Section 475.100  Nature of the Tax

 

a)         The Illinois Hydraulic Fracturing Tax Act (Tax Act) imposes a tax on the severance and production of oil and gas removed from oil and gas wells in this State that are permitted, or required to be permitted, under the Hydraulic Fracturing Regulatory Act (Regulatory Act) [225 ILCS 732].  The Tax Act does not impose a tax on the severance and production of oil and gas from oil and gas wells that commenced production prior to July 1, 2013, unless the wells are subsequently required to be permitted under the Regulatory Act, or were completed on and after July 1, 2013, and were not permitted, or required to be permitted under the Illinois Hydraulic Fracturing Regulatory Act.  Purchasers and operators are not required to withhold and remit tax for oil and gas severed or produced from these latter two classes of wells.

 

b)         If a well is required to be permitted under the Regulatory Act, the tax imposed by the Tax Act applies, whether or not a permit was obtained [35 ILCS 450/2-15(a)].  The failure of an operator to obtain a permit for a well subject to the tax imposed by that Tax Act does not change a producer's liability for the tax imposed by the Tax Act.

 

c)         The tax is imposed upon the producers of oil or gas severed from a well subject to the tax imposed by the Tax Act.  The purchaser of any oil or gas sold from these wells must collect the tax from the producers by deducting and withholding the tax from any payments made by the purchaser to the producers for oil or gas removed from the well.  The first purchaser is responsible for remitting the tax to the Department. (See Section 2-30(a) of the Tax Act.)  If oil or gas is transported off the production unit by the operator, used on the production unit, or refined on the production unit, the operator is responsible for registering with the Department, withholding the tax from any payments made by the operator to the producers and remitting the tax to the Department. (See Section 2-50(a) of the Tax Act.)

 

d)         For wells that commenced production prior to July 1, 2013 that are not subject to the tax imposed by the Tax Act, the obligation to obtain the exemption certificate required by Section 475.130(b) only applies when a first purchaser enters into a new contract with an operator to purchase oil or gas from those wells on or after January 1, 2019.  If the first purchaser meets this obligation for wells that commenced production prior to July 1, 2013, no further obligations are imposed on the first purchaser or the operator with respect to those wells.

 

e)         First purchasers shall not be required to obtain exemption certificates from the operator pursuant to Section 475.130(b)(2) until the first high volume horizontal hydraulic fracturing permit has been approved by the Department of Natural Resources on or after January 1, 2019.

 

f)         The first purchaser is required to obtain an exemption certificate required by Section 475.130(b):

 

1)         when subsection (d) applies; and

 

2)         for wells the first purchaser begins purchasing oil or gas on or after January 1, 2019.

 

Section 475.105  Definitions

 

"Average daily production" means the average amount of oil produced daily from a well, as determined by Section 475.115.

 

"Barrel" for oil measurement means a barrel of 42 U.S. gallons of 231 cubic inches per gallon, computed at a temperature of 60 degrees Fahrenheit.

 

"Department" means the Illinois Department of Revenue.

 

"DNR" means the Illinois Department of Natural Resources.

 

"Fracturing" or "hydraulic fracturing" means the propagation of fractures in a rock layer, by a pressurized fluid used to release petroleum or natural gas (including shale gas, tight gas, and coal seam gas), for extraction.

 

"Gas" means natural gas taken from below the surface of the earth or water in this State, regardless of whether the gas is taken from a gas well or from a well also productive of oil or any other product.

 

"Lease number" means the number assigned by the purchaser to identify each production unit.

 

"Oil" means petroleum or other crude oil, condensate, casinghead gasoline, or other mineral oil that is severed or withdrawn from below the surface of the soil or water in this State.

 

"Operator" means the person primarily responsible for the management and operation of oil or gas productions from a production unit.

 

"Person" means any natural individual, firm, partnership, association, joint stock company, joint adventure, public or private corporation, or limited liability company, or a receiver, executor, trustee, guardian, or other representative appointed by order of any court.

 

"Produced" means severed.

 

"Producer" means any person owning, controlling, managing, or leasing any oil or gas property or oil or gas well, and any person who severs in any manner any oil or gas in this State, and shall include any person owning any direct and beneficial interest in any oil or gas produced, whether severed by that person or some other person on their behalf, either by lease, contract, or otherwise, including working interest owners, overriding royalty owners, or royalty owners.

 

"Production unit" means a unit of property designated by the Department of Natural Resources from which oil or gas is severed.

 

"Purchaser" means a person who is the first purchaser of a product after severance from a production unit.

 

"Regulatory Act" means the Hydraulic Fracturing Regulatory Act [225 ILCS 732].

 

"Remove" or "removal" means the physical transportation of oil or gas off of the production unit where severed; and if the oil or gas is used on the premises where severed, or if the manufacture or conversion of oil or gas into refined products occurs on the premises where severed, oil or gas shall be deemed to have been removed on the date that use, manufacture, or conversion begins.

 

"Severed" or "severing" means:

 

the production of oil through extraction or withdrawal of the same, whether that extraction or withdrawal is by natural flow, mechanical flow, forced flow, pumping, or any other means employed to get the oil from below the surface of the earth, soil, or water and shall include the withdrawal by any means whatsoever of oil upon which the tax has not been paid, from any surface reservoir, natural or artificial, or from a water surface; and

 

the production of gas through the extraction or withdrawal of the same by any means whatsoever, from below the surface of the earth, soil, or water.

 

"Severance" means the taking or severing of oil or gas from below the surface of the earth, soil, or water by any means or in any manner whatsoever.

 

"Tax" means the tax levied pursuant to the Tax Act.

 

"Tax Act" means the Illinois Hydraulic Fracturing Tax Act [35 ILCS 450].

