Summary of Decision issued January 26, 2007
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Case Name: RME Petroleum Company v. Wyoming Department of Revenue
Chevron U.S.A., Inc. v. Department of Revenue, State of Wyoming
The Louisiana Land and Exploration Company; and Burlington Resources Oil & Gas Co., LP v. Wyoming Department of Revenue; Board of County Commissioners of the County of Fremont
Citation: 2007 WY 16
Docket Number: 04-185; 04-190; 04-204
W.R.A.P. 12.09(b) Certification from the District Court of Sweetwater County, (No. 04-185) the Honorable Nena James, Judge
W.R.A.P. 12.09(b) Certification from the District Court of Uinta County, (No. 04-190) the Honorable Dennis L. Sanderson, Judge
W.R.A.P. 12.09(b) Certification from the District Court of Fremont County, (No. 04-204) the Honorable Nancy Guthrie, Judge
Representing Appellants (Petitioners): Lawrence J. Wolfe, Patrick R. Day and Walter F. Eggers, III of Holland & Hart, LLP, Cheyenne, Wyoming. Argument by Mr. Wolfe.
Representing Appellant Chevron USA, Inc.: William J. Thomson, III, Randall B. Reed and Brian J. Hanify of Dray, Thomson and Dyekman, P.C., Cheyenne, Wyoming. Argument by Mr. Thomson.
Representing Appellee (Respondent): Patrick J. Crank, Wyoming Attorney General; Michael L. Hubbard, Deputy Attorney General; Martin L. Hardsocg, Senior Assistant Attorney General; Karl D. Anderson, Senior Assistant Attorney General; Cathleen D. Parker, Senior Assistant Attorney General. Argument by Mr. Anderson.
Date of Decision: January 26, 2007
Louisiana Land: Pursuant to properly promulgated rules the Department of Revenue has defined “direct costs of producing” in Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) to exclude taxes and royalties. This rule is binding upon both the State Board of Equalization and the Department of Revenue. Both agencies have chosen to ignore the rule, and thereby exceeded their statutory authority.
Taxes and royalties are not “direct costs of producing” under the proportionate profits valuation method set forth in Wyo. Stat. Ann. § 39-14-203(b)(vi)(D).
The Board erred in allowing Fremont County to intervene in Burlington’s tax appeals.
RME Petroleum Company adopts the issues presented by Burlington, and states three additional issues: The Court’s decision in Hillard v. Big Horn Coal, 549 P.2d 293 (Wyo. 1976) does not support the Board’s conclusion that taxes and royalties are “direct costs of producing.” The actions of the 2002 Legislature on Senate File 69 do not support the Board’s position. As a tax statute, Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) must be strictly construed.
Chevron U.S.A., Inc. presents the following issues: Whether the Board erred as a matter of law in concluding that Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) unambiguously includes exempt royalties, nonexempt royalties, and production taxes as a direct cost of producing despite the fact that the statute neither includes nor excludes them as a direct cost of producing. Whether the Board erred as a matter of law when interpreting Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) to include production taxes, exempt royalties, and nonexempt royalties as a “direct cost of producing,” when that interpretation is contrary to the Department’s rule and previous policy, is contrary to the legislative history of the statute, results in taxation of exempt federal royalties, and is contrary to canons of statutory construction. Whether Chevron was denied its constitutional right to uniform and equal taxation because it was treated disparately from other producer/processors of natural gas that reported taxable values for production years 1993-1995, and because oil and gas producers are treated differently from other mineral taxpayers within the same class.
Department of Revenue issues: Did the State Board of Equalization properly affirm the Department of Revenue’s application of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D), in which the Department classified production taxes and royalties as direct production costs within the direct cost ratio? Was the Department of Revenue required to institute new rules to correct its previous erroneous interpretation and application of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D)? Did the Supreme Court’s decision in Amoco Prod. Co. v. Wyoming Dep’t of Revenue, 2004 WY 89, 94 P.3d 430 (Wyo. 2004), foreclose the Department of Revenue’s determination that production taxes and royalties are a direct cost of producing within the direct cost ratio of the proportionate profits method? Did the State Board properly affirm the Department of Revenue’s determination that exclusion of production taxes and royalties from the direct cost ratio produces an absurd result and a taxable value which is less than fair market value?
The Board’s decision in Amoco 96-216: The Board concluded that royalties and production taxes are direct costs of producing for purposes of applying the oil and gas proportionate profits formula. When Amoco 96-216 was appealed to the Court, the Department changed its position and accepted the ruling of the Board. Upon review, the Court concluded the county should not have been allowed to intervene. The Court vacated the portion of the Board’s decision that addressed the direct cost ratio issue raised by the county without specifying how royalties and production taxes should be treated under the proportionate profits formula in Wyo. Stat. Ann. § 39-14-203(b)(vi)(D). Although Amoco 96-216 was vacated, the Department thereafter administered the statute in accordance with the Board’s decision.
#04-185 RME: During production years 1996 and 1997, RME was the operator of the Brady Unit in Sweetwater County. Oil and gas production was valued by the Department under the proportionate profits method. After an audit and the Board’s decision in Amoco 96-216, the Department assessed additional severance taxes, based on the inclusion of production taxes and royalties as direct costs of production under the proportionate profits valuation method.
#04-190 Chevron: From 1993 to 1995, Chevron produced oil and gas from property in Uinta and Lincoln Counties. Production was valued under the proportionate profits method. Chevron was not including royalties or production taxes in the direct cost ratio during that time. Later an audit was initiated and prior to when the final determination letters were issued, Amoco 96-216 was decided. Chevron received additional assessments including the severance taxes, interest and increased ad valorem taxable value of the properties. After appeal, the Board upheld the Department’s determinations but ordered that interest accrue only from the date Amoco 96-216 was issued.
