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Legislative Exemptions

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Two-Year Inactive Well Exemption

Definition of Exemption This exemption is for oil or gas wells brought back into production after being inactive for two years. The operator is allowed one month of production during that two year period.
Effective Date of Legislation Sept. 1, 1997, extended 1999.
Length of Exemption
  • Ten years beginning on the date of certification by the Texas Railroad Commission.
  • Certification for a two-year inactive well exemption by the Texas Railroad Commission ends 02/28/2010 which means credits can be recouped through 02/28/2020.
Certification Taxpayers must:
  1. obtain a certification letter from the Texas Railroad Commission (RRC) designating a well as being approved for the two-year inactive well exemption.
  2. submit their application to the RRC by Aug. 31, 2009.
Comptroller's Application
  • Taxpayers must submit a completed Comptroller's exemption application form #AP-217 and attach a copy of the letter of certification from the Texas Railroad Commission.
  • The Comptroller's office will send the taxpayer a letter acknowledging the two-year inactive well as being approved.
Oil Field Clean-up
Regulatory Fee
  • Approved two-year inactive wells are exempt from the oil field clean-up regulatory fee through the August 2003 report period.
  • Beginning with the September 2003 report period, the oil field clean-up regulatory fee is due on approved exempt wells where the taxpayer has reported as being liable for the tax for commodities reported as raw gas, lease use and products.
Exempt Natural Gas Tax 100 percent exempt
Exempt Crude Oil Tax 100 percent exempt
Condensate Tax NOT EXEMPT
Natural Gas Tax Report
  • "Exemption Type" must be reported as "03."
  • "Net Taxable Value" must be reported as zero.
  • "API Number" for the approved exempt well must be reported beginning with the November 2007 report period.
Crude Oil Tax Report
  • "Exemption Type" must be reported as "03."
  • "Net Taxable Value" must be reported as zero.
  • "API Number" for the approved exempt well must be reported beginning with the December 2007 report period.
Recovery of Taxes Paid Taxpayers must file an amended report to recover taxes paid prior to the Comptroller's Office approval date.
One Year Limitation None. The normal four-year statute of limitations applies.
NOTE A "worked over" lease may not be eligible for the existing exemption under the old lease number. Taxpayers should contact the Texas Railroad Commission to determine if the new lease qualifies for an existing exemption. A new application with both the Texas Railroad Commission and the Comptroller's office may be required.

Three-Year Inactive Well Exemption

Definition of Exemption This exemption is for oil or gas wells brought back into production after being inactive for three years. The operator is allowed one month of production in that three year period.
Effective Date of Legislation Sept. 1, 1993 - Feb. 28, 2006
Length of Exemption Ten years from the date of certification by the Texas Railroad Commission. Because the last day for certification was Feb. 28, 1996, this exemption expired during March 2007.
Certification
  • Taxpayers must obtain a certification letter from the Texas Railroad Commission designating a well as being approved for the three-year inactive exemption.
  • If the well was certified as part of the mass certification done by the Texas Railroad Commission on Feb. 28, 1996 then a certification letter is not needed.
Comptroller's Application
  • Taxpayers must submit a completed Comptroller's exemption application form #AP-214 and attach a copy of the certification letter from the Texas Railroad Commission.
  • If the certification date was Feb. 28, 1996, then a certification letter is not needed.
Oil Field Clean-up Regulatory Fee
  • Approved three-year inactive wells are exempt from the oil filed clean-up regulatory fee through the August 2003 report period.
  • Beginning with the September 2003 report period, the oil field clean-up regulatory fee is due on approved exempt wells where the taxpayer has reported as being liable for the tax for commodities reported as raw gas, lease use and products.
Exempt Natural Gas Tax 100 percent exempt
Exempt Crude Oil Tax 100 percent exempt
Condensate Tax NOT EXEMPT
Natural Gas Tax Report
  • "Exemption Type" must be reported as "07".
  • "Net Taxable Value" must be reported as zero.
  • "API Number" for the exempt well must be reported beginning with the November 2007 report period.
Crude Oil Tax Report
  • "Exemption Type" must be reported as "03".
  • "Net Taxable Value" must be reported as zero.
  • "API Number" for the exempt well must be reported beginning with the December 2007 report period.
Recovery of Taxes Paid Taxpayers must file a credit amended report to recover taxes paid prior to the Comptroller's Office approval date.
One Year Limitation None. The normal four-year statute of limitations applies.
NOTE A "worked over" lease may not be eligible for the existing exemption under the old lease number. Taxpayers should contact the Texas Railroad Commission to determine if the new lease qualifies for an existing exemption. A new application with both the Texas Railroad Commission and the Comptroller's office may be required.

