Natural gas well owners underpay tax by 43 percent

by Chris Cotelesse

Posted Feb. 19, 2015

(Jared Rodriguez/Truthout)

Natural gas well owners shorted the Ohio tax department millions of dollars in 2014, but the state lacks the authority to claim it.

Well owners are required to report how much of the fuel they “sever” from the Earth and file two separate reports each quarter. One goes to the Ohio Department of Natural Resources (ODNR). The other is a severance tax return that goes to the Ohio Department of Taxation.

Ideally, each department should have matching reports, but an analysis by Renegade Press found the tax department's figures were 43 percent lower than ODNR's from July 1, 2013 to June 30, 2014, the fiscal year. As a result, the tax department only collected severance taxes on 57 percent of natural gas in fiscal year 2014, a difference of $2.5 million.

Gary Gudmundson, a spokesperson for the tax department, declined to explain the discrepancy or acknowledge one exists, but he has forwarded my calculations to a "number cruncher" for examination.

ODNR's website carries a disclaimer that says the department "can neither guarantee the accuracy of the information, nor guarantee that the information set forth herein reflects all of the production of oil and gas that has occurred in a county or year." State law requires well owners to report their production accurately, and ODNR can force them to comply.

But while the tax department can audit the tax returns, officials don't have the authority to go to the wells and check the meters against the reports. They rely on well owners to make a truthful account of natural gas production and, apparently, take them at their word.

So unless the difference is hiding in the paperwork, the gas and the money may as well have never existed.

It's a drop in the $35-billion bucket that Gov. John Kasich proposed for the 2016 budget, but natural gas is becoming increasingly important in the Buckeye State. In just the first three quarters of calendar year 2014, Ohio well owners produced nearly three times as much natural gas than they had the previous year.

Kasich expects even more natural gas drilling in at least the near future. He wants to raise severance taxes, which he estimates could generate $183 million in 2017. The Ohio Oil and Gas Association bashed Kasich's proposal, saying that higher taxes will slow production and kill jobs. But industry spokespeople always say that.

The state has misaccounted for severance tax dollars in the past. reported in 2012 that Ohio's severance taxes on natural gas were off by more than $1.5 million dollars between 2000 and 2009.

At the time, officials in both departments said they weren't able to verify that production numbers or taxes were accurately reported.

“We just process the tax returns and allocate the money to ODNR’s oil and gas program. … We can audit the returns, but we don’t have the authority to go to the well sites and check the meters,” said Gary Gudmundson, spokesman for the tax department.

ODNR said much the same.

“We don’t really evaluate them from the viewpoint of whether they’re true or false,” said Mike McCormac, oil and gas permitting manager for ODNR.

Then-State Rep. Bob Hagan publicly criticized the discrepancies, calling the uncollected revenue “a real failure of government.”

“It is all too apparent now that the Department of Taxation and the Ohio Department of Natural Resources give the oil and gas industry a free pass to write a tax check to the state based on what they think is fair,” Hagan said in a Feb. 6, 2012 press release.