BEFORE THE DEPARTMENT OF REVENUE
OF THE STATE OF MONTANA
In the matter of the proposed adoption of New Rule I through V and amendment of ARM 42.17.101
relating to Mineral Royalty Backup Withholding
NOTICE OF PUBLIC HEARING ON PROPOSED ADOPTION AND AMENDMENT
TO: All Concerned Persons
1. On November 15, 2007, at 1:00 p.m., a public hearing will be held in the 4 East Conference Room of the Sam W. Mitchell Building, at Helena, Montana, to consider the adoption and amendment of the above-stated rules.
Individuals planning to attend the hearing shall enter the building through the east doors of the Sam W. Mitchell Building, 125 North Roberts, Helena, Montana.
2. The Department of Revenue will make reasonable accommodations for persons with disabilities who wish to participate in this public hearing or need an alternative accessible format of this notice. If you require an accommodation, contact the Department of Revenue no later than 5:00 p.m., November 5, 2007, to advise us of the nature of the accommodation that you need. Please contact Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-3696; or e-mail firstname.lastname@example.org.
3. The proposed new rules do not replace or modify any section currently found in the Administrative Rules of Montana. The proposed new rules provide as follows:
NEW RULE I ADVANCE PAYMENTS AND FURTHER DISTRIBUTIONS
(1) Advance mineral royalty payments that relate to, refer to, or concern production are subject to the mineral royalty tax withholding requirements.
(2) Each remittor who disburses funds that are owed to any person owning a royalty interest, overriding royalty interest, production payment, or any other nonworking interest in minerals produced in this state, is subject to the withholding requirement of 15-30-261, MCA.
(3) If a mineral is taken in-kind by a royalty owner, the remittor must forward 6% of the net value of the mineral that was taken in-kind to the department on behalf of that royalty owner. The value of the mineral is calculated by multiplying the volume of the mineral that was taken in-kind with a market or going rate for the mineral. For instance, if a royalty owner takes in-kind 100 barrels of oil, the remittor will multiply the 100 barrels of oil to the sales price of the other barrels of oil sold from the lease to establish the net value of the mineral taken in-kind.
(4) If you are a remittor and you are providing accounting services, and these accounting services include fulfilling the requirements of 15-30-266, MCA, for more than one producer, you must remit separate withholding payments and submit a separate Montana Mineral Royalty Withholding Tax Reconciliation Return (Form RW-3), for each producer.
AUTH: 15-30-272, MCA
IMP: 15-30-266, MCA
REASONABLE NECESSITY: The department is proposing to adopt New Rule I.
Section (1) to establish that advance mineral payments made to royalty interest owners that represent the royalty interest owner's future share of the receipts from the sale of the natural resource, are subject to the withholding requirements of 15-30-261, MCA.
Section (2) establishes that all nonworking royalties are subject to possible withholding.
Section (3) is proposed to establish that if minerals are taken in-kind, 6% of the value of those minerals is required to be remitted as withholding.
Section (4) establishes that if a remittor provides bookkeeping services, which includes distribution of royalty interest payments, for a number of producers the remittor must submit a separate RW-3 for each producer.
NEW RULE II CLAIMING THE CREDIT FOR TAX WITHHELD (1) Claiming credit for the tax withheld shall be accomplished as follows:
(a) Credit may be claimed for the tax withheld on a Montana Individual Income Tax Return or a Montana Corporation License Tax Return, with a copy of Form 1099-MISC attached to substantiate the amount claimed.
(b) Taxpayers who are shareholders in a corporation taxed under Subchapter S of the Internal Revenue Code and are Montana residents, members of a Montana limited liability company, or members of a partnership doing business in this state must attach a copy of federal form K-1 to their Montana individual income tax return. They may claim credit for the amount shown as their percentage share of the tax withheld from Montana net royalty payments by the corporation, limited liability company, or partnership.
(c) An estate or trust is entitled to credit for the tax withheld in proportion to its share of federal distributable net income. The remaining credit must be passed through to the beneficiaries in proportion to their respective shares of federal distributable net income of the estate or trust. To claim the credit, the beneficiaries must attach a copy of federal form K-1 to their Montana Individual Income Tax Return for Fiduciaries and Trusts (FID-3) and claim credit for the amount shown by the fiduciary as their percentage share of the tax withheld from Montana mineral production payments.
(d) Any person filing on a fiscal year ending other than December 31 must claim a credit for the withholding tax shown on the person income tax return required to be filed during the year following the December closing period of the Montana Mineral Royalty Withholding Tax Reconciliation Return (Form RW-3).
