Oil and gas companies win battle about taxes
March 30, 2005
Gas-development companies can continue to deduct processing and shipping costs from their taxes, according to a recent decision from the Colorado Supreme Court.
In the energy industry, the practice of deducting the costs from taxes is referred to as “net back.” Companies in Moffat County have been using net back to reduce their taxes for the past several years, Moffat County Assessor Suzanne Brinks said.
Of the 31 gas companies active in Moffat County, seven use net back. The practice costs the county $46,000 in taxes.
“It’s happening now, but there’s not a lot of oil and gas companies doing net back,” Brinks said.
There are about 400 active gas wells in Moffat County. Net back only reduced the assessed value of gas production by 1 percent, Brinks said.
“If more and more companies start using it, then of course it’s going to be a bigger deal,” she said.
At least the larger, more sophisticated companies take advantage of net back, said Ken Wohlstolen, general counsel for the Colorado Oil and Gas Association.
But just as some taxpayers don’t itemize all their deductions, not all gas companies use net back.
“Some companies say it’s just not worth it,” Wohlstolen said.
State law allows companies to deduct processing and shipping costs equivalent to as much as 95 percent of their taxes. In Moffat County, gas companies used net back to reduce their taxes by between 1 percent and 42 percent.
Natural-gas developers are usually eligible for greater deductions, because natural gas needs to be processed more than oil, Wohlstolen said.
Moffat County’s liquid minerals mostly consist of natural gas.
The court’s decision is good news for those who own royalties on oil and gas wells, because net back applies to royalty owners, too, Wohlstolen said.
Moffat County is one of the few Colorado counties that owns mineral rights, and it owns a one-sixth or one-eighth royalty on most of the wells it has leased.
The Supreme Court made its decision in response to a civil suit between Washington County on the Eastern Plains and the Denver firm Petron Development Corp.
Washington County wanted Petron to pay full taxes on the company’s oil wells, without deductions for processing or shipping.
Wohlstolen stressed that ad valorem gas taxes are growing so quickly in Colorado, they will make up for any losses counties see from net back.
Washington County may see a financial loss if oil companies ask for tax abatements, because the companies paid taxes when they could have made deductions, Wohlstolen said.
Several years ago, Tom Brown Inc. used net back to win tax abatements across the state, including in Moffat County. The county had to pay the abatement with interest, and it was a ‘significant amount,'” Brinks said.
But the state Legislature since has approved legislation that said counties no longer need to pay gas companies interest with abatements.
Rob Gebhart can be reached at 824-7031 or email@example.com.