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Marcellus Shale Tax

Taxing the Marcellus Shale

(The Legal Intelligencer -Stephen J. Blazick, Daniel M. Dixon and Brent K.  Beissel)
— Pennsylvania imposes an impact fee on energy companies for each natural gas-producing well they drill in the state. The impact fee was enacted in  response to the large concentration of natural gas producers flocking into the  Marcellus Shale region. However, in the commotion of ramping up drilling operations and focusing on the impact fee, companies may fail to fully consider  the effects of Pennsylvania’s sales, corporate net income and franchise taxes on  their Marcellus operations.

So while safety, land and mineral rights litigation often grabs the  spotlight when discussing Marcellus Shale activities, taxes could be the final  frontier in Marcellus Shale litigation. This article discusses: (1) the impact  fee and its effect on Pennsylvania drillers; (2) the basic exemptions available  for Marcellus companies; and (3) lesser-known issues involving Keystone  Opportunity Zones and Pennsylvania’s franchise tax.

Pennsylvania’s Impact Fee

In 2012, Governor Tom Corbett signed Act 13, permitting counties to impose  an impact fee on natural gas-producing wells drilled. The law gives each county  the power to impose a $40,000 to $60,000 flat fee on a well in its first year of  operation, with the fee declining over the next 15 years. A producer’s total fee  is based on (1) the number of wells the producer operates in each municipality  within each county that has imposed the fee; (2) the date each well was drilled  or ceased production; and (3) the price of natural gas. Although signed in 2012,  Act 13 authorizes a retroactive impact fee on all wells drilled before 2012, in  addition to newly drilled wells.

There is some question as to whether the retroactive nature of the impact  fee passes constitutional muster. It is possible that some of the harder-hit  energy companies may challenge the retroactive portion of the impact fee,  resulting in the invalidation or repeal of the retroactive portions of Act 13.  If successful, producers would be entitled to refunds.

Impact Fee vs. Severance Tax

The impact fee is very different from the severance tax imposed on similar  businesses in neighboring states like West Virginia and Ohio. The severance tax  in each of those states is a percentage-based tax on the volume of gas actually  extracted from the shale. This wholesale difference in taxing schemes can cause  problems for drillers operating in the tri-state area. For example, a driller’s  unproductive or “stripper” wells may be wholly exempt from a severance tax, yet  they would still be subject to the impact fee for the first three years of  operation.

The impact fee has raised more than $400 million for the state in only two  years. But a recent Pennsylvania Public Utility Commission report has again  sparked debate over whether that’s enough. The report suggested that a severance  tax, like West Virginia’s, would provide substantially more revenue than the  impact fee. So, with a gubernatorial race quickly approaching and a Democratic  challenger trying to unseat the Republican incumbent (who signed the impact fee  into law), we can expect to see a flurry of debate around this issue — likely  including chatter about replacing the impact fee with a severance tax — before  the November 4, 2014, election.

Miners Should Pay Little or No Pennsylvania Tax

Pennsylvania’s mainstay taxes — the sales tax, the corporate net income tax  and the franchise tax — also apply to producers with Marcellus operations in  Pennsylvania. But these taxes provide some important exemptions that all  Marcellus operators should know.

• Extracting natural gas from the Marcellus Shale.

Hydraulic fracturing (fracking) is a process by which pressurized fluid is  injected into a shale formation, causing small fractures in the rock, which  releases trapped natural gas that can then be extracted. Fracking has made  large-scale natural gas extraction from the Marcellus Shale a viable  proposition.

• Mining exemption from sales tax.

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