AUTH: 15-30-272, MCA
IMP: 15-30-264, MCA
REASONABLE NECESSITY: The department is proposing to adopt New Rule II to clarify the proper procedures and forms used by individuals, corporations, shareholders of S Corporations, members of limited liability companies (LLC), partners in partnerships, estates and trusts to claim amounts withheld from royalty payments.
NEW RULE III APPLICABLE THRESHOLDS – CHANGE OF OWNERSHIP – PUBLICLY TRADED PARTNERSHIPS - NONPROFIT ORGANIZATIONS – EXEMPT ROYALTY OWNERS (1) An oil and gas remittor is not required to withhold from their royalty interest owners if the production does not exceed 100,000 barrels of oil and 500 million cubic feet of gas, based on the previous three calendar years' average production reported to the Montana Board of Oil and Gas Conservation. For example, the department will calculate whether an entity is required to withhold from their royalty interest owners for 2008 by averaging the production numbers for calendar years 2004, 2005, and 2006 and comparing this average to the production exemption limits.
(2) If an entity does not have three years of recent oil and/or gas production records, the remittor may provide the department with information supporting the exemption from the withholding requirements of 15-30-261, MCA. The department shall review this information to determine if an exemption is warranted and notify the remittor of the determination.
(3) On or before September 15 of each year, the department shall notify all oil and gas producers of their requirements as it relates to the provisions of 15-30-261 and 15-30-264, MCA.
(4) If a person that is required to withhold on behalf of their royalty interest owners sells their mineral interests during the year and ceases to be the remittor, the person that acquired the mineral interests becomes the remittor and must continue to withhold 6% of the net royalty payments from the royalty interest owners subject to the withholding requirements of 15-30-261, MCA.
(5) If a remittor produces both oil and gas and only one resource meets the requirements for withholding as provided in 15-30-264, MCA, the withholding provisions apply to both oil and gas regardless of the production volumes of the other resource that does not meet the requirements of 15-30-264, MCA.
(6) If a person, not previously extracting resources in the state, begins extracting from new sources of natural resources in Montana (i.e., newly drilled oil or gas wells or a new mine), that person is required to withhold 6% of the net royalty payments from the royalty interest owners subject to the withholding requirements of 15-30-261, MCA.
(7) The person described in (6) that extracts oil and/or gas only may not be required to withhold on net royalty payments from their royalty interest owners if the person can provide information that satisfies the department that the new producing property will not meet the threshold requirements established for oil and gas in 15-30-264, MCA.
(8) All persons that extract minerals other than oil and gas must withhold 6% of the net royalty payments of all royalty interest owners subject to the withholding requirements of 15-30-261, MCA.
(9) The person described in (8) may not be required to withhold net royalty payments from their royalty interest owners if the person can provide information that satisfies the department that the net royalty payments are immaterial.
(10) Section 15-30-264, MCA allows for a publicly traded partnership to be exempt from the withholding requirements of 15-30-261, MCA, provided the publicly traded partnership, who is a royalty owner, submits a report to both the remittor and the Department of Revenue. The report, which can be in the form of a letter must contain the publicly traded partnership's letterhead and state that the partnership is publicly traded and the partnership requests exemption from 15-30-261, MCA. The request must be received by the remittor and the department prior to November 1 of the year prior to the calendar year in which the partnership requests exemption. Upon receipt of the report, the department will notify the partnership and the remittor of either acceptance or denial of the request within thirty days. The election does not need to be repeated annually unless requested by the department.
(11) Section 15-30-264, MCA, allows for an organization that is exempt from taxation under 15-31-102, MCA to be exempt from the withholding requirements of 15-30-261, MCA provided the exempt organization, who is a royalty owner, submits a report to both the remittor and the department. The report, which can be in the form of a letter, must contain the exempt organization's letterhead and requests exemption from 15-30-261, MCA. The request must be received by the remittor and the department prior to November 1 of the year prior to the calendar year in which the exempt organization requests exemption. Upon receipt of the report the department shall notify the exempt organization and the remittor of either acceptance or denial of the request within thirty days. The election does not need to be repeated annually unless requested by the department.
(12) According to 15-30-264, MCA, the department grants remittors the authority to forego withholding the tax from royalty owners who meet the following qualifications:
(a) the amount of the royalty interest payment is less than $2,000 per year; or
(b) less than $166 per month.
