Ad Valorem Taxes for Oil and Gas

Owners of oil and gas assets may have to pay taxes at both state and federal levels. While the term ‘Ad Valorem’ is generic for different assets like property, real estate, vehicles, etc., Ad valorem tax oil and gas may be pretty technical for first-time taxpayers.

So, in this post, we will look at different aspects of Ad valorem tax related to the oil and gas industry and what you should know about it.

What is Ad Valorem Tax?

Ad Valorem is a Latin word meaning ‘according to value .’ So, an Ad Valorem tax depends on the asset value. Other than assets, Ad Valorem applies to services and products too. Generally, Ad Valorem tax is charged by governments and municipalities.

Ad Valorem tax is mainly applied to personal property or real estate, but it can also extend to value-added taxes and sales tax. It’s charged at the time of sales, and sometimes, it can also be charged as an annual fee, for example, for inheritance, etc.

When Do Ad Valorem Taxes Apply?

Generally, in many states of the US, the Ad Valorem tax applies to the production and extraction of minerals. If your property is not producing the minerals, the tariff doesn’t apply to you just yet. Moreover, the tax is collected once a year only.

Because oil and gas lie under the ‘minerals’ category, the Ad Valorem taxes that apply to oil and gas are the same as those used for real property. So, they are based on appraised Fair Market Value. But what’s a fair market value?

Fair Market value is the price a buyer will pay from the open market. Therefore, the cost of the mineral interest should stay within the limits of the current market conditions.

Ad Valorem Tax Examples

Ad Valorem taxes come in many forms. However, especially in the oil and gas sector, they are the primary source of revenue for the states, which means that property owners must pay such taxes on time. Here are some common examples of Ad Valorem taxes as far as the example of Ad Valorem taxes are concerned.

Property Taxes

Property tax is a broader term that applies to real estate property, either commercial or residential. Depending on the property’s value, owners are liable to pay the relevant taxes every year. For oil and gas Ad valorem tax, the term property refers to the piece of land used to extract minerals and fuel resources.

Moreover, it also includes the vehicles used to transport and extract oil and gas. So, any concrete machinery used to produce oil and gas qualifies for property tax, i.e., Ad Valorem tax.

Other than that, governments often exempt taxes on non-tangible items, inventories, and household goods. So, all oil and gas inventory items used in the extraction and production process do not come under Ad Valorem taxes.  

Calculating Your Oil and Gas Property Tax

To determine your oil and gas Ad Valorem tax, the central appraisal authority of the state evaluates all your oil and gas assets. The oil and gas ad valorem tax can vary from person to person depending on the production rate. 

Generally, the total tax amount is calculated by multiplying the entire asset value and the oil and gas mileage rate. The millage is in the order of one-thousandth of a dollar.

Value Added Tax

Value Added Tax (VAT) is commonly known as goods and service tax (GST). Its value depends on how much value a business adds by purchasing certain goods and services. 

Unlike sales tax, Value Added Tax is not charged on the final value of the purchased goods.

Generally, the end-user pays the VAT for a purchased product. For instance, when you buy oil or gas assets, you pay the tax for the entire process of extraction, production, and delivery of the final product because these assets enhance their value at each stage.  

Sales Tax

Sales Tax is another typical example of Ad Valorem Tax. The tax applies when you either sell or purchase oil and gas assets. Generally, oil and gas sales tax is charged as a percentage of the total price of the products, and it’s charged at the time of purchase. 

If you want a resale of your assets, you can present a resale certificate to the tax authorities. In that case, the assets will be exempted from sales tax.

Sales tax includes other forms of taxes like consumer excise tax, seller tax, and retail transaction taxes. Oil and gas sales tax can vary from state to state. Depending on the oil and gas asset type, some states charge a specific percentage of the sales price while others charge a particular amount per unit quantity.  

How to Determine Ad Valorem Taxes

If you’re wondering how you can calculate the Ad Valorem Tax that you are liable to pay, here are some essential elements to consider. 

Fair Market Value

Every type of property has a fair market value. It’s best determined by tax assessment authorities, where they estimate the worth of your property and assets. For oil and gas, it’s relatively more accessible because the international market dictates the prices of different fuel resources.

The tax value is calculated against a specific percentage of the fair market value, and it’s estimated as of January 1st every year.

Paying the Ad Valorem Tax

Tax authorities impose ad Valorem Tax, so the property owners get a notification for tax payment when it’s due. It depends on the type of property and assets you are liable to pay taxes for to the authorities.


Ad Valorem Taxes apply to any assets or property owned by an individual in the US. So, they apply to the oil and gas assets similarly to other property types. Therefore, knowing about these taxes can help avoid unnecessary payments and gives you a better understanding of finances related to the oil and gas sector. 

There are different types of taxes that fall under the Ad Valorem tax term. Both oil and gas companies and mineral owners may be liable to pay these taxes on federal and/or state level.