#04-204 Burlington: Burlington had three appeals, which were consolidated, regarding valuation under the proportionate profits method where the Department had included production taxes and royalties as direct costs of producing in the formula.
In each of its decisions against Taxpayers, the Board relied upon its decision in Amoco 96-216 and determined that Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) required royalties and production taxes to be treated as direct costs of production. The district courts certified the cases to the Court who accepted them and consolidated them for argument and decision.
Standard of Review: When reviewing cases certified pursuant to W.R.A.P. 12.09(b), the Court applies appellate standards which were applicable to the court of the first instance. At issue in the instant case is the proper interpretation of the statutory proportionate profits formula, a question of law the Court reviews de novo. The Court affirms an agency’s conclusions of law when they are in accordance with the law. When the agency has failed to properly invoke and apply the correct rule of law, the Court corrects the agency’s error.
Discussion: The Department is charged with valuing oil and gas in accordance with Wyo. Stat. Ann. § 39-14-203(b). The Board is an independent quasi-judicial organization with constitutional and statutory duties to equalize valuation and decide disagreements regarding statutory provisions affecting the assessment, levy and collection of taxes. The proportionate profits method is one of the methods authorized by statute to value crude oil, lease condensate or natural gas production not sold in a bona-fide arms length sale at or prior to the point of valuation. See Wyo. Stat. Ann. § 39-14-203(b)(vi)(D). The issue in the case is whether royalties (both exempt and non-exempt) and production taxes are “direct costs of producing”, properly included in both the numerator and denominator of the direct cost ratio. (Follow link to case to see mathematical formula.)
The Department promulgated a rule defining “direct cost of producing” in Section 4b of Chapter 6 of the Department’s rules and regulations. For a number of years the Department did not view production taxes and royalties as fitting within the definition provided by the rule. However, when the Board’s decision in Amoco 96-216 was appealed, the Department abandoned its prior administration of the proportionate profits formula and without altering the language of Rule § 4b, thereafter treated royalties and taxes as direct costs of producing. Consolidated appeals arose in the midst of this administrative about-face. Ultimately, Taxpayers argued that the Board misinterpreted Wyo. Stat. Ann. § 39-14-203(b)(vi)(D). The Court considered whether the statute was ambiguous as a matter of law. The plain language of the statute does not specify that royalties and production taxes are to be either included or excluded as direct costs of producing. Neither of the interpretations urged by the parties was unreasonable and either reading of the statute supplied a plausible legislative intent. Accordingly, the Court found the statutory proportionate profits formula susceptible to varying meanings and therefore, ambiguous.
Although the Court agreed with the Department that the coal and bentonite statutory formulas express a clear legislative intent to exclude royalties and production taxes as direct costs, the Court did not view the comparative silence in Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) as a clear statement of legislative intent. The definitional subsections are absent in the oil and gas formulas. The legislature failed to provide any exclusions, definitions, or directions to identify the direct cost of producing oil and gas.
The Board relied on Hillard to find that as a matter of law, royalties and production taxes were direct costs of producing a mineral. The Court stated the question of the proper components of the direct cost ratio in the proportionate profits method was not decided in Hillard. Rather, Hilllard requires the full value of non-exempt royalties be included in the taxable value of the mineral and suggests that production taxes should be treated similarly.
Taxpayers contend that as defined by Rule § 4b the direct costs of producing do not include royalties and production taxes. They assert the Board failed to consider and give effect to Rule § 4b in rendering its decision. The Court’s finding that the statute is ambiguous requires analysis of the Rule. The Court interprets rules in the same manner as statutes. The Court defers to an administrative agency’s construction of its rules unless that construction is clearly erroneous or inconsistent with the plain meaning of the rules. The Department has applied different interpretations of Rule § 4b over time. The Court rejected the Department’s current interpretation of the Rule because it is contrary to the rule’s plain language. Applying the doctrine of ejusdem generis to Rule, the Court said one could easily conclude the detailed list of costs were not in the same class or of the same nature as royalties or production costs. It did not make sense that a specific type of tax would be listed while the more general tax obligation would be relegated to a catch-all provision. The omission must have been deliberate. The Court found the language to be clear and unambiguous. The Court held that royalties and production taxes should not be included as direct costs of producing in the direct cost ratio of the oil and gas proportionate profits formula. In addition, statutes levying taxes should not be extended by implication beyond the clear import of the language used. The legislature specified how royalties and production taxes were to be treated in the first and final steps of the formula. If the legislature ha intended royalties and production taxes to be included in every step of the formula, the Court would expect to see that intent reflected in the language of the statute.
Other issues: Prior to the Court’s decision in Amoco Production Co., the Board permitted Fremont County to intervene in Burlington’s cases leading to the appeal. Recognizing the holding in Amoco as controlling, the county did not participate in the appeal and appears to have abandoned its status as intervenor. Therefore the Court did not address Burlington’s challenge in that regard. Given the resolution of the instant case, it was not necessary to resolve Chevron’s constitutional challenge or its objection to the assessment of interest.
Holding: The Board erroneously found that Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) unambiguously required royalties and production taxes to be included in the direct cost ratio. This conclusion led the Board to disregard the Department’s Rule § 4b, which was at odds with its statutory interpretation. The language of that rule is clear and does not include royalties and production taxes as direct costs of producing. The Department’s promulgated definition is not consistent with the statue and must be given effect. We find that excluding royalties and production taxes from the direct cost ratio provides a more reasonable interpretation of the statute while giving effect to the Department’s rule. The decisions of the Board were reversed.
J. Burke delivered the decision of the Court.
Link: http://tinyurl.com/2glj4z .
Friday, January 26, 2007
Summary of Decision issued January 26, 2007