Severance Tax

Updated at April 14th, 2025

Table of Contents

Overview Severance Tax Setup Setup Step 1: Severance Tax Acct Maint Setup Step 2: Severance Tax Maintenance Setup Step 3: Severance Tax Property Maintenance Reviewing Severance Tax Calculation

Overview

The purpose of Pak Accounting's Severance Tax feature allows specific severance taxes to be calculated and deducted from revenue distribution items entered from Check Stub. This will handle the situation where the first purchaser does not deduct the severance taxes, but you are still required to do so. This is NOT a severance tax reporting feature in that Pak Accounting does not create the reports sent to your specific state agency. Special features of the calculations:

Calculates and combines multiple taxes (production, conservation, ad valorem, etc.) for a specific property.
Calculates taxes on variables based on ownership type, product type, and specific periods of time.
Calculates taxes on various basis of tax (gross, net, volumes).
Specific calculated taxes are to be displayed separately on the revenue distribution record reported to your revenue owners.
Creates general ledger entries to record the liabilities to any severance tax payables accounts the user desires and includes an audit trail of which tax type and sequence number generated the specific tax amount.
Suspends the tax calculation on a revenue distribution item that already has taxes deducted by the first purchaser.

The automatic calculation occurs during the Revenue disbursement cycle at the Extract Entries menu option. To determine the results of the calculations, there are four basic points of visibility to which the user can refer:

The Extract Revenue and Billing Entries Status Listing during the extract gives the company-wide total of computed severance tax.
The listing is accessed via the Distribute/Combine menu option (List button). Any transactions with a From (FM) status of "ST" are a system-generated tax calculation. This gives you visibility at the distribution level.
The Pre-Check Reports option, Print Distribution by Property Listing, gives you visibility at the property/owner-level visibility. The Print Office Copy Listing displays each tax as deducted. The After-Check and Owner Copies reports display the same information to the revenue owners.
The Journal Entries are created when the Revenue/billing cycle is updated.

(In these entries, the description has been expanded to include an additional line containing:

Property Sub-Account
State
Tax code
Tax code sequence number
Volume
Gross Amount
Tax basis amount - (This is used by the First Purchaser's system severance tax reporting)

Severance Tax Setup

There are four basic steps to create a system-generated severance tax calculation:

Create the specific 100% Tax expense accounts in your chart of accounts. (See Severance Tax Acct Maint below).
Set up the Tax Rate Maintenance screen. (See Severance Tax Maintenance below).
Assign the Rate to a specific property. (See Severance Tax Property Maintenance below).
Extract the calculated entries as part of the Revenue Cycle. (See Severance Tax Calculation below).

The link between a tax calculation and a property is the unique Tax Code for that property in a specific state is the link between a tax calculation and a property. Therefore, WY-1 is a different Rate Maintenance record than TX-1.

You can have multiple Tax Codes for a specific state. Wyoming is an example state where you may use this technique, as different counties have different ad valorem rates.

Also, there can be multiple sequence numbers for a specific Tax Code. An example state where this technique may be used is Texas. Sequence 1 would calculate your gas tax on 7.5% (tax rate= 0.075) of the gross dollars, and Sequence 2 would calculate the state cleanup fee of 0.0666% (tax rate= 0.000666) of the volume produced. Combining the two Sequence numbers would constitute the tax calculation for that specific Tax Code. Another reason to have multiple sequences is if your tax rates change on a specific date, you can add another sequence for the new rate with the new date.

Setup Step 1: Severance Tax Acct Maint

First Step: Account maintenance [F11]

Minimum of two accounts are needed to be set up.

Set up a separate account for each stub detail line on check. To make the accounts available to Revenue it must have an Account Type of R for Revenue, it must have a Category Name of TAXES and it must have the correct Product Code assigned. The Applicable Interest Types defaults to A for all (owners). Only change this switch if the tax is applied to Working or Non-Working (royalty) only.
Set up a separate Liability account for each governmental entity you are responsible to remit payments too. This account clears out when you make that payment.

Account numbers and descriptions—Pak Accounting recommends keeping your account descriptions as generic as possible so that all states can use the accounts. Another alternative is to set up specific accounts for each state tax.

Setup Step 2: Severance Tax Maintenance

Second Step: Severance Tax Rate Maintenance

Set up the tax codes and sequence numbers for each state to compute the tax(es).

