Natural Gas Severance Taxes – Audit Policy on Marketing Costs

This webpage originated as an attachment to Audit Policy #116.

Section 201.101 of the Tax Code states "The market value of gas is its value at the mouth of the well from which it is produced." Rule 3.15, Gas Marketing Costs, states "The "market value at the mouth of the well" shall be determined by ascertaining the producer's actual marketing costs and subtracting those costs from the producer's gross cash receipts from the sale of the gas." Market value has been further discussed in the court case Mobil v. Calvert, 451 SW 2d 889 (Tex 1970).

The purpose of the marketing cost deduction is not to cause the taxable value to be a "net income" tax. It simply equalizes the tax burden for those selling at or near the point of production with those who have to treat the gas and send it further away to market. Where there is no compression, sweetening, dehydration or transportation to the market, there will be no marketing costs. (The one exception is for costs on the sales meter or a necessary allocation meter. See "Meters" for more information on this subject.)

If a marketing facility is being used for gas lift, pressure maintenance or handling gas for outside parties, those volumes must also be included to calculate a "per mcf" value for the marketing cost deduction. The volumes for gas that qualify for one of the exemptions from tax (i.e., high cost gas) must also be used in the calculation of a "per mcf" cost.

Marketing costs may not reduce the taxable value of gas below zero. Marketing costs may not be carried forward from one month to another.

Three general rules:

• Marketing costs do not include any costs associated with producing natural gas or with the separation of natural gas from oil, condensate and water.
• The cost must be necessary and essential to marketing the gas.
• The cost should be directly related to the physical handling of the gas.

General Concepts:

Only the lease operator can take marketing cost deductions.

What if other interest owners have paid their own share of the taxes? Can they then take their own share of the costs?

No, but the operator taking the costs should reimburse the other interest owners for their share of the costs. Exception: If the producer puts in writing that they will tell the other parties the amount of the costs, and agree to make supporting records available if necessary, the non-operator can take marketing cost deductions. Also, a non-operating, tax-paying interest owner may file for a refund of marketing costs if the operator provides supporting documentation and if the operator has not already deducted those same costs or received a refund for those costs.

Note: each non-operator has their own statute of limitations for the purposes of filing refunds.

What if the gas purchaser is paying the tax? Can the producer tell the purchaser how much the costs were so that the purchaser can enter them on the tax return?

No. The purchaser can only take costs that are built into the contract.

What if the gas purchaser has paid the tax? Can the producer and/or operator get an assignment letter from the purchaser and file for a refund on their costs?

Yes. They may file the costs on a schedule rather than on amended returns since they have zero reported value.

Amended returns need to be filed for all refund requests.

Amended returns are required to provide a good audit trail for costs taken. If additional costs are submitted as part of a refund request and are to be incorporated in an audit and/or filed on a schedule, the taxpayer must first obtain approval from Account Maintenance Division and from Audit Division.

Taxpayers can compute costs on an annual basis and use a rate per MCF for reporting

Taxpayers can compute costs on an annual basis and use a rate per MCF for reporting, then go back at the end of the year and compute the actual costs and rate. Then if the rate used was too high or too low, the rate for the next year must be adjusted accordingly. Actual costs must be used for audits and refund requests.

A reasonable amount is allowed for overhead, at a rate of 6% of the appropriate accounts.

The "overhead" accounts from which the 6% is taken are to be marketing related overhead accounts. Joint interest billings can be used to determine the accounts if necessary, but joint interest billings or amounts billed as "COPAS" overhead can NOT be used directly as the overhead amount.

To allocate costs between sales and gas lift systems:

Use a ratio of gas sales to the total gas produced or compressed.

To allocate costs between gas and condensate systems:

Use:

• hydrocarbon
• gas to hydrocarbon liquids method

To calculate typical depreciation and return on investment:

Follow this example:

• Purchase price = $100,000
• Salvage value = $ 10,000
• Useful life = 10 years

Depreciation per year = $100,000 - $10,000 = $90,000 / 10 yrs = $9,000 per yr

Return on Investment

Undepreciated balance at beginning of year	$100,000
Undepreciated balance at end of year	91,000
Subtotal	$191,000
Divided by 2	$95,500
Less: salvage value	- 10,000
Average undepreciated balance	$85,500
Multiplied by 6 percent rate	.06
Return on Investment per year	$5,130

Notes:

• Useful life and depreciation rate: Ten years useful life and a depreciation rate of 10% per year is normally used for field equipment. Twenty years useful life or more is normally used for plants. However, a different term can be used if the situation calls for it, based upon documentation in the taxpayer's records. Useful life must be the lesser of the expected life of the equipment or the life of the field. Straight-line depreciation is the preferred and recommended depreciation method.
• If another method is used, the taxpayer should be ready to support why that particular method is appropriate for the situation. Useful life should be adjusted for major capital improvements. Useful life for marketing cost purposes should match the depreciation on the financial books.
• In cases where one company acquires another, it is best to use the value placed on the new owner's books. If the new owners place no value on the equipment, valuing only the reserves, the company should not be allowed to depreciate the equipment.
• If equipment that has been fully depreciated is sold for more than the salvage value, the additional "profit" is subject to severance tax. If equipment that is not yet fully depreciated is sold for more than book value, the excess depreciation taken can be recouped. In either case, tax is due, and auditors should assess this in audits.
• If fully depreciated equipment continues in use by the taxpayer, they can continue to deduct the return on investment amount on the salvage value.

Lease schematics appropriate to the relevant time period and signed by a company engineer should be provided for all audits or refund requests.

If not available, a written description, including a listing of equipment, signed by a company engineer, may be provided.

Marketing Costs

The following tables present various costs by category as "Allowable" or "Disallowed" as marketing costs. The exact answer as to whether the cost is deductible or not often depends upon exactly how the item is used. Also, if the cost is deductible, it must be determined whether the item should be expensed or depreciated.

Wellhead and Downhole Equipment/Operations

Item	Allowable	Disallowed	Comments
Wellhead and DownholeEquipment/Operations			These items all relate to either the drilling of the well or well servicing activities. None are deductible as marketing costs.
Acidizing		X
Casing		X
Cementing		X
Drill Pipe		X
Fishing/fishing tools		X
Fracturing		X
Hot oiling/hot oil treatment	X	X	Allowable if used in flow lines on a percentage basis. Downhole uses are not allowed.
Injecting baroid		X
Logging		X
Packers/setting packers		X
Paraffin removal		X
Perforating		X
Swabbing		X
Tubing		X
Well Service		X
Wire line service		X

Production Equipment/Operations

Item	Allowable	Disallowed	Comments
Production Equipment/Operations			These items are all involved with the production of oil and gas, not marketing the gas. Therefore, none are allowable as marketing costs.
Christmas tree		X
Compressors: wellhead/suction/vacuum		X	This type of compressor is used to create a vacuum or suction pressure to help produce oil and gas. Our policy is that if a well has a flowing pressure greater than the atmospheric pressure (14.65 psi), the oil and gas will flow to the surface in a natural state without the aid of a compressor. Therefore, the compressor is allowable as a marketing cost. If the flowing pressure is less than the atmospheric pressure, the well will not produce without the compressor. Consequently, the compressor relates to production, and its costs are not deductible as a marketing expense.
Corrosion inhibiting chemicals	*	X	Most of these chemicals are used downhole and are not allowable. If the chemical is used in pipelines that are part of the marketing function, that portion may be allowed.*
Downhole separation		X
Electricity to run pumping unit		X
Lease use gas to run pumping unit		X	Gas used to run a pumping unit is taxable as lease use gas, and there is not a corresponding marketing deduction for this gas value since pumping units are used to produce oil and gas.
Pumping unit		X
Replacement valves/parts for Christmas tree		X
Rods / pulling rods		X
Submersible pumps		X
Tanks		X
Tank and Vessel cleaning		X
Automatic Shut-Down Devices (ASDs)		X	These devices will automatically shut-down the operations of all lease equipment in the event there is a problem with the wellhead or within the lease operations.