Example of Approval Letter for Two-Year Inactive Well Exemption

Flared/Released Gas Exemption

Definition of Exemption In 1997, the Legislature created an exemption for the marketing of gas that has been previously flared or released from oil leases.
To qualify for this exemption, an oil lease must have flared or released the gas according to Texas Railroad Commission rules for the previous 12 months.
Effective Date of Legislation Sept. 1, 1997
Length of Exemption Life of the well or lease.
Certification A certification letter certifying an oil well for the flared/released exemption must be obtained from the Texas Railroad Commission.
Comptroller's Application
  • Taxpayers must submit a completed exemption application Comptroller's form #AP-217 and attach a copy of the letter of certification from the Texas Railroad Commission.
  • The Comptroller's office will send the taxpayer a letter acknowledging the two-year inactive well as being approved.
Oil Field Clean-up Regulatory Fee
  • Approved leases for flared/released gas are exempt from the oil field clean-up regulatory fee through the August 2003 report period.
  • Beginning with the September 2003 reporting period, the oil field clean-up regulatory fee is due on approved exempt leases for flared/released gas where the taxpayer has reported as being liable for the tax for commodities reported as raw gas, lease use and products.
Exempt Natural Gas Tax 100 percent Exempt
Natural Gas Tax Report
  • Exemption Type" must be reported as "04".
  • "Net Taxable Value" must be reported as zero.
Recovery of Taxes Paid Credit amended reports must be filed to recover the 100 percent exemption of the taxes paid prior to the Comptroller's approval of the exemption.
One Year Limitation None. The normal four-year statute of limitations applies.

Reactivated Orphan Well Exemption

Definition of Exemption This exemption is for oil or gas wells that have been approved for the Texas Railroad Commission orphan-well program.
Effective Date of Legislation Jan. 1, 2006.
Length of Exemption This exemption begins on the first of the month following the Comptroller's approval. The exemption will last as long as the approved orphan well operator operates the well.
Certification Taxpayers must obtain a certification letter from the Texas Railroad Commission designating a well as a reactivated orphan well.
Comptroller's Application Taxpayers must submit a completed Comptroller's exemption application form #AP-217 and attach a copy of the certification letter from the Texas Railroad Commission.
Exempt Natural Gas Tax Natural gas tax and the oil field cleanup regulatory fees are exempt.
Exempt Crude Oil Tax Crude oil tax and the regulatory tax and the oil field cleanup fees are exempt.
Condensate Tax NOT EXEMPT
Natural Gas Tax Report
  • "Exemption Type" must be reported as "12."
  • "Net Taxable Value" must be reported as zero.
  • "API Number" for the approved exempt well must be reported beginning with the November 2007 report period.
Crude Oil Tax Report
  • "Exemption Type" must be reported as "12."
  • "Net Taxable Value" must be reported as zero.
  • "API Number" for the approved exempt well must be reported beginning with the December 2007 report period.
Recovery of Taxes Paid Taxpayers must file a credit amended report to recover taxes paid prior to the Comptroller's Office approval date.
One Year Limitation None. The normal four-year statute of limitations applies.

