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Is The Sale of Oil and Gas Rights Subject to Real Estate Transfer Taxes?

By Paul R. Yagelski, Esq.
Rothman Gordonre Oi
Pittsburgh, Pennsylvania

Oil and gas are “real property.”  See Duquesne Natural Gas Co. v. Fefolt, 203 Pa. Super. 102, 198 A.2d 608, 610 (1964).  Oil and gas are part of the land so long as they are on it or in it or are subject to control therein.  In other words, they are part of the land while they are in place. Id.  Like other minerals within the bounds of a freehold (which extends to the center of the earth – Chartiers Block Coal Co. v. Mellon, 152 Pa. 286, 295, 25 A. 597 (1893)), they may be the subject of a sale, separate and apart from the surface and from any other minerals beneath it.  When severed from the realty, however, gas and oil like other minerals, become personal property.  Williams v. Bridy, 391 Pa. 1, 136 A.2d 832, 833 (1957).

As oil and gas are “real property,” if the oil and gas rights are sold, is there a transfer tax that must be paid upon the recording of the deed for the sale of the oil and gas rights?  The answer is yes.  Pennsylvania courts have consistently held that transfers in minerals and oil and gas rights are considered transfers of real property.  Duquesne Natural Gas Co., 198 A.2d at 610.

The authority for taxing a conveyance of oil and gas rights is found in 61 Pa. Code § 91.169, which states:

Conveyances of coal, oil, natural gas or minerals.  Instruments evidencing an interest in all or a fixed amount of unremoved coal, oil, natural gas or minerals in place are taxable if the interest conveyed, transferred, released, demised, vested or confirmed thereby is an estate fee simple or approximates an estate in fee simple.

The amount of transfer tax is one percent to the state and normally one percent to the local government; however, this may vary for some local governments within the county.  Normally, the real estate transfer tax is split between the grantor and grantee although both are held jointly and severably liable for the transfer tax payment, but how are oil and gas rights valued for purposes of calculating the transfer tax?

The taxable value of mineral rights is determined in the same manner as any other real estate interest.  For realty transfer tax purposes, taxable value is the actual consideration, paid or to be paid, in the case of a bona fide sale or if the conveyance is for nominal consideration, the “value” thereof is determined from the price set forth in or actual consideration for the contract of sale.  In the event that there is no sale or no consideration or for consideration less than the actual monetary worth of the real estate, the actual monetary worth of the real estate is determined by adjusting the assessed value of the real estate for local real estate tax purposes for the common leave ratio of assessed values to market values of the taxing district as established by the State Tax Equalization Board.  See 72 P.S. § 8101-C (definition of “value”).  Pennsylvania Department of Revenue regulations provide that the value of real estate is to be determined by appraisal when the real estate is not subject to a bona fide sale and is not separately assessed for local real estate tax purposes.  61 Pa. Code § 91.136.

In addition to an appraisal, the Department of Revenue may, in its discretion, accept other credible evidence of the value of mineral rights such as comparable sales.  See also Inheritance Tax Bulletin 2012-01 for additional acceptable valuation methods for natural gas rights when there is no sale price, appraisal or other credible evidence.[1]

It is the tax payer’s burden to provide the true, full and complete value of real estate.  See 72 P.S. § 8109-C(a).  This would include the value of mineral rights.

In conclusion, while in place, oil and gas are considered to be real estate.  As such, the transfer of oil and gas rights is subject to real estate transfer taxes. If you have an oil and gas issue, contact an oil and gas attorney.

[1] Pennsylvania Department of Revenue Informational Notice Realty Transfer Tax and Personal Income Tax 2012-04, issued October 10, 2012 – Division and Transfer of Interest Related to Oil and Natural Gas.