AN ACT Relating to the taxation of minerals and mineral resources; adding a new chapter to Title 82 RCW; adding a new section to chapter 84.36 RCW; creating a new section; and prescribing penalties.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION. Sec. 1. TITLE. This chapter may be cited as the oil and gas severance and conservation act.

NEW SECTION. Sec. 2. LEGISLATIVE DECLARATION AND PURPOSE. (1) This chapter establishes an excise tax on the severance of oil and gas within this state, a conservation excise tax on the severance of oil and gas within this state to provide funds for the administration of the state oil and gas conservation laws, and procedures for the efficient administration and collection of both taxes.

(2) The legislature recognizes that when nonrenewable natural resources such as oil and gas are removed from the earth or waters within the state of Washington, the development and production of these resources contribute to the economy of the state, but nonetheless create expenses of diverse nature to the state and local governments. The legislature therefore seeks to compensate for these additional costs of government through the adoption of this chapter which provides a severance tax on the privilege of removing nonrenewable resources at appropriate rates of taxation.

(3) The legislature further recognizes that it is appropriate to levy a charge on the severance of oil and gas within the state to support the administration of the state oil and gas conservation laws, which are intended to avoid waste and promote the maximum economic recovery from these vital resources. Therefore, the legislature hereby adopts a separate oil and gas conservation tax for this purpose.

(4) The legislature intends that the revenues derived from the severance tax be used by the state for public purposes, including the meeting of those public needs occasioned by the oil and gas activity being taxed. The legislature further intends that a portion of these revenues go to local governments to help compensate for the cost of nonrenewable resource development.

NEW SECTION. Sec. 3. DEFINITIONS. Unless the context clearly requires otherwise, the definitions in this section apply throughout this chapter:

(1) "Department" means the department of revenue;

(2) "Oil" means crude oil, condensate, distillate or other oil, or other liquid hydrocarbon extracted from the earth or waters in this state, regardless of gravity;

(3) "Gas" means natural gas and casinghead gas, or other gaseous hydrocarbon from the earth or waters in this state, regardless of whether produced from a gas well or from a well also producing oil or other liquid hydrocarbons;

(4) "Value" means the market value at the time and point of production, as established by the actual price received by the interest owners for oil and gas or as otherwise provided in this chapter;

(5) "Interest owner" means a person owning an entire or fractional interest of whatever kind or nature in the products at the time of severance, or who has a right to a monetary payment which is determined by the value of such products which individually or in any combination represent one hundred percent of the interests in oil and gas produced;

(6) "Purchaser" means a person who is the first purchaser of a product from the producer at or after severance;

(7) "Product" or "products" means oil or gas, individually or any combination thereof;

(8) "Severance" means the taking from the earth or waters in this state of any product in any manner;

(9) "Person" means "person" as defined in RCW 82.04.030;

(10) "Production" means those acts taken to sever, contain, save, and measure any product and includes any acts otherwise necessary to bring it to merchantable condition or pipeline quality in any manner on the premises of the lease or property from which it is severed, except that production does not include those acts which constitute the operation of a gas processing plant, or gas distribution business within the meaning of RCW 82.16.010;

(11) "Producer" means any person who produces or extracts in any manner any oil or gas by taking it from the earth or waters of this state, whether produced or extracted by that person or some other person on his or her behalf, by lease, contract, or otherwise; and

(12) "Point of production" means:

(a) For oil, the point where it is first metered or measured (by automatic custody transfer meter, tank gauge, or other approved method) in a condition of pipeline quality on the premises of the lease or property from which it is severed; however, if the oil is not of pipeline quality when it is removed from the premises of the lease or property from which it is recovered or if the oil recovered from a lease or property is not metered or measured (by automatic custody transfer meter, tank gauge, or other approved method) on the premises of the lease or property from which it is recovered, then the point of production is the off-premises location where the oil is first metered or measured (by automatic custody transfer meter, tank gauge, or other approved method) in a condition of pipeline quality;

(b) For gas recovered from or in association with oil, the value of the gas at the point where it is first accurately metered or measured after separation from the oil on or near the premises of the lease or property from which it is severed;

(c) For gas not recovered from or in association with oil, the point where it is first accurately metered or measured on or near the premises of the lease or property from which the gas is severed.

