Regular Session 2017-2018 House Bill 1624 P.N. 2150

PRINTER'S NO. 2150

THE GENERAL ASSEMBLY OF PENNSYLVANIA

HOUSE BILL

No.

1624

Session of

2017

INTRODUCED BY DEAN, SIMS, KINSEY, V. BROWN, FRANKEL, RABB, MURT,

PASHINSKI, STURLA, DAVIS, McNEILL AND DONATUCCI,

JUNE 26, 2017

REFERRED TO COMMITTEE ON ENVIRONMENTAL RESOURCES AND ENERGY,

JUNE 26, 2017

AN ACT

Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An

act relating to tax reform and State taxation by codifying

and enumerating certain subjects of taxation and imposing

taxes thereon; providing procedures for the payment,

collection, administration and enforcement thereof; providing

for tax credits in certain cases; conferring powers and

imposing duties upon the Department of Revenue, certain

employers, fiduciaries, individuals, persons, corporations

and other entities; prescribing crimes, offenses and

penalties," providing for education reinvestment severance

tax, for minimum royalty for unconventional oil or gas well

products and for remedy for failure to pay the minimum

royalty on unconventional oil or gas wells; and making a

related repeal.

The General Assembly of the Commonwealth of Pennsylvania

hereby enacts as follows:

Section 1. The act of March 4, 1971 (P.L.6, No.2), known as

the Tax Reform Code of 1971, is amended by adding an article to

read:

ARTICLE XI-E

EDUCATION REINVESTMENT

SEVERANCE TAX

SUBARTICLE A

OIL AND GAS

Section 1101-E. Definitions.

The following words and phrases when used in this subarticle

shall have the meanings given to them in this section unless the

context clearly indicates otherwise:

"Coal bed methane." Gas which can be produced from coal

beds, coal seams, mined-out areas or gob wells.

"Department." The Department of Revenue of the Commonwealth.

"Dry natural gas." Hydrocarbon gases severed from

unconventional formations, consisting mostly of methane, that

remain after the natural gas liquid portion of the natural gas

stream has been removed and any volume of nonhydrocarbon gases

have been removed in sufficient quantity to render the gas

marketable. The term includes consumer-grade natural gas or

pipeline-quality natural gas.

"Gross proceeds." The value, whether in money or other

property, actually proceeding from the sale of property, without

a deduction for the cost of property sold or expenses of any

kind.

"Gross value." The gross proceeds received or receivable for

property transferred, except as follows:

(1) In a transaction involving related parties, gross

proceeds of the property transferred may not be less than the

fair market value of similar grade and quality property.

(2) In the absence of a sale, gross proceeds of the

property transferred may not be less than the fair market

value of similar grade and quality property.

(3) In a transaction where property is transferred for

the purpose of processing and resale, gross proceeds of the

property transferred may not be less than the fair market

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value of similar grade and quality property.

"Meter." A device to measure the passage of volumes of gases

or liquids past a certain point.

"Natural gas." A fossil fuel severed from unconventional

formations consisting of a mixture of hydrocarbon gases,

including methane, ethane, propane, butane, carbon dioxide,

oxygen, nitrogen and hydrogen sulfide and other gas species. The

term includes natural gas from oil fields known as associated

gas or casing head gas, natural gas fields known as

nonassociated gas, shale beds and other formations. The term

does not include coal bed methane.

"Natural gas liquids." Hydrocarbons, including ethane,

propane, butane, isobutane and pentane that are separated from

natural gas severed from unconventional formations as liquids

through the process of absorption, condensation, adsorption,

cooling in gas separators, gas processing or cycling plants or

condensate at the well head.

"Person." Includes a corporation, partnership, limited

liability company, business trust, other association, a

government entity other than the Commonwealth, estate, trust,

foundation or natural person.

"Producer." A person who engages or continues within this

Commonwealth in the business of severing natural gas from

unconventional formations for sale, profit or commercial use.

"Producing site." A point of severance, including a well and

its associated zones and multilateral well bores, that is

capable of producing natural gas from an unconventional

formation.

"Related parties." Two or more people, organizations or

businesses owned or controlled directly or indirectly by the

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same interests. Control exists if a contract or lease, either

written or oral, is entered into where one party severs or

processes natural gas owned or held by another party and the

owner or lessor participates in the severing, processing or

marketing of the natural gas or receives any value other than an

arm's-length passive royalty interest.

"Reporting period." A calendar month in which natural gas is

severed.

"Sales meter." A meter at the point where natural gas is

sold or transported to a purchaser or the market.

