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Effects of Oil & Gas Operations on Property Taxes

Article VIII, Sec. 1(d)1 of the Texas Constitution, along with Chapter 23 of the Texas Tax Code, allow for the appraisal of agricultural land on the basis of the value of productivity, rather than its market value. When the use that qualified the land for this special valuation changes, the property is not only taxed at the market value going forward, but the landowner is subject to rollback taxes, equal to the difference between what was paid based on the agricultural appraisal and what would have been paid at market value, plus interest, for the previous five years. To secure the payment of these taxes and interest, a tax lien is attached to the property on the date the change of use occurs.

According to the Texas Land & Mineral Owners Association’s 4th Quarter Newsletter, in at least one Texas County, oil and gas operations have triggered these rollback taxes based on the location of pad sites on agricultural lands. In April of 2015, the Zavala County Appraisal Districtsent landowners Notice of Change of Use Determination letters stating that the acreage used for pad sites and frac ponds would be treated differently, for the purposes of taxation, than the surrounding property. For one particular owner, the appraised property value increased from $73.00/acre to $2,000.00/acre.

This is particularly troublesome for surface owners that do not own the underlying minerals, as they see no monetary benefit from the production of oil and gas, and have no authority to negotiate for the inclusion of a provision addressing the tax implication of surface operations in an oil and gas lease. In fact, since the surface estate is servient to the mineral estate, lessees of the underlying minerals can use as much of the surface as is necessary to extract the minerals, subject to certain limitations such as those found in the Accommodation Doctrine first established in Getty Oil Co. v. Jones, 470 S.W.2d 618 (Tex. 1971). Essentially, the Accommodation Doctrine states that operators are obligated to reasonably accommodate the surface owner’s use, but in no way operates as a complete prohibition against use of the surface.

It appears as though Zavala County is the first and only county in Texas to implement this practice, but it is not to say that others won’t follow suit. As a result, owners of agricultural land whose minerals have not been severed from the surface, and who are presented an oil and gas lease for execution, should consult with an attorney to ensure that a carefully drafted provision is included that sufficiently addresses the allocation of risk of rollback taxes due to the lessee’s surface operations to the lessee.

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