Mineral Rights Xchange
Texas severance tax is an excise tax on natural resources produced and severed from the land in Texas. Mineral rights owners, as recipients of royalty income, are often connected to the severance tax through the operator or the company that pays the royalty. The post below is general information; verify the current state with a Texas-licensed CPA.
What the severance tax is
The severance tax is paid by the producer of the resource — typically the operator of the well — and the rate depends on the type of resource. For oil and gas, the rate is set by the Texas Comptroller and is a function of the market price of the resource at the time of severance. The tax is remitted to the state; it is not withheld from the royalty owner’s check in most cases.
Royalty owners, as a result, usually do not file or pay severance tax directly. The tax is a cost of production that affects the operator’s economics and, indirectly, the operator’s willingness to keep producing a given well. The severance tax is separate from the owner’s federal income tax and from the Texas franchise tax (which applies to certain entities, not to individuals).
The current rate structure
The oil rate is a percentage of the market value of the oil at the wellhead, with a tiered structure: a lower rate below a price threshold, a higher rate above. The gas rate follows a similar pattern. The Comptroller publishes the current rates and the price thresholds; these are the numbers to verify rather than relying on memory or older sources.
The thresholds are designed to be progressive: when prices are low, the rate is lower; when prices rise above the threshold, the rate increases. Owners often consider this when they look at a high recent royalty check stub and ask whether the run-rate is sustainable. The severance tax is one of several mechanisms that captures upside when commodity prices are high.
What the royalty owner actually sees
Most royalty owners do not see the severance tax on their check stub. The deductions that show up on a typical check stub are:
- Severance tax reimbursement. In some leases, the operator passes a portion of the severance tax through to the royalty owner. The lease controls this; verify with the owner’s lease language or a Texas-licensed attorney.
- Post-production costs. Gathering, transportation, and processing costs. The lease controls how these are calculated; some leases permit broad deductions, others are narrower. Texas case law has narrowed some of these deductions in recent years; verify with a Texas-licensed attorney.
- Marketing and compression. Costs of moving the gas to a pipeline. The lease controls.
The headline royalty fraction (e.g., 1/4 or 3/16) is the starting point, but the net check is the result of those deductions and the calculations in the lease. The underwriter review walks through the net calculation as part of the income approach.
Reporting and compliance
Operators handle the severance tax reporting. The Comptroller publishes the forms and the schedule. Royalty owners do not have a separate filing obligation for severance tax, but they do have a federal income tax obligation on the royalty income, and the basis, depletion, and the holding period matter at the federal level.
A Texas-licensed CPA is the right professional for the federal income tax treatment, particularly for the depletion calculation (cost depletion vs. percentage depletion), the installment treatment on a sale, and the basis recovery. The severance tax and the federal income tax are different mechanisms; one does not displace the other.
Exemptions and deductions
A few specific exemptions and deductions apply. The Comptroller’s published guidance is the source of truth. Owners often consider the following, but each requires verification with a CPA or the Comptroller’s office:
- Two-year inactive well severance tax incentive. A reduced rate for inactive wells returned to production.
- Low-producing well severance tax incentive. A reduced rate for low-volume wells.
- Enhanced oil recovery (EOR) projects. Specific incentives for EOR projects.
- Offshore and deepwater. Different rate structures; verify with the Comptroller for any specific situation.
The list changes. The Comptroller’s office is the source of truth.
What the underwriter review does with severance tax
A underwriter review typically does not size the severance tax. The review is focused on the income side (production × royalty fraction × deductions) and the discount-rate side. The severance tax affects the operator’s economics, not the owner’s check directly (in most leases). If the lease includes a severance tax pass-through, the review surfaces it; otherwise, the review treats the severance tax as a background assumption in the operator’s cost stack.
When to involve a Texas-licensed CPA
For any specific situation, the right move is a Texas-licensed CPA familiar with mineral-rights tax. The CPA will:
- Confirm the current severance tax rate with the Comptroller’s published guidance.
- Review the lease for any severance tax pass-through language.
- Calculate the federal income tax treatment, including basis, depletion, and the installment treatment on a sale.
- Coordinate with the owner’s federal tax preparer on the year-of-sale reporting.
A short summary
Texas severance tax is paid by the producer; the royalty owner usually does not file or pay it directly. The current rate is set by the Texas Comptroller, with a tiered structure that rises with price. The royalty owner’s check stub may show severance-tax-related deductions if the lease passes them through. Verify any specific situation with a Texas-licensed CPA and the Comptroller’s published guidance.