Summary 2009 WY 139

Summary of Decision issued November 12, 2009

Summaries are prepared by Law Librarians and are not official statements of the Wyoming Supreme Court

Case Name: Exxon Mobil Corp. v. The State of Wyoming, Dept. of Revenue

Citation: 2009 WY 139

Docket Number: S-08-0098

W.R.A.P. 12.09(b) Certification from the District Court of Sublette County, Honorable Norman E. Young, Judge

Representing Appellant (Petitioner): Patrick R. Day and Walter F. Eggers, III, Holland & Hart, Cheyenne, Wyoming; Brent R. Kunz, Hathaway & Kunz, Cheyenne, Wyoming

Representing Appellee (Respondent): Bruce A. Salzburg, Attorney General; Michael L. Hubbard, Deputy Attorney General; Martin L. Hardsocg, Senior Assistant Attorney General.

Issues: Whether the State Board of Equalization erred in determining that ExxonMobil’s Black Canyon facility is an “initial dehydrator” for point of valuation purposes under Wyo. Stat. Ann. § 39-14-203(b)(iv). Whether the State Board of Equalization correctly affirm the Department of Revenue’s method of deducting post-plant transportation costs and determination that post-plant transportation costs are not included in the direct cost ratio pursuant to Wyo. Stat. Ann. § 39-14-203(b)(vi)(D).

Holdings: The statutory terms initial dehydrator and processing facility, as used in Wyo. Stat. Ann. § 39-14-203(b)(iv), are ambiguous. Because the statute is ambiguous, the principles of statutory construction must be relied upon in order to ascertain the legislative intent.

Tax statutes are to be construed in favor of the taxpayer and are not to be extended absent clear intent of the legislature. In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government and in favor of the citizen. Thus, taxes may not be imposed by any means other than a clear, definite and unambiguous statement of legislative authority.

The severance tax is imposed at the point where “the production process is completed.” Wyo. Stat. 39-14-203(b)(ii). Historically, the term “production” refers to the severance of minerals from the ground. Accordingly, the severance tax was traditionally imposed on the value of the mineral at the point where it is severed from the ground. For natural gas, severance is generally considered to occur at the wellhead. The legislature may choose to adjust or clarify the precise point of valuation, and over the years it has enacted legislation to do that. But unless the statute includes a clear expression of legislative intent to shift the point of valuation away from the wellhead, the statutory language should be construed to conform as nearly as possible to the basic severance tax concept of valuation at the wellhead.

In the present action, the Black Canyon facility is separated, physically and functionally, from the wellheads. It does not play a part in removing the gas from the ground, but instead in handling the gas after it has been removed from the ground and gathered at the facility. On this basis, it seems inappropriate to consider Black Canyon part of the production process. It seems more appropriate to consider Black Canyon to be part of the post-production operations. Based on these considerations, the construction of Wyo. Stat. 39-14-203(b)(iv) must be that the legislature’s intent was not to classify Black Canyon as an initial dehydrator as that term is used in the first sentence, but rather to consider Black Canyon a processing facility as that term is used in the second sentence of the statute.

Thus, ExxonMobil’s Black Canyon is not an “initial dehydrator,” as that term is used in the first sentence of Wyo. Stat. 39-14-203(b)(iv), and the correct point of valuation for severance taxes is not the outlet of the Black Canyon facility. Black Canyon is instead a “processing facility” as that term is used in the second sentence of the statute, and the proper point of valuation is “at the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first.”

ExxonMobil asserts that there is a custody transfer meter located at each wellhead, so the proper point of valuation is at the inlet to these custody transfer meters. The record, however, does not establish with sufficient certainty whether those meters are custody transfer meters or volume meters. If they are volume meters, they are not the proper points of valuation. The Court is unable to resolve this issue based on the record and will remand this case to the Board to determine the correct point of valuation in accordance with this opinion.

