FOR THE STATE OF WYOMING



LANCE OIL & GAS COMPANY FROM A          )         Docket No. 2001-117



DEPARTMENT OF REVENUE                          )

(Audit Period 1997-2000)                                 )



                                                  FINDINGS OF FACT

                                              CONCLUSIONS OF LAW

                                               DECISION AND ORDER






Walter F. Eggers, III, and Lawrence J. Wolfe of Holland & Hart for Lance Oil and Gas Company, Petitioner.


Cathleen D. Parker, Assistant Attorney General, for the Department of Revenue (Department).





Pursuant to notice duly given to all parties in interest, this matter came on for hearing on the 26th day of March, 2002, at 10:05 a.m. in Hearing Room 1722, Herschler Building, 122 West 25th Street, Cheyenne, Wyoming and was heard by the State Board of Equalization (Board) consisting of Chairman Edmund J. Schmidt, Vice-Chairman Roberta A. Coates and Board Member Sylvia Lee Hackl, with Gayle R. Stewart, Hearing Officer, presiding. This appeal arises from a decision of the Department assessing Petitioner on underpayment of sales and use tax. 





Upon application of any person adversely affected, the Board is mandated to review final Department actions concerning state excise taxes, and "[h]old hearings after due notice in the manner and form provided in the Wyoming Administrative Procedure Act [Wyo. Stat. 16-3-101 through 16-3-115] and its own rules and regulations of practice and procedure." Wyo. Stat. 39-11-102.1(c)(viii).



The Board is required to "[d]ecide all questions that may arise with reference to the construction of any statute affecting the assessment, levy and collection of taxes, in accordance with the rules, regulations, orders and instructions prescribed by the department." Wyo. Stat. 39-11-102.1(c)(iv).  The rules of practice and procedure for appeals before the Board involving tax matters contemplate appeals from final administrative decisions of the Department.  Rules, Chapter 2, 3, Wyoming State Board of Equalization.  The rules require appeals to be filed with the Board within thirty days of any final administrative decision.  Rules, Chapter 2, 5, Wyoming State Board of Equalization.





This is an appeal by Lance Oil & Gas Company from an audit assessment by the Excise Tax Division of the Department. The assessment  imposed sales tax on services performed for the period of October 1, 1997, to September 30, 2000, to install underground natural gas gathering lines, which carry gas from coal bed methane wells to  meters at the “pod.”


Petitioner contends that gathering lines once installed are real property under Wyoming Statute 39-15-101(v)(A),and are not subject to sales tax under Wyoming law.


The Department contends that the services were “equipping for production” of gas and are thereby taxable under Wyoming Statute 39-15-103(a)(i)(K). The Department also contends that prior to the amendment of Wyoming Statute 39-15-101(v) in 1999, the services were services on tangible personal property and were therefore taxable.


A related issue is whether interest is due on the taxes or whether the Department must waive interest for “good cause” pursuant to Wyoming Statute 39-15-108(b)(iii).


The Board finds that sales tax is due because the services were part of the “equipping for production” and are therefore taxable pursuant to Wyoming Statute 39-15-103(a)(i)(K).







1.     Petitioner and Williams Production RMT Company, through a joint venture, as the producer, manage a coal bed methane project in the Powder River Basin in Campbell County, Wyoming. Petitioner is a wholly-owned exploration and production subsidiary of Western Gas. Petitioner’s primary areas of operation are Wyoming and Colorado. Petitioner owns and operates the wells at issue in this appeal. [Transcript, Vol. I, pp. 20-23, 46].



2.     The Department of Audit conducted an audit of Petitioner’s company for the period October 1, 1997, through September 30, 2000. The services at issue are the installation of gathering lines to coal bed methane wells and the taxation of such services under Wyoming Statute 39-15-103(a)(i)(J) and (K).  [Exhibits 501 and 502].


3.     The Department of Audit issued final audit findings on May 14, 2001, indicating  Petitioner owed $81,221.40 in taxes plus interest and penalty. [Exhibit 501].


4.     As a result of the audit, the Department on May 28, 2001, assessed Petitioner $51,228.01 in taxes and interest after credit for a payment received from Petitioner. [Exhibit 500].


5.     Petitioner filed its Notice of Appeal on June 26, 2001. [Stipulated Updated Summary of Uncontroverted Facts].


6.     It is the Department’s position that gathering lines are necessary for a well to produce and therefore, the installation of those gathering lines are part of “equipping for production” pursuant to Wyoming Statute 39-15-103(a)(i)(K).


