SECTION 3.27. Exemptions of Governmental Entities and Two-Year Inactive Oil Wells

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Casinghead gas--Gas or vapor indigenous to an oil stratum and produced from the stratum with oil.

(2) Commission--The Railroad Commission of Texas.

(3) Condensate--Liquid hydrocarbon that is or can be recovered from gas by a separator but does not include liquid hydrocarbon recovered from gas by refrigeration or absorption and separated by a fractionating process.

(4) Hydrocarbons--Any oil or gas produced from a well, including hydrocarbon production.

(5) Two-year inactive well--A well that has not produced oil or gas in more than one month in the two years preceding the date of application for severance tax exemption. The term only includes a well certified by the commission on or after September 1, 2019, and does not include a well that is:

(A) part of an enhanced oil recovery project, as defined by Natural Resources Code, §89.002 (Definitions); or

(B) drilled but not completed and that does not have a record of hydrocarbon production reported to the commission.

(b) Exemption of certain entities. The federal government and its subdivisions and the State of Texas and its subdivisions are not subject to the gas occupation tax.

(1) Subdivisions of the federal government include, but are not limited to, the following:

(A) the Federal Land Bank;

(B) the Department of the Interior;

(C) the Bureau of Land Management; and

(D) the Army Corps of Engineers.

(2) Subdivisions of the State of Texas include, but are not limited to, the following:

(A) Texas cities, towns, and villages;

(B) Texas counties;

(C) Texas independent and common school districts; and

(D) Texas public colleges and universities.

(c) Tax borne ratably. The natural gas tax shall be borne ratably by all nonexempt interested parties in proportion to their interests.

(d) Two-year inactive oil well.

(1) To apply for the exemption for a two-year inactive oil well, taxpayers must submit to the comptroller a copy of the approved certification letter provided by the commission and a completed Texas Well Exemption Application (form AP-217), or any successor to that form promulgated by the comptroller.

(2) Casinghead gas produced from a certified two-year inactive oil well is not subject to the natural gas tax. Since oil wells do not produce condensate, condensate does not qualify for the exemption for a two-year inactive oil well.

(3) The exemption extends for five years beginning with the month following the date certified by the commission.

(4) If the tax is paid at the full rate provided by Tax Code, §201.052(a) (Rate of Tax) before the comptroller approves an application for an exemption provided for in this subsection (d) of this section, the operator is entitled to a credit against taxes imposed by Tax Code, §201.052 in an amount equal to the tax paid. To receive a credit, the operator must apply to the comptroller for the credit before the expiration of the applicable period for filing a tax refund claim under Tax Code, §111.104 (Refunds).

(e) Recompleted two-year inactive oil well. A two-year inactive oil well that is subsequently recompleted shall only receive the five-year exemption from the initial certification of the well. A taxpayer must file another Texas Well Exemption Application (form AP-217), or any successor to that form promulgated by the comptroller, for the recompleted oil well identifying the original commission lease number when that well meets the requirements:

(1) the commission certifies the recompleted two-year inactive oil well;

(2) the commission assigns a new lease number for the recompleted oil well; and

(3) the American Petroleum Institute number for the well does not change.

(f) Oil-Field cleanup regulatory fee. Gas exempt under subsection (d) of this section is not exempt from the oil-field cleanup regulatory fee, which is due on casinghead gas sold.

(g) Penalty. On notice from the commission that the certification for a two-year inactive well has been revoked, the tax exemption shall not apply to oil or gas production sold after the date of notification. A person who claims the exemption is liable to the state for a civil penalty if the person applies or attempts to apply the tax exemption allowed by subsection (d) of this section after the certification for a two-year inactive well is revoked. The amount of the penalty may not exceed the sum of:

(1) $10,000; or

(2) the difference between the amount of taxes paid or attempted to be paid and the amount of taxes due.

Source Note: The provisions of this §3.27 adopted to be effective June 2, 2013, 38 TexReg 3355; amended to be effective November 3, 2020, 45 TexReg 7715