Section 3.21 - Exemption or Tax Reduction for High-Cost Natural Gas(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise. (1) Commission--The Railroad Commission of Texas.(2) Recompletion--The performance of work within an existing wellbore for the purpose of drilling to a deeper producing formation or plugging back to a more shallow producing formation.(3) High-cost gas-- (A) High-cost natural gas as described by Natural Gas Policy Act of 1978, §107, as that section exists on January 1, 1989, without regard to whether that section is in effect or whether a determination has been made that the gas is high-cost natural gas for purposes of that Act; or(B) All gas produced from oil wells or gas wells within a Commission approved co-production project.(4) Commission approved co-production project--A reservoir development project in which the Commission has recognized that water withdrawals from an oil or gas reservoir in excess of specified minimum volumes will result in recovery of additional oil and/or gas from the reservoir that would not be produced by conventional production methods and where operators of wells completed in the reservoir have begun to implement Commission requirements to withdraw such volumes of water and dispose of such water outside the subject reservoir. Reservoirs potentially eligible for this designation shall be limited to those reservoirs in which oil and/or gas has been bypassed by water encroachment caused by production from the reservoir and such bypassed oil and/or gas may be produced as a result of reservoir-wide high-volume water withdrawals of natural formation water.(5) Date of first production--For high-cost natural gas wells spudded or completed after August 31, 1996, the first day of the month of the deliverability test as reported on the appropriate Commission form, or the production month as indicated on the first production report filed with the Commission that shows a gas disposition code other than "lease or field fuel use" or "vented or flared", whichever month is earlier.(6) Consecutive months--Months in consecutive order, regardless of whether or not a well produces oil or gas during any or all such months.(7) Amount of tax reduction for a well--The product of the full tax rate times the ratio of drilling and completion costs for the well to twice the median drilling and completion costs for high-costs wells for which an application for the exemption or tax reduction was made during the previous state fiscal year. Drilling and completion costs for a recompletion shall only include current and contemporaneous costs associated with the recompletion.(8) Reduced tax rate--The tax rate obtained when the amount of tax reduction is subtracted from the full tax rate, except that the effective rate of the tax shall never be less than zero.(b) Producers. Producers producing gas or gas products extracted from the gas from a gas completion certified by the Commission as qualifying for the high-cost gas tax exemption or reduced tax rate or from an oil or gas well within a Commission approved co-production project may file with the comptroller an application for tax exemption or the reduced tax rate. Except as provided by subsection (k) of this section, tax must be paid on gas and gas products at the full rate until the date the comptroller approves the application.(c) Condensate. Condensate, as defined under Tax Code, § 201.001(2), produced with the high-cost gas is not exempt from the tax.(d) Gas produced. Gas produced along with oil is not exempt from the tax unless the gas is from an oil well within a Commission approved co-production project.(e) Application form. The operator shall make application on forms prescribed by the comptroller for the exemption or tax reduction on gas produced and sold or used by the operator or by any other interest owner in the property. The operator shall provide a copy of the approved application to any interest owner taking gas in-kind. The operator shall also be responsible for advising the comptroller whenever the status of an exemption or tax reduction changes.(f) Application supporting documents. The application for exemption or reduced tax rate shall include: (1) a copy of the Commission High-cost Gas State Severance Tax Exemption Certificate Application;(2) a copy of the letter of tax exemption certificate issued by the Commission;(3) the date the Commission approves the exemption or reduced tax rate;(4) the date of first production;(5) a statement as to whether or not tax has been paid on the gas for periods after the effective date of the exemption, and the name of the party paying the tax; and(6) a report of drilling and completion costs incurred for each well on a form and in the detail as determined by the comptroller.(g) Application due date. The application for exemption or tax reduction must be filed with the comptroller on or before the later of the 180th day after the date of first production or the 45th day after the date of approval by the Commission, except when: (1) the application is received after August 31, 1995, and before September 1, 1997, for wells spudded or completed and producing prior to September 1, 1995, and qualifying for the exemption created by Tax Code, § 201.057(b), where the application for the exemption must be made within 180 days of September 1, 1995, or(2) an application is filed for the exemption created by Tax Code, § 201.057(a)(2)(B) and may not be filed before January 1, 1990, or after December 31, 1998.