Volume 9 - Opinions of Counsel SBEA No. 33
Assessment, separate (oil and gas rights) - Real Property Tax Law, §§ 590-597:
Oil and gas rights which have not been exercised may be separately assessed notwithstanding the provision of Title 5 of Article 5 of the RPTL.
In 4 Op.Counsel SBEA No. 77, we concluded that oil and gas rights may be separately assessed. We are asked whether oil and gas rights which have not been “exercised” may still be separately assessed given the enactment of Title 5 of Article 5 of the RPTL.
Title 5 of Article 5 of the RPTL (L.1981, c.846), which sets forth procedures for the assessment of oil and gas rights, was enacted in 1981 in response to problems encountered by assessors and taxpayers concerning the assessment of such rights. Chapter 869 of the Laws of 1985 amended Title 5 to clarify certain definitions and procedures relating to the determination of unit of production values and their use. The State Board has implemented the law through rules set forth in Part 196 of the Official Compilation (9 NYCRR Part 196).
Section 594(1) of Title 5 provides that “oil and gas economic units shall be assessed only in the manner provided in this title” (emphasis added).
Among the terms defined in RPTL, section 590, are “economic unit”, “oil and gas rights”, and “exercise of oil and gas rights”, which definitions are as follows:
2. “Economic unit” means all the real property subject to taxation and assessed pursuant to this title associated with the exercise of oil and gas rights, including the unextracted oil and gas, oil and gas rights and any and all equipment, fixtures and pipeline, regardless of size, length or pressure rating necessary to drill, mine, operate, develop, extract, produce, collect, deliver or sell the oil or gas to a point of sale to a commercial purchaser or the pipeline or equipment of a user, including wells, well-head equipment, pipes, compressor stations, related equipment and buildings used to store equipment. Each economic unit may include either a single well and the associated property, or a group of wells and the associated property under common ownership and operated as a unit. No economic unit shall extend beyond the point of sale or where the gas or oil is delivered to the pipe or equipment of a user, nor shall an economic unit include special franchise property, or the percentage of any pipe, pipelines, equipment or fixtures such as cogeneration equipment, which generates income from activity which is not associated with or necessary for the extraction, collection, delivery and sale of oil and gas from the economic unit to a user or commercial purchaser.
3. “Oil and gas rights” means any right to drill, mine, operate, develop, extract, produce, collect, deliver or sell oil or gas located on or below real property.
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7. “Exercise of oil and gas rights” means the act or acts of drilling, mining, operating, developing, extracting, producing, collecting, delivering or selling oil or gas located on or below real property and such other acts as are deemed necessary and appropriate for the proper operation and development of oil and gas wells.
Clearly an “economic unit” exists only where there has been an “exercise of oil and gas rights.” Accordingly, where no action within the definition of that term has taken place, no “economic unit” exists and Title 5 has no application, since Title 5 makes no provision for the assessment of oil and gas rights which have not been “exercised”. Where Title 5 does not apply, we must assume that the “unexercised” oil and gas rights are to be treated the same as they were prior to the enactment of Title 5 and, in such case, the analysis and conclusions set forth in 4 Op.Counsel SBEA No. 77 are applicable. Therefore, such rights may be separately assessed, although we do not recommend this because of the problems relating to valuation and tax collection and enforcement.