"Sever." The extraction or other removal of natural gas from

an unconventional formation in this Commonwealth.

"Storage field." A natural formation or other site that is

used to store natural gas that did not originate from and has

been transplanted into such formation or site.

"Stripper well." A producing site that is incapable of

producing more than 50 units of natural gas each day in a

calendar month.

"Tax." The tax imposed under this subarticle.

"Taxpayer." A person subject to the tax imposed by this

subarticle.

"Unconventional formation." A geological shale formation

existing below the base of the Elk Sandstone or its geologic

equivalent stratigraphic interval where natural gas generally

cannot be produced at economic flow rates or in economic volumes

except by vertical or horizontal well bores stimulated by

hydraulic fracture treatments or using multilateral well bores

or other techniques to expose more of the formation to the well

bore.

"Unit." A thousand cubic feet (Mcf) of natural gas at a

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temperature of 60 degrees Fahrenheit and an absolute pressure of

14.73 pounds per square inch, in accordance with American Gas

Association (AGA) standards and according to Boyle's law for the

measurement of gas under varying pressures with deviations

therefrom as follows:

(1) The average absolute atmospheric pressure shall be

assumed to be 14.4 pounds to the square inch, regardless of

actual elevation or location of point of delivery above sea

level or variations in such atmospheric pressure from time to

time.

(2) The temperature of the gas passing the meters shall

be determined by the continuous use of a recording

thermometer installed so that the thermometer may properly

record the temperature of the gas flowing through the meters.

The arithmetic average of the temperature recorded each 24-

hour day shall be used in computing gas volumes. If a

recording thermometer is not installed, or if installed and

not operating properly, an average flowing temperature of 60

degrees Fahrenheit shall be used in computing gas volume.

(3) The specific gravity of the gas shall be determined

by tests made by the use of an Edwards or Acme gravity

balance, annually, or at intervals as are found necessary in

practice. Specific gravity shall be used in computing gas

volumes.

(4) The deviation of the natural gas from Boyle's law

shall be determined by tests annually or at other shorter

intervals as are found necessary in practice. The apparatus

and the method to be used in making the tests shall be in

accordance with recommendations of the National Bureau of

Standards of the Department of Commerce, or Report No. 3 of

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the Gas Measurement Committee of the American Gas

Association, or any amendments thereof. The results of the

tests shall be used in computing the volume of gas delivered.

"Wellhead meter." A meter placed at a producing site to

measure the actual volume of natural gas severed.

Section 1102-E. Imposition of tax.

(a) Imposition.--There is levied a privilege tax on every

producer.

(b) Rate.--The tax imposed under subsection (a) shall be

imposed as follows:

(1) Six and one-half percent of the gross value of the

dry natural gas derived from the natural gas severed in this

Commonwealth received by a producer.

(2) Six and one-half percent of the gross value of the

natural gas liquids derived from the natural gas severed in

this Commonwealth received by the producer.

not be imposed upon a producer with respect to the following:

(1) Natural gas, dry natural gas or natural gas liquids

severed under a natural gas lease and provided to a lessor

for no consideration for the lessor's own use.

(2) Natural gas, dry natural gas or natural gas liquids

severed from a stripper well.

(3) Natural gas, dry natural gas or natural gas liquids

severed from a storage field.

(4) Natural gas, dry natural gas or natural gas liquids

severed, sold and delivered at or within five miles of a

producing site for the processing or manufacturing of

tangible personal property, as defined in section 201, within

this Commonwealth.

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Section 1103-E. Impact fee.

(a) Credits.--Unconventional gas well fees timely paid by a

producer for the prior calendar year under 58 Pa.C.S. Ch. 23

(relating to unconventional gas well fee) shall be allowed as

credit against the tax imposed under this subarticle.

(b) Limitations.--The following shall apply:

(1) A credit may be first taken on the return due under

this subarticle on April 20, 2018.

(2) The initial credit under paragraph (1) shall be

based on one-half of the unconventional gas well fee paid by

a producer before April 1, 2018, for the 2017 calendar year.

Thereafter, the credit shall be based on the entire

unconventional gas well fee paid by a producer on or before

April 1 for the preceding calendar year.

(3) A credit under this section may not be carried back

or carried forward beyond 12 months after payment of the

unconventional gas well fee that is sold, assigned or

refunded.

stripper well in 58 Pa.C.S. § 2301 (relating to definitions) or

any other provision of 58 Pa.C.S. Ch. 23 to the contrary, a

stripper well shall only be exempt from the payment of the

unconventional gas well fee due under 58 Pa.C.S. Ch. 23 if the

stripper well was incapable of producing more than 90 units of

natural gas each day of every calendar month in a calendar year.