Back page of Form AP-217

Front page of Form AP-217, Texas Well Exemption Application


High Cost Gas Exemption

Definition of Exemption Natural gas can be designated by the Texas Railroad Commission as high cost gas. This gas must be produced from the following:
1. any gas well, if production is from a completion which is located at a depth of more than 15,000 feet;
2. geopressured brine;
3. occluded natural gas produced from coal seams;
4. Devonian shale; or designated tight formations or produced as a result of production enhancement work.
Effective Date of Legislation
  • Became effective Sept. 1, 1991 for the original 100 percent exemption.
  • House Bill 398 created the reduced tax rate exemption effective Sept. 1, 1997 and extended in 1999 and was changed again in 2003 to create a permanent application period.
Length of Tax Reduction for Wells Spudded After May 24, 1989 and before September 1, 1996 Wells spudded after May 24, 1989 and before Sept. 1, 1996, are exempt from the natural gas production taxes until Aug. 31, 2001.
Length of Tax Reduction for Wells Spudded After August 31, 1996 For wells spudded after Aug. 31,1996, each well will receive a reduced tax rate, for 10 years, or until the well accumulates tax savings of 50 percent of the actual drilling and completion costs for the well.
Certification Operators must obtain a certification letter from the Texas Railroad Commission.
Comptroller's Application
  • Operators must submit a completed Comptroller's exemption application form #AP-180 and include a copy of the certification letter from the Texas Railroad Commission. All wells spudded after Sept. 1, 1995, must include the actual drilling and completion costs for that well. Only current costs will be allowed on new and reworked wells.
  • The Comptroller's application (#AP-180) must be filed the later of the 180 day after the first day of production, or the 45 day after the approval date by the Texas Railroad Commission. If this date is not met, a 10 percent penalty is assessed.
  • The Comptroller's office will send the taxpayer a letter acknowledging the high cost gas well as being approved. This letter will indicate if a 10 percent penalty applies to the exempt lease for certain report periods.
Oil Field Clean-up Regulatory Fee
  • Approved high cost gas leases are exempt from the oil field clean-up regulatory fee through the August 2003 report period.
  • Beginning with the September 2003 reporting period, the oil field clean-up regulatory fee is due on approved high cost gas leases where the taxpayer has reported as being liable for the tax for commodities reported as raw gas, lease use and products.
Exempt Natural Gas Tax Wells spudded after May 24, 1989, and before Sept. 1, 1996, 100 percent exemption from natural gas tax applies. This exemption must be reported as "Exemption Type" of "06."
Reduced Natural Gas Tax Wells spudded after Aug. 31, 1996, a reduced tax rate from natural gas tax applies. This reduced tax rate on each well is based on the actual completion and drilling costs for that well. This creates the possibility of a different reduced tax rate for each well.
To calculate the reduced tax rate for each well:
  • Divide the actual completion and drilling costs reported on the form #AP-180 by two, times the median cost of all high-cost gas wells applied for the previous state fiscal year.
  • Take that percentage and multiply it by the tax rate of 0.075.
  • This percentage is then subtracted from the normal tax rate of 0.075 to come up with the reduced tax rate.
Natural Gas Tax Report for 100% Exemption (Exemption Type 06)
  • "Exemption Type" must be reported as "06."
  • Net taxable value must be reported as zero.
Natural Gas Tax Report for Reduced Natural Gas Tax (Exemption Type 05)
  • "Exemption Type" must be reported as "05."
  • "Reduced Tax Rate For Type 05" should be reported.
  • "Tax due on Type 05" is calculated by multiplying the "Net Taxable Value" times the "Reduced Tax Rate For Type 05."
Recovery of Taxes Paid Credit amendments must be filed to receive a credit for taxes paid prior to exemption/reduction approval by the Comptroller's office.
Limitations On Refunds 1. Four-Year Statute of Limitation:
The normal four-year statute of limitations applies.
2. One-Year Window Requirement:
Credit amendments for report periods due and payable prior to the Comptroller signature date on the application must be filed within one year of the signature date indicated on the Comptroller's exemption application form #AP-180.
3. Two-Year Window Requirement:
Beginning Jan. 1, 2004, refunds will be limited to report periods two years prior to postmark date of the Texas Railroad Commission application for exempt certification of the lease.
Penalty For Late Application Filed If the exemption application is not received by the application deadline, the tax exemption is reduced by 10 percent for the report period beginning the 180 day after the first day of production and ending on the date the application is filed with the Comptroller.
Condensate Tax Not Exempt
NOTE A "worked over" lease may not be eligible for the existing exemption under the old lease number. Taxpayers should contact the Texas Railroad Commission to determine if the new lease qualifies for an existing exemption. A new application with both the Texas Railroad Commission and the Comptroller's office may be required.

