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Revenue Administrative Bulletin 1992-9

Approved: March 31, 1992



(Replaces Revenue Administrative Bulletin 1990-13)

RAB-92-9. This bulletin announces an administrative change in the computation of allowable marketing costs arising from the use of gas conditioning equipment owned and operated by the producer. In all other respects, this bulletin restates the discussion contained in Revenue Administrative Bulletin 1990-13.

The computation of allowable marketing costs is no longer based upon the full capacity operation of the equipment, but instead is based upon the actual volume of gas processed through the equipment.

This bulletin is directed at gas production only, as the marketing costs for Michigan oil and condensate are nil. It identifies the marketing costs referenced in Revenue Administrative Bulletin 1992-5 which can be deducted in determining the wellhead value for severance tax purposes. These marketing costs are deductible only when the gas conditioning equipment is owned and operated by the producer. (Refer to Revenue Administrative Bulletin 1992-5 for allowable gas production costs paid to a third party.)


The Michigan severance tax act provides that the value (tax value) of all production of oil and gas shall be computed at the wellhead. [MCL 205.303(l); MSA 7.353(l)] If the market is away from the wellhead, there may be marketing costs allowed as deductions from the selling price determined at such time as title to the severed product transfers to the purchaser of the oil or gas.

Allowable Marketing Costs

For gas production, the following marketing costs are allowable as deductions from the selling price to arrive at the wellhead value for severance tax purposes:

  1. Plant investment, straight-line depreciation for each year of the statutory period in accordance with provisions of the Internal Revenue Code;
  2. Operating costs for each year;
  3. Return on investment, based on the average prime rate for the year of production applied against the average of yearly beginning and ending depreciated investment;. and
  4. Direct overhead (i.e., administrative costs directly allocated to the plant operation).

Note: Normal lease separation is not a marketing cost and the required equipment up to and through lease separation shall not be included in the marketing cost computations.


After the marketing costs are determined, they must be divided by the actual throughput volume of product for the plant equipment to arrive at the per thousand cubic feet (MCF) or per million british thermal units (MMBTU) allocation.

The allowable marketing cost deduction for future years would be based upon either:

  1. The average MCF or MMBTU cost for the past four years, or
  2. The MCF or MMBTU cost computed for the previous year.

At the end of each subsequent year, the actual costs must be determined and adjustments must be made for any difference between the actual marketing costs and the estimate.