Texas Severance Tax: Rates, Exemptions, and Filing Rules

The Texas severance tax is a state tax on oil and natural gas the moment they come out of the ground: crude oil is taxed at 4.6% of market value (or 4.6 cents per barrel, whichever is greater), and natural gas at 7.5% of market value.1State of Texas. Texas Tax Code 202.052 – Rate of Tax2State of Texas. Texas Tax Code 201.052 – Rate of Tax Producers file and pay monthly, but who counts as a “producer,” what counts as market value, and which exemptions apply all shape the real bill.

The Rates by Product

An additional oil-field cleanup regulatory fee of $0.00625 per barrel of crude (five-eighths of a cent) is reported and paid alongside the severance tax to fund plugging and remediation of orphaned wells.4Cornell Law School. 34 Texas Admin Code 3.731 – Oil-Field Cleanup Regulatory Fee on Oil

The tax applies to any oil, gas, or condensate physically removed from the ground in Texas, regardless of extraction method or land ownership. It also applies to product that isn’t sold: crude used on the lease, moved to storage, or even lost or unaccounted for after measurement is still taxable.5Texas Comptroller. Crude Oil Form Instructions

Who Owes the Tax

The natural gas tax is imposed on “each producer of gas,” and the statute defines “producer” broadly.6State of Texas. Texas Tax Code 201.051 – Tax Imposed It reaches anyone who takes gas from the earth, anyone who owns or leases a gas well, and anyone who holds an interest in the gas or its value, including royalty interest owners. The crude oil tax is imposed on production in the same fashion.7State of Texas. Texas Tax Code 202.051 – Tax Imposed

In practice, the operator calculates, files, and remits for everyone on the lease, and royalty owners see the tax already withheld from their revenue statements. The underlying liability still belongs to each interest owner, though, so if a lease agreement shifts responsibility or an operator fails to pay, royalty owners can be pulled in.

Separately, the first entity that buys gas from a producer has its own reporting obligation to the Comptroller, filed by the 20th day of the second month after purchase.8State of Texas. Texas Tax Code 201.2035 – First Purchasers Report The Comptroller cross-checks those numbers against the producer’s during audits.

How Market Value Is Calculated

For natural gas, market value is the value at the mouth of the well, not the downstream sales price.9State of Texas. Texas Tax Code 201.101 – Market Value You start with gross cash receipts from selling the gas and subtract actual marketing costs — the expenses of moving gas from the wellhead to the buyer.

Deductible marketing costs include compression, dehydration, sweetening, pipeline transportation from the separator to the sales point, and sales metering, plus a 6% overhead allowance on marketing-related accounts.10Texas Comptroller. Natural Gas Severance Taxes – Audit Policy on Marketing Costs What you cannot deduct is anything tied to actually producing the gas, separating oil and water at the lease, or insuring the marketing facility. The line trips producers up during audits. A compressor boosting gas into the wellbore is a production cost. The same compressor pushing gas to sales-line pressure is deductible marketing.

For crude oil, the calculation is simpler: 4.6% of market value, or 4.6 cents per barrel, whichever is greater.

Exemptions and Reduced Rates

Several exemptions can lower the effective rate. None apply automatically; each requires certification, application, or both.

Enhanced Oil Recovery

Wells using techniques like CO2 injection, waterflood expansion, or chemical flooding to recover additional oil pay 2.3% instead of 4.6%.1State of Texas. Texas Tax Code 202.052 – Rate of Tax The project must be certified by the Texas Railroad Commission as new or expanded. Projects using anthropogenic CO2 (captured from industrial sources rather than naturally occurring underground) can take an additional 50% reduction on top of the EOR rate for up to 30 years after approval.11State of Texas. Texas Tax Code 202.0545 – Tax Exemption for Enhanced Recovery Projects Using Anthropogenic Carbon Dioxide

Low-Producing and Marginal Wells

An oil lease producing fewer than 15 barrels per day is a “low-producing oil lease” eligible for a reduced rate or full exemption depending on market prices.12State of Texas. Texas Tax Code 202.058 – Tax Credit for Qualifying Low-Producing Oil Lease A separate “marginal well” category covers oil wells averaging 10 barrels or less per day during a month. These provisions keep stripper wells producing when prices dip.

