Determination of market value and marketing costs

(a) Producers of natural gas who incur marketing costs in connection with the sale of natural gas production may deduct such costs from the actual cash receipts when computing the market value subject to the severance tax.
(b)(1) Marketing costs are reasonable and necessary nonproduction costs incurred by the producer to enable the transport of gas from the well to the first purchaser, including costs for:

(A) Compressing the gas sold to the first purchaser;

(B) Dehydrating the gas sold to the first purchaser;

(C) Treating the gas sold to the first purchaser; and

(D) Delivering the gas sold to the first purchaser.

(2) Marketing costs do not include:

(A) Costs incurred in producing the gas;

(B) Costs incurred in normal lease separation of the oil, gas, or condensate; or

(C) Insurance premiums on the marketing facility.

(c) Marketing facilities include but are not limited to:

(1) Flow lines or gathering systems from the separator to the purchaser's transmission line;

(2) Compressor stations;

(3) Dehydration units;

(4) Line heaters (after the separator); and

(5) Treating facilities.

(d) Marketing costs are determined by adding:

(1) Charges for depreciation of the marketing facility being used, provided that if the facility is rented the actual rental fee is added;

(2) Costs of direct or allocated labor associated with the marketing facility;

(3) Costs of materials, supplies, maintenance, repairs, and fuel associated with the marketing facility;

(4) Ad valorem taxes paid on the marketing facility; and

(5) Charges for fees paid by the producer to any provider of dehydration, treating, compression, and/or delivery services as provided in subsection (b) of this section.
(e)(1) Marketing cost deductions from actual cash receipts from production may only be claimed when gas is actually sold.

(2) Marketing costs claimed cannot exceed actual cash receipts from production received.

(3) If marketing costs do exceed the actual cash receipts from production received, there is no credit or carryover and the market value should be reported as zero (0) for that month.
(f)(1)(A) Whether a cost is deductible or not will often depend upon exactly how the item is used.

(B) If the cost is deductible, it must then be determined whether the item should be expensed or depreciated.

(2) Depreciation shall be determined by subtracting the salvage value from the purchase price and dividing the difference by the number of years of useful life.
Example of calculation:
Purchase price $ 100,000
Minus salvage value $ 10,000
Equals $ 90,000
Divided by useful life ÷ 10
Equals depreciation per year $ 9,000
(3)(A) Ten (10) years of useful life and a depreciation rate of ten percent (10%) per year are normally used.

(B) However, a different term can be used if the situation warrants, based upon documentation in the taxpayer's records.

(C) Useful life must be the lesser of the expected life of the equipment or the life of the field.

(D) Straight line depreciation is the preferred and recommended depreciation method.

(E) If another method is used, the taxpayer should be ready to support why that particular method is appropriate for the situation.