In the oil and gas industry, severance tax is more than just another item on the compliance checklist—it’s a financial obligation with significant implications for profitability and risk management. States rely heavily on severance tax revenue, which is why the rules are complex, enforcement is strict, and errors can be costly.
Despite this, many companies treat severance tax like a general tax issue, hiring a third party that assigns the work to sales or property tax professionals, relying solely on accounting software, or outsourcing to firms without oil and gas accounting expertise. That approach results in not maximizing recoveries, missing incentives and exemptions, and being unable to defend or substantiate claims due to a lack of industry knowledge and understanding of state-specific laws.
At Revenew, we’ve worked with energy producers of all sizes and seen the full spectrum of severance tax management approaches. The companies that recover the most—and avoid the biggest headaches—are the ones that recognize that severance tax requires specialized expertise.
What Makes Severance Tax So Complex?
Severance tax is assessed at the point of resource extraction, not at the point of sale. That distinction matters. It means tax calculations are based on detailed, well-level production data, not financial transactions. These filings are jurisdiction-specific, involve regulatory updates, and require intricate allocation methodologies across leases, units, and product types.
Severance tax depends heavily on:
- Accurate volume reporting
- Wellhead pricing knowledge
- Understanding additional operator expenses at the lease-level
- Real-time tracking of high-cost gas, marginal wells, and other incentive thresholds
That’s why tax professionals without oil and gas accounting experience can easily make costly mistakes—even with the best intentions.
Complexity of Oil and Gas Severance Tax
Severance tax in the oil and gas industry is inherently complex, driven by a variety of regulatory and operational factors:
- Diverse State Regulations:
Each producing state enforces its own severance tax framework, encompassing unique rates, calculation methodologies, and exemptions. Operators active in multiple jurisdictions must ensure compliance with varying and often conflicting requirements. - Tax Base Determination:
Severance taxes may be assessed based on either the volume or the market value of the resource extracted. Value-based assessments require navigating fluctuating commodity prices, making accurate forecasting and valuation challenging. While volume-based taxes are simpler to administer, they fail to capture market volatility. Some states employ hybrid models, further complicating compliance. - Price Volatility:
The inherent volatility in oil and gas prices creates uncertainty in both tax liability projections for operators and revenue forecasting for state governments. - Incentives and Exemptions:
Many states offer severance tax relief through targeted incentives—such as those for marginal wells, high-cost gas, or reactivated inactive wells. While these programs reduce tax burdens, they introduce significant complexity in qualification, tracking, and reporting. - Operational Complexity:
The nature of oil and gas operations—ranging from cost allocations to well classifications (e.g., conventional vs. horizontal)—and multi-jurisdictional activities further complicate accurate tax calculation and reporting. - Specialized Reporting and Compliance Systems:
Given the intricacies of severance tax regulation, companies require advanced systems and dedicated personnel to ensure accurate reporting and compliance across states.
Effective management of severance tax obligations requires a deep understanding of state-specific regulations, market dynamics, and operational intricacies. Leveraging specialized expertise is essential to maximizing incentives, mitigating risks, and maintaining regulatory compliance.
That’s why tax professionals without oil and gas accounting experience can easily make costly mistakes—even with the best intentions.
The Hidden Risks of Using Generalists
When companies hand severance tax responsibilities to sales tax specialists or accounting firms unfamiliar with production data, the risks multiply:
- Missed credits and refunds: Common incentives like high-cost gas exemptions or marginal well credits are often overlooked.
- Compliance exposure: Inaccurate or unsubstantiated refund claims can trigger audits or penalties.
- Longer audit resolution timelines and statutory deadlines missed: Severance tax refunds often have narrow lookback windows. If you're not proactively identifying opportunities, you're likely missing them.
- Inability to defend claims: Auditors scrutinize claims. You're at risk if you can't back them up with confidence.
What Makes Revenew Different
At Revenew, we specialize in complex cost recovery—and severance tax is one of our core areas of expertise. We don’t just understand tax; we understand oil and gas revenue accounting inside and out.
We embed seamlessly with your internal teams, requiring minimal time and input, while delivering:
- In-depth state-by-state severance tax knowledge
- Audit-ready documentation
- Accurate, defendable claims
- Fast action that maximizes recovery within statute deadlines
We’re not here to replace your team—we act as a strategic extension of it. Our collaborative, transparent approach means you always know what we’re doing and why. And because we specialize in results, we stay laser-focused on uncovering real value.
Proven Results—Without the Disruption
Revenew has helped energy clients recover millions in severance tax refunds and credits, often from prior periods when other third parties believed everything was already being captured.
A large Texas oil and gas operator engaged with Revenew due to limited internal resources and a lack of knowledge of state-specific regulations recovered $12 million in marketing costs and experienced improved compliance and streamlined processes.
In every case, our process is designed to create value without overloading your staff. We operate with a light footprint, maintain clear lines of communication, and deliver tangible results your revenue accounting team can rely on. In addition, we work with a relentless sense of urgency to ensure we maximize recoveries during the statute of limitations and produce deliverables for teams to use in internal initiatives.