Oil and gas taxes on royalty income in North Dakota and Montana

Two different layers

Royalty owners run into taxes in two places. The first is the state production taxes, which are charged on the oil and gas itself and taken out before your share is calculated. The second is income tax on what you actually receive, which you report on your own return. Montana adds a third piece, income tax withholding on royalty payments. This guide takes them in that order.

Each state sets its own rates, and both states change their rules. The numbers below are the ones the agencies published when we read their pages on October 25, 2026.

North Dakota: oil

North Dakota charges two taxes on oil. The state tax department's page describes an oil gross production tax of 5 percent of the gross value at the well, and an oil extraction tax of 5 percent of the gross value at the point of extraction.^[1] The statutes say the same thing. Section 57-51-02 levies five percent of the gross value at the well, and says the tax “attaches to the whole production, including the royalty interest.”^[2] Section 57-51.1-02 sets the extraction tax at five percent and says every owner of any part of the oil extracted, including any royalty owner, is deemed to be engaged in extracting it.^[3]

So for oil that isn't covered by an exemption, the two rates add up to 10 percent of gross value at the well. The tax department lists the exemptions and reductions: low-producing stripper wells are exempt from the extraction tax, incremental production from qualifying secondary and tertiary recovery projects is exempt for five or ten years, and the extraction tax rate is 2 percent for qualified production from wells completed outside the Bakken and Three Forks formations.^[1] The page also says royalty interests in oil from state, federal or municipal holdings, and from American Indian holdings within a reservation boundary, are excluded from the 5 percent gross production rate.^[1]

There's also a trigger price that can raise the rate to 6 percent. Since a 2023 law it applies only to wells inside the exterior boundaries of a reservation and to certain straddle wells.^[1] Wells on the Fort Berthold Reservation are covered by a tribal oil agreement between the state and the Three Affiliated Tribes, and the tax department points readers there for the details.^[1] If your minerals are in McKenzie, Mountrail or Dunn County, ask the operator whether the well is on the reservation.

North Dakota: gas

Gas works differently. The tax on gas is a flat rate per thousand cubic feet, adjusted each year. Under section 57-51-02.2 the rate is four cents times a base rate adjustment, which is the prior calendar year's average of a federal producer price index for gas fuels divided by 75.7. The tax department has to post the new rate by June 1.^[2] For July 1, 2026 through June 30, 2027, its notice sets the rate at $.0655 per mcf.^[4] The statute says the tax attaches to the whole production, royalty interest included.^[2]

One more point from section 57-51-03. The gross production tax is paid in place of local property taxes on the rights attached to producing oil and gas, but the statute says it isn't in lieu of income taxes.^[2]

Seeing the taxes on your statement

North Dakota's rule on royalty statements requires the payor to show the total amount of state severance and other production taxes, along with the owner's share of the total sales value before any tax deductions.^[5] If your stub only shows a net number, you can compare it against the gross line. Our guide to royalty check deductions covers what else belongs on the stub, and the division order guide explains the decimal that applies to your share.

Montana: production tax

Montana taxes oil and gas production as a percentage of gross value. Its Department of Revenue lists a 15.10 percent rate for nonworking interest owners, which includes royalty owners, and the rate is the same across the production categories on its tables.^[6] The statute shows 14.8 percent for nonworking interests, and then adds 0.3 percent for the privilege and license tax and the oil and gas natural resource distribution account.^[7] That's how the two sources reach 15.1.

The department's page says tribal royalties from on-reservation production leased under the Indian Mineral Leasing Act of 1938, and all government royalties, including federal, state, county and municipal ones, are exempt.^[6] The reduced working-interest rates for new wells and stripper wells don't change the nonworking rate.^[6]

Montana: income tax withholding

Montana also requires the payor to withhold state income tax from mineral royalty payments on Montana production. The Department of Revenue's guide says this applies to every type of royalty owner, whether an individual, estate, trust, partnership or corporation, that the amount withheld can be used as a credit against the income taxes the owner owes, and that the payor has to report each owner's royalties on a Form 1099-MISC or 1042-S.^[8]

The rate has changed. The department's November 2025 Employer and Information Agent Guide says Senate Bill 53, passed in 2025, ties the withholding rate on mineral royalties to the highest marginal income tax rate: 5.9 percent in 2025, 5.65 percent in 2026 and 5.4 percent in 2027.^[9] Some of the department's other publications were written before that change and show an older figure, so if a figure you see doesn't match, ask the payor or the department which one applies.

The Department's page describes small-payment relief. With written request and the department's authorization, a payor doesn't have to withhold on a royalty payment under $166, or on payments that annualize to less than $2,000.^[10] That's a request the payor makes, not one you make. The guide adds that the payor has to file the forms for each owner whether or not any tax was withheld.^[8]

Federal income tax

For your federal return, the IRS instructions for Schedule E tell you to report royalties from oil, gas or mineral properties, other than operating interests, on line 4 of Part I. They say a payer should send a Form 1099-MISC if you received $10 or more in royalties during the year, and that you enter the gross royalty income even if state or local taxes were withheld.^[11] The same instructions say that if you have an economic interest in mineral property you may be able to deduct depletion.^[11]

How much of that applies to you depends on your whole return, and on how you came to own the interest. That's the CPA's job, not ours. If the minerals came from an estate, our guide on inherited minerals in North Dakota covers the probate side.

Checking your own numbers

To see how these rates affect a particular royalty, put your decimal and a few assumptions into the royalty estimator. Our guide on what a royalty is worth shows how the pieces fit together. Common questions are also on the FAQ.

A note on our interest

Fort Union buys minerals and royalty interests, so we have a commercial interest in this subject. Nothing in this guide depends on selling to us, and each statement comes from a public source listed below. Our editorial standards explain how we source and review our pages. If you ever want to know what we'd pay for your interest, the offer page is the way to reach us.

Sources

These are the sources behind this guide, in the order we first cite them. We read the parts of each one that this guide relies on, on October 25, 2026.

1. Oil and Gas Severance Tax — North Dakota Office of State Tax Commissioner, page read October 25, 2026.
2. N.D.C.C. chapter 57-51, Oil and Gas Gross Production Tax (sections 57-51-02, 57-51-02.2 and 57-51-03) — North Dakota Legislative Branch, Century Code, parts read October 25, 2026.
3. N.D.C.C. chapter 57-51.1, Oil Extraction Tax (section 57-51.1-02) — North Dakota Legislative Branch, Century Code, parts read October 25, 2026.
4. Gas Tax Rate Notice, fiscal year 2027 — North Dakota Office of State Tax Commissioner, notice dated June 1, 2026.
5. N.D.A.C. chapter 43-02-06, Royalty Statements — North Dakota Legislative Branch (Administrative Code), read October 25, 2026.
6. Oil and Natural Gas Production Tax — Montana Department of Revenue, page read October 25, 2026.
7. MCA 15-36-304, Production tax rates imposed on oil and natural gas — Montana Legislature, read October 25, 2026.
8. Montana Mineral Royalty Withholding Tax Guide (V2, March 2025) — Montana Department of Revenue, read October 25, 2026.
9. Montana Employer and Information Agent Guide (V4, November 2025) — Montana Department of Revenue, read October 25, 2026.
10. Mineral Royalty Withholding — Montana Department of Revenue, page read October 25, 2026.
11. 2025 Instructions for Schedule E (Form 1040) — Internal Revenue Service, read October 25, 2026.