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Ext. PublicationColorado Severance Tax: Filing Requirements for Royalty Owners and Oil and Gas Operators
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Colorado imposes a severance tax on the extraction of nonrenewable natural resources, including oil and gas. This tax is designed to compensate the state for the depletion of its natural resources and fund various state programs. Understanding the filing requirements is essential for compliance and avoiding penalties. We outline the obligations for both oil and gas operators and royalty owners, along with potential tax savings opportunities.
Filing Requirements for Royalty Owners
For royalty owners receiving payments from oil and gas production in Colorado, understanding withholding requirements, filing thresholds and available credits can help reduce tax liability. Here’s what you need to know:
- Withholding statement: Oil and gas operators must provide royalty owners with Form DR 0021W, by March 1. This statement details the gross income, the royalty owner’s share of property taxes paid and the withholding amount.
- Taxable income: Royalties are subject to severance tax; however, if your annual withholding is less than $250 and the operator has withheld sufficiently to cover the severance tax liability, you are exempt from filing.
- Filing and payments: If you meet the $250 filing threshold, file Form DR 0021 by April 15. A six-month filing extension may be requested pushing back the filing deadline to October 15.
- Credits: Royalty owners can reduce their severance tax liability by claiming property tax credits.
Filing Requirements for Oil and Gas Operators
Oil and gas operators have additional responsibilities, including withholding tax for royalty payments and managing their own severance tax obligations. It’s important for the operators to understand the filing requirements for compliance and efficient tax management. Key requirements include:
- Tax rates: This is based on gross income, ranging from 2% to 5%, with deductions for transportation and processing costs.
- Royalty owner reporting: Operators are required to withhold and remit 1% of gross income attributable to interest owners. They are also required to provide interest owners with withholding statements (DR 0021W) on or before March 1.
- Filing and payments: Submit Form DR 0021, make quarterly payments if your liability exceeds $5,000 and file your annual return by April 15. A six-month filing extension may be requested pushing back the filing deadline to October 15.
- Credits and deductions: Claim severance tax credits for property taxes and deduct eligible leasehold and transportation costs.
Compliance and Penalties
Failure to comply with Colorado’s severance tax laws may result in penalties and interest. Late payments accrue interest at the statutory rate, and non-compliance may result in penalties. It’s highly recommended that operators and royalty owners maintain detailed records of production, revenue and deductions to ensure accurate reporting. Royalty owners should maintain detailed records of any monthly royalty income statements and withholding statements. If any issues or discrepancies arise, it is important to reach out to the company leasing your mineral rights for clarification and resolution. Proper documentation ensures compliance and that you can address any concerns promptly.
For more details, refer to official resources:
- Colorado Department of Revenue – Severance Tax
- Colorado Revised Statutes (C.R.S.) Title 39, Article 29
Understanding Colorado’s severance tax rules for oil and gas operators and royalty owners is critical to ensure compliance and optimize tax strategies. It should also be noted that taxpayers that might benefit from these opportunities are not precluded from exploring the marginal well credit at the federal level.
Weaver’s tax team can help with guidance on filing, deductions or compliance strategies. Contact us today.
Authored by Mayur Naik and Tanner Owens
©2025
