Providing for a three-year exemption from severance tax for new oil and gas wells.

Session of 2026
HOUSE BILL No. 2775
By Committee on Taxation
Requested by Jason Watkins on behalf of the Kansas Independent Oil and Gas
Association
2-12
AN ACT concerning taxation; relating to severance tax; providing for a
three-year exemption from severance tax for oil and gas wells;
amending K.S.A. 79-4217 and repealing the existing section.
Be it enacted by the Legislature of the State of Kansas:
Section 1. K.S.A. 79-4217 is hereby amended to read as follows: 79-
4217. (a) There is hereby imposed an excise tax upon the severance and
production of coal, oil or gas from the earth or water in this state for sale,
transport, storage, profit or commercial use, subject to the following
provisions of this section. Such tax shall be borne ratably by all persons
within the term "producer" as such term is defined in K.S.A. 79-4216, and
amendments thereto, in proportion to their respective beneficial interest in
the coal, oil or gas severed. Such tax shall be applied equally to all
portions of the gross value of each barrel of oil severed and subject to such
tax and to the gross value of the gas severed and subject to such tax. The
rate of such tax shall be 8% of the gross value of all oil or gas severed
from the earth or water in this state and subject to the tax imposed under
this act. The rate of such tax with respect to coal shall be $1 per ton. For
the purposes of the tax imposed hereunder the amount of oil or gas
produced shall be measured or determined:
(1) In the case of oil, by tank tables compiled to show 100% of the
full capacity of tanks without deduction for overage or losses in handling;
allowance for any reasonable and bona fide deduction for basic sediment
and water, and for correction of temperature to 60 degrees Fahrenheit will
be allowed; and if the amount of oil severed has been measured or
determined by tank tables compiled to show less than 100% of the full
capacity of tanks, such amount shall be raised to a basis of 100% for the
purpose of the tax imposed by this act; and
(2) in the case of gas, by meter readings showing 100% of the full
volume expressed in cubic feet at a standard base and flowing temperature
of 60 degrees Fahrenheit, and at the absolute pressure at which the gas is
sold and purchased; correction to be made for pressure according to
Boyle's law, and used for specific gravity according to the gravity at which
the gas is sold and purchased, or if not so specified, according to the test
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made by the balance method.
(b) The following shall be exempt from the tax imposed under this
section:
(1) The severance and production of gas which that is:
(A) Injected into the earth for the purpose of lifting oil, recycling or
repressuring;
(B) used for fuel in connection with the operation and development
for, or production of, oil or gas in the lease or production unit where
severed;
(C) lawfully vented or flared;
(D) severed from a well having an average daily production during a
calendar month having a gross value of not more than $87 per day, which
well has not been significantly curtailed by reason of mechanical failure or
other disruption of production; in the event that the production of gas from
more than one well is gauged by a common meter, eligibility for
exemption hereunder shall be determined by computing the gross value of
the average daily combined production from all such wells and dividing
the same by the number of wells gauged by such meter;
(E) inadvertently lost on the lease or production unit by reason of
leaks, blowouts or other accidental losses;
(F) used or consumed for domestic or agricultural purposes on the
lease or production unit from which it is severed; or
(G) placed in underground storage for recovery at a later date and
which was either originally severed outside of the state of Kansas, or as to
which the tax levied pursuant to this act has been paid;
(2) the severance and production of oil which that is:
(A) From a lease or production unit whose average daily production
is five barrels or less per producing well, which well or wells have not
been significantly curtailed by reason of mechanical failure or other
disruption of production;
(B) from a lease or production unit, the producing well or wells upon
which have a completion depth of 2,000 feet or more, and whose average
daily production is six barrels or less per producing well or, if the price of
oil as determined pursuant to subsection (d) is $16 or less, whose average
daily production is seven barrels or less per producing well, or, if the price
of oil as determined pursuant to subsection (d) is $15 or less, whose
average daily production is eight barrels or less per producing well, or, if
the price of oil as determined pursuant to subsection (d) is $14 or less,
whose average daily production is nine barrels or less per producing well,
or, if the price of oil as determined pursuant to subsection (d) is $13 or
less, whose average daily production is 10 barrels or less per producing
well, which well or wells have not been significantly curtailed by reason of
mechanical failure or other disruption of production;
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(C) from a lease or production unit, whose production results from a
tertiary recovery process. "Tertiary recovery process" means the process or
processes described in subparagraphs (1) through (9) of 10 C.F.R. §
212.78(c) as in effect on June 1, 1979;
(D) from a lease or production unit, the producing well or wells upon
which have a completion depth of less than 2,000 feet and whose average
daily production resulting from a water flood process, is six barrels or less
per producing well, which well or wells have not been significantly
curtailed by reason of mechanical failure or other disruption of production;
(E) from a lease or production unit, the producing well or wells upon
which have a completion depth of 2,000 feet or more, and whose average
daily production resulting from a water flood process, is seven barrels or
less per producing well or, if the price of oil as determined pursuant to
subsection (d) is $16 or less, whose average daily production is eight
barrels or less per producing well, or, if the price of oil as determined
pursuant to subsection (d) is $15 or less, whose average daily production is
nine barrels or less per producing well, or, if the price of oil as determined
