Small Mineral Rights Owners Face Burden
The estimated the number of royalty owners in West Virginia is around 19,550, more in the recent years.
What is depletion? Put simply, in the context of taxation, it represents the depleting value of a limited reservoir of a non-renewable resource such as natural gas, copper, oil, etc. Tax liability in America has often been dependent on the value of the property being taxed. As the object of taxation changes in value, the tax liability changes accordingly.
This is commonly accepted by federal and state governments with regard to all manner of property, whether brick and mortar, automobile value, etc. As an automobile depreciates, the tax rate is lowered in subsequent years. As the minerals are extracted from a given property, the reserves are depleted, and the value of that mineral interest depreciates, as should the tax liability.
Even if the quantity and composition of minerals in the ground can be known with relative certainty, the markets for energy sources like natural gas and oil are volatile. This has been abundantly demonstrated with the dramatic price fluctuations of oil and natural gas in recent years. These turbulent markets make it difficult to predict the overall value of mineral reserves, especially beyond one year.
Beyond unpredictable markets, there were additional problems with depletion. Even today, the science of interpreting seismic data and the drilling of exploration wells remain something of an art, albeit to a lesser extent than in previous decades. The accuracy of pre-extraction predictions on the quality and quantity of minerals can prove disappointing.
However, the inability to know with certainty the total future value of oil or gas from a given mineral interest, and the quantity which is likely to be producible, results from more than just the imperfections of geological data analysis. The “producible” quantity underground is unpredictable due to unknowable, yet inevitable changes in technology.
Because of the impossibility, both for taxpayer and tax administrator, of predicting the nature and timeline of technological advances, and the difficulty for both parties of defending variables like quantity of reserves, quality of reserves, and projected market value, we should depend on the producers for these calculations.
Large mineral interest owners such as energy companies are more likely to file for the depletion deduction. The reason for this is that they have already incurred the cost of a complex analysis of their mineral holdings as part of the process of exploration. Larger mineral interest owning entities have incentive to be reluctant to share information with smaller or individual mineral owners from whom they may need to lease or re-lease mineral rights. They consider this information proprietary and necessary to compete in the marketplace.
While collectively the minerals they own are of vast value, the minerals owned by a single individual are often relatively small in amount. A geological and reservoir assessment can be very costly for these small royalty owners. Geologists and engineers bill on an hourly basis, plus expenses, and it is hard to estimate the time an adequate assessment can take.
Royalty owners cannot afford to see their income eaten up by the cost of independent geological and reservoir assessments, attorney’s fees, and accounting fees that can quickly accrue in the pursuit of claiming a different depletion than allowed by the state tax dept. This lays an undue burden on these folks, to pay additional tax because of the current depletion allowance.
Many royalty owners already struggle to pay their current property tax, ad valorem tax, severance tax, state income tax, local tax, non-resident income tax, state and federal income tax on their producing minerals.
Regardless of intent, the tax increases of these valuations will have the effect of burden on many – while still allowing large producers to apply, with the proper information, for lower valuations, thereby reducing their tax burden, which the ordinary taxpayer can not afford to do.
Royalty owners are teachers, farmers, ranchers, homemakers, accountants, firemen, plumbers, retirees, dentists, small business owners, factory workers, engineers, pet groomers, widows, roofers, lawyers, policemen, florists, carpenters, bricklayers, and members of Congress; we are ordinary citizens, not multi-national corporations. We consider our mineral estates as assets to be managed and protected with responsible stewardship. For the majority of us, our minerals are part of a family legacy acquired through the hard work and sacrifices of our forbearers. Royalty income pays to educate our children, care for aging parents, and supplement salaried and Social Security income. We spend our money in our communities, give to our local charities and save for the future. Our financial benefits come solely from the mineral interests we own – deep under American soil.