Estimating Tax Reduction for a Lease Designated as High Cost Gas

Estimates for the reduced tax rate for wells spudded or completed after Aug. 31, 1996, can be computed on the Comptroller's Web site: http://ecpa.cpa.state.tx.us/ngrate/wellcalc.html

High-cost gas leases may qualify for a reduced natural gas severance tax rate if the producer:

  • obtains certification for the lease as a high-cost gas lease from the Texas Railroad Commission and
  • completes a Texas Request for Approval of High Cost Gas Exemption or Reduced Tax Rate (form number AP-180).

The Texas Request for Approval of High Cost Gas Exemption or Reduced Tax Rate, AP-180, must be filed with the Comptroller's office at the later of the 180th day after the date of first production or the 45th day after the date of approval by the Railroad Commission.

If the application is not filed by the applicable deadline, the tax exemption or tax deduction is reduced by 10 percent for the period beginning on the 180th day after the first day of production and ending on the date on which the application is filed with the Comptroller.

The Comptroller's computer system calculates the reduced tax rate using the fiscal year drilling and completion cost median. The formula used is:

0.075-[.075 ((actual drilling and completion cost) / (2 X FY median cost))]

The medians calculated for each fiscal year are:

  • FY97 Median = $ 577,392
    (leases completed between 9/1/1996 to 8/31/1997)
  • FY98 Median = $ 578,491
    (leases completed between 9/1/1997 to 8/31/1998)
  • FY99 Median = $ 707,706
    (leases completed between 9/1/1998 to 8/31/1999)
  • FY00 Median = $ 828,463
    (leases completed between 9/1/1999 to 8/31/2000)
  • FY01 Median = $ 810,503
    (leases completed between 9/1/2000 to 8/31/2001)
  • FY02 Median = $ 875,599
    (leases completed between 9/1/2001 to 8/31/2002)
  • FY03 Median = $ 979,318
    (leases completed between 9/1/2002 to 8/31/2003)
  • FY04 Median = $1,144,985
    (leases completed between 9/1/2003 to 8/31/2004)
  • FY05 Median = $ 939,000
    (leases completed between 9/1/2004 to 8/31/2005)
  • FY06 Median = $1,008,893
    (leases completed between 9/1/2005 to 8/31/2006)
  • FY07 Median = $1,338,843
    (leases completed between 9/1/2006 to 8/31/2007)
  • FY08 Median = $2,275,342
    (leases completed between 9/1/2007 to 8/31/2008)

To calculate an estimate of the reduced tax rate for a well, scroll to the bottom of the Comptroller's Web site at: http://ecpa.cpa.state.tx.us/ngrate/wellcalc.html and enter the information in the boxes (displayed below). Then click on the "Calculate" button (displayed below).

Calculate

Back Page of Form AP-180

Front Page of Form AP-180, Texas Request for Approval of High Cost Gas Exemption or Reduced Tax Rate

Example of Approval Letter

Example of 30% Accumulated Savings Letter

 Example of 50% Accumulated Savings Letter

Low Producing Gas Well Exemption

The Texas Legislature has provided a natural gas severance tax exemption for low producing gas wells. The exemption took effect September 1, 2005.

To qualify for tax exemption, production on an eligible gas well as reported to the Texas Railroad Commission during the prior three months cannot exceed 90 M. C. F. per day. The amount of exemption is based upon the average gas price certified by the Comptroller's office for a specific report month. The average gas price is based upon daily index prices for the three months immediately prior to the report month.