(13) The remittor that does not withhold from royalty interest owners pursuant to (12) may, upon request from the department, be required to provide a list of the royalty interest owners.
AUTH: 15-30-272, MCA
IMP: 15-30-264, MCA
REASONABLE NECESSITY: The department is proposing to adopt New Rule III(1) to establish if an entity is required to withhold taxes from mineral royalty interest payments.
Section (2) is proposed to possibly allow withholding exemptions on producing properties that do not have three years of recent production.
Section (3) is intended to inform producers/remittors that they exceed the production levels and are required to withhold a portion of the royalty interest payments. This rule also requires the department to provide this information to the producers/remittors on or before September 15.
Section (4) clarifies that if you purchase leases from a producer that previously was required to withhold 6% of the net royalties, you are also required to continue to withhold 6% of the production from the royalty interest owners.
Section (5) states the withholding requirements for entities that produce both oil and gas.
Section (6) establishes that any new natural resource extraction venture in Montana by an entity that currently does not extract resources in Montana must withhold 6% of the net royalty payment.
Section (7) allows for an exemption from the withholding for oil and/or gas extraction entities described in part (6) if the entity can prove that the production will not meet the requirements for withholding.
Sections (8) and (9) are proposed to inform mineral extraction entities other than gas and oil that withholding is required unless the entity can prove the amount of the royalty interests are immaterial.
Section (10) explains the process a publicly traded partnership must complete to receive exemption from the withholding requirements of 15-30-261, MCA.
Section (11) explains the process a nonprofit organization must complete to receive exemption from the withholding requirements of 15-30-261, MCA.
Section (12) explains that a remittor can choose not to withhold from a royalty interest owner.
Section (13) explains that a remittor may be required to provide a list of the royalty interest owners not being withheld upon.
NEW RULE IV REGISTRATION FOR WITHHOLDING (1) Every entity that extracts natural resources within the boundaries of Montana must register and file an application for a state identification number on the form provided by the department.
(2) Any owner or operator who has acquired the business of another entity shall not use the predecessor's state identification number. The owner or operator must register before the due date of the first report. This applies to both new businesses and businesses which have been purchased.
(3) Each registration application must contain the applicable tax identification number assigned by the Internal Revenue Service.
(4) No registration is considered complete unless the federal identification number appears on the form.
(5) Not being registered does not relieve a remittor from the collection and reporting requirements.
AUTH: 15-30-272, MCA
IMP: 15-30-263, 15-30-266, MCA
REASONABLE NECESSITY: The department is proposing to adopt New Rule IV to clarify the registration requirements for natural resource extraction companies. The rule also provides guidance for changes in remittors.
NEW RULE V FILING REQUIREMENTS (1) The following forms are to be completed and filed in accordance with instructions provided by the department:
(a) Form RW-1, Mineral Royalty Withholding Payment Coupon, must be filed quarterly unless the department establishes that the entity is exempt from the withholding requirements of 15-30-261, MCA. A remittor may request to file a form RW-1 on an accelerated basis. The remittor must receive approval from the department before remitting the withholding tax on a more frequent basis than quarterly;
(b) A remittor who has no withholding to remit for a remittance period shall on or before the due date, submit a payment coupon showing that a zero amount is being remitted;
(c) Montana Annual Mineral Royalty Withholding Tax Reconciliation (Form RW-3), must be filed on or before February 28 of each year. Form RW-3 must be accompanied by copies of each royalty owner's Withholding Statements on Federal Form 1099-MISC;
(d) Form 1099-MISC, Miscellaneous Income, shall be furnished by the remittor to each person who is entitled to a credit for taxes withheld each calendar year before January 31 of each year; and
(e) Each remittor that is exempt from withholding is still required to file with the department a copy of Forms 1099-MISC for every recipient of royalties. For ease of reporting the department will accept the comparable federal form, or submission of the form in electronic format as defined by the IRS. These reports are due on or before February 28 of each year.
(2) Electronic filing requirements for state purposes are the same as those mandated for federal purposes.
AUTH: 15-30-272, MCA
IMP: 15-30-266, 15-30-268, 15-30-269, MCA
REASONABLE NECESSITY: The department is proposing to adopt New Rule V to clarify the forms that must be filed each year for the taxpayer to be in compliance with the 15-30-261, MCA.
Section (1) outlines the quarterly returns and annual returns that must be submitted to the department along with the forms that must be submitted to each royalty owner at the end of the year. In addition, this section details the information that must be submitted to the department by remittors exempt from the mineral withholding provisions.
