Summary:

 House Bill 548 (HB 548) enacts the Oil and Gas Equalization Tax Act, imposing a privilege tax on the severance and sale of oil and gas products in New Mexico. The tax is set at 0.85% of the taxable value of oil, condensate, and other liquid hydrocarbons removed at or near the wellhead. The bill establishes a framework for determining taxable value, collection, and reporting requirements for operators and purchasers. It also includes provisions for withholding tax payments from interest owners and outlines conditions under which the Taxation and Revenue Department may adjust product valuation. HB 548 takes effect on July 1, 2025. 

Legislation Overview:

 House Bill 548 (HB 548) creates the Oil and Gas Equalization Tax Act, which levies a privilege tax on oil and gas severance at a rate of 0.85% of the taxable value of oil, condensate, and other liquid hydrocarbons extracted at or near the wellhead. The tax is applicable to all interest owners, including individual operators, partnerships, corporations, and other business entities engaged in severing oil and gas products. The measure of the tax is based on the taxable value, which is determined by averaging the per-barrel taxable value of all oil produced in the state within a given calendar year.

The bill authorizes the Taxation and Revenue Department to determine product value when transactions occur between affiliated entities, when sales are not conducted at arm’s length, or when no established market value exists. The taxable value may be reduced by deducting royalties paid to the federal government, the state, or tribal entities, as well as reasonable transportation costs for trucking products to the first point of sale. Any increase in product value that is subject to federal or state regulatory approval is taxable, but if an approved increase is later disallowed, a refund may be issued.

Operators and purchasers are required to withhold the tax owed by interest owners from their payments and remit the amount to the state. Monthly reports must be submitted to the Taxation and Revenue Department detailing total volume, value, and tax liability for products severed from each production unit. The bill establishes advance payment requirements based on historical tax liabilities, requiring annual prepayments calculated from the average tax paid over the previous year.

HB 548 also integrates the Oil and Gas Equalization Tax Act into the Tax Administration Act, ensuring that its provisions align with existing tax enforcement mechanisms. The bill specifies that the tax will not be levied more than once on the same product and outlines procedures for tax remittance, reporting, and compliance enforcement. The effective date of HB 548 is July 1, 2025.

Implications

HB 548 introduces an additional tax on oil and gas production in New Mexico, generating new revenue for the state while potentially increasing the financial burden on industry operators. The 0.85% tax rate, though relatively modest, could have a cumulative impact on producers, especially smaller operators with narrower profit margins. By incorporating deductions for royalties and transportation costs, the bill seeks to ensure that the tax applies to net revenue rather than gross sales, which may mitigate some financial strain on producers.

The withholding and remittance requirements place administrative responsibilities on operators and purchasers, requiring them to collect and submit tax payments on behalf of interest owners. This approach ensures more reliable tax collection but may create additional compliance costs for businesses. The requirement for advance tax payments, based on prior-year liabilities, may present cash flow challenges for companies experiencing declining production or revenue fluctuations.

The bill strengthens the authority of the Taxation and Revenue Department by granting it discretion to determine taxable value in cases of non-arm’s length transactions or missing market data. This provision helps prevent tax avoidance through underreporting or intra-company transfers but may also introduce uncertainty for operators subject to department valuation adjustments.

By integrating the Oil and Gas Equalization Tax Act into the Tax Administration Act, the bill streamlines enforcement and ensures consistency with other tax programs. The inclusion of refund provisions for disallowed price increases provides a safeguard for taxpayers in cases where regulatory approvals are later reversed. The bill’s overall fiscal impact on state revenues will depend on production levels, price fluctuations, and industry compliance with the new reporting and payment requirements. 

Current Law:

 Under current law, oil and gas production in New Mexico is subject to multiple severance taxes, including the Oil and Gas Severance Tax, the Oil and Gas Emergency School Tax, and the Oil and Gas Conservation Tax. These taxes are assessed on the volume or value of extracted products and are used to fund state and local government programs. However, there is no existing Oil and Gas Equalization Tax, and taxable value determinations are based primarily on sales transactions rather than state-administered valuation adjustments.

Operators and purchasers are already required to report production and tax liabilities under existing severance tax laws, but HB 548 introduces additional reporting and withholding requirements specific to the new tax. Current tax laws do not require advance payments based on historical liabilities, making the prepayment provision of HB 548 a significant departure from existing policy.