A new Louisiana Third Circuit Court of Appeal decision bars the Louisiana Department of Revenue from imposing severance taxes on crude oil production based on index pricing, according to 10/12 Industry Report.
The ruling issued last week pertained to a petition Avanti Exploration filed with the Board of Tax Appeals. It reaffirmed that severance taxes should be based on the “gross proceeds” obtained in an arm’s length sale at the lease.
The Department of Revenue sought additional severance taxes from numerous Louisiana producers that sold crude oil in such arm’s length sales. The contracts provided that the sales price of the crude oil was based on index pricing, less the amount producer incurs transportation costs in getting his product to market. The department argued that this deduction must be disallowed when computing severance taxes, effectively imposing severance taxes on the index pricing.
At issue in the case were Avanti’s contracts with two of its first purchasers, Phillips 66 Company (Phillips), and Cokinos Energy Corporation (Cokinos). Each contract contained a negotiated price formula to establish the sales price to be paid to Avanti for the oil it conveyed to the buyer at the lease each month during the term of the contract.
The price formulas in Avanti’s contracts with its buyers began with published, oil market center prices for the month of production and made various positive and negative adjustments to arrive at a lower price to be paid for the crude oil being sold at the lease. Read the full story.