• Under current law, the oil and gas severance tax is a tax on the value of oil or gas at the point of production. The problem is, the taxable value at the point of production is unknowable and can only be estimated by "working back" from the price at the point of sale.
   
• In 1995 and 1996, Exxon Mobil chaired the committee that helped the Revenue Department draft the regulation that defined the "workback method"-- the formula which defined the point of production and how to calculate the taxable value starting with the price at the point-of-sale. Having had a hand in its creation, Exxon’s tax manager spoke at the public rulemaking hearing to state that Exxon was satisfied with the final regulation and recommended its adoption. The workback rule became effective April 1, 1997.
   
• In early 2000, a consultant presented a scheme to Exxon by which he would help Exxon obtain severance tax refunds in return for a percentage of the refunds received. With nothing to lose, Exxon agreed to let the consultant prepare and file petitions for refunds based on previously unclaimed deductions, including costs unrelated to processing the gas and "indirect costs" which had never before been contemplated by Exxon as legitimately deductible.
   
• Through the consultant, Exxon filed several petitions for refunds of severance taxes paid for periods between January 1992 and December 2000, claiming even more deductions than had already been claimed on the returns. The Department denied the refund requests, and Exxon appealed to the Administrative Law Judge, challenging the very regulation they helped draft and adopt years earlier.
   
• On September 13, 2007, the Administrative Law Judge invalidated parts of the Revenue Department’s regulation, declared that there were no statutory or case law guidelines concerning the workback method, and ordered that the state refund to Exxon a total of $41,083,934.22, plus additional interest after December 31, 2006.
   
• Taking refunds and interest into account, Exxon successfully reduced its total offshore severance tax liability for a period in dispute to LESS THAN ZERO. For the period subject to the first refund request (January 1992 to December 1996) Exxon paid the state $16,000,466.97 in offshore severance taxes. After the Administrative Law Judge’s ruling, the state owes Exxon a total of $21,552,311.81 for offshore refunds and interest for that same period (refunds and interest through March 15, 2008). Stated differently, Exxon’s refund of offshore taxes and interest for the period exceeds the offshore taxes paid for the same period. In effect, this means that the natural gas extracted by Exxon during the period was worth less than nothing - Alabama actually owes Exxon for taking the gas.
   
• The recent Administrative Law Judge ruling will now allow all oil & gas producers to claim any and all direct and indirect costs, including transportation, processing, treatment and other costs. The only production costs that are still not allowed are down-hole costs - all other costs are now considered either direct or indirect. This could conceivably reduce their severance tax liability in future months to ZERO.

The Impact on Local Governments

• The Exxon ruling will also have a significant impact on the budgets of several cities and counties. The following entities will have to pay refunds of at least the amounts shown below (based on the ALJ’s ruling, plus refund petitions currently pending, plus interest calculated through Oct. 31, 2007. These numbers do not include claims filed since June 2004.)

The Severance Tax Preservation Bill

• The Exxon ruling has eviscerated the state’s severance tax base. Because Alabama has a value-based tax and the ruling allows oil and gas producers to artificially reduce the “value” at the wellhead through clever and aggressive accounting, the state no longer has any confidence in this important tax base.
   
• The Legislature MUST ACT to preserve this tax base. The judge ruled that there is no statutory basis or judicial guidance for calculating value and stated that the Legislature must act to clarify the base of this tax.
   
• The Revenue Department recommends moving from a value-based tax to an adjustable-rate volume-based tax (cents per 1,000 cubic feet) in order to simplify the calculation of severance tax for the taxpayer and the department, and to eliminate costly litigation for all parties.
   
• Governor Riley’s bill would preserve this important source of revenue by calculating tax based on volume instead of the elusive “value” at the wellhead. The tax rate applied to each unit would be adjusted annually according to an industry-recognized index, to ensure that the state doesn’t “leave money on the table” as natural gas prices increase.