SALT Report 2075 – The Utah Supreme Court issued a ruling regarding the six month exemption from the oil and production tax as it applies to wells drilled after 1989. Section 59-5-102 of the Utah Code imposes tax on oil or gas produced from a well; however, it also provides an exemption for “the first six months of production for development wells started after January 1, 1990.” In this particular case, the Supreme Court had to determine when a well is “started” as required by the statute.
The well in question was spudded, or started, in 1983 by a former owner. The well was completed and capable of producing natural gas in 1984. As part of the completion process, the well’s former owner conducted a flow test in which the natural gas was allowed to flow to measure its productivity. Four days later, the well’s former owner “shut in” the well. It remained shut until 2006, when it was acquired by the Taxpayer who, after further construction, began to commercially produce gas from the well in 2008.
During a subsequent audit, the Taxpayer was denied the use of the 6 month tax exemption for this particular well. The auditor denied the exemption because the well was “started” prior to 1990. The Taxpayer filed a request for redetermination arguing that the language of the statute is ambiguous and that “started” could refer to either a “well’s production or a well’s development.”
In his argument, the Taxpayer said he interpreted the statute to mean a well starts when it begins commercial production. Therefore, he believed he was entitled to the 6 month tax exemption because the well started commercial production in 2008. The Tax Commission asserts that a well starts on the date that drilling begins. Consequently, they determined that the Taxpayer was not entitled to the tax exemption because drilling for the well began in 1983.
Upon review of the case, the Utah Supreme Court stated that the phrase “development wells started after January 1, 1990” described the type of wells entitled to the exemption, while the phrase “the first six months of production” described the period to which the exemption applied. Because there are two separate phrases, the Supreme Court determined that the distinction suggested that the start of a well and the start of a well’s commercial production are two different events.
Therefore, the Supreme Court ruled that it was the well itself, not oil or gas production, which must have started after January 1, 1990. Accordingly, the Supreme Court concluded that the correct interpretation of the statute indicates that a well “starts” when it is spudded.
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