Current through Register Vol. XLI, No. 38, September 20, 2024
3.1.
Imposition of Tax. -- Upon every person exercising the privilege of engaging or
continuing within this State in severing, extracting, reducing to possession
and producing for sale, profit or commercial use any natural resource product
or products, there is hereby imposed a tax in the amount to be determined by
the application of rates against the gross value of the articles produced, as
shown by the producer, except as otherwise provided, multiplied by the rates in
the classifications and according to the effective dates as follows:
3.1.1. On coal, and including the thirty-five
one hundredths (.35) of one percent additional severance tax on such coal for
the benefit of counties and municipalities, as provided in W. Va. Code
'11-13A-6,
on
July 1, 1987 - three and eighty-five one hundredths (3.85)
percent;
July 1, 1988 - three and eighty-eight one hundredths (3.88)
percent; and
March 1, 1989 - and thereafter - five (5.0) percent.
3.1.2. On limestone or sandstone
quarried or mined, on
July 1, 1987 - two and two-tenths (2.2) percent;
July 1, 1988 - two and fifty-six one hundredths (2.56)
percent;
July 1, 1989 - two and ninety-two one hundredths (2.92)
percent;
July 1, 1990 - three and twenty-eight one hundredth (3.28)
percent;
July 1, 1991 - three and sixty-four one hundredths (3.64)
percent;
July 1, 1992 - four (4.0) percent;
July 1, 1993 - four and fifty one hundredths (4.5) percent;
and
July 1, 1994 - and thereafter - five (5.0) percent.
3.1.3. On oil, on
July 1, 1987 - four and thirty-four one hundredths (4.34)
percent;
July 1, 1988 - four and two hundred seventy-two one
thousandths (4.272) percent; and
March 1, 1989 - and thereafter - five (5.0) percent.
3.1.4. On natural gas, on
July 1, 1987 - six and five-tenths (6.5) percent;
July 1, 1988 - six (6.0) percent;
July 1, 1989 - five and five-tenths (5.5) percent; and
July 1, 1990 - and thereafter - five (5.0) percent.
3.1.5. On natural gas produced
from new wells drilled and placed in service on and after July 1, 1987, on
July 1, 1987 - four (4.0) percent; and
March 1, 1989 - and thereafter - five (5.0) percent.
3.1.6. On sand, gravel or other
mineral product not quarried or mined, on
July 1, 1987 - four and thirty-four one hundredths (4.34)
percent;
July 1, 1988 - four and two hundred seventy-two one
thousandths (4.272) percent;
March 1, 1989 - and thereafter - five (5.0) percent.
3.1.7. On timber, on
July 1, 1987 - two and five-tenths (2.5) percent; and
March 1, 1989 - and thereafter - three and twenty-two
hundredths (3.22) percent.
3.1.8. On other natural resources, on
July 1, 1987 - two and eighty-six one hundredths (2.86)
percent;
July 1, 1988 - three and eighty-eight one thousandths (3.088)
percent;
July 1, 1989 - three and three hundred sixteen one
thousandths (3.316) percent;
July 1, 1990 - three and five hundred forty-four one
thousandths (3.544) percent;
July 1, 1991 - three and seven hundred seventy-two one
thousandths (3.772) percent; and
July 1, 1992 - and thereafter - four (4.0) percent;
July 1, 1993 - four and fifty one hundredths (4.5) percent;
and
July 1, 1994 - and thereafter - five (5.0) percent.
3.2. Tax in Addition to
All Other Taxes. -- The severance taxes apply to all persons severing or
processing (or both severing and processing) natural resources in this State
and are in addition to all other taxes imposed by law.
3.3. Tax Allocation Agreements Preserved. --
Provisions of any contract entered into prior to July 8, 1985 and which related
to the allocation, reimbursement, payment or assessment imposed by W. Va. Code
'11-13-2a prior to July
1, 1987, shall apply with full force and effect to the severance tax which is
imposed on and after July 1, 1987.
3.4. Producing Natural Resource Products for
Others. -- Persons performing under contract, either as prime contractors or
subcontractors, the necessary labor or mechanical services for others who are
engaged in the business of producing natural resources, are performing a
service for the producer and therefore are not taxable as a producer of natural
resources for purposes of severance taxes.
