BEFORE THE STATE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEAL OF )
MTG OPERATING COMPANY FROM AN ) Docket No. 2002-46
AUDIT ASSESSMENT DECISION BY THE )
MINERAL DIVISION OF THE DEPARTMENT )
OF REVENUE (Production years 1997-1999 )
Caballo, Hoe Creek, Bone Pile & Marquiss )
fields )
FINDINGS OF FACT, CONCLUSIONS OF LAW, DECISION AND ORDER
APPEARANCES
Randal T. Cox, Attorney at Law, Gillette, Wyoming, for MTG Operating Company, Petitioner.
Martin L. Hardsocg, Senior Assistant Attorney General, Wyoming Attorney General’s Office, for the Department of Revenue, Respondent (Department).
DIGEST
This matter came on for hearing on February 18 and 19, 2003, before the State Board of Equalization (Board), consisting of Edmund J. Schmidt, Chairman, and Roberta A. Coates, Vice Chairman (Chairman at the time of the Decision and Order), constituting a quorum of the Board, with Gayle R. Stewart acting as Hearing Officer. Chairman Schmidt resigned from the Board prior to the Decision and Order. Vice Chairman Alan B. Minier and Board Member Thomas R. Satterfield have considered this matter by reviewing the file, hearing transcript and exhibits, the proposed findings of facts and conclusions of law submitted by the parties and participated in this Decision and Order. This appeal arises as a result of an audit of Petitioner’s production of coal bed methane gas from October, 1997 through December, 1999 and the Department’s assessment of additional severance taxes and certification of increased value for ad valorem tax purposes based on the audit.
JURISDICTION
The Board shall review final decisions of the Department on application of any interested person adversely affected. Wyo. Stat. Ann. § 30-11-102.1(c). Taxpayers are specifically authorized to appeal final decisions of the Department concerning oil and gas valuation amendments. Wyo. Stat. Ann. § 39-14-209(b)(v). The taxpayer’s appeal must be filed with the Board within thirty days of the Department’s final decision. Wyo. Stat. Ann. § 39-14-209(b)(iv); Wyoming State Board of Equalization Rules, Chapter 2 § 5(a). This case arises from the Department of Revenue’s assessment of additional severance taxes and increase in taxable valuation related to Petitioner’s gas production based on an audit by the Department of Audit. Wyo. Stat. Ann. § 39-14-208(b).
DISCUSSION
Petitioner contends it properly reported and paid severance and ad valorem taxes on its October, 1997 through December, 1999 coal bed methane production in Campbell County, Wyoming. Petitioner asserts the Department erred in not taking into consideration two provisions of the gas sales and purchase contracts in valuing its production: one provision providing for use of gas for fuel by the purchaser without payment after the point of valuation and the other provision providing for price reductions if Petitioner failed to meet contractual production requirements. In addition, Petitioner asserts that acceptance of the Department’s position would lead to non-uniform taxation, impairment of its contract with the purchaser and retroactive implementation of new policies.
The Department counters that it properly determined the taxable value of Petitioner’s production based on the information provided by Petitioner and the review of that information by the Department of Audit. The Department further asserts that Petitioner’s claimed deduction for gas used as fuel after the point of valuation and price reduction for failure to meet contractual production requirements are not permitted under Wyoming law.
We conclude that Petitioner failed to meet its burden of proof with respect to the fuel use issue. However, we conclude Petitioner was entitled to a reduction in value for the compression design capacity charges contained within the contracts.
FINDINGS OF FACT
1. Petitioner produces coal bed methane gas in Campbell County, Wyoming. [Petitioner’s Exhibit 113].
2. From October, 1997 through December 31, 1999, Petitioner sold its gas to Western Gas Resources (Purchaser). [Stipulation Regarding Exhibits and Evidence ¶ 1].
3. The gas was delivered and sold by Petitioner to Purchaser at four different delivery points: the Riehemann, Carter, Carter No. 2 and Hawkpoint inlets. [Stipulation Regarding Exhibits and Evidence ¶ 2].
4. Petitioner’s sales of gas to Purchaser were made pursuant to three separate contracts: the 1997 Riehemann contract dated June 10, 1997 [Joint Exhibit A], the 1997 Carter contract dated July 3, 1997 [Joint Exhibit B], and the 1998 New Contract dated October 6, 1998. [Joint Exhibit C].
5. These three contracts between Petitioner and Purchaser are bona fide arms-length transactions. [Trans. Vol. I, pp. 29-31; Vol. II, p. 276]. Therefore, “the fair market value shall be the value established by bona fide arms-length transaction.” Wyo. Stat. Ann. § 39-14-203(b)(v). The Department does not dispute this conclusion. [Trans, Vol. II, pp. 300-301].