High-Cost Gas Wells

Gas wells with unusually high drilling or completion costs (extreme depths or advanced horizontal techniques, for example) may qualify for an exemption or reduced rate. Producers apply to the Comptroller with cost data, and the Railroad Commission certifies eligibility.13Cornell Law School. 34 Texas Admin Code 3.21 – Exemption or Tax Reduction for High-Cost Natural Gas

Two-Year Inactive Wells

An oil well that hasn’t produced in more than one month during the two years before the application date can qualify for a full five-year severance tax exemption. The Railroad Commission certifies the well, and the operator files Form AP-217 with the Comptroller.14Cornell Law School. 34 Texas Admin Code 3.27 – Exemptions of Governmental Entities and Two-Year Inactive Oil Wells Wells in an enhanced recovery project, or those drilled but never completed, don’t qualify.

Otherwise-Flared Gas

Gas that would lawfully have been vented or flared can be exempt if it’s consumed within 1,000 feet of a qualifying well.15State of Texas. Texas Tax Code 201.061 – Exemption for Gas Produced That Would Otherwise Have Been Vented or Flared Qualifying wells are those where pipeline capacity can’t handle output, where a pipeline connection isn’t technically or commercially feasible, or where the well isn’t connected and hasn’t been dedicated to a pipeline operator. Producers must apply annually with a Railroad Commission certificate.

Filing Dates and Forms

Reports are due monthly, on the 20th day of the second month after the production month. Oil produced in January is reported and paid by March 20.16Texas Comptroller. Natural Gas Production Tax You must file even if no tax is due.

Crude oil producers file Form 10-158 with the lease detail supplement Form 10-162.5Texas Comptroller. Crude Oil Form Instructions Natural gas producers file Form 10-159.17Texas Comptroller. Form 10-159 Producer Report of Natural Gas Tax First purchasers of gas file Form 10-157.18Texas Comptroller. Form 10-157 Purchaser Report of Natural Gas Tax Each report requires lease numbers, purchaser details, volumes, and tax calculations.

Whether paper filing is allowed depends on your prior-year tax payments, measured over the state fiscal year running September 1 through August 31. If you paid $50,000 or more in any of the covered severance taxes, electronic filing is mandatory.19Texas Comptroller. File and Pay The threshold for electronic payment is $10,000. Anyone owing $500,000 or more in a single tax must use TEXNET, the state’s electronic funds transfer system.

Late Penalties and Interest

Late payment triggers a 5% penalty for 1 to 30 days past due. After 30 days, the penalty rises to 10%. If the tax remains unpaid after a formal Notice of Tax/Fee Due, another 10% is added, bringing the total to 20%.20Texas Comptroller. Penalties for Past Due Taxes

Fraud or intentional evasion carries a separate 50% penalty on the tax due, and the Comptroller can refer cases for criminal prosecution.21State of Texas. Texas Tax Code 111.061 – Penalty on Delinquent Tax or Tax Reports The same 50% penalty applies to altering, destroying, or concealing records during an audit.

Interest accrues on delinquent severance tax starting 60 days after the due date, at an annual rate equal to the prime rate plus one percent (published in The Wall Street Journal on the first business day of each calendar year).22State of Texas. Texas Tax Code 111.060 – Interest on Delinquent Tax Interest runs on top of the penalty.

Audits

The Comptroller has four years from the date a tax becomes due and payable to assess a deficiency.23Cornell Law School. 34 Texas Admin Code 3.339 – Statute of Limitations Audits cross-reference severance tax filings against the production reports submitted to the Railroad Commission and against the first purchaser’s report. Mismatches among those three data sets are the most common audit trigger.

Marketing cost deductions get particular scrutiny. Claiming production-related expenses as marketing costs, or inflating the overhead allowance, are the errors that expand a routine review into a full examination. For persistent noncompliance, the Comptroller can place liens on assets or seek revocation of operating permits, though those measures are reserved for serious cases.

Appeals

After a deficiency notice, you have 60 days from the date of the notice to file a request for redetermination with the Comptroller.24Cornell Law School. 34 Texas Admin Code 1.10 – Requesting a Hearing Miss that window and you lose your hearing right; your only remaining path is to pay the assessment and file a refund claim. The Comptroller often holds an informal conference before issuing a final decision, and disputes over marketing costs or exemption eligibility frequently get resolved there.

If the Comptroller’s final decision goes against you, you can request a formal contested-case hearing before the State Office of Administrative Hearings.25Cornell Law School. 34 Texas Admin Code 1.5 – Filing Documents with SOAH or the Office of Special Counsel for Tax Hearings SOAH reviews evidence and issues a recommendation. The final step is a petition for judicial review in Travis County district court, filed within 30 days of the decision becoming final.