 

"Value" means the sale price of oil or gas at the time of removal of the oil or gas from the production unit and if oil or gas is exchanged for something other than cash, or if no sale occurs at the time of removal, or if the Department determines that the relationship between the buyer and the seller is such that the consideration paid, if any, is not indicative of the true value or market price, then the Department shall determine the value of the oil or gas subject to tax based on the cash price paid to one or more producers for the oil or gas or based on the cash price paid to producers for like quality oil or gas in the vicinity of the production unit at the time of the removal of the oil or gas from the production unit.

 

"Well" means the entire length of any drill hole, including all horizontal well bores, required to be permitted under the Illinois Oil and Gas Act [225 ILCS 725]. 

 

"Well site" has the meaning ascribed to that term in Section 1-5 of the Regulatory Act.

 

"Working interest" means any interest in or any right to the production of oil and gas, excluding royalty or overriding royalty interests. [35 ILCS 450/2-10]

 

Section 475.110  Tax Imposed

 

a)         Beginning July 1, 2013, a tax is imposed upon the severance and production of oil or gas from a well on a production unit in this State permitted, or required to be permitted, under the Regulatory Act, for sale, transport, storage, profit, or commercial use.  Except as provided by Section 475.170, the tax shall be applied equally to all portions of the value of each barrel of oil severed and subject to that tax and to the value of the gas severed and subject to that tax.

 

1)         For a period of 24 months from the month in which oil or gas was first produced from the well, the rate of tax shall be 3% of the value of the oil or gas severed from the earth, soil or water in this State.

 

A)        The 24-month period begins on the first day of the month oil or gas is first removed by a purchaser.

 

B)        If a well was producing oil or gas prior to July 1, 2013 and operations are conducted for which a permit is required under the Regulatory Act, the 24-month period begins on the first day of the month in which oil or gas is first removed after operations are conducted for which a permit was required under the Regulatory Act.

 

2)         Beginning the 25th month from the month in which oil was first produced from the well, the rate of tax for oil shall be as follows:

 

A)        where the average daily production from the well during the month is less than 25 barrels, 3% of the value of the oil severed from the earth, soil or water;

 

B)        where the average daily production from the well during the month is 25 or more barrels but less than 50 barrels, 4% of the value of the oil severed from the earth, soil or water;

 

C)        where the average daily production from the well during the month is 50 or more barrels but less than 100 barrels, 5% of the value of the oil severed from the earth, soil or water; or

 

D)        where the average daily production from the well during the month is 100 or more barrels, 6% of the value of the oil severed from the earth, soil, or water. 

 

3)         Beginning the 25^th month from the month in which gas was first produced, the rate of tax for gas shall be 6% of the value of the gas severed from the earth, soil, or water [35 ILCS 450/2-15].

 

4)         If a first purchaser is required to withhold tax because the operator has not supplied the purchaser with an exemption certificate required by Section 475.130(b), the first purchaser shall withhold tax at the rate of 6% of the value of oil and gas.

 

b)         The Tax Act provides for a Local Workforce Tax Rate Reduction under certain conditions.  The rate of tax imposed on working interest owners of a well under Section 2-15 of the Tax Act shall be reduced by 0.25% for the life of the well when a minimum of 50% of the total workforce hours on the well site are performed by Illinois construction workers being paid wages equal to or exceeding the general prevailing rate of hourly wages [35 ILCS 450/2-17].  (See Section 475.170.)  To receive the Local Workforce Tax Rate Reduction, the oil from the well must be segregated and not commingled with the oil from any other well.  If oil produced from a well that qualifies for the Local Workforce Tax Rate Reduction is commingled with the oil produced from any other well, the Local Workforce Tax Rate Reduction will be suspended during the period of that commingling, unless all the oil that is commingled is produced from wells that qualify for the Local Workforce Tax Rate Reduction, the producers are the same for all wells, and the amount of interest owned by each producer is the same for each well.  Gas removed from a well that qualifies for the Local Workforce Tax Rate Reduction shall be separately metered prior to entering a common pipeline. 

 

c)         Measurement of Oil and Gas

 

1)         For the purposes of the tax imposed by the Tax Act, the amount of oil produced shall be measured or determined by tank tables or lease automatic custody transfer (LACT) units without deduction for overage or losses in handling.  Allowance for any reasonable and bona fide deduction for basic sediment and water, and for correction of temperature to 60 degrees Fahrenheit, will be allowed. 

 

2)         For the purposes of the tax imposed by the Tax Act, the amount of gas produced shall be measured or determined, by meter readings showing 100% of the full volume expressed in cubic feet at a standard base and flowing temperature of 60 degrees Fahrenheit, and at the absolute pressure at which the gas is sold and purchased.  Correction shall be made for pressure according to Boyle's law, and used for specific gravity according to the gravity at which the gas is sold and purchased.  [35 ILCS 450/2-15(c)]

 

d)         The liability for the tax accrues at the time the oil or gas is removed from the production unit [35 ILCS 450/2-15(f)].

 

Section 475.115  Average Daily Production for Wells or Production Units Subject to Tax

 

a)         For purposes of determining average daily production for oil wells or production units subject to the tax imposed by the Tax Act, oil is considered produced during the month it is removed from the production unit by the purchaser.  For operators withholding and remitting tax, oil is produced during the month oil is transported off the production unit where severed by the operator, used on the production unit where severed, or manufactured and converted into refined products on the production unit where severed.  Average daily production for a month is determined by dividing the number of the total barrels produced in a month by 30.

 

b)         If an operator commingles the production from multiple wells on a production unit, the multiple wells shall be deemed one well for purposes of determining average daily production.  Average daily production for a month is determined by dividing the number of the barrels removed by the first purchaser in a month by 30 and dividing the result by the number of wells in the production unit.  If a well on the production unit did not produce any oil during the month, it may not be considered in calculating average daily production.

 

c)         Operators must include the oil identified in Section 475.120(a) when calculating average daily production.

