On February 11, House Bill 64, the two-year budget bill for the state, was introduced in the Ohio House of Representatives. Continuing a trend from prior budgets, the plan calls for an additional 23 percent reduction in the personal income tax rate and an expansion of the small business deduction to the first $2 million on net business income. These reductions would be paid for in part by increasing the sales tax rate from 5.75 percent to 6.25 percent, increasing the tax on tobacco products by $1, increasing the commercial activity tax from 0.26 percent to 0.32 percent of gross receipts, and revamping Ohio’s severance tax on oil and natural gas. The proposal increases the severance tax rate to 6.5 percent of the value of oil or natural gas at the wellhead, or in some cases, 4.5 percent of the value downstream. This varies significantly from the proposals that were considered during 2014. This bulletin briefly compares the various proposals and provides additional information on H.B. 64.
The severance tax is a volume-based tax imposed on oil and natural gas at a rate, including a regulatory fee, of $.20 per barrel and $.03 per mcf, respectively. These rates apply to oil and natural gas produced by both conventional vertical wells and horizontal wells using hydraulic fracking technology.Condensate and natural gas liquids are not separately taxed.
House Bill 375
An effort to revise Ohio’s severance tax began in early 2014 with House Bill (H.B.) 375. As introduced, the bill sought to shift Ohio’s severance tax from a tax based on volume produced to a tax based on the value of the commodity produced. Oil and natural gas would both have been taxed at a rate of 1 percent of “net proceeds” (a term that was not defined in the proposal) for the first five years of production. They then would both be taxed at a rate of 2 percent of “net proceeds,” with no tax on slow-producing wells.
House Bill 472: Mid-biennium Budget Review
The Kasich administration released its proposal to revise the severance tax as part of its mid-biennium budget review process. Like the current proposal, H.B. 472 sought to make significant cuts in the personal income tax rate. Those cuts would be paid for in part by revamping the severance tax. Under H.B. 472, the severance tax for oil and natural gas produced by vertical wells remained unchanged. However, both oil and natural gas produced by a horizontal well would have been taxed at a rate of 2.75 percent of gross receipts from the first sale of the oil or natural gas. Similar to H.B. 375, the term “gross receipts” was not defined in the legislation. The bill did, however, provide that in the case of sales between related entities, the Tax Commissioner had authority to establish an arm’s-length price for the transaction.
H.B. 472 did provide a cost recovery period for drillers; during the first three years of production, the first $4 million, $3 million, and $1 million, respectively, of gross receipts was excluded from the tax. Thereafter, the tax applied to the all gross receipts.
The bill also called for a hike in the commercial activity tax rate, from 0.26 percent to 0.30 percent.
Sub. H.B. 375
Eventually, the House wrapped the severance tax changes into a substitute version of H.B. 375. Under Sub. H.B. 375, the rate on oil and natural gas produced by vertical wells would be reduced to $.10 per barrel and $.015 per mcf, respectively. The first $10 million of “wellhead gross receipts” of oil and natural gas produced by a horizontal well would not be subject to tax; thereafter, both would be taxed at 2.75 percent of “wellhead gross receipts.” The term “wellhead gross receipts” was defined as the proceeds from the first sale of oil or natural gas, reduced by specified production costs.
In addition, the bill provided a nonrefundable income tax credit for persons holding a royalty interest in a well producing oil or natural gas equal to a portion of the amount of severance tax paid by holders of the royalty interest. The bill also provided a limited exclusion from the commercial activity tax if the taxpayer is subject to income tax on the income from the first sale of the oil or natural gas.
House Bill 64 - Current Proposal
In the case of oil or natural gas produced by vertical wells, the tax will be imposed at rates of 20? per barrel of oil, and 3? per MCF of natural gas; the existing assessment fees are repealed. In the case of oil, natural gas, condensate, or natural gas liquids produced by horizontal wells, the tax will be based on the volume of product produced during a calendar quarter multiplied by the average quarterly spot price of the commodity in question. For each product, the “average quarterly spot price” means, for the quarter that begins six months prior to the existing quarter, the average daily spot price of a specified quantity of product, as publicly available from a source determined by the tax commissioner. Before the first day of each quarter, the tax commissioner is required to certify and post on the Department’s web site, the average quarterly spot rice for each product for the ensuing quarter.
The tax is imposed at the following rates:
For oil, the tax is imposed at a rate of 6.5 percent For all other natural gas, 4.5 percent For condensate collected at a point other than the wellhead, 6.5 percent For natural gas liquids collected other than at the wellhead, 4.5 percent
The tax rates associated with these various proposals are compared in the following chart:
Click here to view the chart.
“Condensate" means liquid hydrocarbons separated at or near the well pad or along the gas production or gathering system prior to gas processing. “Natural gas liquids” means hydrocarbons separated from natural gas, including ethane, propane, butane, pentane, hexane and natural gasoline.
Items produced from exempt wells are not subject to tax. In addition, natural gas severed from low-producing wells that are not horizontal wells is not subject to tax.
Returns and tax are due for each quarter by the 15th day of the second month following the close of the quarter, unless the tax commissioner prescribes a different time for a taxpayer.
Funds generated by the tax are deposited into the severance tax receipts fund. After any transfer of funds into the tax refund fund, the remaining funds are credited as follows:
- Monthly, an amount to the oil and gas well fund and geological mapping fund, based on amounts appropriated for regulation, geological mapping, and plugging idle and orphaned wells.
- Quarterly, of the remaining amount, o 10 percent to the county severance tax fund o 5 percent to the severance tax infrastructure fund o 5 percent to the severance tax endowment fund o 80 percent to the general revenue fund
The proposal also includes an increase in the commercial activity tax rate, from 0.26 percent to 0.32 percent, of taxable gross receipts. This increase will apply to severers that sell their product in Ohio.
In addition, the sales tax rate will be increased 0.5 percent, from 5.75 percent to 6.25%. The tax will also be expanded to a number of services, regardless of the profession of the provider, including:
- Transactions by which bad debt is or is to be transferred
- Travel service, which means acting as an agent in selling travel, tour, or accommodation services to the general public and commercial clients
- Research and public opinion polling service, which means systematically gathering, recording, tabulating and presenting marketing and public opinion data
- Public relations service, which means designing and implementing public relations campaigns designed to promote the interests and image of one or more clients
- Lobbying service, which means any activity that serves to influence the behavior or opinion of an individual, an industry, or an organization
- Management consulting services, which means any activity that provides advice and assistance to businesses and other organization on business issues
- Debt collection service, which means collecting payments for claims and remitting payments collected to their clients
The tax on tobacco products is increased by an amount equal to $1.00 per package of cigarettes. E-cigarettes are also taxed at an equivalent rate.