How did 2012 House Bill 2117 change the mineral severance tax new-pool exemption for oil and gas?

Plain-English summary

Revised Notice 12-02 (November 2012) explains how 2012 House Bill 2117 changed the Kansas mineral severance tax imposed by K.S.A. 79-4217.

Prior law. Before July 1, 2012, the first 24 months of production of oil or gas from a "pool" were exempt. A "pool" (K.S.A. 79-4217(b)(4)) is an underground accumulation of oil or gas in a single natural reservoir with a single pressure system.

New oil vs. gas rules (Section 29 of the Bill).

• Section 29 amends K.S.A. 79-4217(b)(4) so the 24-month exemption reaches only pools first produced on or after April 1, 1983 and before July 1, 2012. Oil or gas first produced on or after July 1, 2012 is not exempt -- except as provided for oil.
• Section 29 adds new subsection (b)(5): a new oil pool with initial production on or after July 1, 2012 gets the 24-month exemption only if production does not exceed 50 barrels per day, as certified by the Corporation Commission and the Director of Taxation. The Department interprets this as 50 barrels per well in the pool, per day, based on average daily production over the initial six-month period (prorated for partial first and final months).
• For new gas pools, the 24-month exemption is eliminated entirely, regardless of the amount of gas produced.

Losing the exemption. If a qualifying oil well's average daily production later exceeds 50 barrels per day in any one-month period after the initial qualifying period, its exemption terminates as of the start of that period.

Administration. The Department assigns a lease well number to each well certified as a new pool; where a well has multiple formations each certified as a new pool, production must be allocated separately on the Mineral Severance Tax Report.

Date note. The notice carries only a "(November 2012)" revision date, not a specific day.

What this means for you

New oil pool producers

• A new oil pool (initial production on or after July 1, 2012) can still get the 24-month exemption, but only while production stays at or below 50 barrels per well per day.
• Exceeding 50 barrels per well per day in any later one-month period ends the exemption from the start of that period.

New gas pool producers

• There is no longer a 24-month new-pool exemption for new gas pools, no matter how little gas is produced.

Reporting

• Wells certified as new pools receive a lease well number; multiple certified formations in one well must be allocated separately on the Mineral Severance Tax Report.

Common questions

Are new gas pools still exempt for 24 months? No -- HB 2117 eliminated the new-pool 24-month exemption for all new gas pools.

Can a new oil pool still qualify for the exemption? Yes, if oil production does not exceed 50 barrels per well in the pool per day.

How is the 50-barrel limit measured? By average daily production over the initial six-month period, prorated for partial first and final months.

Can the exemption be lost after it is granted? Yes -- if average daily oil production exceeds 50 barrels per day in a later one-month period, the exemption terminates as of that period.

Citations and references

• K.S.A. 79-4217 -- imposes the mineral severance tax and defines "pool"; amended by Section 29 of 2012 House Bill 2117.
• K.S.A. 79-4217(b)(4) -- limits the 24-month exemption to pools first produced April 1, 1983 through June 30, 2012.
• K.S.A. 79-4217(b)(5) -- new-oil-pool 24-month exemption capped at 50 barrels per well per day.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 12-02

Original ruling text

Policy & Research Phone: 785-296-3081
915 SW Harrison St FAX: 785-296-7928
Topeka KS 66612-1588 www.ksrevenue.org
Nick Jordan, Secretary Department of Revenue Sam Brownback, Governor
Richard Cram, Director

                                  REVISED NOTICE 12-02
                                    (November 2012)

                     2012 MINERAL SEVERANCE TAX LEGISLATIVE UPDATE

During the 2012 Legislative Session House Bill 2117 was passed and signed into law.

Changes made by the Bill affect the mineral severance tax in Kansas.

  The mineral severance tax is imposed by K.S.A. 79-4217. The law in effect prior to July 1,

2012 provided an exemption for the first 24 months of production of oil or gas from a "pool".
The term "pool" is defined in K.S.A. 79-4217(b)(4) to mean "an underground accumulation of
oil or gas in a single and separate natural reservoir characterized by a single pressure system so
that production from one part of the pool affects the reservoir pressure throughout its extent".

  Section 29 of the Bill amends K.S.A. 79-4217(b)(4) to limit the 24 month exemption to

"the severance of gas or oil from any pool from which oil or gas was first produced on or after
April 1, 1983, and prior to July 1, 2012 . . ." As a result of this language, gas or oil which is first
produced on or after July 1, 2012 will not be exempt from the mineral severance tax. There is,
however, an exception to this new rule for oil production.

   Section 29 of the Bill also amends K.S.A. 79-4217 to create new subsection (b)(5). This

subsection provides that, with regard to new oil pools, the 24 month exemption is available for
initial production occurring on or after July 1, 2012, but only if production from the pool does
not exceed 50 barrels per day, as certified by the Corporation Commission and the Director of
Taxation. The Department is interpreting the production limitation to be 50 barrels per well in
the pool, per day. If production exceeds this limit the well will not qualify for the exemption.
The Department will base the 50 barrels per well per day calculation on the average daily
severance and production of oil for such producing well, which well has not been significantly
curtailed by reason of mechanical failure or other disruption of production, during the initial six-
month production period, commencing with the date of first production from such well. If the
date of first production for a well occurs other that the first day of the calendar month, then the
average daily production calculation shall be based on the prorated production for the first and
final calendar months in that initial production period, as necessary. For example, if the date of
first production for a well in a new pool commences on August 15, 2012, the initial six-month
production period shall be August 15, 2012 to February 15, 2013, and the production for the
initial and final calendar months of production in that period shall be prorated.

  For any well that has qualified for this exemption, if the average daily severance and

production of oil from such well exceeds 50 barrels per day within any qualifying one-month
production period after the initial qualifying production period, the exemption for such well shall
be terminated as of the commencement of such one-month production period.

 The Kansas Department of Revenue will assign a lease well number to each well that has

been certified as a new pool by the Kansas Corporation Commission. When encountering a well
that has multiple formations, each certified as a new pool, the Department requires that
production be allocated separately on the Mineral Severance Tax Report.

  Section 29 of the Bill eliminates the "new pool" 24 month exemption for all new gas pools,

regardless of the amount of gas produced. There is a 24 month exemption for new oil pools, but
only if oil production from the pool does not exceed 50 barrels, per well, per day.

                                 Taxpayer Assistance

 Additional copies of this notice, forms or publications are available from our web site,

www.ksrevenue.org. If you have questions about severance tax, please contact:

                             Taxpayer Assistance Center
                            Kansas Department of Revenue
                            915 SW Harrison St., 1st Floor
                              Topeka, KS 66612-1588
                                Phone: 785-368-8222
                                 Fax: 785-291-3614