pursuant to subsection (d) is $14 or less, whose average daily production is
10 barrels or less per producing well, which well or wells have not been
significantly curtailed by reason of mechanical failure or other disruption
of production;
(F) test, frac or swab oil which that is sold or exchanged for value; or
(G) inadvertently lost on the lease or production unit by reason of
leaks or other accidental means;
(3) (A) any taxpayer applying for an exemption pursuant to
subsections (b)(2)(A) and (B) shall make application biennially to the
director of taxation therefor. Exemptions granted pursuant to subsections
(b)(2)(A) and (B) shall be valid for a period of two years following the
date of certification thereof by the director of taxation;
(B) any taxpayer applying for an exemption pursuant to subsections
(b)(2)(D) or (E) shall make application biennially to the director of
taxation therefor. Such application shall be accompanied by proof of the
approval of an application for the utilization of a water flood process
therefor by the corporation commission pursuant to rules and regulations
adopted under the authority of K.S.A. 55-152, and amendments thereto,
and proof that the oil produced therefrom is kept in a separate tank battery
and that separate books and records are maintained therefor. Such
exemption shall be valid for a period of two years following the date of
certification thereof by the director of taxation;
(C) any exemption granted pursuant to subsections (b)(2)(A), (B), (D)
or (E) with an odd lease number and an exemption termination date
between June 1, 2004, and May 31, 2005, inclusive, shall be valid for a
period of one year following the date of certification; and
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(D) notwithstanding the provisions of paragraph (A) or (B), any
exemption in effect on the effective date of this act affected by the
amendments to subsection (b)(2) by this act shall be redetermined in
accordance with such amendments. Any such exemption, and any new
exemption established by such amendments and applied for after the
effective date of this act shall be valid for a period commencing with May
1, 1998, and ending on April 30, 1999;
(4) the severance and production of gas or oil from any pool from
which oil or gas was first produced on or after April 1, 1983, and prior to
July 1, 2012, as determined by the state corporation commission and
certified to the director of taxation, and continuing for a period of 24
months from the month in which oil or gas was first produced from such
pool as evidenced by an affidavit of completion of a well, filed with the
state corporation commission and certified to the director of taxation.
Exemptions granted for production from any well pursuant to this
paragraph shall be valid for a period of 24 months following the month in
which oil or gas was first produced from such pool. The term "pool"
means an underground accumulation of oil or gas in a single and separate
natural reservoir characterized by a single pressure system so that
production from one part of the pool affects the reservoir pressure
throughout its extent;
(5) the severance and production of oil from any well within a pool
from which oil was first produced on or after July 1, 2012, as certified by
the state corporation commission to the director of taxation, and from
which the average daily severance and production of oil during the initial
six months of production from the date of first production from such
producing well, which well has not been significantly curtailed by reason
of mechanical failure or other disruption of production, does not exceed 50
barrels per day, and continuing for a period of 24 months from the month
in which oil was first produced from such pool as evidenced by an
affidavit of completion of a well, filed with the state corporation
commission and certified to the director of taxation. Exemptions granted
for production from any well pursuant to this subsection shall be valid for
a period of 24 months following the month in which oil was first produced
from such pool. The term "pool" means an underground accumulation of
oil in a single and separate natural reservoir characterized by a single
pressure system so that production from one part of the pool affects the
reservoir pressure throughout its extent. For any such well that has
qualified for exemption, if the average daily severance and production of
oil from such well exceeds 50 barrels per day within any qualifying one-
month production period after the initial qualifying production period, the
exemption for such well shall be terminated as of the commencement of
such one-month production period;
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(6) the severance and production of oil or gas from a three-year
inactive well, as determined by the state corporation commission and
certified to the director of taxation, for a period of 10 years after the date
of receipt of such certification. As used in this paragraph, "three-year
inactive well" means any well that has not produced oil or gas in more
than one month in the three years prior to the date of application to the
state corporation commission for certification as a three-year inactive well.
An application for certification as a three-year inactive well shall be in
such form and contain such information as required by the state
corporation commission, and shall be made prior to July 1, 1996. The
commission may revoke a certification if information indicates that a
certified well was not a three-year inactive well or if other lease
production is credited to the certified well. Upon notice to the operator that
the certification for a well has been revoked, the exemption shall not be
applied to the production from that well from the date of revocation;
(7) (A) the incremental severance and production of oil or gas which
that results from a production enhancement project begun on or after July
1, 1998, shall be exempt for a period of seven years from the start-up date
of such project. As used in this paragraph:
(1)(i) "Incremental severance and production" means the amount of
oil or natural gas which that is produced as the result of a production
enhancement project which that is in excess of the base production of oil
or natural gas, and is determined by subtracting the base production from
the total monthly production after the production enhancement project is
completed.
