DEFINITION of 'Severance Tax'

A tax imposed on the removal of nonrenewable resources such as crude oil, condensate and natural gas, coalbed methane and carbon dioxide.

Severance tax is charged to producers, or anyone with a working or royalty interest, in oil or gas operations in the imposing states. You may be charged severance tax even if you do not realize a net profit on your investment.

BREAKING DOWN 'Severance Tax'

Certain wells may be exempt from severance tax based on the amount they produce. Different states have different rules. For example, in Colorado, as of 2008, an oil well that produces less than an average of 15 barrels per producing day, or a gas well that produces less than an average of 90,000 cubic feet per producing day, is exempt from this tax.

It is important to note that severance tax is different from income tax, and you still have to pay all federal and state income taxes on oil and gas income in addition to severance tax.

RELATED TERMS
  1. Natural Gas Equivalent

    The amount of energy used by the burning of natural gas versus ...
  2. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
  3. Carbon Dioxide Tax

    A tax on businesses and industries that produce carbon dioxide ...
  4. Gross Production Tax

    A state tax imposed on companies that generate revenues by depleting ...
  5. Direct Tax

    A tax that is paid directly by an individual or organization ...
  6. Royalty Interest

    In the oil and gas industry this refers to ownership of a portion ...
Related Articles
  1. Investing

    Oil: A Big Investment With Big Tax Breaks

    Oil and gas investments can provide unmatched deduction potential for accredited investors.
  2. Investing

    5 Reasons Why Private Equity Investors Like Oil and Gas Companies

    Oil and gas companies may look like a risky industry on the outside, but private equity investors have found reasons to regularly invest in these firms.
  3. Taxes

    5 States Without Sales Tax

    Learn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
  4. Investing

    Do Natural Gas Prices Always Follow Oil Trends?

    Prices for oil and natural gas are highly correlated. But investors should be aware of different factors affecting the prices of these commodities.
  5. Investing

    Natural Gas Industry: An Investment Guide

    Investors looking into this industry are faced with a confusing amount of information. We explain the important concepts and terms.
  6. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  7. Investing

    Do Oil and Natural Gas Prices Rise And Fall Together?

    Do the prices of crude oil and natural gas affect each other? Investopedia explores price patterns and provides analysis.
  8. Investing

    Understanding How Oil Companies Pay Taxes

    Read about how big oil corporations pay taxes, and learn about tax exemptions and the option to defer. Discover the argument about big oil being given tax exemptions
  9. Financial Advisor

    The 7 Biggest Canadian Natural Gas Companies (CNQ, HSE.TO)

    Read about the seven biggest Canadian natural gas companies as measured by production volume and learn a little more about their recent performance.
  10. Investing

    The World's Top 10 Natural Gas Companies (XOM, OGZPY)

    Read about the 10 companies that combined to produce about 105 billion cubic feet of natural gas in 2014, about 30% of the world's total production.
RELATED FAQS
  1. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
  2. What economic indicators are important to consider when investing in the oil and ...

    Find out more about economic indicators and which ones are important when investing in companies in the oil and gas sector. Read Answer >>
  3. How does an oil and gas company measure and state its production?

    Learn the ways in which oil and gas companies measure and state production, and how much oil and gas is produced worldwide ... Read Answer >>
  4. What impact has the increase in shale gas drilling had on the oil and gas industry?

    Read about some of the domestic and global impacts of the shale oil and gas revolution on the oil and gas industry, particularly ... Read Answer >>
  5. What are average operating expenses for the oil and gas sector?

    Learn about the average operating expenses and average operating expenses margin for the oil and gas sector and how they ... Read Answer >>
  6. What are the best and worst states to pay taxes in?

    Explore and compare the wide variations that exist in the overall tax burden imposed by different states, including which ... Read Answer >>
Hot Definitions
  1. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  2. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  3. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  4. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  5. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  6. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
Trading Center