Mineral Severance Tax
REVENUE RULING 92 - 1998 - 01
December 31, 1998
: How is the “gross value” of gas, for use in the calculation of the mineral severance tax, determined by the Department of Revenue if no sale occurs at the time gas is severed?
: K.S.A. 79-4201 et. seq.
This Ruling is intended to clarify how the Department of Revenue determines the gross value of gas which is subject to the mineral severance tax. To this end, this Ruling will clarify the Department's interpretation of the definitions of “gas” and “gross value” that are found in the current statute. These definitions illuminate the Department's practice regarding the calculation of gross value. They are not a departure from historic policy.
K.S.A. 79-4216(c), defines “gas” as “. . . natural gas taken from below the surface of the earth or water in this state, regardless of whether from a gas well or from a well also productive of oil or any other product.” In order for the Department to properly administer this statute, this Ruling clarifies that “natural gas” means a “complex mixture consisting essentially of hydrocarbons of the paraffin series but including in certain instances and in varying proportions nitrogen, carbon dioxide, sulfur components and helium.” (Council of Petroleum Accountants Societies,
Gas Accounting Manual
, Bulletin Number 7, April 1993.) This is the most recent definition of natural gas recognized by industry accountants
and represents the generally held meaning of natural gas
Northern Natural Gas Company v. Grounds
, 441 F. 2d 704 (10th Cir. 1971), cert den. 404 U.S. 951 (1971)).
Since natural gas liquids and helium are components of natural gas and are measured as part of the full volume of gas as it is severed
(see K.S.A. 79-4217(a)(2)), both the liquids and helium contribute to the gross value of gas at the well-head. [This is true for market determined well-head prices or gross value. Prices determined under regulation accounted for only the value of the residue gas.] Since natural gas liquids and helium are components of natural gas and contribute to its market determined well-head sale price, both have been and remain subject to the mineral severance tax.
In K.S.A. 79-4216(d), “gross value” is defined as:
. . . the sale price of oil or gas at the time of removal of the oil or gas from the
lease or production unit and if oil or gas is exchanged for something other than
cash, or if no sale occurs at the time of removal . . . then the director shall
determine the value of the oil or gas subject to tax based on the cash price paid to
one or more producers for the oil or gas or based on the cash price paid to producers
for like quality of oil or gas in the vicinity of the lease or production unit at the time
of the removal of the oil or gas from the lease or production unit.
This Ruling clarifies that when no sale occurs at the time of removal from the lease or production unit, royalty statements will continue to be reviewed for an indication of “the cash price paid to [the] producers”. The gross value of gas production in Kansas will be determined using the following method:
Sum of net royalty proceeds (as paid by the taxpayer, as lessee, to the owners of the mineral interests from which the taxpayer's production occurs in Kansas).
Sum of the royalty interest owners share of gross well-head (less any in-kind gas) production volume, expressed in MCFs for gas or BBLs for oil, for which a royalty is paid.
Actual gross well-head production volume, from the same lease/well (less any in-kind gas to any other party except the taxpayer) expressed in MCFs for gas or BBLs for oil
Gross value of oil or gas produced from the lease/well in Kansas for the purposes of the Kansas Mineral Severance Tax, as applied in K.S.A. 79-4201 et. seq.
The following is an example of the application of the above formula to calculate the taxable gross value from a hypothetical gas lease located in the State of Kansas.
This example is provided for illustrative purposes only. Actual calculations of gross value may or may not resemble the outcome of this hypothetical case.
The Sum of Royalty Proceeds
Residue Gas $192.56
Plant Products $102.96
Helium $ 15.57
Sum of Gross Royalty Proceeds $311.09
Net Royalty Proceeds $249.08
Sum of Royalty Owner's Share of Gross Well-head
Production Volume (MCFs for gas or BBLs for oil) 187 MCF
Equals Value Per MCF
Actual Gross Well-head Production Volume
(MCFs for gas or BBLs for oil) 8,989 MCF
Equals Taxable Gross Value $11,955.37
Expenses are amounts deducted from the royalty owner's gross proceeds from leasehold production (the nature of which have been previously allowed by the Department) which are attributable to the post production costs associated with the sale of the gas to the first purchaser. These amounts are prorated using the same percentage as that used in allocating the royalty owner's share of the gross production volume.
Royalty owners are included in this statute's definition of “producer” (see K.S.A. 79-4216(h)) and royalty statements reflect payments made to the owners for all components of the gas or oil production at the time of severance. Therefore, it is reasonable to continue following the above method of calculating gross value when a sale does not occur at the well-head. Royalty statements reflect an unbundled view of the contributions to gross value made by each component of natural gas. Because the
royalty proceeds are reviewed, the royalty method of calculating gross value reasonably captures the well-head value of all components of natural gas.
Secretary of Revenue
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