NEWS The Voice of the Gas and Oil Industry
February 2021
New forms required for 2020 severance tax To avoid having to file your severance tax returns twice, all producers need to use the new forms posted on the West Virginia Tax Department website. With respect to oil and gas severance tax, the State Tax Department reports that: • Schedule C is now used to report Natural Gas Mid Volume Vertical Rate. This should only include natural gas vertical wells that qualify for the reduced rate for mid-volume production. • Schedule D is used to report the Oil Mid Volume Vertical Rate. This should only include only oil vertical wells that qualify for the reduced rate for mid-volume production. • Schedule E is used to report Coalbed Methane, NGL, and other Commodity. • Lines have been added to the second page
of the return to capture the calculations from Schedule D & E. • The instruction page has been updated to include the changes to the return and schedules. Please go to the website, Doug Douglass review the instructions for the Producers Issues year 2020, entitled SEV-401 Committee Chair Severance Tax Annual Return Effective for Tax Year Ending 12/31/2020 and use the new forms and new schedules. The Tax Department reports that filings made on the old, prior year forms will be returned. If you have questions, please email Cliff Wilkinson, the excise supervisor at the West Virginia State Tax Department.
Court okay’s post-production expense deduction On December 1, 2020, the Fourth Circuit Court of Appeals gave a significant victory to our industry with its decision in Young v. Equinor, Appeal No. 19-1334. In its opinion, the Fourth Circuit held that the method of calculating the deduction of post-production expenses stated in Equinor's lease with the Youngs satisfied the third prong of the test set out in the 2006 Tawney decision by the West Virginia Supreme Court of Appeals. Tawney established a three-prong test to determine the enforceability of a clause allowing the deduction of post-production expenses in the calculation of royalties. In order to satisfy each prong of this test, a royalty clause must include: (1) an express statement that expenses are deductible; (2) a specific description of each type of deductible expense; and (3) a description of the method used to calculate the amount of expense to be deducted.
The royalty clause in the Equinor lease states "[t]o pay Lessor on all volumes of gas actually sold from said land, fourteen percent of the net amount realized by Lessee, computed at the wellhead." In considering the method of royalty calculation, the Fourth Circuit observed William Herlihy that the reality of modern gas Spilman Thomas sales requires the deduction of & Battle, PLLC post-production expenses from the value-added downstream price. According to the Court, this "work back" method of royalty calculation prevents lessors from unfairly increasing their royalty stream without bearing their proportionate share of the costs necessary to achieve the Court decision Continued on page 19
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2 Ben Sullivan/ Tom Westfall 3 Jeff Isner 4 Charlie Burd 5 Association News 6 Mark Clark 7 Maribeth Anderson 7 Kathy Hill 8 Tim Bigler 9 Greg Kozera 10 Madeline Scarborough 11 Thomas Downs 12 Industry Events 13 Jeff Isner 14 Michael Forbes 15-19 Industry News 22-23 GO WV Ad Contracts
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