 

d)         The average daily production shall be calculated by the operator twice a year by taking the sum of the average daily production for each well or production unit for the months of January, February, March, April, May and June and dividing the number by 6, and for the months of July, August, September, October, November and December and dividing the number by 6.  The purchaser shall use the average daily production calculated by the operator for purposes of determining the tax to be withheld and remitted to the Department in accordance with Sections 475.130 and 475.135.  If the operator fails to provide the average daily production for a well or production unit to the first purchaser, the first purchaser shall withhold tax at the rate of 6%.  After providing an initial certification, the operator is required to provide the first purchaser with a new certification only when the average daily production for a 6-month period would cause the rate of tax to change.  When tax is being withheld at the rate of 6%, the operator has no obligation to calculate and report average daily production.

 

e)         If a purchaser and its employees have no actual knowledge that the average daily production reported to it by the operator is incorrect, and the Department later determines the operator provided to the purchaser an incorrect figure resulting in an underpayment of tax, the Department will collect any underpayment from the operator and producers.  Prior to the purchaser or its employees obtaining actual knowledge that the average daily production reported to it by the operator for the purpose of withholding and remitting the tax imposed by the Tax Act is incorrect, a first purchaser has no obligation to calculate the average daily production on a well or production unit to verify an operator's certification.  If the Department provides a purchaser or an operator required to withhold and remit the tax with a lien in the amount of any assessment for underpayment of tax, penalty and interest, the purchaser or operator shall suspend payment of oil proceeds from the well to the producers until such time as the purchaser or operator receives a release of lien.  A purchaser and an operator shall also honor any levy issued to it to collect amounts withheld pursuant to a lien.  The Department retains all other legal remedies to collect the underpayment from the producers.

 

Section 475.120  Exemptions from Tax

 

a)         All oil and gas removed from the premises where severed is subject to tax imposed by the Tax Act unless exempt under the terms of the Tax Act [35 ILCS 450/2-15].  The following severance and production of oil is not exempt from the tax imposed by the Tax Act:

 

1)         oil manufactured and converted into refined products on the production unit where severed; and

 

2)         oil used on the production unit where severed.

 

b)         Oil produced from a well whose average daily production is 15 barrels or less for the 12-month period immediately preceding the month of production is exempt from the tax imposed by the Tax Act [35 ILCS 450/2-15(b)].

 

1)         The Tax Act imposes a tax at the rate of 3% for the first 24 months of production.  The first 12-month period for purposes of the exemption begins on the first day of the 13^th month after oil is first removed from an oil well or production unit.  After the first 24 months of production, a calculation can be made to determine if a well or production unit is exempt.

 

2)         To determine whether oil production is exempt from tax imposed by the Tax Act, the average daily production is determined in accordance with Section 475.115.

 

3)         When a well or production unit qualifies for the exemption based on the average daily production, the operator is responsible for notifying the purchaser of the exemption.  The operator has 30 days from the end of the 12-month period to notify the first purchaser that a well or production unit no longer qualifies for the exemption.  The first purchaser has 30 days to make the change to its records after it receives notice from the operator.  The exemption begins on the first of a month.  Once a well or production unit qualifies for the exemption, the operator annually shall determine whether oil production from a well or production unit remains exempt and shall notify the purchaser when the exempt status of a well or production unit changes.

 

A)        EXAMPLE:  An operator determines that the average daily production of oil from a well for the immediately preceding 12-month period May through April is 15 barrels.  The operator notifies the first purchaser on or before May 31.  Oil removed from the well or production unit beginning June 1 is exempt.  The operator must calculate the average daily production the following year and each year thereafter using the period May through April.

 

B)        EXAMPLE:  On May 20, the operator determines the annual average daily production of oil from a well for the period May through April is 16 barrels.  The operator notifies the first purchaser on June 20.  The first purchaser has 30 days to make the change on its records.  The exemption ends on the first of the month.  Oil removed on and after August 1 is no longer exempt from tax.

 

C)        EXAMPLE:  In May the operator determines the annual average daily production of oil from May through April is less than 15 barrels.  The operator notifies the purchaser on July 2.  The purchaser has 30 days to make the change.  The purchaser should discontinue withholding and remitting tax on oil produced from the well beginning September 1.

 

D)        EXAMPLE:  On May 21, the operator determines the annual average daily production of oil from May through April is 25 barrels.  The operator does not notify the first purchaser until December 15.  The purchaser starts withholding and remitting tax on February 1.  Oil removed from the well or production unit beginning July 1 was no longer exempt from tax.  The operator and producers are liable for tax, penalties and interest for oil produced in the months of July through January.  When the purchaser is notified that the proper tax was not withheld, the purchaser must calculate the tax that should have been collected for the months of July through January and notify the Department.  The purchaser must suspend payments to the producers on the well until the tax is collected from the producers.  The Department will notify the purchaser of the amount of penalties and interest the producers owe for the period. The purchaser should suspend, or continue to suspend, payment to the producers on the well until the Department notifies the purchaser that penalties and interest, as well as any unpaid tax, has been collected from the producers.

 

c)         The following severance and production of gas shall be exempt from the tax imposed by the Tax Act:

 

1)         gas injected into the earth for the purpose of lifting oil, recycling, or repressuring;

 

2)         gas used for fuel in connection with the operation and development for, or production of, oil or gas in the production unit where severed;

 

3)         gas lawfully vented or flared; and

 

4)         gas inadvertently lost on the production unit by reason of leaks, blowouts, or other accidental losses.  [35 ILCS 450/2-15(d)]

 

d)         If a purchaser and its employees have no actual knowledge that the average daily production reported to it by the operator for the purpose of withholding and remitting the tax imposed by the Tax Act is incorrect and the Department later determines the operator provided to the purchaser an incorrect figure to use for purposes of withholding and remitting the tax imposed by the Tax Act resulting in an underpayment of tax, the Department will collect any underpayment from the operator and producers.  Prior to the purchaser and its employees obtaining actual knowledge that the average daily production reported to it by the operator for the purpose of withholding and remitting the tax imposed by the Tax Act is incorrect, a first purchaser has no obligation to calculate the average daily production on a well or production unit to verify an operator's certification.  If the Department provides a purchaser or an operator required to withhold and remit the tax and file a return with a lien in the amount of any assessment for underpayment of tax, penalty and interest, the purchaser or operator shall suspend payment of oil proceeds from the well to the producers until such time as the purchaser or operator receives a release of lien.  A purchaser and an operator shall also honor any levy issued to it to collect amounts withheld pursuant to a lien.  The Department retains all other legal remedies to collect the underpayment from the producers.