7.     Similar service providers in Wyoming have been assessed sales tax for the installation of gathering/flow lines attached to the wellhead as “equipping for production” under Wyoming Statute 39-15-103(a)(i)(K). This includes oil, natural gas, and coal bed methane companies. [Transcript Vol. I, pp. 69, 117, 120].


8.     The Department has not undertaken formal rule-making to define its interpretation of “equipping for production” to include gathering lines to the meter. [Transcript Vol. I, pp. 75, 78, 91, 106, 165].


Gathering Lines Are Part of Equipping for Production


9.     When drilling a coal bed methane well, the producer selects an appropriate site for a well based on geologic, seismic and conventional core data. The producer drills a well using a water well drilling rig, as opposed to a larger oil and gas well drilling rig, because coal bed methane wells are much shallower than other traditional gas wells. [Transcript, Vol. I, pp. 24-25].


10.     The producer drills an initial hole and sets ten-and-three quarter inch casing to the bottom of the hole. The producer then displaces cement down the hole around the casing to seal the area and prevent cross-communication of aquifers. This process is called “cementing.” [Transcript, Vol. I, p. 26; Exhibit 505].


11.     The producer installs a diverter on top of the surface pipe. Once the diverter is installed, the producer continues drilling until the coal is reached. The producer then obtains samples from the bottom of the hole to confirm the drill has reached hard coal that can support casing. [Transcript, Vol. I, pp. 27-30; Exhibit 505].

12.     Once the desired drilling depth is reached, seven-inch casing is placed into the hole to the top of the coal. The producer again cements around the casing from the coal to the surface. After the cement sets, the producer drills again with a six-and-one quarter inch bit into the coal. This is the “completing process.” [Transcript, Vol. I, pp. 27-30;  Exhibit 505].


13.     Next, the producer engages in the “logging” process. The producer rigs-up an electric logging truck that takes a picture of the interior of the well with a gamma ray casing collar log. Looking at this picture, the producer logs the location of the sands and coals in the well, and confirms that the casing set point is properly located. [Transcript, Vol. I, pp. 30-31; Exhibit 505].


14.     The producer inserts down-hole equipment into the well that includes a submersible pump. The pump moves water from the bottom of the well to the surface.   [Transcript, Vol. I, pp. 33-34].


15.     The producer then expands the bottom of the hole through an “underreaming” process that improves the efficiency of the pump.  [Transcript, Vol. I, pp. 30-32].


16.     Following the “underreaming” process, the producer blows out the well with air. This process removes solids from the well that accumulate during the drilling process. [Transcript, Vol. I, p. 32].


17.     Above the surface, the producer installs a wellhead or “Christmas tree.” The wellhead secures the well and is equipped with valves for both the gas outlet and water outlet.   [Transcript, Vol. I, pp. 33-34].


18.     The producer connects the well to an electric power source to run the pump. [Transcript, Vol. I, pp. 33-34].


19.     Producers might also “stimulate” the well when it is almost ready for production.  The producer stimulates the well by pumping water down the well and into the coal formation. This process flushes the cleat system below the surface and dilutes any clays or solids that may be in the system, which in turn makes the well more efficient. [Transcript, Vol. I, pp. 34-35].


20.     A valve is attached at the downstream side of the gas valve to a gathering line made of polyethylene pipe.  The gathering line, which takes the gas from the well, is buried. The gathering line goes from the well to a central point or a pod. [Transcript, Vol. I, pp. 34-35].


21.     Meters could be placed at the well. However, Petitioner places the meters at the central pod to avoid numerous roads to each well. This saves pumper time and it is economical by saving on labor to drive to each well. Petitioner’s gathering lines are as long as six miles. [Transcript, Vol. I, pp. 41, 62].


22.     The Wyoming Statutes specify that when valuing natural gas for severance and ad-valorem tax purposes, production is complete when gas travels through the gathering lines and enters the custody transfer meter. Wyo. Stat. 39-14-203(b)(iv).


23.     The Department decided the initial point of metering would constitute the “point of taxability” for sales tax purposes. In other words, services on any property associated with a well located upstream of the initial meter would be subject to sales tax. Conversely, services on property located downstream of the initial meter would not be subject to sales tax.  [Transcript, Vol. I, p. 68].


