Royalty Tax Explanation

Factors considered when determining market value of oil and gas leasehold properties include past and present production history, current oil and gas prices, and remaining reserves. The State of Kansas publishes a guide that is followed to help in the determination of the market value of oil and gas. The formula is used to "determine today's benefit for future revenues discounted to present value".

The ad valorem tax (local personal property tax) that you are billed for on your royalty tax statement is based upon value; therefore, there are some years in which the taxes may appear high and way out of line when your income is down. Personal property taxes are always for the prior year so the prior year's production is used in the formula. A loss in one year's income does not eradicate value. An example of this would be a farmer who is hailed out one year, but does not see a decrease in the market value of his farm ground.

Gas wells may be shut in during the current year, but still have large reserves and are capable of producing a lot of gas, causing taxes to remain high with income down for the year. The values placed on these royalty interests are supported by offers from several investors to purchase these properties.