Lease Equipment After the Wellhead

Item	Allowable	Disallowed	Comments
Lease Equipment After the Wellhead
Air compressors used to start lease equipment		X	Not allowable unless used to start equipment that otherwise qualifies as marketing equipment.
Cathodic protection	X	X	These are rods used to prevent corrosion of pipes and vessels. They are allowed if used on the marketing gathering lines or if used on any allowed marketing equipment but not allowed if used downhole.
Chrome/stainless steel piping for handling gas with high H2S content.	X*		*Depends on if the piping qualifies as allowable, based on location of the piping and its function. The "chrome/stainless steel" element is irrelevant.
Cranes for compressor building	X		Used to lift and move the compressor. Sometimes referred to by just the crane’s brand name such as "Coffing."
Compressor installation charges	X		If the compressor is owned and used in a manner related to gas marketing, the installation costs may be included in depreciable base.
Compressors/parts and service for compressors - gas lift systems		X
Compressors/parts and service for compressors - to return gas to leases		X
Compressors/parts and service for compressors - to get gas up to required sales pressure. Compressors owned rather than rented.	X		If compressors perform a dual purpose, the costs can be allocated between allowable and not allowable marketing costs. Must be depreciated over useful life, and return on investment may be calculated.
Compressors - rented sales compressors	X		Deducted as a monthly expense.
Compressors - at central facility (compressor stations)	X		Same as above for all compressors.
Compressors - transmission line		X	Not allowable unless it occurs before the sale has been made.
Compression charge on settlement statement	X*		*Allowable if not already deducted from the reported gas sales price.
Compressor fuel for gas lift compressors		X
Concrete slab for compressor	X		If compressor is owned, cost of slab may be included in depreciable base.
Concrete pad around compressor to collect oil and drainage, to reduce environmental clean-up in the future.		X	Environmental related costs are not allowed. These pads are not necessary and essential to market the gas and they do not physically handle the gas.
Cost reimbursement from gas purchaser for compression		X	Should be included in gross taxable value, and actual marketing costs deducted by the producer.
Dehydrators	X		Takes the water content out of the gas stream.
Demulsification chemicals		X	Used to break down oil emulsions, usually in a heater treater.
Fence around compressor		X
Filters	X*		*Allowable if used on a piece of equipment that qualifies as a marketing cost deduction.
Fin Fans	X		Used to cool the gas after it has been compressed.
Flow lines from separator to purchaser's transmission line	X
Glycol for use in dehydrators	X		See "dehydrators"
Heater treater		X	Used to treat oil, not gas.
Hydrogen sulfide (H2S) scavengers	X
Hydrogen sulfide monitoring		X
Insurance on compressor		X
LACT Units		X	These measure crude oil being sold.
Lease chiller	X*		*Costs of the chiller are allowable if tax is paid on the products obtained at 7.5% tax rate. If the taxpayer defines the liquids obtained as condensate and pays tax at 4.6% tax rate, no marketing costs are allowed.
Lease separators		X	By law, the costs of separation are not allowable.
Line heaters	X*		*Allowable if the heater is located after the first separator. If located before the first separator, the cost may be allocated based on the liquids to gas ratio.
LTX Unit	X*		*Allowable if the producer is paying gas tax on the liquids that are obtained from the unit.
Methanol for gas line	X		Used in preventing freeze-ups.
Oil/condensate storage tanks		X
Painting dehydrator and sales compressor building	X
Painting separators		X
Paint storage tanks to prevent rusting		X
Pig socks used around oil storage tanks & compressor		X	Used to clean oil spills.
Pigs and pigging equipment	*	X	*Allowed if used on gathering lines prior to the sales point. However, most pigs are used on gas transmission lines after the lease sale, in which case they are not allowed as a marketing cost.
Pipeline between wellhead and first separator	X*		*Allowed based on the percentage of production flow attributable to gas. The allocation should be based on the Railroad Commission production reports.
Pipeline between wellhead and central separation facility	X*		*Allowed based on the percentage of production flow attributable to gas. The allocation should be based on the Railroad Commission production reports.
Pipeline between wellhead and sales line if there is no lease separation and no separation prior to sale (gas is sold full well stream).	*	*	*Allocate costs of this line between gas and condensate. Marketing costs are allowable on portion of line allocated to gas, and not allowable on the portion allocated to condensate.
Pipeline between wellhead and plant if there is no lease separation and gas is going full well stream to the plant for processing	*	*	*Allocate costs of this line between gas and condensate. Marketing costs are allowable on portion of line allocated to gas, and not allowable on the portion allocated to condensate.
Pipeline after first separator	X		Between separator and sales point.
Purchase and installation of compressor to increase capacity due to tight sands drilling program	*	*	A vacuum type compressor being used to increase production. The deductibility would be based on the well's flowing pressure (see policy on vacuum /suction/wellhead compressors)
Removal of contaminated soil, back-fill new dirt		X
Repair handrails on vessels at tank battery		X
Repair water leg on heater treater		X
Security alarm on compressor		X	Not necessary and essential.
Separators at central facility		X*	*Allowed if first separation has already occurred
Shed/cover over sales compressor		X	The covering does not physically handle the gas and it is not essential to the marketing of the gas.
Skid mounting of sales compressor	X		Should be included in the depreciable price. Skid mounting of gas lift compressors is not allowable.
Stack packs/ production units		X	Basically separators that contain a heat source. There may also be lease use gas consumed on these.
Sweetening chemicals and H2S Sweetening Scavengers	X*		Used to remove hydrogen sulfide from gas. *Not allowed if used downhole.
Vapor recovery units (VRU)		X*	Recovering additional vapors is a production function, not marketing. *However, costs may be allowed on the VRU if the additional vapors recovered are metered separately and then sold. In that case, the costs of the VRU can be deducted from the additional value received for the vapors recovered and sold.
Drip Stations and the costs of hauling products from drip stations		X	Pipeline drip is generally considered to be condensate, so the costs of handling it are not deductible.
Culverts to protect pipelines		X	Not necessary and essential to market the gas