6. The Riehemann and Carter contracts provided for the payment of a purchase price to Petitioner based on a percentage of the index price for Colorado Interstate Gas Company, Rocky Mountains published in “Inside FERC’s Gas Market Report, Prices of Spot Gas Delivered to Pipelines” (CIG index price). [Joint Exhibits A & B at Article IX, section 9.02, Article I, section 1.08]. The New Contract provided for payment of the CIG index price to Petitioner less fees specified in the contract. [Joint Exhibit C at Article IX, section 9.02, Article I, section 1.10].
7. The Riehemann and Carter contracts provided for the use of a portion of the gas delivered by Petitioner as fuel after the point of transfer and valuation for Purchaser’s compressors located down stream, with the fuel so used to be borne by Petitioner. [Joint Exhibits A & B, Article IX, section 9.01]. The New Contract contained a clearer provision providing that Purchaser would pay Petitioner for gas delivered to Purchaser, less allocated fuel. [Article IX, section 9.01, Joint Exhibit C]. All three contracts included a volumetric formula to be used to determine the quantity of gas used for fuel. [Joint Exhibits A, B & C, Article IX, Section 9.01].
8. All three contracts provided for a reduction of the purchase price if the average daily volume of gas delivered by Petitioner to Western Gas Resources did not meet specified levels. The Riehemann and Carter contracts provided that Western Gas Resources would make available to Petitioner a specified amount of compression design capacity. In return, Petitioner agreed to drill, complete for production and connect a sufficient number of wells to utilize at least seventy-five percent of the compression design capacity made available. [Joint Exhibits A & B at Article II, sections 2.04 & 2.05]. In the event the average daily volume of gas delivered by Petitioner was less than seventy-five percent but greater than fifty percent of the compression design capacity, the percentage of the CIG index price to be paid to Petitioner would be reduced by 2.5 percentage points. If the average daily volume was fifty percent or less of the compression design capacity, the percentage of the CIG index price would be reduced by 5 percentage points. [Joint Exhibits A & B at Article IX, section 9.02]. The New Contract provided for a deficiency fee of twenty-five cents per mcf of gas if the average daily volume delivered was less than the compression design capacity made available by Purchaser. The deficiency fee was reduced by five cents on each of the first three anniversaries and waived thereafter. [Joint Exhibit C, Article IX, section 9.02, c.].
9. The gas sales volumes reported by Petitioner were accurately reported, except for corrections not pertinent to this appeal. [Stipulation Regarding Exhibits and Evidence ¶ 3].
10. Petitioner timely reported and paid severance and ad valorem taxes on the price allegedly received for the sale of coal bed gas from Purchaser. The report was used as the basis for computing and paying such taxes during the period which was audited. The Department asserts that Petitioner did not pay all severance and ad valorem taxes due on such sales. [Stipulation Regarding Exhibits and Evidence ¶ 5].
11. The Department of Audit performed an audit of gas sales by Petitioner to Purchaser. The Department of Audit reviewed reports of production volumes, sales volumes, Western Gas Resources’ monthly gas purchase statements (to the extent they were provided), Petitioners annual ad valorem tax returns, sales contracts and monthly severance tax reports (including amended reports) submitted by Petitioner to the Department. [Stipulation Regarding Exhibits and Evidence ¶ 6].
12. The Department of Audit accepted the volumes reported on Purchaser’s sales invoices provided by Petitioner as reflecting Petitioner’s gas sales volumes. [Stipulation Regarding Exhibits and Evidence ¶ 7].
13. For the sale of gas under all of the contracts, the Department of Audit made an independent determination of the contract prices which the Department of Revenue and the Department of Audit contend should have been paid by Western Gas Resources to Petitioner. The Department of Audit requested that Petitioner justify and explain the bases for computing the reported values, but were not satisfied with Petitioner’s responses. The Department of Audit then determined that Petitioner had failed to report and pay taxes on what the auditors determined was the appropriate prices pursuant to the contracts between Petitioner and Purchaser. [Stipulation Regarding Exhibits and Evidence ¶ 9].
14. For sales of gas under the 1997 contracts, the Riehemann and Carter contracts, the auditors multiplied 80 percent (or another multiplier tied to the CIG price range) times the CIG Index price and then deducted the compression fee from the sales value. [Stipulation Regarding Exhibits and Evidence ¶ 10].
15. The Department of Audit made numerous requests for information concerning the fuel use. [Joint Exhibits I, K & O; Trans. Vol. II, pp. 224-227, 230-231]. Petitioner responded to requests for information concerning the fuel use by providing information indicating that the fuel use was the difference between the price reflected on the Purchaser’s sales statements and the price calculated pursuant to the terms of the contract. [Joint Exhibits J, L & P]. The Department of Audit was also referred to a representative of Purchaser for additional information. [Joint Exhibit N].
