To answer the question whether or not there is a Real Estate Transfer Tax on the conveyance of an interest in oil and gas in Pennsylvania, we must first ask if oil and gas interests are treated as real property under Pennsylvania law.
Real estate is divided into three estates:
1.) The surface estate, which contains the surface as we know it and, in most jurisdictions, all substances below the surface that are not otherwise defined as “minerals” such as sand, gravel and potable water.
2.)The subsurface (mineral rights) estate is the property interest created in oil, gas or minerals after a severance in the chain of title by way of a reservation or an outright conveyance.
3.) The support estate is a proprietary right at common law that requires the mineral estate owner to take the mineral estate, subject to the burden of surface support, and mine the estate in a method and manner that ensures that sufficient support remains to sustain the surface estate.
Oil and gas interests that have not been severed from the surface estate, and otherwise remain in place, are considered real estate. The oil and gas is part of the fee interest unless and until the interests are physically severed from the surface estate, i.e., extracted. Once the oil and gas has been severed, it is considered personal property.
Pennsylvania Realty Transfer Tax is imposed upon any “document” that effectuates or evidences the transfer of “title to real estate.” 72 P. S. § 8101-C. A “document” can be any writing that effectuates or evidences the transfer of title to real estate thereby making the transfer taxable. 61 Pa. Code § 91.169. Accordingly, there is a realty transfer tax on the conveyance of an interest in the oil and gas rights in place. The taxable value is the actual monetary worth as determined by a bona fide sale, i.e., the consideration paid, or the computed value if there is no consideration exchanged. Under current Pennsylvania law, oil and gas estates and interests are not separately assessed and subject to real estate taxes, so the transfer tax cannot be based on a computed value. In the event that there is no bona fide sale or assessed value, an appraisal of the oil and gas interests is necessary to determine the monetary worth.
With all of the activity surrounding the Marcellus and Utica shale, interests in oil and gas are being conveyed on a routine basis. Those engaging in such transactions should be aware that the Pennsylvania Department of Revenue is reviewing oil and gas transactions and assessing Realty Transfer Tax where it was due, but otherwise unpaid at the time of sale or conveyance. To avoid any surprises from the Department of Revenue, it is important that you pay close attention to the tax treatment when dealing in oil and gas interests.