Other Lease Related Items

Item	Allowable	Disallowed	Comments
Other Lease Related Items
Ad valorem taxes	X*		*Allowable on value of marketing equipment only. If there is no breakdown between marketing equipment versus other equipment, taxes are not allowable.
Building or trailer rental		X
Cattle guards around lease equipment or on lease roads		X
Clean out dumpsters, trash barrels at lease facility		X
Cleaning agents	X*		*Deductibility depends on purpose for which they are being used. Costs are allowable if used on allowable marketing equipment.
Construction/installation of lease road		X
Cost to acquire pipeline right of way	X*		*Only for the right-of-ways for pipelines prior to the sales point. Right-of- way expenses after the sales point are not allowed. Auditors should carefully scrutinize which pipeline right-of-way costs are being booked.
Fence around lease facility		X	Not essential for marketing the gas
Fire ant treatment around lease, including compressor		X
Fire extinguishers		X
Heat sensing devices on leases		X	Safety expenses are incidental to the marketing function
Hydrostatic testing	X*		*Usually refers to testing pressure and amount of water in pipelines. Deductibility depends on which pipelines are being tested.
Miscellaneous parts, valves, fittings, plugs, duct tape, lubricants, tools, etc.	X*		*Deductibility depends on purpose for which they are being used. Costs are allowable if used on allowable marketing equipment.
Motor freight & hauling	X*		*Deductibility depends on purpose of freight and hauling. Costs are allowable if for allowable marketing equipment.
Mowing, weeding around lease equipment		X
Mowing, weeding pipeline right of way		X
Repairing fire wall		X
Repair and maintenance on lease roads		X
Salt water disposal expenses, including wells or hauling		X	Water is produced as part of the production operations. Disposing of that water is also a production related expense not related to marketing gas.

Labor Expenses

A portion of both company and contract labor is allowed as a marketing cost deduction. The cost of labor includes salaries and the cost of the employee's benefits. In other words, all expenses necessary to keep the person who works on marketing equipment employed is subject to the deduction. The exact percentage of these expenses that is deductible depends on the employee's or contractor's overall duties and the types of equipment on which the employee or contractor works. In the interest of saving time on the part of both taxpayers and auditors, a standard percentage has been identified as allowable without being supported with documentation. That percentage is 50% of the labor expenses on gas wells and 25% of the expenses on oil wells. If the taxpayer wants to claim a higher percentage of the labor expenses, that higher number must be supported with a detailed analysis of how the employee spends his or her time as well as an analysis of the equipment on the various leases on which the employee or contractor works.

Incidental employee expenses such as cell phones, transportation costs, and supervisory expenses are considered to be overhead and allowed at the 6% overhead rate.