24.     The Department was consistent in applying sales tax to services on gathering lines prior to the initial meter. The Department advised various taxpayers in writing that such services were taxable. [Exhibits 510 and 511].


25.     Gathering lines do not make a well produce but are necessary for a well to produce gas for sale. [Transcript, Vol. I, p. 124]. Therefore, the installation of gathering lines is  part of “equipping for production” pursuant to Wyoming Statute 39-15-103(a)(i)(K). [Transcript, Vol. I, pp. 127, 134, Exhibits 510, 511 and 513].


26.     Industry publications support the conclusion that gathering lines are necessary for production.  Pennaco Energy, a producer of coal bed methane, published a booklet in 2000 that sets out the chronological order for a well to produce. The motor, switch box, pump, and lines are all installed prior to gas being produced from the well. This indicates the necessity of the installation of this equipment for production purposes. [Exhibit 508, p. 105].


27.     The Powder River Information Council publication, Coal Methane Development Information, is consistent with the position that gathering lines are necessary for production. [Exhibit 509, p. 110].


28.     This appeal concerns the Department’s audit assessment of Petitioner for the time period between October 1, 1997 and September 30, 2000. In its assessment, the Department decided that services to gathering lines are subject to sales tax. [Transcript, Vol. I, pp. 56-57; Exhibits 103 and 104].


29.     Wyoming Statute 39-15-103 (a)(i)(K) has been amended to remove the laundry list of taxable services and provide a bright line test, but it was not effective until July 1, 2002. Wyoming Session Law 2002, Chapter 37.


The Department Contends Gathering Lines Were Taxable as Real Property


30.     Prior to July 1, 1999, Wyoming Statute 39-1-101(a)(xiv) defined real property as, “land and appurtenances, including structures, affixed thereto.” [Transcript Vol. I, pp. 98-99].


31.     The Board and the Wyoming Supreme Court have ruled gathering lines may be tangible personal property. [Exhibits 100 and 101] Wyo.  Stat.  39-15-103(a)(i)(K), and In the Matter of the Appeal of Amoco Production Company, Wyoming State Board of Equalization, Docket No. 98-170(June 18, 1999); Amoco Production Co. v. Wyoming State Board of Equalization, 1999 WL 418051, 15 P.3d 728 (Wyo. 2001).


32.     The gathering lines at issue are buried. [Transcript, Vol. I pp. 38-39].


33.     During the time period of the audit, the statutory definition of real property for sales tax purposes changed. Section 39-1-101(a)(xiv) was recodified and a provision was added defining real property in more detail. As of July, 1999, Wyoming Statute 39-15-101(a)(v) defines real property as:


[L]and and appurtenances, including structures affixed thereto. An article shall be considered real property if:


(A) It is buried or embedded; or


(B) It is physically or constructively annexed to the real property; and


(C) It is adapted to the use of the real property; and


(D) Considering the purpose for which the annexation was made, one can reasonably infer that it was the intent of the annexing party to make the article a permanent part of the real property.


[Transcript, Vol. I pp. 98-99, 129, 187].


Is Interest Due?


34.     Petitioner relied on a letter sent to Presidio Oil Company on July 24, 1991, in support of its position not to pay sales tax on the gathering line services. [Transcript, Vol. I, pp. 52- 53; Exhibits 100, 101].


35.     The letter to Presidio Oil Company is not applicable because it addressed lines to a cryogenic processing plant, and not gathering lines to the coal bed methane gas meter. Furthermore, the language in the statute at the time of the letter did not refer to “equipping for production” as it does now.


36.     Petitioner did not request a ruling from the Department regarding whether services to install gathering lines were taxable. [Transcript, Vol. I, pp. 96-97, 133].



37.     Any discussion above or Conclusion of Law below which includes a finding of fact may also be considered a Finding of Fact and is therefore incorporated herein by this reference.





38.     The letter of appeal by Petitioner was timely filed and the Board has jurisdiction to determine this matter. [Stipulated Updated Summary of Uncontroverted Facts].


39.     The applicable rules provide in relevant part as follows:


Chapter 2, 20. Burden of Going Forward; Burden of Persuasion. 


Except as specifically provided by law or in this section, the Petitioner shall have the burden of going forward and the ultimate burden of persuasion, which burden shall be met by a preponderance of the evidence.  If Petitioner provides sufficient evidence to suggest the Department determination is incorrect, the burden shifts to the Department to defend its action. For all cases involving a claim for exemption, the Petitioner shall clearly establish the facts supporting an exemption.  In proceedings involving the question of whether or not there is a taxable event under Wyoming law, the Petitioner shall have the burden of going forward and the Department shall have the ultimate burden of persuasion.