Section 1104-E. Prohibition.

A producer may not make the tax imposed under section 1102-E

on natural gas severed under a natural gas lease, an obligation,

indebtedness or liability of a landowner, leaseholder or other

person in possession of real property upon which the removal or

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extraction occurs and shall not otherwise require the landowner

to pay or reimburse the producer for the amount of the tax.

Section 1105-E. Future agreements.

On or after the effective date of this section, a provision

of an agreement in violation of section 1104-E is declared to be

illegal, contrary to public policy and null and void.

Section 1106-E. Return and payment.

(a) Return.--Each producer is required to file a return with

the department, on a form to be prescribed by the department,

reporting all severed natural gas per reporting period and the

tax due as imposed under section 1102-E.

(b) Filing.--The return required by subsection (a) must be

filed with the department on or before the 20th day of the

fourth calendar month after a reporting period.

on the day the return is required to be filed and becomes

delinquent if not remitted to the department by that date.

Section 1107-E. Natural gas severance tax licensing.

(a) License required.--Each producer must apply to the

department for a severance tax license before severing natural

gas from this Commonwealth. Producers who have been severing

natural gas from this Commonwealth prior to the effective date

of this subarticle must obtain a license from the department

within six months from the effective date of this section. All

other producers must obtain a license before severing natural

gas from this Commonwealth. A producer is liable for the tax

imposed by this subarticle without regard to whether the

producer obtains a license.

(b) Fee.--The department may charge an application fee to

cover the administrative costs associated with the application

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and licensing process. If the department charges an application

fee, the department may not issue a license until the producer

has paid the application fee.

the producer shall provide a declaration of all sites in this

Commonwealth used by the producer for the severance of natural

gas. The declaration shall include all producing sites and shall

specify which sites include stripper wells. The producer shall

update the declaration when the producer adds or removes a

producing site in this Commonwealth or when there is a change in

the status of a producing site. The producer shall update the

declaration within 30 days after any calendar month in which a

change in the information contained in the declaration occurs.

(d) Department duties.--The department shall, after the

receipt of an application, issue the license applied for under

subsection (a), if the applicant filed all required State tax

reports and paid any State taxes not subject to a timely

perfected administrative or judicial appeal or subject to a duly

authorized deferred payment plan. The license shall be

nonassignable. Each producer shall be required to renew the

license on a staggered renewal system established by the

department. After the initial staggered period, a license issued

shall be valid for a period of five years.

(e) State taxes.--If an applicant for a license or a

licensee has not filed all required State tax reports and paid

any State taxes not subject to a timely perfected administrative

or judicial appeal or subject to a duly authorized deferred

payment plan, the department may refuse to issue, suspend or

revoke the license. The department shall send a notice by first

class mail to the applicant or licensee of the refusal,

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suspension or revocation which shall contain a statement that

the refusal, suspension or revocation may be made public. An

applicant or licensee aggrieved by the determination of the

department may file an appeal of the determination in the same

manner as provided for reassessments of tax under section 1109-

E. In the case of a suspension or revocation which is appealed,

the license shall remain valid pending a final outcome of the

appeal. Notwithstanding any other provision of law to the

contrary, if no appeal is taken or if an appeal is taken and

denied at the conclusion of the appeal process, the department

may disclose, by publication or otherwise, the identity of an

applicant or licensee whose license has been refused, suspended

or revoked under this subsection. Disclosure may include the

basis for refusal, suspension or revocation.

(f) Severing without a license.--A producer that severs

natural gas in this Commonwealth without holding a valid license

under this section commits a summary offense and shall, upon

conviction, be sentenced to pay a fine of not less than $300 nor

more than $1,500 or to imprisonment of not less than five days

nor more than 30 days, or both. The penalties imposed by this

subsection shall be in addition to any other penalties imposed

by law. For purposes of this subsection, the severing of natural

gas during any calendar day shall constitute a separate

violation. The Secretary of Revenue may designate employees of

the department to enforce the provisions of this subsection. The

employees shall exhibit proof of and be within the scope of the

designation when instituting proceedings as provided by the

Pennsylvania Rules of Criminal Procedure.

(g) Liability.--Failure to obtain a license does not relieve

a person from liability for the tax imposed by this subarticle.

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(h) Civil penalty.--In addition to any tax, interest or

other penalty due under this subarticle, the department shall

impose a civil penalty of 10 ¢ per unit severed during the period

a producer is required to and does not have a license. The

penalty shall be assessed and collected under this subarticle.