Labor Expenses

Item	Allowable	Disallowed	Comments
Labor Expenses
Cellular phone in pumper's truck, radios, CBs, etc.	X*		*Include in overhead. Allow at 6% rate.
Cost to operate district office building, warehouses, shops, garages, etc.		X
Cost of consultant assessing compressor needs		X	This expense is not for an actual compressor involved in marketing gas
Cost of secretary in district office		X	Does not work on equipment which is physically handling gas.
Field supervisor cost (salary and transportation)	X*		*Include in overhead and allow at 6% rate.
Gauger salaries		X*	*Gaugers normally refer to employees who measure volumes in storage tanks. If this is the case, the gauger's salary would not be deductible. However, the use of this term differs from company to company. Some gaugers are actually doing the work of a pumper. The determining factor as it relates to marketing costs is exactly what the job duties entail.
Hand tools used by pumper/gauger	X*		*If the employee’s duties are such that his or her salary is an allowable marketing expense, the tools the employee uses are then includable as an overhead expense and allowed at the 6% overhead rate.
Break out of heater and removal; set new heater and start hook-up.	X		Allowable if the work is performed on a qualifying heater.
Meals/food expenses for pumper/gauger	X*		*Include in overhead and allow at 6% rate.
Meals/food expenses for other district office personnel		X
Pumper/gauger benefit costs	X*		*Allow the same percentage as for pumper's salary and benefits.
Pumper salaries/benefits	X*		*The percentage of salary attributable to pumper's time spent working on marketing equipment is allowable. The percentage of salary attributable to other duties, i.e., production, is not allowable. A standard percentage is often used, i.e., 50% of the salary charged to gas wells and 25% charged to oil wells. See explanation before this section for more details.
Training classes for pumpers	X*		*Allowable as overhead at the 6% rate. Any meals provided at company expense during the training session are not allowable.
Safety clothing	X*		*Required by OSHA or EPA. Allowable at 6% overhead rate.
Supervisors of company and contract labor	X*		*Allowable at 6% overhead rate
Thawing gas lines	X*		*Allowable if the lines being thawed are after initial separation, partially allowable if before initial separation (based on gas to hydrocarbon liquids ratio)
Transportation expenses for pumpers/gaugers/field supervisors (trucks)	X*		*Include in overhead and allow at the 6% rate.

Meters

Item	Allowable	Disallowed	Comments
Meters
Gas analysis expenses	X		To make sure contract requirements are met.
Meters - sales	X		Meter on which payment is based. If sales meter is owned by producer, the cost of the meter (depreciation plus monthly maintenance expense) is deductible.
Meter - allocation meter	X		Allowable if more than one well or lease is paid from a single purchaser meter. If the sales meter is owned by the purchaser, the producer is allowed to take the cost of lease allocation meters (since we require lease level reporting).
Meters - check		X	Used to verify sales volumes; usually located next to the purchaser's sales meter.
Meter to measure lease use gas		X
Meter calibration services	X*		*For sales or allocation meters only.
Pens for meters: graphic red pen, graphic green pen, black static pen	X		Allowable if used in an allowable meter only.
Meter on test separator		X

Electricity

Item	Allowable	Disallowed	Comments
Electricity
Central separation/compression facility	X*		*Partially allowable. Allocate electricity costs based on how much is used in each function of the facility.
District office building		X
Electronic gate		X
Gas lift compressor		X
Gas sales compressor	X
Generators	X*		*Depends upon use. If used for allowable equipment, it is allowable.
Lease lighting/security light		X
Maintenance shop		X
Oil pumps		X
Pumping unit		X
Storage building		X
Electrical control systems and electric line charges	X*		*Partially allowable depending on the types of electrical equipment on the lease or facility

Plants

In general, costs cannot be taken on a plant if the producer is receiving settlement based on a product/residue plant split (getting a percentage of the proceeds). The producers/leases pay tax only on the percentage or dollar value received from the plant. The percentage kept by the plant is considered the processing or marketing fee, and the tax is not paid on that amount. In essence, that amount is the marketing cost deduction on the leases involved. In most cases, producers have filed their monthly tax returns and paid tax in accordance with this method.

When filing refunds for additional marketing costs, some taxpayers want to include the actual costs of operating gas-processing plants. In such cases, they will go back and pay additional tax on the full value of the products and residue extracted at the plant in place of the percentage originally reported. This is allowable, but there are complicating factors that must be considered. They are as follows:

• First, auditors must verify that the marketing costs have been offset by 100% of the tailgate value received by the plant for the sale of the products (liquid hydrocarbons) and residue. It should be noted that this amount should be more than the total of the amounts that the plant has paid to the individual leases. It must be the total that the plant receives for processing and selling the gas.
• Secondly, if the plant is processing gas for unrelated parties, 100% of the plant costs cannot be taken. Likewise, if the plant operator has other interest owning partners in the field sending in-kind gas to the plant, 100% of the costs cannot be taken. In either situation, a cost per mcf for processing the gas should be calculated. The total costs should then be allocated between the different functions based on the cost per mcf. The only costs that can be deducted from the plant owner's taxes are the costs attributable to their proportional share of the gas produced and sold.

If a taxpayer changes to a 100% revenue/100% cost method as a result of a refund request, they should continue to report using that method on the future monthly tax returns. They cannot switch back and forth on the method used. If they do not continue to repot on the 100% revenue/100% cost method on their monthly tax return, they will not be allowed to use this method for future refunds.