General Tab
State	Two digit state code.
Tax Code	Twelve character alpha/numeric code that identifies the specific tax to a property. Example: The exemption is for 03 (Two year inactive). Then the tax code would be OILEX-03 or OILEXMP-03 NOTE: Texas Exempt Tax Codes should be setup with the state's exemption code number as the last two digits of the Pak Accounting Severance Tax Code. Non-Exempt tax codes should not end with numeric digit(s).
Sequence Number	Four digit number that identifies specific components of the tax calculation. You can have multiple Sequence Numbers (each a separate screen) for each Tax Code.
Comments	Informative description for each Sequence Number. This field displays Texas Production Tax – Gas. It identifies the name of the tax on the settlement statement.
Basis of Tax	There are three options for this component. Depending on what the state law requires will dictate how this severance tax code is setup. Gross /Price Per: Some require the tax be based on gross dollars or the price per Bbl/MCF. Choosing this option will base the tax on gross dollars, unless you select a reduction option (Deduct Other From Basis). Volume: If selected, the severance tax will be based on the Bbls of Oil, MCFs for Gas, etc. Allocated Flat Amount: This is a rarely used option. Typically, if selected, it is usually a tax credit amount that needs redistribution to the owners on that lease. Users accomplish this by having one sequence calculate severance tax normally and then a second sequence that handles the tax credit. Credits can also be issued through check stub if the purchaser has a severance tax line item added.
Deduct Other	Deduct Other From Basis: Utilize this when the state allows deductions such as marketing fees, etc. before calculating severance tax. Again, there are multiple options, so choose carefully as this option will directly impact the severance tax calculation. Don’t Deduct: This is the default setting when saved. When selected, the system does not consider any deductions when calculating severance tax. Deduct Taxable Owner’s Share: Reduces this basis amount only by the Taxable Owner’s Share. In other words, only their burden of the deductions. Deduct All Regardless of Who’s Paying: When choosing this option, it will deduct all the ‘Other’ deducts, not just the taxable owner share.
Deduct Exemptions	Reduce the severance tax amount by user-defined exemptions. Exemptions can be set up under Company Maintenance using the Severance Tax Exemptions option. This screen allows for the set-up of additional expenses allowable for deduction by that state. States may offer an exemption for wells that are not producing, inactive wells, or discovery wells. See Severance Tax Exemption.
Adjust Basis before exemptions by multiplying by:	Default is 1.000000. Take the value of the volumes and calculate the exemption for low volumes, then deduct the exemption, and finally calculate the Severance Tax Rate.
Tax Rate	Eight decimal place numeric rate to apply as the tax. For instance, 7.5% is expressed as 0.07500000. This is the rate to apply against the selected basis.
For Tax rate changes: Apply this Tax to Run Dates	This option allows certain production dates to assign to the tax rate based on a state’s tax laws for a specific production period. For instance a tax rate of 0.0012 for production in 2002 and a rate of 0.0033 for production in 2003 could be captured by using two different Sequence Numbers for this Tax Code.
TX Special Reporting Option	For TX only. Options: Normal - default, for normal severance tax reporting Enhanced Oil Recovery (EOR) - Report Net Value is divided by 2 Tax-Exempt - The Report Net Value is forced to zero. Texas Low Producing Oil Lease Sev Tax Credit: Low Producing Oil Lease No Exemption- Tax Rate - 0.046 Low Producing Oil Lease 25% Credit- Tax Rate - 0.0345 Low Producing Oil Lease 50% Credit- Tax Rate - 0.023 Low Producing Oil Lease 100% Credit- Tax Rate - 0.000
Only Include Taxable Owners	(Default checked) If checked, the system will go through the division of interest and accumulate only the revenue percentages that are taxable. If unchecked, and all 3 tax interest types are checked, then tax is computed on 100%. NOTES: There are 3 different ways to exempt an owner's interest from a tax. On the Division of Interest, the exemption could be coded for all taxes by coding TAXES or a specific tax or tax(es) by coding the account(s) for those tax(es). All working or non-working interests can be exempt from a tax by coding it that way on the account maintenance screen for that tax. If all working interest or non-working interest types should be exempt from a particular tax, the setting in Account Maintenance can help. However, it is best practice to set up a unique account number for this charge especially if there are other tax codes where the calculation includes all interest types. If one type of tax is only for Working Interest and one is for all interest types, then make sure to use two separate GL account codes.
Restrict to following interest types	Check which interest types the severance tax applies to: Working, Royalty and/or Override. These 3 options only affect the computation of the tax at the 8/8s level and NOT the distribution of the tax.
G/L Coding Tab
Severance Tax Payable Account / Sub-Account	The specific Liability Account Payable for the tax deducted. Hint: create a different account or Account/Sub combo for each taxing authority you must remit taxes. NOTE: If a different payable Account/Sub-Account combination is being used for a second tax sequence and this same sequence is using the same Revenue tax account, an error will be generated stating that there is a duplicate product tax account. If the sequences for a tax code are coded to different payable accounts/Sub-Accounts, then the product tax accounts must also be different. This error will have to be corrected prior to the extract.
Product Code/Product Tax Account	Assign a product(s) to this sequence as needed and code the correct revenue tax account to that product. This screen can display multiple products when using the same tax code. If collecting Oil (Condensate) from a Gas well, then one sequence in the TXGAS, for example, would include the Oil product and the Oil revenue tax account.
Special Options tab Some severance tax calculations need special tier-based options. If a state has a different tax based on a specific market price or a specific volume level, use the 2-Tier based option. Again, this severance tax module allows for even the most complicated setup. To use the Special Options tab, the basis for the tax calculation on the General tab needs to be set to Gross/Price Per.
Type of Rate	Choices include a 2nd Tier Rate or a Replacement Rate.
Based on	Base the Tiered rate on either Price Per Bbl or MCF, etc. or Daily Volume multiplied by the number of wells or the Daily Gross.
When reaching	This allows customization of the tier-based system. Price Per would need dollar amounts down the first column and the volume selected would require the number of Bbls/MCFs broken down to represent a new tax rate.
Use Severance Tax Adj	Default is set to none. (Normal selection) See Property Master for the three defined rates. This is used in states where a specified rate may be adjusted up or down for a specific well. For instance, a special adjustment may be allowed for one well out of 100 because of production incentives.
Based on Property’s First Run Date	Must be used in relation to the specific property’s Beginning Production month as defined in the Property master. Used for states that have different rates for the first number of specific production months. For instance, if you state has one rate for the first 24 months of production (only months 0 thru 24) and a different rate for the rest of the life of the well (25 thru 9999) create two different Sequence Numbers for that Tax Code.
Ignore if Stripper	When used with the Property Maintenance - stripper switch this will allow the severance tax sequence to be exempt from the calculations of this tax code.
Minimum Volume Rate	This option allows for a different rate to apply when volumes reach a designated level.
Minimum Price Per:	This option can be used for oil contained in tank bottoms or other materials purchased from producers (Reclaimed Oil). During the Revenue cycle - Distribute and Combine menu - it will calculate taxes based on the minimum price per unit. This field is limited to 2 decimal places only. With this option the system will take the gross amount/ the quantity to determine the price per unit and if the price per is below the minimum in this new field then it will use the value in the field to calculate the tax. If above then it will use the actual.

