Audit reveals unacceptable levels of reporting noncompliance and millions in lost tax revenue and fines to the state and local governments

DENVER, CO — The Joint Legislative Audit Committee today heard an audit of severance tax systems within the Departments of Revenue and the Department of Natural Resources, which shows unacceptable reporting noncompliance from oil and gas and mining operators that may have left state and local governments without millions in tax revenue

Severance taxes are meant to “recapture a portion of the wealth that is lost when nonrenewable natural resources are removed from the earth and sold for private profit.” These taxes are used to fund water infrastructure, local government projects, and a variety of conservation efforts.

“This audit shows how oil and gas operators have failed to pay millions in tax revenue to the state, local governments, and their communities, all the while running expensive television ads to tout their contributions to the state,” said Speaker KC Becker (D-Boulder). “We have one of the lowest severance tax rates in the nation and yet operators aren’t even paying what they owe. This highlights yet another aspect of the oil and gas industry that has gone unchecked for years, and we need a reliable reporting and compliance system so this industry can no longer skirt the system with impunity.”

“This report is astounding and reveals years of noncompliance by oil and gas operators, potentially leading to millions of dollars in unreported production,” said Audit Committee vice-chair Rep. Michaelson Jenet (D-Commerce City). “This money is critical for local governments, and is intended to be used for infrastructure projects in communities impacted by the extraction industry.

“I supported this audit because Coloradans and state agencies need to know how much oil and gas is being produced in our state, and it’s now crystal clear that oil and gas operators are failing to pay their taxes and report this information,” said committee member Rep. Kraft-Tharp (D-Arvada). “I look forward to working with the Departments of Natural Resources, Revenue, and the Colorado Oil and Gas Conservation Commission to swiftly fix these extremely troubling issues and get the severance tax system in order.”

The audit report found that the state is largely unaware of how much oil and gas is produced because operators have failed to report this information as required by law. As a result, the state has likely lost millions of dollars in severance taxes. Of the 420 operators that produced oil and gas in the state from 2016 to 2018, 316 of them submitted incomplete monthy well reports or failed to submit as many as 50,055 required monthly reports.

If the maximum $200 per day fine was imposed for failing to report this information, the state would have collected as much as $308 million in fines from oil and gas operators for the violations over two years. Furthermore, only eight of 79 mine operators submitted production reports in 2017, and 73 percent of the operators in the report’s sample failed to submit Oil and Gas Withholding Statements, which are used to enforce severance tax compliance.

After applying all applicable deductions and credits, the state’s effective severance tax rate is just .54 percent of gross revenue for oil and gas. This audit, although focused on 2016 through 2018, shows extensive and systemic failures on the part of industry to comply with state reporting and tax remittance requirements.