On March 10, 2015, Pennsylvania Governor Tom Wolf-(D) provided the text of his proposed changes to the Tax Reform Code of 19711 that would levy a tax on the extraction of natural gas in the Commonwealth of Pennsylvania. As promised by Governor Wolf in February 2015, the “Pennsylvania Education Reinvestment Act”2 (Act) would tax producers for the natural gas they extract or “sever”3 from the ground. According to a February 11, 2015 press release from the Governor’s Office, the legislation is modeled after West Virginia’s severance tax law.4 The Governor’s Office claims the Pennsylvania Education Reinvestment Act is similar to legislation enacted by Texas and Oklahoma to “fund key priorities and initiatives.”5
The Act places the following taxes upon “producers”6 of natural gas:
- 4.7 cents per every thousand cubic feet of gas volume extracted;7
- Five percent of the gross value of the dry natural gas derived from the natural gas severed as shown by the gross proceeds derived from the sale by the producer;8 and
- Five percent of the gross value of the natural gas liquids derived from natural gas severed as shown by the gross proceeds derived from the sale by the producer.9
Importantly, the Act sets a minimum value of $2.97 per thousand cubic feet of natural gas for the “gross proceeds” term used to calculate the tax.10
The taxes do not apply to natural gas, dry natural gas or natural gas liquids extracted: (i) under a lease and provided to a lessor for no consideration; (ii) from a stripper well; or (iii) from a storage field.11
Other key provisions of the Act include:
- The Act invalidates any existing agreements that violate its provisions and declares any future agreements inconsistent with the Act to be illegal.12
- Producers must file a return with the Pennsylvania Department of Revenue (Department) reporting all natural gas severed per reporting period and the tax due as imposed by the Act.13
- Producers must apply to the Department for a “severance tax license” before extracting natural gas in Pennsylvania.14
- Producers already engaged in natural gas extraction must obtain a “severance tax license” within six months from the enactment of the Act.15
- In addition to any liability imposed for failing to obtain the “severance tax license,” the Act authorizes the Department to enforce a civil penalty of ten cents per every thousand cubic feet of natural gas extracted during the period the producer did not have the license.16
The Act administers the funds collected from the taxes to education according to Tax Reform Code of 1971.17 The Act then purports to “overlay” the existing Impact Fee established in the state treasury pursuant to the Unconventional Gas Well Fee.18 In some instances, the Act increases the funding dispersed to stakeholders like conservation districts and State agencies.
Not only does the Act enact additional taxes, it also creates additional reporting and licensing requirements for natural gas producers.
1Act of March 4, 1071 (P.L. 6, No. 2), known as the “Tax Reform Code of 1971” (as amended, 72 P.S. §§ 7101-10009).
2Proposed Article XI-E of the Tax Reform Act of 1971, “Education Reinvestment,” Sections 1101-E to 1129-E.
3“Sever” is defined in the Act as “the extraction or other removal of natural gas from an unconventional formation in this Commonwealth.”
4See “Severance and Business Privilege Tax Act of 1993,” West Virginia Code § 11-13A et seq.
5Governor Tom Wolf press release, February 11, 2015.
6“Producer” is defined in the Act as “a person who engages or continues within this Commonwealth in the business of severing natural gas for sale, profit or commercial use.”
7Act Section 1102-E(b)(1).
8Act Section 1102-E(b)(2).
9Act Section 1102-E(b)(3).
10Act Section 1101-E.
11Act Sections 1102-E(c)(1-3).
12Act Sections 1104.1-E and 1104.2-E.
13Act Section 1105-E(a).
14Act Section 1106-E(a).
15Act Section 1106-E(a).
16Act Section 1106-E(h).
17Act Section 1108-E.
18Act Section 1124-E. These provisions mirror those set forth in the Unconventional Gas Well Fee. See 58 Pa.C.S. § 2314.