Severance tax

Severance tax is a tax on the amount of produced oil or gas, or some other nonrenewable resource. This tax is usually applied only when the production level exceeds a certain minimum amount. Responsibility for paying the severance tax depends on the underlying contract and local law, but usually resides with the purchaser. In essence, the purchaser takes on the role of agent for the state government, since it deducts the amount of this tax from its purchases, pays the interest owners an amount net of severance tax, and then remits the tax to the government. Thus, the severance tax is not recognized as an expense by the purchaser – only as a liability. Or, the tax payment responsibility can be shifted to the lease operator, who then acts as an agent for the state government, withholding severance taxes from payments to the interest owners.

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Oil and Gas Accounting