The Services Performed on the Gathering Lines Were Taxable Because They Were Services That Were “Equipping for Production”


40.     The applicable statute, Wyoming Statute 39-15-103(a) provides in relevant part:


(a) Taxable event. The Following shall apply:


(i)Except as provided by W.S. 39-15-105, there is levied an excise tax upon:


(J) the sales price paid for services performed for the repair, alteration or improvement of tangible personal property;


(K) The sales price paid for contract seismographic surveying, contract geophysical surveying and other contract geophysical exploration operations calculated to reveal the existence of geologic conditions favorable to the accumulation of oil or gas, and for all services rendered in and all types of coring, logging, testing, stimulating, perforating, cementing, completing, recompleting, repairing, equipping for production or abandonment, and all other services in completing or attempting to complete any well for production of oil or gas or as an injection or disposal well for the injection of water, gas, air, stem or other substances into any underground stratum, including but not limited to all types of logging, testing, stimulating, perforating or cementing any such well or formation encountered therein;


(emphasis added).


41.     The installation of gathering lines was properly subject to sales tax as “equipping for production.”  Wyo. Stat 39-15-103(a)(i)(K).


42.     Wyoming Statute 39-15-103(a)(i)(K) does not differentiate between real and personal property for purposes of taxation of services. In fact, the specifically enumerated services, including coring, logging and testing, are services that can only be performed on real property.


43.     Gathering lines are not necessary to bring the gas to the surface of the ground but they are necessary for the gas to be produced for sale. If there were no gathering lines then the gas would be vented and no sale could occur. Because the gathering lines are necessary for the production of oil and/or gas, the installation of those gathering lines is properly considered “equipping for production” and is taxable. Wyo. Stat 39-15-103(a)(i)(K).


44.     Petitioner incorrectly asserted the gathering lines are not necessary for production because the well is equipped when the vertical portion of the well is completed. Petitioner also contends the well is actually producing prior to the installation of the lines, because the well is producing water and venting gas. Those activities are not producing gas.


45.     Wyoming Statute 39-15-103(a)(i)(K), references the production of gas or oil, not water, therefore it is not production under the statute to produce water. Likewise, it is not production to vent gas. The only relevant production is readying gas or oil for sale. By limiting “equipping for production” to the vertical well, Petitioner is interpreting “completion” and “equipping for production” to mean the same thing. This argument makes the terms superfluous, and renders “equipping for production” inoperative. The Wyoming Supreme Court has held that a statute must be interpreted so no part will be superfluous or inoperative. State Board of Equalization v. Cheyenne Newspapers, Inc., 611 P.2d 805 (Wyo. 1980).


46.     The language of Wyoming Statute 39-15-103(a)(i)(K), imposing an excise tax on the sales price paid for services to equip a well for production, is clear and unambiguous. A statute is unambiguous if its wording is such that reasonable persons are able to agree


as to its meaning with consistency and predictability. General Chemical Corporation v. Wyoming State Board of Equalization, 819 P.2d 418, 420 (1991).


47.     Petitioner argues that the statutory construction principle ejusdem generis supports its interpretation of Wyoming Statute 39-15-103(a)(i)(K), that only vertical work on the well is taxable. This is incorrect. The term “equipping for production” is not a general term in the statute. The general term is “all other services in completing or attempting to complete any well for production of oil or gas.” Thus, the more specific terms of “coring, logging, testing, stimulating, perforating, cementing, completing, recompleting, repairing, and equipping for production” modify “all other services.” The term “equipping for production” is specific. A reasonable person should understand that in this context, it means the steps necessary so that saleable gas is not vented, but prepared for sale.


48.     The language of the statute is clear and unambiguous and it would be impermissible for this Board to substitute our interpretation. As the Supreme Court stated in State ex. rel. Department of Revenue v. Buggy Bath Unlimited, Inc., 18 P.3d 1182, 1187 (Wyo. 2001):


When the words used are clear and unambiguous, a court risks an impermissible substitution of its own view, or those of others, for the intent of the legislature if any effort is made to interpret or construe statutes on any basis other than the language invoked by the legislature... if the language selected by the legislature is sufficiently definitive, that language establishes the rule of law.