 

Section 475.125  Taxable Value of Oil and Gas

 

a)         The value of oil and gas is the sales price paid by the purchaser for the oil or gas produced, measured in accordance with Section 475.110(c), without any reduction for transportation charges or other charges imposed on the operator for services rendered by the purchaser in removing the oil from the production unit.  If the operator transports oil and gas off the production unit where severed, the operator uses the oil and gas on the production unit where severed, or the manufacture and conversion of oil and gas into refined products occurs on the production unit where severed, the value of the oil and gas is the sales price paid by the operator, measured in accordance with Section 475.110(c), without any reduction for transportation charges or other charges imposed by the operator for services rendered by the operator in severing or removing the oil or gas from the production unit.  If oil or gas is exchanged for something other than cash, or if no sale occurs at the time of removal, or if the Department determines that the relationship between the buyer and the seller is such that the consideration paid, if any, is not indicative of the true value or market price, then the Department shall determine the value of the oil or gas subject to tax based on the cash price paid to one or more producers for the oil or gas or based on the cash price paid to producers for like quality oil or gas in the vicinity of the production unit at the time of the removal of the oil or gas from the production unit.  [35 ILCS 450/2-10]

 

b)         The Department may determine the value of oil and gas severed from a production unit when the operator and purchaser are affiliated persons, when the sale and purchase of oil and gas is not an arm's length transaction, or when oil and gas are severed and removed from a production unit and a value is not established for that oil and gas.  The value determined by the Department shall be commensurate with the actual price received for oil and gas of like quality, character, and use that are severed in the same field or area.  If there are no sales of oil or gas of like quality, character, and use severed in the same field or area, then the Department shall establish a reasonable value based on sales of oil and gas of like quality, character, and use that are severed in other areas of the State, taking into consideration any other relevant factors.  [35 ILCS 450/2-20]

 

Section 475.130  Withholding of Tax

 

a)         Any purchaser who makes a monetary payment to a producer for his or her portion of the value of oil and gas from a production unit shall withhold from that payment the amount of tax due from the producer.  Any purchaser who pays any tax due from a producer shall be entitled to reimbursement from the producer for the tax so paid and may take credit for that amount from any monetary payment to the producer for the value of the oil and gas.  To the extent that a purchaser required to collect the tax imposed by the Tax Act has actually collected that tax, the tax is held in trust for the benefit of the State of Illinois.  [35 ILCS 450/2-25]

 

b)         Withholding of Tax by Purchasers

 

1)         The tax imposed by the Tax Act is upon the producers of the oil or gas in the proportion to their respective beneficial interests at the time of severance.  The first purchaser of any oil or gas sold shall collect the amount of the tax due from the producers by deducting and withholding that amount from any payments made by the purchaser to the producers and shall remit the tax imposed by the Tax Act to the Department.  [35 ILCS 450/2-30(a)]

 

2)         The first purchaser is required to withhold and remit the tax imposed by the Tax Act to the Department from the oil and gas purchased from the production unit unless the first purchaser obtains from the operator an exemption certificate signed by the operator stating that the production unit is not subject to the tax imposed by the Tax Act.

 

A)        Wells Drilled Prior to July 1, 2013

 

i)          For production units containing wells drilled prior to July 1, 2013 and from which the first purchaser commences purchasing oil or gas on or after January 1, 2019, the exemption certificate must include the following information:

 

•           name and address of the operator;

 

•           common name of the production unit and the number assigned to the production unit by the prior first purchaser;

 

•           a statement by the operator that he or she will promptly notify the first purchaser in the event that the well becomes subject to the tax imposed by the Tax Act; and

 

•           a statement by the operator that the production unit is exempt from the tax imposed by the Tax Act. 

 

ii)         The first purchaser shall maintain in its books and records the legal description of each production unit identified in the exemption certificate.  The operator may provide, and the first purchaser may accept, one exemption certificate containing the name of the operator, the common names and numbers of all the production units, and the statements required by subsections (b)(2)(A)(i), third and fourth bullets. 

 

B)        For wells drilled on or after January 1, 2019, the exemption certificate must include the following information:

 

i)          name and address of the operator;

 

ii)         common name of the well on the permit issued by DNR;

 

iii)        number assigned to the production unit by the first purchaser, if available;

 

iv)        legal description of the production unit;

 

v)         well reference number on the permit issued by DNR;

 

vi)        a statement by the operator that he or she will promptly notify the first purchaser in the event that the well becomes subject to the Tax Act; and

 

vii)       a statement by the operator that the production unit is exempt from the tax imposed by the Tax Act.  [35 ILCS 450/2-30(b)]

 

3)         An operator must promptly notify the first purchaser in the event that a well certified as exempt from the tax imposed by the Tax Act becomes subject to tax.

 

4)         The purchaser is not required to obtain a new exemption certificate if the operator providing the exemption certificate to the purchaser assigns or transfers operations and management of the well to a new operator. 

