Illinois’ Hydraulic Fracturing Tax Act

Prior to the Hydraulic Fracturing Tax Act, Illinois was one of the few drilling states not to impose any severance or gross production taxes on the extraction of its minerals. For oil and gas removed on or after July 1, 2013, Illinois imposes a tax upon the severance and production of oil or gas from a well on a production unit, provided that well is subject to the Hydraulic Fracturing Regulatory Act.

On June 17, 2013, Illinois P.A. 98-0022, consisting of the Hydraulic Fracturing Regulatory Act (225 ILCS 732/1-1 et seq. (2013)) (HFRA) and the Illinois Hydraulic Fracturing Tax Act (35 ILCS 450/2-5 et seq. (2013)) (HF Tax Act), became law. Originally enrolled as HR 2615, PA 98-0022 was later enrolled as SB 1715 and was passed by the General Assembly on May 29, 2013. Governor Pat Quinn signed the Act on June 17, 2013. The Act, which was the result of months of negotiations among industry and some environmental groups, had been stalled since March 2013 after a last-minute amendment added a licensing regime that would have favored water-well drilling contractors, who happen to be largely unionized. That impasse was resolved when the objectionable well licensing regime was replaced by a local workforce credit against HF Tax Act liability. This On The Subject discusses the HF Tax Act. For more information on the HFRA, see McDermott's White Paper "Illinois Set to Regulate Shale Oil and Gas."

HF Tax Act

Prior to the HF Tax Act, Illinois was one of the few drilling states not to impose any severance or gross production taxes on the extraction of its minerals. For oil and gas removed on or after July 1, 2013, Illinois imposes a tax upon the severance and production of oil or gas from a well on a production unit, provided that well is subject to the HFRA. The liability for the hydraulic fracturing (HF) tax accrues at the time the oil or gas is removed from the production unit. "Removed" is defined at 35 ILCS 450/2-10(2013) as the physical transportation of oil or gas off of the production unit where severed; and if the oil or gas is used onsite where severed, or if the manufacture or conversion of oil or gas into refined products occurs onsite where severed, the oil or gas is deemed to have been removed on the date such use, manufacture or conversion begins from a well on a production unit that is permitted, or required to be permitted, under the HFRA. All oil and gas removed is subject to the HF tax unless expressly exempt. If a well is subject to the...