Marcellus Shale Tax
Taxing the Marcellus Shale
(The Legal Intelligencer -Stephen J. Blazick, Daniel M. Dixon and Brent K. Beissel)
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.