 

5)         If a first purchaser obtains an exemption certificate that contains the required information and reasonably relies on the exemption certificate and it is subsequently determined by the Department that the production unit is subject to the tax imposed by the Tax Act, the Department will collect any tax that is due from the operator and producers, and the first purchaser is relieved of any liability [35 ILCS 450/2-30(b)].  During any determination by the Department of whether the first purchaser reasonably relied on an exemption certificate, the Department will inquire whether the purchaser had any information or knowledge that would lead a reasonable person to believe the statement provided by the operator that the production unit is exempt was false.  If the Department provides a purchaser with a lien in the amount of any assessment for underpayment of tax, penalty and interest, the purchaser shall suspend payment of oil or gas proceeds from the well to the producers until such time as the purchaser receives a release of lien.  A purchaser shall also honor any levy issued to it to collect amounts withheld pursuant to a lien.  The Department retains all other legal remedies to collect the underpayment from the producers.

 

6)         When the title to any oil or gas severed from the earth, soil, or water is in dispute and the purchaser of that oil or gas is withholding payments on account of litigation, or for any other reason, the purchaser is hereby authorized, empowered, and required to deduct from the gross amount thus held the amount of the tax imposed and to make remittance of the tax to the Department as provided in the Tax Act [35 ILCS 450/2-55].

 

7)         If a purchaser purchases oil or gas from an operator or person claiming to be acting as a purchaser for purposes of the Tax Act, or the operator or person requests payment for 100% of the value of the oil or gas without withholding the tax imposed by the Tax Act, the purchaser shall obtain a written withholding certification from the operator or person for each well or production unit from which oil or gas is removed, subject to the tax imposed by the Tax Act. 

 

A)        The withholding certification shall contain the following information:  

 

i)          name and address of the operator or person;

 

ii)         common name of the well on the permit issued by DNR;

 

iii)        number assigned to the production unit by the operator, if available;

 

iv)        legal description of the production unit;

 

v)         well reference number on the permit issued by DNR;

 

vi)        the certificate of registration number obtained by the operator or person from the Department under Section 475.160; and

 

vii)       a statement by the operator or person stating that the tax imposed by the Tax Act will be withheld and paid by the operator or person.

 

B)        The purchaser shall maintain the certification in its records.  The purchaser is prohibited from paying 100% of the value of the oil or gas removed from wells subject to the tax imposed by the Tax Act to any operator or person without withholding the tax imposed by the Tax Act unless the purchaser obtains from the operator or person a certificate of registration number issued by the Department under Section 475.160.  A withholding certificate is not required if the oil or gas purchased from the wells or production units by the purchaser is not subject to the tax imposed by the Tax Act.

 

c)         Withholding of Tax by Operators

 

1)         The tax imposed by the Tax Act is upon the producers of the oil or gas in proportion to their respective beneficial interests at the time of severance.  Any operator who makes a monetary payment to a producer for his or her portion of the value of products from a production unit shall withhold from that payment the amount of tax due from the producer.  Any operator who pays any tax due from a producer shall be entitled to reimbursement from the producer for the tax so paid and may take credit for that amount from any monetary payment to the producer for the value of products.  To the extent that an operator required to collect the tax imposed by the Tax Act has actually collected that tax, the tax is held in trust for the benefit of the State of Illinois.  [35 ILCS 450/2-50(c)]  (See Section 475.135(b).)

 

2)         When the title to any oil or gas severed from the earth or water is in dispute and the operator of the oil or gas is withholding payments on account of litigation, or for any other reason, the operator is hereby authorized, empowered and required to deduct from the gross amount thus held the amount of the tax imposed and to make remittance of the tax to the Department as provided in this Section [35 ILCS 450/2-50(e)].

 

Section 475.135  Payment of Tax

 

a)         Payment by Purchasers

 

1)         The tax incurred under the Tax Act shall be due and payable on or before the last day of the month following the end of the month in which the oil or gas is removed from the production unit.  The tax is upon the producers of the oil or gas in the proportion to their respective beneficial interests at the time of severance.  [35 ILCS 450/2-30(a)]

 

2)         In the event the tax shall be withheld by a purchaser from payments due a producer and the purchaser fails to make payment of the tax to the State as required by the Tax Act, the first purchaser shall be liable for the tax.  However, in the event a first purchaser fails to pay the tax withheld from a producer's payment, the producer's interest remains subject to any lien filed pursuant to subsection (a)(3) of this Section.  A producer shall be entitled to bring an action against the purchaser to recover the amount of tax so withheld, together with penalties and interest that may have accrued by failure to make the payment.  A producer shall be entitled to all attorney fees and court costs incurred in such action.  To the extent that a producer liable for the tax imposed by the Tax Act collects the tax, and any penalties and interest, from a purchaser, the tax, penalties, and interest are held in trust by the producer for the benefit of the State.  [35 ILCS 450/2-30(a)]

 

3)         Notwithstanding subsections (a)(1) and (a)(2) of this Section, the tax is a lien on the oil and gas from the time of severance from the earth, soil, or water until the tax and all penalties and interest are fully paid, and the State shall have a lien on all the oil or gas severed from the production unit in this State in the hands of the operator, any producer or the first or any subsequent purchaser, to secure the payment of the tax.  If a lien is filed by the Department, the purchaser shall withhold from producers or operators the amount of tax, penalty, and interest identified in the lien.  [35 ILCS 450/2-30(c)]

 

b)         Payment by Operators

 

1)         If oil or gas subject to the tax imposed by the Tax Act is transported off the production unit where severed by the operator, used on the production unit where severed, or the manufacture and conversion of oil and gas into refined products occurs on the production unit where severed, the operator is responsible for remitting the tax imposed under the Tax Act, on or before the last day of the month following the end of the calendar month in which the oil and gas is removed from the production unit, and that payment shall be accompanied by a return to the Department showing the gross quantity of oil or gas removed during the month for which the return is filed, the price paid therefor, and, if no price is paid, the value of the oil and gas, a description of the production unit from which the oil or gas was severed, and the amount of tax.  The Department may require any additional information it may deem necessary for the proper administration of the Tax Act.  [35 ILCS 450/2-50(a)]

 

