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Impact of Pipeline Costs on State Tax Payments

Analyzing the impact of pipeline tariffs on royalty and production tax payments to the state of Alaska, including sovereign taxes and tax deductions.

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Impact of Pipeline Costs on State Tax Payments

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  1. Legislative Audit & BudgetSenate Resources CommitteeInterim HearingsAlaska Natural Gas Pipeline Issues Dan Dickinson, Director Tax Division June 16-17, 2004

  2. Impact of Pipeline Costs (Tariffs) on Royalty & Production Tax Payments Due to the State • Sovereign Taxes • royalty is a contract

  3. Tax on Non-Royalty Volumes • 10% x ELF x Gross Value at Point of Production = Tax • Gross Value = value at destination less “actual costs of transportation”

  4. Potential Production Tax Revenue Destination value ($/btu) $ 2.00 $ 3.00 $ 6.00 $10.00 Less Tariff ($/btu) ($ 2.40) ($ 2.40) ($ 2.40) ($ 2.40) Value of PoP ($/btu) ($ 0.40) $ 0.60 $ 3.60 $ 7.60 4.0 bcf per day 365.0 days per year 87.5% non-royalty fraction 10.0% tax rate 80.0% estimated ELF 102.2 X Tax Revenue ($000,000)($ 40.9) $ 61.3 $367.9 $776.7 Alternative Minimum cents per mcf $ 0.064 $ 2.80 Tax Deduction for Tariff $245.3

  5. Impact of Pipeline Costs (Tariffs) on Royalty & Production Tax Payments Due to the State • Sec. 43.55.150. Determination of gross value. (a)For the purposes of AS 43.55.100-43.55.150, the gross value shall be calculated using the reasonable cost of transportation of the oil or gas. The reasonable costs of transportation shall be the actual costs; except (1) when the parties to the transportation of oil or gas are affiliated; (2) when the contract for the transportation of oil or gas is not an arm’s length transaction or is not representative of the market value of that transportation; (3) when the method of transportation of oil or gas is not reasonable in view of existing alternative methods of transportation.

  6. Impact of Pipeline Costs (Tariffs) on Royalty & Production Tax Payments Due to the State • Sec. 43.55.150. Determination of gross value, cont. (b) If the department finds that the conditions in (a) (1), (2), and (3) of this section are present, the department shall determine the reasonable cost of transportation, using the fair market value of like transportation, the fair market value of equally efficient and available alternative modes of transportation, or other reasonable methods. Transportation costs fixed by tariff rates properly on file with the Regulatory Commission of Alaska or other regulatory agency shall be considered prima facie reasonable

  7. Impact of Pipeline Costs (Tariffs) on Royalty & Production Tax Payments Due to the State • Commerce Clause Issue • Complete Auto Transit Inc. v. Brady 430 US 274 (1977) Tax on interstate activities conducted by an out-of-state corporation within a state is constitutional as long as • the tax is not discriminatory • the tax is fairly apportioned to the state • the local activities in the taxing state establish sufficient nexus • the tax is fairly related to services provided by the state

  8. Impact of Pipeline Costs (Tariffs) on Royalty & Production Tax Payments Due to the State • Mechanics • higher of 1% gross receipts or 25% net receipts • allowance vs. deduction • Stranded Gas Act: contract to effect sovereign’s rights

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