NOTES:

When using the Allocated Flat Amount on the General tab, enter in the Flat Dollar Amount (Typically WV Severance Tax uses this for tax credits).
- The Allocated Flat amount is to be used to issue a severance tax credit.
- The purpose is to calculate the full amount of the severance tax due with the first sequence and issue a credit with the second sequence. This can be used for any state.
- Required set-up: The severance tax code must contain at least 2 sequences.
  - Sequence 1: Must contain a valid tax to calculate during the Rev/Bill cycle.
  - Sequence 2: Should contain a credit in the form of a flat amount (for example 50.00-) This credit will reduce the amount of tax calculated in sequence 1 by the flat amount entered. If more than 1 property uses this severance tax code each property is subject to the full amount of the credit. (50.00- for each property so a total of 100.00-)
  - The amount to be credited in sequence 2 cannot be greater than the full amount of tax calculated in sequence 1. If the credit in sequence 2 is greater than the severance tax calculated in sequence 1, the system will not issue the difference as a credit. Instead, the system will calculate zero taxes.
The cycle Update/Post process will include the number of wells when using the Second Rate option.
1. The sequence that the severance taxes are defined determines what is included in the basis of the allocation. If a type of severance tax shouldn’t be in the basis of the allocation, then assign it a sequence number that is greater than the Basis: Severance Record.
2. If a credit tax is being issued with this sequence, it will be limited to the basis amount.
3. The system will limit each allocation group to a single amount for this cycle. The allocation group is made up of the Property Master, State Code and Acquisition Code.
Now that you are done with setting up your severance tax codes you can use the List button on the Severance Tax Rate Maintenance screen. This will allow you to see each tax code and each sequence, as well as it is set up.

For example, the CO Tax code:

All of the Revenue Tax Accounts are different accounts so that each tax will show as separate stub detail lines on checks.
The Severance Tax Payable Accounts are different accounts to allow for tracking Liabilities in separate G/L accounts so that you can balance your account per governmental entity.

Where the TX code above is set up differently:

The Revenue Tax accounts are the same account for gas and will show up as one stub detail line on the check.
The Severance Tax Payable Account is also one account per State Severance Tax.

Setup Step 3: Severance Tax Property Maintenance

Third Step: Property Maintenance > Severance Tax tab

On the Property Maintenance for each property, enter the state on the General Tab, and on the Severance Tax Tab enter the Severance Tax Code to be used to calculate the tax.

Sev Tax Tab

TECH TIP: Use the Effective Date only if you have any date sensitive tax needs, such as a property has an exempt certificate for 5 years then it becomes taxable. You are still liable for the clean up fee so you will need a tax code with just that one sequence.

Special Situation – Tax Exempt Owner.

To exempt a specific owner/owners from the severance tax calculation, enter TAXES in the exemption column of DOI Maintenance.

Reviewing Severance Tax Calculation

After you have Extracted your Revenue/Billing Cycle, on the Distribute/Combine menu item is a List button to view how the calculated the Severance Tax for each applicable property (NOTE: the ST in the From (FM) column below).
After you Distribute/Combine, on the Pre-Check Reports, Print Distribution by Property, you can see the Severance Tax calculation that is being netting out of the revenue check. This allows you to double check the calculation in addition to your exemptions.
Now that you have deducted the State Severance Taxes from the distributions how do you report and pay to the state? In the Revenue/Billing Module > Reports > Property Tab > Historical Distribution report will help you fill out your State Severance Tax reports.