16. No volumetric information was provided by Petitioner from which the volume of Petitioner’s gas used as fuel could be verified. The volumetric information was not contained in the gas purchase statements. [Trans. Vol. I, p. 58]. The Department of Audit did not reduce the sales price for the use of fuel by Purchaser. [Trans. Vol II, p. 222-223].
17. The Department of Audit did not reduce the sales price for the Compression Design Capacity charge contained in the contracts. [Trans. Vol II, p. 242, 260]. The auditor did not understand that it was an issue until after discovery in the case had commenced. [Trans. Vol. II, p. 242, 243]. She would not have allowed it in any event because she would characterize it as a penalty. [Trans. Vol. II, p. 243-244].
18. The Department of Revenue accepted the determinations of the Department of Audit and issued its assessment to Petitioner. [Joint Exhibit D, Trans. Vol II, p. 296-297].
19. At the hearing a representative of Purchaser testified concerning a method for calculating the fuel use from the information on Purchaser’s gas sales statements, and demonstrated how the volume of fuel used could be calculated or derived from the statement. [Trans. Vol. I, pp. 51-52, 63-67]. The witness admitted “a very small leap of faith” was required by the Producer in accepting the numbers. [Trans. Vol. I, p. 70]. The Producer could back calculate the number and see if it was reasonable or lower than normal and be satisfied. [Trans. Vol 1, pp. 58-59, 70]. However, no evidence of the actual volumes needed to perform the calculation specified by the contracts was provided. [Trans. Vol. I, p. 69-70].
20. Petitioner also presented evidence from another coal bed methane gas producer whose production had been audited. The testimony established that the Department of Audit and the Department of Revenue allowed price adjustments for fuel use and for failure to meet the compression design requirements under a contract with the same Purchaser that was similar to the Reihemann and Carter contracts between the producer and the same Purchaser. [Compare Joint Exhibits A & B with Petitioner’s Exhibit 122; Trans. Vol. I, pp. 130-131, 142-144]. When asked if he knew whether the fuel use was calculated, he stated he did not know if the exact calculation was correct, only that it was within an acceptable range. [Trans. Vol. I, p. 154]. Mr. Craig Grenvik, the audit coordinator for the Department, testified that the fuel adjustments were treated differently on the Purchaser’s statements for Petitioner than they were on the other coal bed methane producer’s statements. [Trans. Vol II, pp. 297-298, 318]. He further testified that if the Department had the other producer’s valuation to do over again the Department would do it differently. [Trans. Vol. II, p. 323].
21. Any discussion above, or Conclusions of Law below, that includes a finding of fact may also be considered a Finding of Fact and, therefore, is incorporated herein by this reference.
CONCLUSIONS OF LAW
22. Petitioner filed its appeal with the Board on May 8, 2002, within thirty days of the April 18, 2002, Department final determination letter. [Board Record; Joint Exhibit D], Its appeal was timely filed and the Board has jurisdiction to hear this matter. Wyo. Stat. Ann. § 39-14-209(b); Wyoming State Board of Equalization Rules, Chapter 2 § 5(a).
23. The role of the Board in this matter is to adjudicate the dispute between the parties. Amoco Production Company v. Wyo. State Board of Equalization, 12 P.2d 668, 674 (Wyo. 2000). The burden of proof is on the party asserting an improper valuation. Amoco Production Company v. Wyo. State Board of Equalization, 899 P.2d 855, 858 (Wyo. 1995). The Board’s rules provide that “. . . 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 of defend its action . . ..” Wyoming State Board of Equalization Rules, Chapter 2, § 20.
24. The Wyoming Constitution requires the gross product of mines to be taxed in proportion to the value thereof and uniformly valued for tax purposes at full value as defined by the legislature. Wyo. Const. Art. 15, §§ 3, 11.
25. For oil and gas the “value of the gross product” means the fair market value as prescribed by Wyoming Statute Section 39-14-203(b), less any deductions and exemptions allowed by Wyoming law or rule. Wyo. Stat. Ann. § 39-14-201(a)(xxix).
26. The fair market value is determined after the production process is completed. Wyo. Stat. Ann. § 39-14-203(b)(iv). “The production process for natural gas is completed after extracting from the well, gathering, separating, injecting and any other activity which occurs before the outlet of the initial dehydrator. When no dehydration is performed, other than within a processing facility, the production process is completed at the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first.” Wyo. Stat. Ann. § 39-14-203(b)(iv).
27. When natural gas is sold to a third party at or prior to the point of valuation as in this case, “the fair market value shall be the value established by bona fide arms-length transaction.” Wyo. Stat. Ann. § 39-14-203(b)(v).
28. In valuing oil and gas production, the Department is entitled to rely on final audit findings. Wyo. Stat. Ann. § 39-14-208((b)(iv).