(2)(ii) "Base production" means the average monthly amount of
production for the twelve-month 12-month period immediately prior to the
production enhancement project beginning date, minus the monthly rate of
production decline for the well or project for each month beginning 180
days prior to the project beginning date. The monthly rate of production
decline shall be equal to the average extrapolated monthly decline rate for
the well or project for the twelve-month 12-month period immediately
prior to the production enhancement project beginning date, except that the
monthly rate of production decline shall be equal to zero in the case where
the well or project has experienced no monthly decline during the twelve-
month 12-month period immediately prior to the production enhancement
project beginning date. Such monthly rate of production decline shall be
continued as the decline that would have occurred except for the
enhancement project. Any well or project which that may have produced
during the twelve-month 12-month period immediately prior to the
production enhancement project beginning date but is not capable of
production on the project beginning date shall have a base production
equal to zero. The calculation of the base production amount shall be
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evidenced by an affidavit and supporting documentation filed by the
applying taxpayer with the state corporation commission.
(3)(iii) "Workover" means any downhole operation in an existing oil
or gas well that is designed to sustain, restore or increase the production
rate or ultimate recovery of oil or gas, including, but not limited to,
acidizing, reperforation, fracture treatment, sand/paraffin/scale removal or
other wellbore cleanouts, casing repair, squeeze cementing, initial
installation, or enhancement of artificial lifts including plunger lifts, rods,
pumps, submersible pumps and coiled tubing velocity strings, downsizing
existing tubing to reduce well loading, downhole commingling, bacteria
treatments, polymer treatments, upgrading the size of pumping unit
equipment, setting bridge plugs to isolate water production zones, or any
combination of the aforementioned operations ;. "Workover" shall does not
mean the routine maintenance, routine repair, or like for-like replacement
of downhole equipment such as rods, pumps, tubing packers or other
mechanical device.
(4)(iv) "Production enhancement project" means performing or
causing to be performed the following:
(i)(a) Workover;
(ii)(b) recompletion to a different producing zone in the same well
bore, except recompletions in formations and zones subject to a state
corporation commission proration order;
(iii)(c) secondary recovery projects;
(iv)(d) addition of mechanical devices to dewater a gas or oil well;
(v)(e) replacement or enhancement of surface equipment;
(vi)(f) installation or enhancement of compression equipment, line
looping or other techniques or equipment which that increases production
from a well or a group of wells in a project; or
(vii)(g) new discoveries of oil or gas which that are discovered as a
result of the use of new technology, including, but not limited to, three
dimensional seismic studies.
(B) The state corporation commission shall adopt rules and
regulations necessary to efficiently and properly administer the provisions
of this paragraph including rules and regulations for the qualification of
production enhancement projects, the procedures for determining the
monthly rate of production decline, criteria for determining the share of
incremental production attributable to each well when a production
enhancement project includes a group of wells, criteria for determining the
start-up date for any project for which an exemption is claimed, and
determining new qualifying technologies for the purposes of subsection (b)
(7)(A)(4)(vii) subparagraph (A)(iv)(g).
(C) Any taxpayer applying for an exemption pursuant to this
paragraph shall make application to the director of taxation. Such
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application shall be accompanied by a state corporation commission
certification that the production for which an exemption is sought results
from a qualified production enhancement project and certification of the
base production for the enhanced wells or group of wells, and the rate of
decline to be applied to that base production. The secretary of revenue
shall provide credit for any taxes paid between the project start-up date
and the certification of qualifications by the commission.
(D) The exemptions provided for in this paragraph shall not apply for
12 months beginning July 1 of the year subsequent to any calendar year
during which:
(1)(i) In the case of oil, the secretary of revenue determines that the
weighted average price of Kansas oil at the wellhead has exceeded $20.00
per barrel; or
(2)(ii) in the case of natural gas the secretary of revenue determines
that the weighted average price of Kansas gas at the wellhead has
exceeded $2.50 per Mcf.
(E) The provisions of this paragraph shall not affect any other
exemption allowable pursuant to this section; and
(7)(8) for the calendar year 1988, and any year thereafter, the
severance or production of the first 350,000 tons of coal from any mine as
certified by the state geological survey; and
(9) the severance and production of oil or gas from a new oil or gas
well shall be exempt from the tax imposed pursuant to this section for a
period of three years beginning on the date that the well first produces oil
or gas.
(c) No exemption shall be granted pursuant to subsection (b)(3) or (4)
to any person who does not have a valid operator's license issued by the
state corporation commission, and no refund of tax shall be made to any
taxpayer attributable to any production in a period when such taxpayer did
not hold a valid operator's license issued by the state corporation
commission.
(d) On April 15 , 1988, and on April 15 of each year thereafter, the
secretary of revenue shall determine from statistics compiled and provided
by the United States department of energy, the average price per barrel
paid by the first purchaser of crude oil in this state for the six-month
period ending on December 31 of the preceding year. Such price shall be
used for the purpose of determining exemptions allowed by subsection (b)
(2)(B) or (E) for the twelve-month 12-month period commencing on May
1 of such year and ending on April 30 of the next succeeding year.
Sec. 2. K.S.A. 79-4217 is hereby repealed.
Sec. 3. This act shall take effect and be in force from and after its
publication in the statute book.
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