3.4.1. The producer of the natural resource
products that are extracted by the contract miner is taxable under the
severance tax.
3.4.2. Contribution
to Capital. -- When the contractor who is drilling the well receives a
percentage of the working interest in the gross proceeds from the production
from that well, such drilling is treated by the contractor as a contribution of
capital to the enterprise and is not considered as income to the contractor
derived from severing the natural resource. Once production begins, however,
all income, received by the contractor for his working interest in such
production, will be included in the gross income subject to the severance tax
of the producing well or wells reporting as a joint venture, partnership or
group or combination acting as a unit.
3.4.3. Persons engaged in the business of
drilling for natural resources, including water, who have no ownership or
economic interest in such resources, shall also be treated as "contract miners"
and not taxed under the severance tax.
3.4.4. Well Servicing. -- Similarly, persons
engaged in the business of shooting, refracturing, and otherwise servicing oil
and gas wells for a fee and who do not have an economic interest in the oil or
gas are also not required to report their total gross income received from the
producer under the severance tax.
3.5. Determination of Producer and Contract
Miner. -- Generally, a producer is one who has ownership, title to or an
economic interest in mineral deposits or standing timber, and a contract miner
is one who does not possess an economic interest but performs services for
producers by contract. The contractual form will not necessarily control the
status of the parties in regard to severance tax liability. The status of the
parties will be determined by the substance of their relationship. Accordingly,
although an agreement may be referred to as a lease, where the true substance
of the agreement does not convey ownership or the economic interest in the
mineral, in place, such agreements will be construed as service contracts.
3.5.1. Economic Interest. -- The concept of
critical importance in determining who is the producer is which party has a
true economic interest in the mineral. In order to have an economic interest,
the taxpayer must have a direct interest in the minerals in place. One must
also have a direct interest in the income from the production of the minerals
and look solely to mineral sales proceeds for his income. A taxpayer does not
have an economic interest simply because a contract entitles him to an economic
or monetary advantage in connection with production of the minerals. For
example, a person who has no ownership, title in, or leasehold interest in the
mineral deposit or standing timber does not possess an economic interest merely
because through a contractual relationship he possesses an economic advantage
derived from production. The pivotal question involves the ownership of the
mineral immediately after it is severed. The owner at that point is the
producer.
3.5.2. If a dispute
should arise as to which party is the producer and which is the contract miner,
the Tax Department shall consider, in addition to the substance of the
agreements, other factors which shall include, but not be limited to the
following attributes which may indicate the presence of ownership or economic
interest subjecting such person to the severance tax.
3.5.2.1. An interest in the mineral in
place.
3.5.2.2. An investment which
is recoverable through depletion not recoverable through
depreciation.
3.5.2.3. Contractual
agreements which are not terminable without cause on short notice.
3.5.2.4. Entitlement to claim a depletion
allowance for federal income tax purposes.
3.5.2.5. Obligation to pay royalties to
another.
3.5.2.6. Exclusive right
to sever, mine, cut or extract the natural resource product.
3.5.2.7. Income from the sale of mineral
proceeds rather than from other sources.
3.5.2.8. Control over the mineral from the
time of extraction to sale.
3.5.3. Interests Not Considered Production.
3.5.3.1. Farm-Out. -- A "farm-out" is an
arrangement under which the owner of an operating or working interest (normally
considered a "producer") assigns his interest to another person as a means of
financing the costs of developing and operating the property. Farm-outs may be
structured many different ways; the following is an example: The owner of the
operating or economic interest in the mineral transfers (usually by assignment
of the lease) his entire operating interest and retains a nonoperating interest
in the property. The retained nonoperating interest usually takes the form of
an overriding royalty which operates much in the same way as an ordinary
royalty, usually designated as a right to receive a specified share of gross
income or production from the mineral property. The person who receives the
working interest and assumes the entire burden of developing and operating the
property should report the entire gross proceeds of sale of the natural
resource product under the severance tax without any deduction for the
overriding royalty or any other royalty payable to others.