Under Wyoming law, the fair market value of natural gas production is determined at the point when the production process has been completed. Wyo. Stat. 39-2-208(a). Severance taxes are to be levied on the “fair market value” of the mineral “after the production process is completed.” Wyo. Stat. 39-14-203(b)(ii). If it is unusually expensive to transport a mineral from the point of production to the point of sale, then that mineral has a lower fair market value at the point of production. In the present action, if the carbon dioxide component of the raw gas stream is extremely expensive to transport, then the value of the carbon dioxide at the point of production is correspondingly low. If the value of the carbon dioxide is low, that reduces the value of the entire gas stream at the point of production.

The statutory formula for the proportionate profits method explicitly includes the “direct cost of producing, processing and transporting the minerals” in the denominator of the direct cost ratio. Wyo. Stat. Ann. § 39-14-203(b)(vi)(D). The use of the plural, “minerals,” indicates that the transportation costs for all components of the raw gas stream must be included in the formula. The statute does not allow the Department to include the direct costs of some minerals and exclude the direct costs of others. While the Department may be correct that including the high costs of post-processing transportation for carbon dioxide results in a lower taxable value for the entire gas stream, that result is not absurd but rather a reflection of the true market value of the gas stream at the point of production. The result is entirely consistent with the mandate of the Wyoming Constitution that “the product of all mines shall be taxed in proportion to the value thereof.” Wyo. Const. art. 15, § 3.

Wyo. Stat. Ann. § 39-14-201(a)(xv) explicitly provides that, “For the purposes of taxation, the term natural gas includes products separated for sale or distribution during processing of the natural gas stream including, but not limited to plant condensate, natural gas liquids and sulfur.” Methane, carbon dioxide, and sulfur are all products separated from the natural gas stream, and all are included within the definition of natural gas for purposes of taxation. Because the Department levies taxes on the value of each individual product, it must also consider the costs of transporting each individual product.

The key to resolving this dispute, is to determine whether post-processing transportation costs are part of the “direct cost of producing, processing and transporting the minerals.” If so, then Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) directs that they be included in the denominator of the direct cost ratio. The statutes and regulations provide no definition of the term “indirect costs” as applied to natural gas. As applied to coal, however, indirect costs are defined to include “allocations of corporate overhead, data processing costs, accounting, legal and clerical costs, and other general and administrative costs which cannot be specifically attributed to an operational function without allocation.” Wyo. Stat. 39-14-103(b)(vii)(D). Applying this statutory definition, the costs of mining permits and environmental impact statements are indirect costs because they benefit the entire operation and cannot be specifically attributed to any coal mining or processing Although this statutory definition applies directly to coal, it is helpful in defining indirect costs of producing natural gas.

The post-processing transportation costs for methane, carbon dioxide, and sulfur are not general administrative costs that benefit the entire project. They are directly attributable to the function of transporting those mineral products. Reading this statutory definition of indirect costs together with the regulatory definition of direct costs, must be concluded that post-processing transportation costs are not indirect costs, but direct costs. Accordingly, post-processing transportation costs must be included in the denominator of the statutory formula for calculating the fair market value of the minerals using the proportionate profits method.

Even if these post-processing transportation costs were indirect costs, however, the Department has provided no case law support for the approach of subtracting them from total sales. The proportionate profits method adopted by the legislature recognizes that indirect costs occur proportionately over all functions, production, processing, and transportation, in the same ratio as direct costs.” Accordingly, Wyo. Stat. 39-14-203(b)(vi)(D) requires a calculation of the ratio of direct costs of production to the direct costs of production, processing, and transportation. It does not require a calculation of indirect costs in this formula, but instead presumes that indirect costs occur in the same ratio as direct costs. The statutory formula, does not mention indirect costs, and therefore cannot be interpreted to authorize the Department’s approach of subtracting indirect costs from total sales.

The Department has cited no statutory or regulatory authority for its approach of subtracting post-processing transportation costs directly from the amount received in sales. The applicable statute, Wyo. Stat. Ann. § 39-14-203(b)(vi)(D), is explicit about what is included in this step of the formula: “The total amount received from the sale of the minerals minus exempt royalties, nonexempt royalties and production taxes.” It does not indicate, in any way, that post-processing transportation costs are also subtracted from the sales amount.

Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) is unambiguous on the correct way to account for post-processing transportation costs. Post-processing transportation costs are direct costs of producing, processing and transporting the minerals. They must therefore be included in the denominator of the direct cost ratio under the proportionate profits method.

Reversed and remanded.

J. Burke delivered the opinion for the court.

Link: http://tinyurl.com/yc5ar4h .

J. Hill dissented and would affirm the BOE’s order. The majority opinion accorded neither the Department of Revenue (DOR) nor the Board of Equalization (BOE) the full benefit of the applicable standards of review. Neither did it apply a complete statement of the applicable principles of statutory construction for revenue statutes such as those at issue here.

The fair market value of natural gas for severance and ad valorem tax purposes is determined “after the production process is completed.” Wyo. Stat. 39-14-203(b)(ii) (2009). Determining the point of valuation is of particular significance because “expenses incurred by the producer prior to the point of valuation are not deductible in determining the fair market value. Thus, because certain expenses “downstream” of the point of valuation are deductible, it is to the producer’s benefit to have the point of valuation determined “upstream” as far as possible. That is the instant case in a nutshell. Here Exxon seeks an “upstream” point of valuation instead of the “downstream” point of valuation determined by the DOR and confirmed by the BOE.

Questions of law are reviewed de novo. The majority bypassed the substantial evidence part of this standard of review by characterizing the issue here as one of “statutory construction” and, thus, a pure question of law.

The Department’s valuations for state-assessed property are presumed valid, accurate, and correct. This presumption can only be overcome by credible evidence to the contrary. In the absence of evidence to the contrary, it is presumed that the officials charged with establishing value exercised honest judgment in accordance with the applicable rules, regulations, and other directives that have passed public scrutiny, either through legislative enactment or agency rule-making, or both.

The petitioner has the initial burden to present sufficient credible evidence to overcome the presumption, and a mere difference of opinion as to value is not sufficient. If the petitioner successfully overcomes the presumption, then the Board is required to equally weigh the evidence of all parties and measure it against the appropriate burden of proof. Once the presumption is successfully overcome, the burden of going forward shifts to the DOR to defend its valuation. The petitioner, however, by challenging the valuation, bears the ultimate burden of persuasion to prove by a preponderance of the evidence that the valuation was not derived in accordance with the required constitutional and statutory requirements for valuing state-assessed property. Moreover, in examining the propriety of the valuation method, the Court’s task is not to determine which of the various appraisal methods is best or most accurately estimates fair market value; rather, it is to determine whether substantial evidence exists to support usage of the chosen method of appraisal.

J. Hill rejected the majority’s conclusion that because the industry and the DOR have different views as to what an “initial dehydrator” and a “processing facility” are that the statute is, therefore, ambiguous and the Court is at liberty to resolve the difference of opinion. His examination of the findings of the BOE, convinced him that the DOR correctly identified the Black Canyon facility as an “initial dehydrator,” even though it may also perform some other miscellaneous functions.

The majority also employed a very general rule to the effect that revenue statutes must be strictly construed in favor of the taxpayer. However, the revenue legislation must also be reasonably construed so that their underlying purpose is not destroyed. Where an interpretation places undue importance on words subordinate to the plainly apparent objective of a statute in order to reward persons who resort to some unusual or not reasonably to be expected procedure, the court should not accept that interpretation.

The long range objective of all tax measures is to promote a stable social order by providing financial support to cover the expenses of the government and its programs. Although different forms of taxation may sometimes produce individual hardships, an overly biased interpretation of tax laws for the benefit of the taxpayer may result in the loss of revenue at the expense of the government and operate to the disadvantage of others contributing to its support. The better rule is that statutes imposing taxes and providing means for the collection of the same should be construed strictly in so far as they may operate to deprive the citizen of his property by summary proceedings or to impose penalties or forfeitures upon him; but otherwise tax laws ought to be given a reasonable construction, without bias or prejudice against either the taxpayer or the state, in order to carry out the intention of the legislature and further the important public interests which such statutes subserve.

Finally, J. Hill did not agree with the majority’s conclusion that the DOR and the BOE applied the proportionate profits method incorrectly.

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