This of course makes for regular political debate within each state. Most states argue this on a regular basis, attempting to find the right balance for their particular circumstances.