2)         In the event the operator fails to make payment of the tax to the State as required by the Tax Act, the operator shall be liable for the tax.  However, in the event a first purchaser fails to pay the tax withheld from a producer's payment, the producer's interest remains subject to any lien filed pursuant to subsection (b)(3).  A producer shall be entitled to bring an action against the operator to recover the amount of tax so withheld, together with penalties and interest that may have accrued by failure to make the payment.  A producer shall be entitled to all attorney fees and court costs incurred in such action.  To the extent that a producer liable for the tax imposed by the Tax Act collects the tax, and any penalties and interest, from an operator, the tax, penalties, and interest are held in trust by the producer for the benefit of the State.  [35 ILCS 450/2-50(d)]

 

3)         Notwithstanding subsections (b)(1) and (b)(2) of this Section, the tax is a lien on the oil and gas from the time of severance from the earth, soil, or water until the tax and all penalties and interest are fully paid, and if oil or gas is transported off the production unit where severed by the operator and sold to a purchaser or refiner, the State shall have a lien on all the oil or gas severed from the production unit in this State in the hands of the operator, the first or any subsequent purchaser, or refiner to secure the payment of the tax.  If a lien is filed by the Department, the purchaser or refiner shall withhold from the operator the amount of tax, penalty and interest identified in the lien.  [35 ILCS 450/2-50(g)]

 

Section 475.140  Returns

 

a)         Returns Filed by Purchasers

 

1)         When a purchaser begins to purchase oil or gas from a well subject to the tax imposed by the Tax Act, the purchaser shall make a return to the Department showing the quantity of oil or gas purchased during the month for which the return is filed, the price paid, total value, the name and address of the operator or other person from whom the same was purchased, a description of the production unit in the manner prescribed by the Department from which the oil or gas was severed, and the amount of tax due from each production unit for each calendar month.  All taxes due, or to be remitted, by the purchaser shall accompany this return.  The return shall be filed on or before the last day of the month after the calendar month for which the return is required.  The Department may require any additional report or information it may deem necessary for the proper administration of the Tax Act.  [35 ILCS 450/2-45]  The purchaser shall also provide a breakdown of the tax by the total percentage of royalty interest, total percentage of overriding royalty interest, and total percentage of working interest.

 

2)         Oil and gas is purchased during the month it is removed from the production unit.  The month in which the oil is measured or gauged by a first purchaser is not controlling, nor is the month of payment of proceeds to the producers and interest owners.

 

EXAMPLE:  The first purchaser measures the quantity of oil in a tank on January 28 but removes the oil from the production unit on February 3.  The first purchaser pays the interest owners for the oil removed on February 3 at the time interest owners are paid for the oil removed during the month of January.  The oil removed from the production unit on February 3 must be reported on the return filed for the month of February and the tax shall accompany the February return filed on or before the end of the month.

 

3)         Returns shall be filed electronically in the manner prescribed by the Department.  Purchasers shall make all payments of that tax to the Department by electronic funds transfer unless the Department grants an exception upon petition of a purchaser.  Payment may be made either by ACH debit or ACH credit.  Purchasers' returns must be accompanied by appropriate computer generated magnetic media supporting schedule data in the format required by the Department.  [35 ILCS 450/2-45]

 

4)         If an operator fails to provide a purchaser with the exemption certificate required by Section 475.130(b)(2) and, as a result, the purchaser must withhold tax, the purchaser must register with the Department and file the returns required by this Section.

 

b)         Returns Filed by Operators

 

1)         Payment of taxes by operators shall be accompanied by a return to the Department showing the gross quantity of oil or gas removed during the month for which the return is filed, the price paid, and if no price is paid, the value of the oil and gas, a description of the production unit from which the oil or gas was severed, and the amount of tax.  The Department may require any additional information it may deem necessary for the proper administration of the Tax Act.  [35 ILCS 450/2-50(a)]  The operator shall also provide a breakdown of the tax by the total percentage of royalty interest, total percentage of overriding royalty interest and total percentage of working interest.

 

2)         Operators shall file all returns electronically in the manner prescribed by the Department unless, as provided by rule, the Department grants an exception upon petition of an operator.  Operators shall make all payments of that tax to the Department by electronic funds transfer unless the Department grants an exception upon petition of an operator.  Payment made be made by either ACH debit or ACH credit.  Operators' returns must be accompanied by appropriate computer generated magnetic media supporting schedule data in the format required by the Department.  [35 ILCS 450/2-50(b)]

 

Section 475.145 Claims and Credit Memoranda

 

Operators withholding tax and filing returns and first purchasers may file claims in accordance with Sections 6, 6a and 6b of the Retailers' Occupation Tax Act.

 

Section 475.150 Books and Records

 

a)         All of the provisions of Section 7 of the Retailers' Occupation Tax Act [35 ILCS 120] that are not inconsistent with the Tax Act shall apply, as far as practicable, to the subject matter of the Tax Act to the same extent as if those provisions were included in the Tax Act [35 ILCS 450/2-70].

 

b)         Every purchaser that removes oil or gas from a production unit, and every operator that transports oil or gas off the production unit where severed, uses oil or gas on the production unit where severed by the operator, or manufactures and converts oil and gas into refined products on the production unit where severed [35 ILCS 120/2-10], shall keep books and records, of all oil and gas removed, transported, used, manufactured or converted, together with invoices, bills of lading, sales records,  production records, copies of bills of sale, and other pertinent papers and documents.  For purposes of this Section, "records" means all data maintained by the taxpayer, including data on paper, microfilm, microfiche, diskettes, flash drives, servers (whether owned by the taxpayer or a third-party), or any type of machine-sensible data compilation.  (See 35 ILCS 120/7.)

 

c)         For each production unit for which a purchaser or operator is required to withhold and remit tax pursuant to Section 475.130, the purchaser or operator shall maintain in his or her books and records the following information:

 

1)         Production Unit Information

 

A)        name and address of the operator;

 

B)        common name of the well on the permit issued DNR;

 

C)        number assigned to the production unit by the operator; and

 

D)        legal description of the production unit.

