In a victory for the oil and gas industry, the Third Circuit rendered a decision rejecting attempts by the Louisiana Department of Revenue to impose severance taxes on crude oil production based on index pricing. The Third Circuit reaffirmed that severance taxes should be based on the “gross proceeds” obtained in an arm’s length sale at the lease. The Department had sought additional severance taxes from numerous Louisiana producers that sold crude oil in arm’s length sales at the lease. The contracts provided that the sales price of the crude oil was based on index pricing, less an amount sometimes designated as a “transportation differential” or simply as a deduction. The Department argued that this “differential” or deduction must be “disallowed” when computing severance taxes, effectively imposing severance taxes on the index pricing. The Louisiana Board of Tax Appeals, faced with numerous cases raising this same issue, heard a “test case” involving Avanti Exploration, LLC. The BTA held that the Department’s theories were invalid, and severance tax properly was based on the actual “gross receipts” received by the producer in an arm’s length sale. In a decision issued on April 17, 2019, the Louisiana Third Circuit Court of Appeal affirmed, holding that, pursuant to the Louisiana Constitution, the severance tax statutes, and the Department regulations, in the absence of any “posted field price,” severance taxes must be based on the actual “gross receipts” received by the producer in an arm’s length sale at the lease.
The decision can be found here.
The attorneys involved in Avanti case are Cheryl Kornick, James Exnicios, Robert Angelico, and R.J. Marse.
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