Mineral Royalty Backup Withholding
The following information is provided to assist you in understanding the Mineral Royalty Backup Withholding Act.
Mineral Royalty Backup Withholding Act - Information for Mineral Royalty Owners
Montana Code Annotated - 15-30-2536 through 15-30-2547, MCA
Electronic filing - File electronically through Taxpayer Access Point (TAP)
- Register Mineral Royalty Withholding Account
- File Form RW-3 - Montana Annual Mineral Royalty Withholding Tax Reconciliation
If you have any questions please call us toll free 1-866-859-2254 (in Helena, 444-6900).
Mineral Royalty Withholding Requirements
The Mineral Royalty Backup Withholding Act requires that anyone who makes mineral royalty payments to a resident or nonresident from property located in Montana must withhold tax from those payments if applicable thresholds are met (15-30-2536 through 15-30-2547, MCA). The withholding requirements were effective as of January 1, 2008.
Each remitter that meets the requirements set forth in 15-30-2536, MCA must withhold from each royalty payment made to a royalty owner an amount equal to 6% of the net royalty amount payable to the royalty owner. After reviewing a remitter's annual production based upon a 3-year rolling average, if applicable, we will notify each remitter as to whether they are required to withhold taxes on royalty payments made to royalty owners.
Withholding is required if the 3-year average production is in excess of 100,000 barrels of oil or 500 million cubic feet of gas annually. Withholding is also required for other types of mineral production if the 3-year rolling average exceeds a value of $5,000,000.
A "remitter" 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.
The "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.
The following are exempt from mineral withholding:
- Payments to the United States or an agency of the federal government, this state or a political subdivision of this state, or another state or a political subdivision of another state;
- Payments to a federally recognized Indian nation or tribe;
- Payments to the same person or entity as the remitter;
- Payments to an organization that is exempt under MCA 15-31-102*; or
- Payments to a publicly traded partnership*
* A royalty owner that is exempt from taxation under MCA 15-31-102 or a publicly traded partnership must report to us and to the remitter all information necessary to establish that the remitter is not required to withhold payments made to the tax-exempt organization or partnership. No form is necessary, the tax exempt organization or partnership must simply provide the information in writing to us and the remitter by November 1 of the year prior to the calendar year for which the exemption is requested. We will notify both the royalty owner and the remitter whether the request has been accepted or denied. The notification will be made within 30 days of our receipt of the request. The election does not need to be repeated annually, unless we specifically request that it be done.
Although payments made to publicly traded partnerships are exempt from withholding, these particular entities are required to submit a copy to us of each partner's federal schedule K-1, form 1065 or 1065-B, as applicable. This form must be filed electronically by February 28 of the year following the applicable calendar year.
Remitters required to withhold taxes on mineral royalty payments
If you are required to withhold taxes on royalty payments, as verified by the letter that we issued, please note the following:
- Payments are due quarterly on the last day of the month following the end of the calendar quarter in which the withholding occurs. The Mineral Royalty Withholding Payment Vouchers (Form RW-1) will be mailed to you 30 days prior to the end of the first quarter.
- If you would like to file on an "accelerated" basis instead of quarterly, please contact us. The voucher packet will still be mailed on a quarterly basis, but will include additional vouchers.
- A voucher or an electronic payment record must be filed even if no royalties were paid during a designated filing period. The submission of a voucher or electronic payment record reporting "zero" withholding fulfills the necessary filing requirement for producers that did not need to withhold during a filing period and will prevent a delinquency letter.
- You must file a Montana Annual Mineral Royalty Withholding Tax Reconciliation (Form RW-3) and a copy of each Form 1099-MISC with us by February 28 of the year following the calendar year in which the withholding occurs. We ask that you use one of the following methods to submit the Form RW-3 and associated Form(s) 1099-MISC:
- Paper documents. Attach Form(s) 1099-MISC to Montana Form RW-3 and mail them to the address shown in the instructions.
- Electronic filing. Establish an online account to transmit the Form RW-3 and 1099s via Taxpayer Access Point (TAP) and File Transfer Service respectively. Use the 1099-MISC format defined by IRS Publication 1220. To report required mineral net royalties to the Montana Department of Revenue use columns 711-722, right justified, reserved for state or filer use, in the 1099-MISC format.
- If the royalty payment made to a royalty owner subject to withholding is less than $166 for the current withholding period or is less than $2,000 if the payment is annualized, we grant remitters the authority to forego withholding the tax from these particular royalty interest owners. The remitter may, upon request from the Department, be required to provide a list of these royalty interest owners.
Remitters Not Required to Withhold Taxes on Mineral Royalty Payments
If you are not subject to the mineral royalty withholding tax requirements, as verified by the letter that we issued, please note the following:
- Each remitter exempted from withholding must file with us a copy of Form 1099-MISC for every recipient of royalties, using one of the methods shown below. It has been determined that a Form RW-3 will be required showing the total royalties paid and the number of Form(s) 1099-MISC attached. The due date is February 28 of the year following the calendar year in which the withholding occurs.
- Paper documents. Attach Form(s) 1099-MISC to Form RW-3, or if Form RW-3 is not available, attach Form(s) 1099-MISC to the IRS Form 1096 "Annual Summary and Transmittal of U.S. Information Returns" and mail to the Montana Department of Revenue, PO Box 5805, Helena, MT 59604-5805.
- Electronic filing. Establish an online account to transmit the Form(s) 1099 via the File Transfer Service. Use the 1099-MISC format defined by IRS Publication 1220. To report required mineral net royalties to the Montana Department of Revenue use columns 711-722, right justified, reserved for state or filer use, in the 1099-MISC format. Remit Form RW-3 through Taxpayer Access Point (TAP) or mail a paper Form RW-3 to the address listed above.
Last updated 2/7/2012 1:08:47 PM