 

2)         Producer/Owner Information

 

A)        the names, addresses, social security numbers or FEINs of the producers;

 

B)        the percentage of interest owned in the well for each royalty interest owner, overriding royalty interest owner and working interest owner; and

 

C)        the rate of tax imposed on each producer and the amount of tax withheld from each producer.

 

d)         All books and records and other papers and documents required by the Tax Act and this Part to be kept shall be kept in the English language and shall, at all times during business hours of the day, be subject to inspection by the Department or its duly authorized agents and employees.  (See 35 ILCS 120/7.)

 

e)         For wells a first purchaser begins to purchase oil and gas on or after January 1, 2019, unless the purchaser obtains a properly completed and executed certification under Section 475.130(b)(2), it shall be presumed that all sales of oil and gas from those wells are subject to tax under the Tax Act until the contrary is established. The burden of proving that oil and gas  is not taxable under the Tax Act shall be upon the person who would be required to remit the tax to the Department if the transaction is taxable.  In the course of any audit, investigation or hearing by the Department with reference to a given taxpayer, if the Department finds that the taxpayer lacks documentary evidence needed to support the taxpayer's claim to exemption from the tax, the Department is authorized to notify the taxpayer in writing to produce that evidence.  The taxpayer shall have 60 days, subject to the right of the Department to extend this period either on request for good cause shown or on its own motion from the date when notice is sent to the taxpayer by certified or registered mail (or delivered to the taxpayer if the notice is served personally), in which to obtain and produce the evidence for the Department's inspection.  If sufficient evidence is not produced, the matter shall be closed and the oil and gas shall be conclusively presumed to be taxable.  (See 35 ILCS 120/7.)

 

f)         The Department shall have the power:

 

1)         to require any operator, producer, transporter, or person purchasing any oil or gas severed from the earth, soil, or water to furnish any additional information deemed to be necessary for the purpose of computing the amount of the tax;

 

2)         for the purpose of tax computation, to examine the meter and other charts, books, records, and all files of that person; and

 

3)         for the purpose of tax computation, to issue subpoenas and examine witnesses under oath. If any witness shall fail or refuse to appear at the request of the Director, or refuses access to books, records, and files, the circuit court of the proper county, or the judge of that court, on application of the Department, shall compel obedience by proceedings for contempt, as in the case of disobedience of the requirements of a subpoena issued from that court or a refusal to testify before that court.  [35 ILCS 450/2-40]

 

Section 475.160  Registration of Purchasers and Operators Responsible for Withholding and Remitting Tax

 

a)         A person who engages in business as a purchaser of oil or gas in this State subject to the tax imposed by the Tax Act shall register with the Department. Application for a certificate of registration shall be made to the Department upon forms furnished by the Department and shall contain any reasonable information the Department may require. Upon receipt of the application for a certificate of registration in proper form, the Department shall issue to the applicant a certificate of registration. [35 ILCS 450/2-35] A first purchaser does not have any obligation to register with the Department until it begins to purchase oil or gas from a well on a production unit in this State permitted, or required to be permitted, under the Regulatory Act or is required to withhold and remit tax because the operator fails to provide a properly completed and executed certification under Section 475.130(b)(2).

 

b)         An operator required to file a return and pay the tax under this Part shall register with the Department. Application for a certificate of registration shall be made to the Department upon forms furnished by the Department and shall contain any reasonable information the Department may require. Upon receipt of the application for a certificate of registration in proper form, the Department shall issue to the applicant a certificate of registration. [35 ILCS 450/2-50(f)]

 

c)         The Department has the power, after 20 days notice and an opportunity for a hearing, to revoke a certificate of registration issued by the Department if the holder of the certificate of registration fails to file a return, or to pay the tax, fee, penalty, or interest shown in a filed return, or to pay any final assessment of tax, fee, penalty, or interest, as required by the Tax Act or any other tax or fee Act administered by the Department [20 ILCS 2505/2505-380(a)].

 

d)         The Department may refuse to issue a certificate of registration authorized to be issued by the Department if a person who is named as the owner, a partner, a corporate officer, or, in the case of a limited liability company, a manager or member, of the applicant on the application for the certificate of registration is or has been named as the owner, a partner, a corporate officer, or, in the case of a limited liability company, a manager or member, on the application for the certificate of registration of a person that is in default for moneys due under the Tax Act or any other tax or fee Act administered by the Department. For purposes of this subsection only, in determining whether a person is in default for moneys due, the Department shall include only amounts established as a final liability within the 23 years prior to the date of the Department's notice of refusal to issue the certificate of registration. For purposes of this Section, "person" means any natural individual, firm, partnership, association, joint stock company, joint adventure, public or private corporation, or limited liability company, or a receiver, executor, trustee, guardian or other representative appointed by order of any court. [20 ILCS 2505/2505-380(b)]

 

e)         Each application for a certificate of registration filed pursuant to subsections (a) and (b) shall be signed and verified and shall state: 

 

1)         the name and social security number or FEIN of the applicant;

 

2)         the address of his or her principal place of business;

 

3)         the address of the place of business (excluding the addresses of wells and production units) from which he or she engages in the business of purchasing oil or gas or conducting operations in this State;

 

4)         the name and address of the person or persons who will be responsible for filing returns and payment of taxes due under the Tax Act;

 

5)         in the case of a publicly traded corporation, the FEIN of the corporation, and the name and title of the Chief Financial Officer, Chief Operating Officer, and any other officer or employee with responsibility for preparing tax returns under the Tax Act; and, in the case of all other corporations, the FEIN of the corporation and the name, title, and social security number of each corporate officer;

 

6)         in the case of a limited liability company, the name, social security number or FEIN of each manager and member; and

 

7)         in the case of a partnership, the name, title, social security number or FEIN of each general partner and each limited partner, if any.

