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Ohio Alters Oil, NatGas Reserves Taxation

Ohio's local collection of the taxes producers pay on their oil and natural gas reserves has changed slightly in a move that could mean increased burdens for some producers that contest the value of their assets and the taxes they must pay on them.

Starting this tax year, the value of reserves will be based upon production volumes reported to the Ohio Department of Natural Resources (ODNR). The change could overvalue reserves in some cases as the volumes reported are produced amounts, unlike the previous practice, which required the value to be based on the volumes produced and sold.

Producers have warned that the change could lead to increased reserve values and taxes. As a result, the Ohio Department of Taxation announced last month a temporary fix for the issue.

Producers, the department said, would be allowed to submit a form to challenge any suspected overassessment based on the difference between produced volumes and produced and sold volumes. Those forms can be submitted with various county auditors for each overassesment.

Local tax bills also will only be sent to producers and no longer royalty interest holders as well. Instead, producers are responsible for paying the taxes owed by those interest holders. They can then recoup those costs from future royalty payments, which will be shown on landowner statements.

"Going forward, the changes...will significantly change how the ad valorem tax is collected. As such, it will be very important to accurately report production volume to ODNR, accurately track shrinkage and confirm that ODNR is accurately attributing volume to each active production site," said Columbus-based law firm Vorys, Sater, Seymour and Pease LLP. "In the event that there are discrepancies with the information, it will be essential for producers to file complaints regarding the valuation, and it will be the producers' burden to prove that the data reported to ODNR and the resulting calculation is incorrect."

The ad valorem tax in Ohio is similar to a property tax and requires assessment. Counties collect the tax and use it for their general funds, schools or other purposes. The changes are being adopted to create a more uniform formula for the valuation of reserves.

They took effect earlier this year. Basing the value of reserves on production volumes brings the billing of ad valorem taxes closer in line with how the state charges for the separate severance taxes that it collects from producers, said Ohio Department of Taxation spokesman Gary Gudmundson.

“The county auditors -- in counties where horizontal drilling is occurring -- came to us four years ago and said, ‘billing these horizontal wells that extend for miles and cross different taxing districts and royalty holder properties is very difficult.’ It’s very difficult to determine the value and issue bills for the large number of involved interest holders,” Gudmundson said. “At that point, the [Department of Taxation] and ODNR developed a system that essentially produced a uniform production value that applies not only to the severance tax but the [ad valorem] tax.”

The information that producers are required to provide to ODNR determines tax values, Gudmundson said. For now, if producers do file a form challenging an overassesment, then county auditors have been instructed to use the amended values if they haven't decreased more than 10% from what is reported to the ODNR.

If the difference is more than that, Vorys said, then auditors would bill based on the ODNR data and the producer would have to file a formal complaint with the county board of revision. If producers do find discrepancies in taxable volume amounts, they can file the applicable form with county auditors by Oct. 3.   

In a memo from Tax Commissioner Joseph Testa earlier this month, the department said it would continue to work with ODNR to find a more permanent solution to the possibility of overassessments.

Ohio Oil and Gas Association (OOGA) Executive Vice President Shawn Bennett said it took some time for all the parties involved to agree on the ad valorem changes.

“In the beginning, there were concerns during multiple meetings with the department of taxation, but we eventually came to an understanding and now we’re all on the same page, automating the system is more efficient,” he said. “It was trying to figure out how to implement this that was difficult.”

Bennett added that there is still confusion among some of OOGA’s members about the changes, but he said the organization is helping to work “through the hiccups,” which were expected.

Neither Gudmundson nor Bennett could say how much producers pay annually in ad valorem taxes. While Bennett said he knows the amount is significant, he added that it’s difficult to track from county to county because it is lumped in with other property values and payments.

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