State law should be amended to provide a reduced natural gas severance tax rate, eliminate the deduction for marketing costs, and place the instance of the tax on producer gross receipts.
Background
Texas' natural gas severance tax code places a 7.5 percent tax rate on the market value of gas. The market value is determined at the mouth of the well from which it is produced. In the early 1970s, the Mobil v. Calvert case defined "value at the mouth of the well" as producer gross receipts minus the costs necessary to move the gas from the wellhead to the point of sale.[1]
Since the deregulation of the natural gas industry in the mid-1980s, producers and consultants have sought broader definitions for marketing costs. Since situations vary from well to well, the process of approving marketing-cost refunds has become quite burdensome. Many consulting companies, working on a contingency basis, attempt to obtain marketing-cost refunds on behalf of gas producers, using data from the Comptroller's office. These claims, however, often feature little or no supporting documentation, and mix valid marketing costs with unwarranted deductions. Investigating these claims is a tedious and time-consuming task for Comptroller auditors.
Producers may list marketing costs on their monthly tax return or may amend their tax returns under a four-year statute of limitations to recoup marketing costs. If a market-cost refund is greater than $10,000, a Comptroller field auditor must examine and verify the claim.
Recommendation
Chapter 201 of the Texas Tax Code should be amended to tax the gross revenue received by gas producers before any marketing costs are taken. The natural gas severance tax rate should be reduced so that the same amount of revenue would be collected from gross value as is now collected from net taxable value.
This recommendation would be revenue-neutral, would simplify tax reporting, and would allow the Comptroller's office to devote auditing resources to other purposes. An analysis of producer severance tax records for calendar 1995 indicates that this proposal would reduce the tax rate from 7.5 percent of net receipts to 6.9 percent of gross receipts.
Fiscal Impact
No revenue impact is anticipated for the deduction in the natural gas severance tax rate. A positive revenue gain can be expected from the reduction in audit hours spent to verify refund claims.
Fiscal Year Gain to the General
Revenue Fund1998 $0 1999 281,000 2000 562,000 2001 843,000 2002 1,125,000
Footnotes
[1] Mobil Oil Corporation v. Robert S. Calvert, 451 S.W. 2d 889 (March 11, 1970).
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