Severance Tax
A state tax on the value or volume of oil and gas severed from the ground. It is withheld off your royalty check, and rates vary by state.
Severance tax is a state-level tax on natural resources "severed" — produced — from the ground. It is charged on the value or the volume of oil and gas at the wellhead and collected from production, which means it is deducted before or as your royalty is paid. You did not do the producing, but as a royalty owner you bear your share of the tax.
Rates and structures vary widely by state. Texas, for example, taxes oil at 4.6% of market value and natural gas at 7.5%, while other states use different percentages or per-barrel rates, and a few impose little or none. The deduction shows up as a line item on your royalty statement, separate from post-production costs and county ad valorem tax.
For a buyer or heir, severance tax is a predictable haircut on gross production revenue. Factor it in when you estimate net income, and remember it is distinct from the income tax you owe on what you actually receive.