49.     The placement of the meter as the physical point for determining when “equipping for production” ceases to be taxable is reasonable given the surrounding facts and is consistent with Wyoming Statute 39-2-208(b)(ii) (recodified as Wyo. Stat. 39-14-203(b)(iv)).


The Services Were Performed to Real Property and Not Personal Property and Are Not Taxable Under Wyo. Stat. 39-15-103(a)(i)(J).


50.     Services to tangible personal property are taxable under Wyoming Statute 39-15-103(a)(i)(J). Therefore, if the gathering lines are tangible personal property then the services are taxable.


51.     Prior to July 1, 1999, Wyoming Statute 30-1-101(a)(xiv) defined real property as “land and appurtenances, including structures, affixed thereto.”


52.     The Wyoming Supreme Court has held that gathering lines are tangible personal property for ad-valorem tax purposes in the case of Amoco Production Company v. Wyoming State Board of Equalization, 2001 WY 1, Paragraph 8, 15 P.3d 728 (Wyo. 2001).


53.     Effective July 1, 1999, Wyoming Statute 39-1-101(a)(xiv) was recodified as 39-11-101(a)(xv). In addition to the recodification, a provision was added to the sales tax statutes defining real property in more detail as:

[L]and and appurtenances, including structures affixed thereto. An article shall be considered real property if:


(A) It is buried or embedded; or


(B) It is physically or constructively annexed to the real property; and


(C) It is adapted to the use of the real property; and


(D) Considering the purpose for which the annexation was made, one can reasonably infer that it was the intent of the annexing party to make the article a permanent part of the real property.


54.     The gathering lines are buried and are real property under the new definition of Wyoming Statute 39-11-101(a)(xv).


55.     In the 1999 Session Laws that announced the new definition of real property, the Legislature explained its 1999 revisions to the sales tax statutes, including the amended definition of “real property,” were not intended to change the law: “This act is intended as a clarification of existing law.” [Exhibit 106, p. 17 D]. (emphasis added). The definition of “real property” for excise tax purposes as it exists in the current sales tax statutes applied prior to the legislative action in 1999. As a result, Petitioner’s gathering lines were real property for the entire audit period.


56.     The gathering lines at issue in this case are real property and would not be subject to sales tax under Wyoming Statute 39-15-103(a)(i)(J).  However, they are subject to sales tax as “equipping for production” under Wyoming Statute 39-15-103(a)(i)(K).  Wyoming Statute 39-15-103(a)(i)(J) is a general statute dealing with the taxation of real property.  Wyoming Statute 39-15-103()(i)(K), on the other hand, deals specifically with taxation of services relating to equipping a well for production.  Thus, the latter controls over the former, under the long-standing rule that provisions of a specific act control over a general law.  Dept. of Revenue & Taxation v. Irvine, 589 P.2d 1295, 1299 (Wyo. 1979); see also State ex rel. Dept. of Revenue v. Buggy Bath, 18 P.3d 1182, 1189 (Wyo. 2001).


Interest Is Due On the Tax


57.     Petitioner relied on the letter that Presidio, Petitioner’s predecessor in the wells, had received exempting gathering lines used to bring gas to a processing plant. [Exhibits 100 and 101]. Presidio inquired about gathering lines to a processing plant, not gathering lines from a wellhead. Furthermore, the letter did not discuss the relevant statute dealing with “equipping for production.”  Therefore, both the facts and the law are different, and Petitioner’s reliance on this letter is misguided and unreasonable.


58.     Once it is established Petitioner is liable for the tax,  the Department has authority to waive interest for good cause. Wyo. Stat. 39-15-108(b)(iii). 


59.     Petitioner failed to show good cause because it failed to ask for an opinion from the Department and instead relied on a letter to its predecessor which is distinguishable from the present facts.




IT IS THEREFORE HEREBY ORDERED:  The Assessment by the Department of tax and interest is hereby affirmed.



Pursuant to Wyoming Statute 16-3-114 and Rule 12, Wyoming Rules of Appellate Procedure, any person aggrieved or adversely affected in fact by this decision may seek judicial review in the appropriate district court by filing a petition for review within 30 days of the date of this decision.


Dated this_25th day of September, 2002.





______________________________                                                                           Edmund J. Schmidt, Chairman





Roberta A. Coates, Vice Chairman





Sylvia Lee Hackl, Member



Wendy Soto, Executive Secretary