 

(Source:  Amended at 47 Ill. Reg. 1462, effective January 17, 2023)

 

Section 475.165  Transporters of Oil and Gas

 

When requested by the Department, all transporters of oil or gas subject to the tax imposed by the Tax Act out of, within or across the State of Illinois shall be required to furnish the Department information relative to the transportation of that oil or gas as the Department may require.  The Department shall have authority to inspect bills of lading, waybills, meters, or other charts, documents, books and records as may relate to the transportation of oil or gas in the hands of each transporter.  The Department shall further be empowered to demand the production of the bills of lading, waybills, charts, documents, books, and records relating to the transportation of oil or gas at any point in the State.  [35 ILCS 450/2-60]  For purposes of this Section, "transporter" includes any person that removes oil from a production unit.

 

Section 475.170  Local Workforce Tax Rate Reduction

 

a)         The rate of tax imposed on working interest owners of a well under Section 2-15 of the Tax Act shall be reduced by 0.25% for the life of the well when a minimum of 50% of the total workforce hours on the well site are performed by Illinois construction workers being paid wages equal to or exceeding the general prevailing rate of hourly wages.  (See Section 475.1105(b).)

 

b)         When more than one well is drilled on a well site, total workforce hours shall be determined on a well-by-well basis. If the operator intends to drill more than one well on a production unit, workforce hours for common costs, such as building lease roads and a well pad to be used by multiple wells, shall be allocated to the first well drilled on the production unit.  If an operator files documentation to claim the Local Workforce Tax Rate Reduction for multiple wells on a production unit no later than the 6 months after the date of the first purchase of oil or gas from the first well on the production unit for which the reduction is claimed, the operator may allocate the common costs equally between the multiple wells.

 

c)         Any operator that intends to claim the reduction provided for in this Section on his or her behalf, or on the behalf of the working interest owners, shall be responsible for obtaining from all construction contractors working on a well site, records to document the claim for the reduction in tax rate.

 

1)         Operators shall, at a minimum, obtain from construction contractors, in writing:

 

A)        the total number of construction workers that performed work under the contract;

 

B)        the number of Illinois construction workers that performed work under the contract, whether oral or written, between the operator and the construction contractor;

 

C)        the hours worked by each construction worker; and

 

D)        the wage paid to each construction worker for the hours of work performed on the well site.

 

2)         The operator shall obtain and retain any other records the Department determines are necessary to verify a claim for a reduction in the tax. The operator shall make the records available to the Department upon request.

 

3)         For the purposes of this Section, each construction contractor, upon written request from the operator, shall retain the following records:

 

A)        each worker's name, address, and telephone number, if available;

 

B)        years of residency in Illinois;

 

C)        the type of work the workers perform;

 

D)        the hourly wages paid each worker; and

 

E)        the number of hours worked by each worker for the term of the contract.

 

4)         The construction contractor shall retain any other records the Department determines are necessary to verify a claim for a reduction in the tax.  The construction contractor shall make the records available to the operator and Department upon request.  The operator and construction contractors shall retain the records for 3 years.

 

5)         No later than the 6 months after the date of the first purchase of oil or gas from a well, the operator shall file with the Department, in the form and manner required by the Department, a report and documentation to support that the working interest owners qualify for the reduction in the rate of tax provided for in this Section.  The report shall be signed by the operator, or an officer, employee, or agent of the contractor, and state under oath that he or she has examined the report and documentation and the report and documentation are true and accurate.  The Department shall keep the records submitted in accordance with this subsection for a period of not less than 3 years from the date of filing.

 

d)         No later than 60 days after receipt of a report and complete documentation to support that the working interest owners qualify for the reduction in the rate of tax, the Department shall notify the first purchaser and the operator when the working interest owners qualify for a reduction in the tax under this Section and state the amount of the reduction.  The reduction shall be effective the date of first production.  The first purchaser or operator may take a credit for any retroactive reduction in the tax rate on a return filed under Sections 2-45 and 2-50 of the Tax Act.

 

e)         Reports shall be filed on forms furnished and prescribed by the Department and shall contain any other information the Department may reasonably require.  [35 ILCS 450/2-17]

 

Section 475.175  Penalties and Interest; Hearings

 

a)         All provisions of the Uniform Penalty and Interest Act [35 ILCS 735] that are not inconsistent with the Tax Act shall apply.  Any officer or employee of any taxpayer subject to the provisions of the Tax Act who has the control, supervision or responsibility of filing returns and making payment of the amount of any trust tax imposed in accordance with the Tax Act and who willfully fails to file the return or make the payment to the Department or willfully attempts in any other manner to evade or defeat the tax shall be personally liable for a penalty equal to the total amount of tax unpaid by the taxpayer, including interest and penalties.  [35 ILCS 735/3-7]

 

b)         The criminal penalties contained in Section 13 of the Retailers' Occupation Tax Act [35 ILCS 120] that are not inconsistent with the Tax Act shall apply.

 

c)         Any person aggrieved by any decision of the Department under this Part may, within 60 days after notice of the decision, protest and request a hearing.  After receipt of the request for a hearing, the Department shall give notice to the person of the time and place fixed for the hearing, shall hold a hearing, and shall issue its final administrative decision in the matter to the person.  In the absence of a protest within 60 days, the Department's decision shall become final without any further determination being made or notice given.

 

Section 475.180  Incorporation by Reference

 

All of the provisions of Sections 4, 5, 5a, 5b, 5c, 5d, 5e, 5f, 5g, 5j, 6, 6a, 6b, 6c, 7, 8, 9, 10, 11, 11a, 12, and 13 of the Retailers' Occupation Tax Act that are not inconsistent with the Tax Act, and all provisions of the Uniform Penalty and Interest Act, shall apply, as far as practicable, to the subject matter of the Tax Act to the same extent as if those provisions were included in the Tax Act [35 ILCS 450/2-70].