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"Municipal B&O Taxes: How Will They Affect the Oil & Gas Industry?"
The headlines read "Weirton City Council has passed the final reading of a business and occupation tax for the natural gas industry." Many in the industry are trying to scramble to determine what this means to the industry and how we deal with this burden.
The B&O tax is imposed upon the gross receipts of the industry. The valuation of the oil and gas, for purposes of the municipal business and occupation tax, is at the well-mouth immediately preceding transportation and transmission. In order to arrive at the well-mouth value of such severance and production, certain transportation or transmission expenses incurred by producers of natural gas shall be allowed as a deduction from the gross proceeds of the sale of gas.
The state B&O tax was eliminated in the mid-1980s in favor of a more progressive tax structure, however the legislature reserved to the municipalities the right to impose and collect the tax.
Many municipalities have a B&O tax on the production of oil and gas and that rate can be as high as 6% for production over $5,000. But the key to the tax is the location of the wellhead. Municipalities can only assess their tax upon the production of natural resources at the point it is severed. For purposes of oil and gas production, the severance occurs at the wellhead. Therefore a wellhead located outside of the corporate limits, even if a portion of the pooled interest is within the municipality, will not be subject to tax.
For cities like Weirton, that have recently imposed or increased their tax rate, or others that might impose or increase their tax rates, the West Virginia Legislature has provided a safe harbor. WV Code §8-13-5(c) allows only the gross income derived from contracts entered into after the effective date of such imposition of tax or any increase in the rate of tax upon any business, occupation or privilege to be subject to the new or increased tax rate. Therefore, in Weirton the new tax upon the production of oil and gas will only apply to contracts entered into after November 8, 2012.
While many municipalities already have maximized their B&O tax, a lot of the class 2, 3 and 4 municipalities have not, or have exempted natural resource production. It is important to know the tax structures of the regions in which you are producing, and monitor possible changes. With proper structuring, you will be able to avoid subjecting yourself to municipal B&O tax.