Severance Tax – Definition

Cite this article as:"Severance Tax – Definition," in The Business Professor, updated December 9, 2019, last accessed October 24, 2020,


What is a Severance Tax?

A severance tax is a tax imposed by the state on natural resources that are extracted within the jurisdiction of the state but intended for use in another state. Individuals or miners pay severance tax on the vale of non-renewable natural resources such as coal, oil, gas, uranium, timber, and others extracted from the earth. In some states, the severance tax is called the gross production tax. Ultimately, this form of tax is levied on the extraction of natural resources meant to be traded or used outside of the state from which it was removed.

A Little More on What is a Severance Tax

The extraction of the following non-renewable natural resources attracts severance tax;

  • Nuclear fuels
  • Fossil fuels
  • Crude oil
  • Condensate and natural gas
  • Coal and coalbed methane
  • Uranium
  • Timber
  • Carbon dioxide.

When any of the above non-renewable natural resources are extracted from the earth or soil of a particular state and is intended to be transported to another state for use, severance tax is levied. This tax is charged based on the value of the extracted natural resource or its volume, some states, however, charge the tax using a combination of the value and volume of the natural resource.

Royalty owners, resource producers and individuals working with royalty intrest pay severance tax. This tax is to compensate a given state for the loss of the non-renewable natural resource extracted by certain individuals. fo r royalty owners, severance taxes are recorded in their monthly revenue statement.

There are different rules used in different states in relation to severance taxes. Also, some states offer severance tax-exemptions to some wells after certain factors have been considered by such states. In addition to a severance tax, many states levy ‘per-well impact fee’ on gas companies for each well they drill. The amount of gas produced from the well determines the amount that will be levied as an impact fee.

References for “Severance Tax

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