NEW SECTION. Sec. 4. IMPOSITION OF SEVERANCE TAX. (1) There is imposed, and the department of revenue shall collect, in addition to any other tax, an excise tax upon the severance of oil and gas from all lands or waters in this state, including all publicly owned lands or waters, and Indian, Indian tribe, and Indian lands or waters to the extent authorized or permitted by law; less the value of any part thereof, the ownership or right to which is exempt from taxation under section 7 of this act.

(2) The rate of the tax imposed is five and three-fourths percent of the value of the oil and gas at the time and point of production.

NEW SECTION. Sec. 5. IMPOSITION OF CONSERVATION TAX. (1) There is imposed, and the department of revenue shall collect, in addition to any other tax, a conservation tax upon the severance of oil and gas from all lands or waters in this state, including all publicly owned lands or waters, and Indian, Indian tribe, and Indian lands or waters to the extent authorized or permitted by law; less the value of any part thereof, the ownership or right of which is exempt from taxation under section 7 of this act. The revenues derived from this tax shall be used for the administration of the oil and gas conservation laws of this state.

(2) The tax imposed under this section shall be one-fourth of one percent of the value of the oil and gas at the time and point of production.

NEW SECTION. Sec. 6. IMPOSITION, PAYMENT, AND COLLECTION OF TAX. (1) The taxes imposed by this chapter on the severance of oil and gas shall be the primary liability of the producer. Except as provided in subsection (2) of this section, these taxes shall be paid by the producer or the purchaser purchasing the oil or gas from the producer. The producer or purchaser shall deduct and withhold the ratable share of the tax from payments made to other interest owners in proportion to their interest, or by the purchaser to the producer, and remit the same to the department. The failure of the purchaser to pay the tax does not relieve the producer from the payment of the tax if the purchaser does not account for and pay the tax to the department. The department shall have a first and paramount lien on all oil and gas produced in this state in the possession of the producer or the purchaser to secure the payment of the taxes imposed by this chapter, including any interest and penalties thereon. Every person producing oil and gas in the state shall determine that the tax has been or will be paid by the persons liable therefor. If the purchaser has failed to pay to the department the tax imposed by this chapter, the department may proceed directly against the purchaser's bond or other asset for collection of the tax. If the bond and other assets fail to satisfy the tax obligation, the department may proceed directly against the producers in proportion to the ratable interest for collection of the balance of the tax due; and all other provisions of chapter 82.32 RCW including those relative to interest and penalties shall apply.

(2) If oil or gas on which the severance and conservation taxes are due is not sold at the time of production but is retained by the producer, the producer shall pay to the department the taxes due with respect to the oil or gas not sold and shall deduct or withhold the ratable share of the tax from payments made to other interest owners in proportion to their interest.

(3) If oil or gas is sold, retained as provided in subsection (2) of this section, or used under circumstances in which the sale price or the value reported to the department does not represent the market value then prevailing for oil or gas of like kind, character, quality, or comparable source from which the product is produced, the department may require the taxes to be paid upon the basis of the prevailing price then being paid at the time and point of production of other oil or gas of the same kind, character, quality, and comparable source.

(4) The taxes imposed by this chapter shall be borne ratably by all interest owners, including royalty interests, and producers and purchasers are authorized to withhold from any payment due any interest owners the proportionate tax due: PROVIDED, That such withholding may not be required by producers and purchasers with respect to contracts or other agreements entered into prior to the effective date of this act.

NEW SECTION. Sec. 7. EXEMPTIONS. The following interests are exempt from the taxes imposed under this chapter:

(1) The interest of this state and any political subdivision of this state in any oil or gas or in the proceeds thereof;

(2) The interest of the United States in any oil or gas or in the proceeds thereof;

(3) Any interest in oil or gas used in producing or drilling operations for repressuring or recycling purposes; and

(4) Any interest in oil or gas reinjected for storage, provided that any subsequent removal of oil or gas produced in this state from storage for sale, use, or other retention shall constitute a severance within the meaning of this chapter.

NEW SECTION. Sec. 8. APPLICABILITY OF GENERAL ADMINISTRATIVE PROVISIONS‑-DEPARTMENTAL RULES, BOND. (1) All of chapter 82.32 RCW, except RCW 82.32.040 and except as otherwise provided in sections 9 and 12 of this act, applies to the tax imposed by this chapter, in addition to any other provisions of law for the payment and enforcement of the tax imposed by this chapter. The department of revenue shall provide for the effective administration of this chapter by rules which shall include, but not be limited to, the determination of value at the time and point of production and a determination of methods of metering and measuring the production of oil and gas reasonably required for such administration.

