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Revenue Administrative Bulletin 1989-20

Approved: April 4, 1989



RAB-89-20. The purpose of this Bulletin is to clarify the severance tax base and the deductibility of certain items from the base in determining the severance tax on gas.

Michigan's Severance Tax Act, MCL 205.303(1), states in part: "The value of ALL production shall be computed as of the time when and at the place where the production was severed or taken from the soil immediately after the severance." (Emphasis added.)

This language directs that ALL production severed, regardless of how it is used or sold, is taxable. The Department of Treasury recognizes that there may be costs incurred to market the gas, and these costs may be allowable deductions from the market value when the market is away from the point immediately after the severance" (i.e., the wellhead). The Department considers the normal lease separation of oil or condensate from the gas, and all functions prior to the separation, to be production costs and not allowable marketing cost deductions. Until such time that the normal lease separation occurs, the products are not yet defined as gas, oil, or condensate. The production has not ceased at this time.

Therefore, any and all severed gas that is used or consumed to operate the on-lease or off-lease normal lease separation functions is taxable for Michigan severance tax purposes. All such lease use of severed gas is to be included in the taxable volumes reported on the purchaser's or the producer's severance tax reports.