(h) Applications that miss the due date. Any application that is not filed by the application due date is subject to a 10% reduction of the tax exemption or tax reduction. The 10% reduction will begin on the first of the month after the 180th day after the date of first production and end on the first of the month prior to the received date by the comptroller of the tax exemption or tax reduction application. Applicants who were denied prior to September 1, 1997, for missing the application due date may reapply for the exemption after September 1, 1997, but will be subject to the 10% reduction of the tax exemption or tax reduction.(i) Time limitations for credit or refunds. (1) When an application for exemption or reduced tax rate has been approved by the comptroller, a producer or purchaser shall file amended reports to recover the tax paid by the producer or purchaser on the high-cost gas for periods after the date of first production and prior to the comptroller's approval of exemption. In order to obtain a credit or refund, as provided in Tax Code, § 201.057(i), the amended reports must be filed by the first anniversary date after the date the comptroller approves the application for exemption or reduced tax rate. The filing of an amended return is the only acceptable method for requesting the credit or refund from the comptroller.(2) If the application for certification of a lease is submitted to the commission after January 1, 2004, the total allowable credit for taxes paid for reporting periods before the application is filed may not exceed the total tax paid on the gas that otherwise qualified for the exemption or tax reduction and that was produced during the 24 consecutive calendar months immediately preceding the month in which the application for certification under this section was filed with the commission.(j) Notification to non-producers. Producers obtaining an approval for exemption from the comptroller shall furnish to any first purchaser required to report a purchase of high-cost gas a copy of the comptroller's approval. Any first purchaser paying tax on high-cost gas for periods after the date of first production and prior to the comptroller's approval of exemption shall file amended reports to recover the tax paid. In order to obtain a credit or refund, as provided in Tax Code, § 201.057(i), the amended reports must be filed by the first anniversary date after the date the comptroller approves the application for exemption or reduced tax rate. The filing of an amended return is the only acceptable method for requesting the credit or refund from the comptroller.(k) Reporting requirements. Producers and purchasers must use the following designations when reporting gas that qualifies for the temporary exemption or tax reduction. (1) Producers and purchasers reporting high-cost gas from a well spudded or completed before September 1, 1996, shall, after the comptroller approves the exemption, designate the gas as being exempt from tax by reporting lease type "6," which shall mean "Approved High-Cost Gas Well Gas--Temporary Exemption."(2) Producers and purchasers reporting high-cost gas from a well spudded or completed on or after September 1, 1996, shall, after the comptroller approves the reduced tax rate, designate the gas as being exempt from tax by reporting lease type "5," which shall mean "Approved High-Cost Gas Well Gas--Reduced Tax Rate."(3) Producers and purchasers reporting high-cost gas from an oil or gas well as defined by subsection (a)(3)(B) of this section shall, after the comptroller approves the exemption, designate the gas as being exempt from tax by reporting lease type "8," which shall mean "High-Cost Gas Exemption--Co-Production Project."(4) Gas qualifying for the temporary exemption, the reduced tax rate or the exemption for gas from a co-production project must be reported separately from any non-exempt production, if any, on the same lease.(5) Producers or purchasers reporting exempt gas and non-exempt gas through the use of a commingling permit issued by the Commission must allocate the gas production between exempt and non-exempt gas by use of a method approved by the comptroller.(6) Except as provided by paragraph (5) of this subsection, producers or purchasers reporting exempt gas or non-exempt gas must report the gas by using as a part of the comptroller's lease identification number the completion number assigned by the Commission.(l) Reduced tax rate. Tax must be paid at the full rate on all gas as defined in subsection (a)(2)(A) of this section for wells spudded or completed between September 1, 1996, and August 31, 1997. On or after September 1, 1997, the party paying the tax at the full rate may apply to the comptroller for a credit or refund of tax equal to the difference between the tax paid at the full rate and the tax that would be due if calculated at the reduced tax rate as defined in subsection (a)(7) of this section.(m) Limitation of tax reduction. Once the comptroller approves an application for the reduced tax rate, tax will be due at the reduced tax rate for the first 120 consecutive months beginning with the date of first production or until the cumulative value of the tax reduction equals 50% of the drilling and completion costs incurred for the well, whichever occurs first. The operator shall provide to any interest owner taking gas in-kind the amount of tax reduction calculated according to subsection (a)(7) of this section.34 Tex. Admin. Code § 3.21
The provisions of this §3.21 adopted to be effective November 23, 1990, 15 TexReg 6499; amended to be effective September 4, 1996, 21 TexReg 8181; amended to be effective August 4, 1998, 23 TexReg 7839; amended to be effective February 18, 2002, 27 TexReg 1177; amended to be effective October 12, 2004, 29 TexReg 9550; amended to be effective November 2, 2009, 34 TexReg 7653