(2) The department may require a sufficient bond from every person required to make or file a return or report or to pay tax under this chapter. The bond shall run to the state and shall be conditioned upon the making and filing of reports or returns as required by law, upon compliance with the rules of the department, and for the prompt payment, by the principal on the bond, of all taxes due the state under this chapter.

NEW SECTION. Sec. 9. FILING OF STATEMENTS. (1) Payment of the taxes imposed by this chapter shall be due forty-five days after the end of the month in which the oil and gas is severed along with reports and forms for submission under oath as the department shall prescribe, providing:

(a) A full description of the property by lease name, control number subdivision of quarter section, section, township, and range, or other legal description by metes and bounds, from which the oil or gas was produced;

(b) The name of the producer;

(d) The total value of the oil or gas at the price paid for it, if purchased at the time of production; and

(e) The prevailing market price of oil or gas sold at the time of production.

(2) A purchaser may furnish a verified copy of the regular settlement sheet in use by the purchaser instead of the statement required by subsection (1) of this section if the settlement sheet contains the information required in subsection (1) of this section.

(3) Every person who has produced oil or gas shall file with the department a sworn statement on forms prescribed by the department, giving the following:

(a) A full description of the property by lease name, control number, subdivision of quarter section, section, township, and range, or other legal description by metes and bounds, from which the oil or gas was produced;

(b) The gross amount of oil or gas produced and saved;

(d) The name of each purchaser of oil or gas from the producer during the quarter; and

(e) Any other information the department requires, including but not limited to leases and contracts entered into by producers, purchasers, and other interest owners.

(4) Taxes derived from all taxable leases may be reported on one report or return by each taxpayer. This single report or return shall contain separate schedules for oil and for gas. The report shall contain the necessary information for each separate lease and well.

NEW SECTION. Sec. 10. COLLECTION AND DEPOSIT OF REVENUE FROM THE SEVERANCE TAX‑-SHARING OF REVENUE FROM THE SEVERANCE TAX WITH LOCAL GOVERNMENTS. (1) The department of revenue shall deposit eighty percent of the money collected by it under section 4 of this act in the general fund.

(2) The local government severance taxation account is hereby established in the general fund into which twenty percent of the severance taxes collected under section 4 of this act shall be deposited. Moneys in this account shall be used solely for making distributions to those local governments in which impacts from oil and gas production activity occur, after appropriation by statute.

NEW SECTION. Sec. 11. DISPOSITION OF CONSERVATION TAX. (1) There is hereby created in the general fund the oil and gas conservation revolving account into which the money collected under section 5 of this act shall be deposited.

(2) Money in the account shall be used exclusively for the administration of the oil and gas conservation laws of the state. The oil and gas conservation committee or its successor may use moneys in the account for such purposes as appropriated by the legislature. At the end of each biennium, the state treasurer shall transfer any balance in the oil and gas conservation revolving account to the general fund.

NEW SECTION. Sec. 12. LIEN FOR TAX. In addition to the lien given in section 6 of this act, a tax imposed by this chapter (including any penalties and interest thereon) is a first and paramount lien against the purchaser's and producer's real and personal property. The provisions of this chapter making the purchaser liable to pay the tax do not release the producer from liability to pay the tax if the tax is not paid.

NEW SECTION. Sec. 13. A new section is added to chapter 84.36 RCW to read as follows:

The following property is exempt from taxation:

Interests in oil or gas reserves and leases on the rights to develop and operate upon or within any lands and waters of this state for oil and gas and the property rights attached to or inherent therein: PROVIDED, That this section does not in any way exempt machinery, appliances, pipelines, tanks, vehicles, and other equipment used in the development or operation of the leases or rights or used in the transportation of oil or gas.

NEW SECTION. Sec. 14. Sections 1 through 12 of this act shall constitute a new chapter in Title 82 RCW.

NEW SECTION. Sec. 15. If any provision of this act or its application to any person or circumstance is held invalid, the remainder of the act or the application of the provision to other persons or circumstances is not affected.

NEW SECTION. Sec. 16. Section captions as used in this act do not constitute any part of the law.