If a plant owner and the lease operator are the same entity, the auditor should also verify that plants are settling back to the leases based at a fair market value. The price should be similar to what other non-owned leases in the area are receiving for a like quality of gas. If not, an assessment for the extra value can be made as an adjustment to the gas sales value.

Plants

Item	Allowable	Disallowed	Comments
Plants			In the examples below, assume that revenue was paid at 100% so that costs are eligible to be taken.
Compressors- inlet	X
Compressors - tailgate	X*		*Compressors handling sales gas before the sales meter are allowable. Compressors handling gas being returned to leases for gas lift, injection or lease use, or transmission, are not allowable.
Control room computers	X
De-methanization expenses	X
Electricity for office building, storage buildings, and control room		X
Installing breaker in control room	X
Janitorial expenses for office building, storage buildings, and control room		X
Painting of plant piping and other facilities	X
Propane compressors	X		Before the sales meter
Scrubbers	X
Water chilling expenses	X
Trucks for intra-plant transportation	X*		*Allowed at the 6% overhead rate
Trucks provided for the transportation of plant managers and supervisors		X

Offshore Leases

Item	Allowable	Disallowed	Comments
Offshore Leases
Boats - crew boats	X*		*Used for taking personnel to and from platform. Allow as part of overhead at the 6% rate.
Boats - used to deliver supplies to production platforms	X*		*Partially allowable, depending upon what is being delivered. If supplies being delivered are related to marketing costs, i.e., glycol or parts for sales compressors, the cost is allowable.
Boats - used for surveillance around platforms (maintenance and security)		X
Boat or barge to transport condensate from platform to shore		X	The cost of transporting crude oil to shore is allowable as a trucking cost for crude oil, but no part of the cost is allowable as a marketing cost.
Compressors	X*		*Allowable if compressing gas for sale. If the compressor is located on the platform and it compresses gas for transport to shore for sale, and if condensate is also placed in the pipeline, compressor costs must be allocated. The portion attributable to condensate is not allowable.
Compressors - gas lift		X
Condensate sent to shore via pipeline		X
Food for platform personnel	X*		*Allowable as overhead at the 6% rate.
Helicopter expense for transporting personnel to and from platform	X*		*Allowable as overhead at the 6% rate.
Housing facilities for platform personnel	X*		*Part of the platform cost and treated the same as "Production platform."
Pipeline - from platform to shore (gas only line)	X*		*Allowable if there has been separation on the platform.
Pipeline - from platform to shore (both gas and condensate in line)	X*		*Allocate as described under "Compressors."
Pipeline - from satellite wells to central platform	X*		*The costs of this line may be allocated based on the oil to gas ratio
Production platform	X*		*An allocation of costs can be made between sales and production based on the total square footage of the platform used for marketing equipment versus the total square footage of the platform.
Separators on platform		X	Separators are never allowed per the statute
Separators on shore		X

Miscellaneous Issues

Item	Allowable	Disallowed	Comments
Miscellaneous Issues
Accounting department salaries		X	Recording revenue from leases and reporting taxes
Ad valorem taxes on marketing facilities or equipment	X		Ad valorem tax statements should clearly identify the marketing equipment being taxed and the amounts should be separately stated from other items being taxed.
Carbon dioxide recovery projects		X*	*These projects are normally used to enhance production of crude oil. Only an allocation of expenses may be allowed as a marketing cost. The cost of removing CO2 from a gas stream that is being sold is allowable. The cost of returning CO2 to leases and injecting into back into the formation is not allowed. The allocation should be based on a study of the schematics for each individual situation.
Brokerage or Marketing Fees		X
Tax-Exempt leases and Partially tax-exempt leases		X	Marketing costs should be allocated to the leases on which the expenses are incurred. The marketing costs for facilities and plants that serve a group of leases should be allocated to all leases within the group based on the production volume for each lease. A marketing cost tax credit will not be issued for the costs attributable to leases that are tax-exempt. Tax credits can be issued for costs attributable to partially tax-exempt leases up until the point that the taxable value reaches zero. Marketing costs can NOT be transferred from one lease to another.
Insurance premiums on any equipment or facilities		X
Legal department salaries and expenses		X	Legal department prepares contracts for marketing gas.
Production Fees	X		These fees relate to the amount produced. Sometimes there is a fee for delivering less than the amount called for in the contract.
Environmental fees and taxes		X	In the case of the state emissions fee, the statute creating the fee specifically states that the entity doing the emitting must pay the fee. It cannot be passed through to another entity. If deducted as a marketing cost, the state would essentially be paying the fee to itself.