The Shale Play: Its Effects on Property Taxes

by John Zimpel  on Monday, Aug. 27, 2007 12:00 am  

Other discovery issues include:

Mineral rights tax sales by the land commissioner or sheriff were invalidated due to illegal listing. The effect on the discovery process has been a compounding of the ownership claims on minerals and many people trying to involve the assessor's office in title disputes. To our knowledge most operating companies do not recognize mineral rights tax sales, and none has occurred since the early 1980s.

Division orders, the documents showing ownership of the various rights, working royalty, overrides, etc., are not always shared with assessor offices.  With these documents assessors could produce a thorough ownership database and better distribution of the mineral rights tax base. 

The laws concerning mineral rights taxation only refer to severed rights and do not address the contributory value of mineral rights production to property where there is single ownership of surface and mineral rights. Producing mineral rights properties not severed from surface estates have not been included in the assessed value property and the potential added value has not been taxed.

Tax Sales Voided

Listing - building the data about and the official record of mineral rights assessments in the Fayetteville Shale - has been particularly difficult. Ownership information has not been well maintained, and the minerals that were assessed have often reverted to the government because of nonpayment of taxes. 

However, all tax sales have essentially been voided and the ownership reverted to those who may have abandoned the property and left no heirs to claim it.  Mineral rights are no longer sold for taxes. When mineral rights properties go delinquent and are certified to the state, they can only be redeemed or retained by the state. The owner of the mineral rights or surface estate above them may redeem them from the land commissioner. If they are not redeemed, the land commissioner retains the mineral rights and the state receives the benefits of the leases and production.

With the law allowing surface right owners to redeem severed mineral rights certified to the state land commissioner's office, county assessors have seen quite a few surface rights owners trying to get them to assess mineral rights to the last known or sometimes unknown owners. The intention appears to be for the mineral rights to go delinquent, get certified to the state and then be redeemed by the surface rights owner. 

Comparatively speaking, natural gas is a small and localized product in Arkansas, and the value of the properties reflects that status. Its contribution to the property tax base is minor on a statewide basis.

As a result, the assessment of natural gas has been a low priority; the valuation methodology, based on annual production and not necessarily the reserves in the ground, was adopted many years ago and remained unchanged. The assessment of mineral rights has also not been audited by the Assessment Coordination Department in the past.

The Fayetteville Shale Play will impact the counties where it's located, but to what extent the discovery, listing and valuation of mineral rights assessed will change is unknown. It's probably safe to say some property assessment methods will change, and there will be a better understanding of the process in the future. And the results will benefit taxpayers, taxing units and county officials alike.

(John Zimpel is a certified general real estate appraiser, researcher, educator and special projects coordinator with the Arkansas Assessment Coordination Department.) 



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