Section (2) outlines the filing requirements for producers who are not subject to the withholding provisions. The rule makes it clear that the electronic filing requirements that the department requires will be the same as those required for federal electronic filing of Forms 1099, 1096, and other relevant federal forms.
4. The rule proposed to be amended provides as follows, stricken matter interlined, new matter underlined:
42.17.101 DEFINITIONS The following terms pertain to this chapter:
(1) "Advanced mineral payments" are payments made to royalty interest owners that represent the royalty interest owner's future share of the receipts from the sale of the natural resource.
(1) remains the same but is renumbered (2).
(3) "First purchaser" means the first person to pay for production after it is extracted from deposits in this state. Generally the first purchaser is an arms-length entity that pays a market price.
(2) remains the same but is renumbered (4).
(5) "Mineral payments" are payments made to royalty interest owners that represent the royalty interest owner's future share of the receipts from the sale of the natural resource.
(6) "Net royalty amount payable" means the amount of mineral proceeds subject to withholding. This amount is equal to the gross royalty payments less any taxes and other expenses deducted pursuant to the royalty agreement in effect.
(7) "Overriding royalty interest" means ownership in a percentage of production or production revenues, free of the cost of production, created by the lessee, company and/or working interest owner and paid by the lessee, company and/or working interest owner out of revenue from the well.
(8) "Person" means any natural person, company, corporation, association,
partnership, joint venture, cooperative, estate, trust, receiver, or any other party or entity that has a working interest, royalty interest, overriding royalty interest, production payment, production payment including in-kind exchanges, or any other ownership interest entitled to production proceeds from deposits in this State.
(9) "Producer" is the person that extracts natural resources from deposits in the State.
(10) "Remittor" means the individual, entity, or trust obligated under a mineral lease to pay royalties to the royalty owner or his assignee, to deliver minerals to a purchaser to the credit of such royalty owner or his assignee, or to pay a portion of the proceeds of the sale of such minerals to the royalty owner or his assignee.
(3) and (4) remain the same but are renumbered (11) and (12).
(13) "Take in kind" means someone other than the well operator takes their share of the production and does not sell it with the party(s) contracted with the operator. The operator might want to sell gas to one purchaser, but another company wants to sell or use their portion of the gas for another purpose. Thus, they "take in kind".
AUTH: 15-30-272, 15-30-305, MCA
IMP: 15-30-201, 15-30-256, 15-30-263, MCA
REASONABLE NECESSITY: The department is proposing to amend ARM 42.17.101 to add terms that will be used in this chapter as they pertain to the mineral royalty withholding requirements in Title 15, chapter 30, part 2, MCA.
5. Concerned persons may submit their data, views, or arguments, either orally or in writing, at the hearing. Written data, views, or arguments may also be submitted to: Cleo Anderson, Department of Revenue, Director's Office, P.O. Box 7701, Helena, Montana 59604-7701; telephone (406) 444-5828; fax (406) 444-3696; or e-mail email@example.com and must be received no later than November 26, 2007.
6. Cleo Anderson, Department of Revenue, Director's Office, has been designated to preside over and conduct the hearing.
7. An electronic copy of this Notice of Public Hearing is available through the department's site on the World Wide Web at www.mt.gov/revenue, under "for your reference"; "DOR administrative rules"; and "upcoming events and proposed rule changes." The department strives to make the electronic copy of this Notice of Public Hearing conform to the official version of the Notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the Notice and the electronic version of the Notice, only the official printed text will be considered. In addition, although the department strives to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.
8. The Department of Revenue maintains a list of interested persons who wish to receive notices of rulemaking actions proposed by this agency. Persons who wish to have their name added to the list shall make a written request, which includes the name and mailing address of the person to receive notices and specifies that the person wishes to receive notices regarding particular subject matter or matters. Such written request may be mailed or delivered to the person in 5 above or faxed to the office at (406) 444-3696, or may be made by completing a request form at any rules hearing held by the Department of Revenue.
9. The bill sponsor notice requirements of 2-4-302, MCA, apply and have been fulfilled. The primary bill sponsor was notified on August 10, 2007, by regular mail and subsequently with the draft rules on August 15, 2007.
/s/ Cleo Anderson /s/ Dan R. Bucks
CLEO ANDERSON DAN R. BUCKS
Rule Reviewer Director of Revenue
Certified to Secretary of State October 15, 2007