Qualifying Wells

Taxpayers must file a Texas Well Exemption Application, (Form #AP-217) for any gas wells that meet the production requirements stated above. The production per day will be determined by using the monthly well production report filed with the Texas Railroad Commission.

Not Exempt

  • The low producing gas well exemption does not apply to casinghead gas or condensate.
  • The regulatory tax and oil clean-up fee are not exempt when reporting the low producing well exemption.

Natural Gas Report Form

  • Report "Exempt Type" as "11" for the low producing well exemption
  • Multiply the "Net Taxable Value" in the lease detail by the applicable percentage credit.

Recovery of Taxes Paid

To recover taxes previously paid to the Comptroller's office, amended tax reports must be filed within four-year statute of limitations of a report period.

Price Conditions

Gas from qualified wells becomes eligible for different levels of exemption from natural gas severance tax based upon the average gas price certified by the Comptroller's office for the reporting month. Below are the different levels of tax exemption.

Average Taxable Gas Price Exemption
more than $3.50 no exemption
over $3.00 to $3.50 25 percent credit
over $2.50 to $3.00 50 percent credit
$2.50 or less 100 percent credit

The Comptroller-certified average price of gas to be used in these calculations will be posted in the Texas Register and the Comptroller's Web site. When the average price falls within one of the categories listed, gas will be allowed the corresponding level of exemption for that reporting month. For the most current posted prices of gas per M.C.F., refer to http://www.window.state.tx.us/taxinfo/nat_gas/low_prod_well.html.

Report Period Price of Gas Per M.C.F. Eligibility
April 2009 $3.64 Not Eligible for Exemption
March 2009 $4.14 Not Eligible for Exemption
February 2009 $4.76 Not Eligible for Exemption
January 2009 $5.16 Not Eligible for Exemption
December 2008 $5.55 Not Eligible for Exemption
November 2008 $5.91 Not Eligible for Exemption
October 2008 $7.01 Not Eligible for Exemption
September 2008 $8.24 Not Eligible for Exemption
August 2008 $9.13 Not Eligible for Exemption
July 2008 $8.95 Not Eligible for Exemption
June 2008 $8.22 Not Eligible for Exemption
May 2008 $7.41 Not Eligible for Exemption
April 2008 $6.90 Not Eligible for Exemption
March 2008 $6.61 Not Eligible for Exemption
February 2008 $6.44 Not Eligible for Exemption
January 2008 $6.25 Not Eligible for Exemption
December 2007 $5.87 Not Eligible for Exemption
November 2007 $5.49 Not Eligible for Exemption
October 2007 $5.37 Not Eligible for Exemption
September 2007 $5.65 Not Eligible for Exemption
August 2007 $5.39 Not Eligible for Exemption
July 2007 $5.82 Not Eligible for Exemption
June 2007 $6.16 Not Eligible for Exemption
May 2007 $6.50 Not Eligible for Exemption
April 2007 $6.42 Not Eligible for Exemption
March 2007 $6.18 Not Eligible for Exemption
February 2007 $6.17 Not Eligible for Exemption
January 2007 $6.29 Not Eligible for Exemption
December 2006 $6.25 Not Eligible for Exemption
November 2006 $5.69 Not Eligible for Exemption
October 2006 $5.40 Not Eligible for Exemption
September 2006 $5.63 Not Eligible for Exemption
August 2006 $5.46 Not Eligible for Exemption
July 2006 $5.75 Not Eligible for Exemption
June 2006 $5.91 Not Eligible for Exemption
May 2006 $6.24 Not Eligible for Exemption
April 2006 $6.78 Not Eligible for Exemption
March 2006 $8.62 Not Eligible for Exemption
February 2006 $9.82 Not Eligible for Exemption
January 2006 $11.06 Not Eligible for Exemption
December 2005 $10.68 Not Eligible for Exemption
November 2005 $10.03 Not Eligible for Exemption
October 2005 $8.35 Not Eligible for Exemption
September 2005 $6.95 Not Eligible for Exemption
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