3.5.3.1.a. Example. -- A, a lessee, owns the
entire operating interest in property W, an undeveloped lease which provides
for 1/8 royalty to be paid to lessor R. In a farm-out arrangement, A transfers
the entire operating or working interest in property W to D in exchange for D's
obligation to drill a well on the property and 1/16 overriding royalty payment
upon production. D drills a successful well and receives $16,000 upon sale of
the product.
D is required to report the entire $16,000 under the
severance tax (less any allowable transportation deductions).
Both R and A are not required to report under the severance
tax.
3.5.3.2.
Fractional Interest Retained. -- The owner of the operating interest may choose
to transfer a fraction of his interest to another party who agrees to bear a
disproportionate share of the development costs. In the event production is
obtained, the two parties would report the proceeds in accordance with their
respective shares of the operating interest.
3.5.3.2.a. Example. -- F, a lessee, owns the
entire operating interest in an undeveloped lease. F retains 25% of the
operating interest on a farm-out of the property. G, acquires the remaining 75%
of the operating interest from F in exchange for G's agreement to drill and
equip a well on the property. The well production derives $10,000 gross
proceeds. Although F would receive $2,500 of the income and G $7,500 of the
income, the tax for severance tax purpose should be reported and paid under a
single account as a group or combination acting as a unit as prescribed in
Subsection 6.1 of these regulations.
3.5.4. Royalties Derived From Natural
Resources. -- Persons who receive payments, as royalties, from producers of
natural resource products are not deemed to be producers thereof and are not
required to file a severance tax return. The fact that the payment is called by
a name other than royalty shall not alter the taxation of such payment if all
the recipient thereof has done is to furnish real property which has a situs in
this State and which includes minerals in place, or any interest therein, for
hire, loan, lease or otherwise.
Lessees, sublessees or other denominated lessees, including
persons to whom an operating interest has been assigned or farmed-out, are
producers of all the natural resources produced, regardless of any payment, in
kind or otherwise, to lessors, sublessors or other denominated lessors of a
part of such natural resources as rent or royalties.
For the purposes of taxation, royalties will include, but not
be limited to, ordinary royalties, overriding royalties, lease bonus, delay
rental, advance royalty, minimum royalty, shut-in royalty, payment for
exploration rights, and the reimbursement by the lessee of lessor's property
taxes. In no instance may a producer of natural resources deduct such payments
from gross value.
3.6. Partially Producing Coal Within and
Without this State. -- In those instances in which the same person partially
produces coal within West Virginia and partially produces coal without West
Virginia, a portion of the gross proceeds of sale are taxable under the
severance tax. The portion of the gross proceeds of the sale that are taxable
under the severance tax shall be determined in a reasonable manner based upon
the facts and circumstances of the particular situation.
3.6.1. Example 1: Company A, a coal producer,
severs coal located in Kentucky. After the coal is mined, it is transported to
Company A's processing facility in West Virginia. At the facility in West
Virginia, the coal is processed and then loaded for shipment to a purchaser.
Company A owes severance tax in West Virginia on the gross value added to the
coal by the activities conducted within West Virginia. Guidelines on
determining the gross value added to the coal by the activities conducted
within West Virginia are set forth in Section 2a of these
regulations.
3.6.2. Example 2:
Company B, a coal processor, purchases coal from a producer in Kentucky. The
processor has the coal delivered to its processing facility located in West
Virginia. At the processing facility in West Virginia, the coal is processed
and loaded for shipment to a purchaser. Company B owes severance tax in West
Virginia on the gross value added to the coal by the processing activities
performed in West Virginia. Guidelines on determining the gross value added to
the coal by the activities conducted within West Virginia are set forth in
Section 2a of these regulations.
3.6.3. Example 3: Company C, a coal producer,
severs coal located in West Virginia. After the coal is mined, it is
transported to Company C's processing facility located in Kentucky for further
processing. Company C owes severance tax in West Virginia on the gross value of
the coal attributable to its activities conducted within West Virginia.
Guidelines on determining the value added to the coal by the activities
conducted within West Virginia are set forth in Section 2a of these
regulations.
