Severance Tax Law and Legal Definition

Severance tax refers to a tax imposed by a state on the value of nonrenewable natural resources extracted from the earth, such as oil, coal, or gas, which will be used in other states.

In P & O Falco, Inc. v. Riley, 271 Ark. 562 (Ark. 1980), the court held that in the state of Arkansas the severance tax is levied as a privilege or license tax upon the severance of natural resources from the soil or water with the tax rate in respect to oil being four percentage or five percentage of the market value of the oil, depending upon the volume of production, and the monthly tax reports to be filed, and the tax paid, by the producer actually severing the oil from the soil, but the producer is required to deduct a proportionate part of the tax in making payment to the royalty owner.