Section 1108-E. Meters.

A producer shall provide for and maintain discrete wellhead

and sales meters. A producer shall ensure that all meters are

maintained according to industry standards.

Section 1109-E. Administration of tax.

Unless otherwise noted to the contrary, Chapters IV, V, VI,

VII and VIII of Part VI of Article II shall apply to this

subarticle.

Section 1110-E. Records.

A producer shall maintain the following records:

(1) Wellhead and sales meter charts for each reporting

period and the meter calibration and maintenance records. If

turbine meters are in use, the maintenance records will be

made available to the department upon request.

(2) All records, statements and other instruments

furnished to a producer by any person to whom the producer

delivers for sale, transport or other delivery of any natural

gas.

(3) Records, statements and other instruments as the

department may prescribe by regulation.

Section 1111-E. Enforcement of subarticle.

The department and the Department of Environmental Protection

shall have the ability to inspect records and locations to

ensure compliance with this subarticle.

Section 1112-E. Use of revenue.

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Revenue collected under this subarticle shall be used for

education.

SUBARTICLE B

MINIMUM ROYALTY FOR

UNCONVENTIONAL OIL OR GAS WELL PRODUCTS

Section 1121-E. Definitions.

The following words and phrases when used in this subarticle

shall have the meanings given to them in this section unless the

context clearly indicates otherwise:

"Gross proceeds." Money generated from the sale by a lessee

of oil, natural gas or gas of any other designation or their

constituents removed or recovered under a lease in an arm's-

length transaction designated and fixed at the actual point of

sale.

"Lease." An agreement conveying to a lessee the right to

remove or recover oil, natural gas or gas of any other

designation from land of the lessor.

"Royalty payment." A payment made by a lessee to a lessor

under a lease.

Section 1122-E. Minimum royalty.

(a) Amount.--

(1) The minimum royalty payment made under the act of

July 20, 1979 (P.L.183, No.60), known as the Oil and Gas

Lease Act, to a lessor for the removal or recovery of oil,

natural gas or gas of any other designation under a lease may

not be less than one-eighth of the gross proceeds received by

the lessee.

(2) No deduction or allocation of costs, expenses or

other adjustments may be taken or made to gross proceeds

before calculating the amount of a royalty payment due to a

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lessor under paragraph (1).

(b) Applicability.--The requirement to pay a minimum royalty

as provided in subsection (a) shall only apply to oil, natural

gas or gas of any other designation sold by a lessee after the

effective date of this section.

Section 1123-E. Remedy for failure to make minimum royalty

payment.

(a) Civil action and venue.--A lessor who is party to a

lease may file an action for failure of the lessee to pay the

minimum royalty under this subarticle in the court of common

pleas of the county where the land of the lessor is located or

the county in this Commonwealth in which the lessor resides.

(b) Burden of proof.--

(1) Demonstration by a lessor who is party to a lease

that the lessee has made a royalty payment which is less than

the amount required under section 1122-E(a) shall create a

presumption that a violation of this subarticle has occurred.

(2) The presumption in paragraph (1) may be rebutted if

the lessee presents clear and convincing evidence that the

required minimum royalty payment was made.

which a court finds that the lessee who is party to a lease has

violated the terms of this subarticle, the lessor shall be

entitled to the remedies specified in subsections (d) and (e)

if, before filing suit, the lessor gave to the lessee 30 days'

written notice by certified mail of the deficiency and the

lessee failed to cure the deficiency.

(d) Additional remedies.--In addition to actual damages and

any other remedy deemed appropriate by the court, the court

shall award reasonable attorney fees and costs in bringing the

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action, including expert witness fees, to the lessor.

(e) Treble damages.--In cases where the court finds that the

lessee acted willfully in failing to make the minimum royalty

payment due or where a lessee has been previously found to have

failed to make the minimum royalty payment, the court may award

treble damages.

(f) Other remedies not precluded.--The remedies provided in

this section are not exclusive of, do not require exhaustion of

and shall be in addition to any other remedies provided by the

lease, by law or in equity.

Section 2. Repeals are as follows:

(1) The General Assembly declares that the repeal under

paragraph (2) is necessary to effectuate the addition of

Article XI-E of the act.

(2) 58 Pa.C.S. § 2318 is repealed.

Section 3. This act shall take effect as follows:

(1) The addition of Subarticle B of Article XI-E of the

act shall take effect in 60 days.

(2) The remainder of this act shall take effect

immediately.

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