SALT Considerations for the Oil & Gas Industry

Increases in exploration and production of oil and gas, and the accompanying oil field services, has reinvigorated economic activity in various regions throughout the United States. In response, state tax laws are rapidly changing in an effort to keep pace with the oil and gas industry.

These law changes can range from offering additional tax incentives to increasing tax costs. Such changes create complex and burdensome challenges which raise the potential for significant multi-state tax exposure for those unaware of how the laws apply to each unique set of facts and issues. However, with the proper guidance, multi-state companies can navigate state tax systems to maximize profit, while minimizing risk.

Sales and Use Tax

To encourage economic development and incentivize behavior, states often create sales and use tax exemptions. Identifying activities subject to exemption is crucial to ensuring the appropriate tax benefits are received. For example:

North Dakota - In an effort to encourage natural gas producers to increase their production capacity, North Dakota enacted a law exempting tangible personal property used to construct or expand gas processing facilities.

Pennsylvania - Encourages natural resource production with an exemption for mining activities, which is broad enough to cover oil and gas production and related services.

West Virginia - Encourages the expansion of oil production by exempting certain services and property if used directly in activities and operations integral and essential to the production of natural resources.

Most of the various state incentives encouraging oil and gas production and oil field services have differences, making compliance and planning increasingly difficult and competent guidance essential.

Income Tax

States frequently encourage economic activity by tinkering with exemptions, deductions and reporting requirements in their corporate income tax codes. For example, Alaska requires taxpayers to capitalize and amortize certain intangible drilling costs (IDCs), where for federal purposes they are allowed a deduction in the year incurred. Alaska's tax code also requires that oil and gas producers and transporters use worldwide combined reporting, which could affect the taxable income of a company.

Many states also require IDCs, whether capitalized or expensed, to be included in the property factor of the apportionment formula.

Differences amongst the states can have large effects on taxable income, and therefore, require careful consideration and tax planning.

Other Taxes

Various states impose different types of excise taxes on the oil and gas industry. These taxes take various forms, such as property taxes, oil production taxes, severance taxes and motor fuel taxes. Such complex laws can catch taxpayers off guard highlighting the need for competent advice.

For more information contact your Eide Bailly professional.