29. There is presumption favoring the Department’s action:
The Department’s valuations for state-assessed property are presumed valid, accurate, and correct. [citation omitted]. This presumption can only be overcome by credible evidence to the contrary. [citation omitted]. In the absence of evidence to the contrary, we presume 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.
Colorado Interstate Gas Company v. Wyoming Department of Revenue, 20 P.3d 528, 531 (Wyo. 2001).
A. Fuel use.
30. Petitioner’s first issue, the disallowance of a deduction for fuel used by Purchaser after the point of sale, may be broken into two separate questions: First, did Petitioner establish by a preponderance of the evidence the amount of fuel used? and Second, whether the value of fuel used after the point of valuation is deductible in determining the fair market of Petitioner’s gas production?
31. The purpose of an audit is to:
(i)Verify the accuracy of the financial data submitted by the taxpayer or operator as well as to determine whether such financial data is in accordance with generally accepted accounting principles; and
(ii)Verify the accuracy of all other data or information contained in the required reporting forms.
Wyoming Department of Revenue Rules, Chapter 6, §14(a).
32. Petitioner contends that the information necessary to verify the fuel use could have been obtained by the Department of Audit from Purchaser. Petitioner had an opportunity before, during or after the audit to obtain sufficient information to support the claimed fuel use after the point of valuation, but did not do so. All three contracts allowed Petitioner to examine the books of Purchaser. [Joint Exhibits A & B, Article XIX; Joint Exhibit C, Article XVIII]. Petitioner had questioned the fuel usage number but accepted Purchaser’s explanation. [Trans. Vol. I, p. 64]. Petitioner knew who to contact to obtain additional information. [Joint Exhibit N]. Petitioner’s accountant advised the Department of Audit that additional information had been requested from Purchaser. [Joint Exhibit V]. However, the volumetric information necessary to calculate the fuel use was never provided. [See Findings of Fact ¶¶ 15, 16].
33. The obligation to maintain sufficient records to establish the reported taxable value rests with Petitioner in this case. Wyo. Stat. Ann. § 39-14-208(b)(vii); Wyoming Department of Revenue Rules, Chapter 6, § 14(c). We decline to accept Petitioner’s suggestion that the Department of Audit could have gone to Purchaser for the necessary information. Petitioner was obligated to maintain sufficient documentation to support its reported taxable value but failed to do so.
34. We do not agree with the assertion that Petitioner can comply with its obligation to maintain sufficient records by relying on a calculation that omits the volumetric information required by the formulas set out in the contracts. The auditors were not required to make a “small leap of faith” to determine the accuracy of Petitioner’s reported taxable value. [See Finding of Fact ¶ 19]. Rather they were required to verify the accuracy of the data which formed the basis for the reported taxable value. Wyoming Department of Revenue Rules, Chapter 6, §14(a).
35. Based on the evidence presented to us at hearing, we conclude that Petitioner failed to meet its burden of proof with respect to fuel usage. We decline to make the leap of faith required by Petitioner’s evidence and conclude the evidence presented by Petitioner is insufficient to overcome the presumption in favor of the Department’s valuation on this issue.
36. Since we conclude Petitioner failed to overcome the presumption in favor of the Department’s valuation, Colorado Interstate Gas Co., supra, and failed meet its ultimate burden of proof on this issue, we need not address the question of whether or not the value of fuel used after the point of valuation is deductible in determining the fair market of Petitioner’s gas production.
B. Compression design capacity charge.
37. The second issue raised by Petitioner concerns the Department’s disallowance of the compression design capacity charges specified in all three contracts. The contracts provided that if Petitioner did not deliver the specified quantity of gas called for by the contracts at the various delivery points, the price paid to Petitioner would be reduced. In the Riehemann and Carter contracts the percentage of the CIG index price to be paid for the gas was reduced. In the New Contract Petitioner was charged twenty-five cents per MCF on the difference between the specified compression design capacity and the quantity of gas delivered. [See Findings of Fact ¶ 8]. Since there is no dispute concerning the quantities of gas delivered by Petitioner to Purchaser, the compression design charge may be calculated from the information in the contracts and the gas purchase statements.
38. Petitioner characterizes the compression design capacity charges as contractual adjustments required to be taken in arriving at the price paid to Petitioner for its gas pursuant to bona fide arms-length transactions. The Department characterizes the compression design capacity charges specified in the contracts as penalties and, therefore, argue they are not deductible in determining the taxable value of Petitioner’s gas production. In support of its argument, the Department relies on the assertion that “[t]here is no statutory exemption provided to producers who don’t produce a certain quantity of gas” citing to the presumption against granting exception and in favor of taxation found in State Board of Equalization v. Tenneco Oil Co., 694 P.2d 97, 100 (Wyo. 1985). [Department’s Proposed Findings of Facts and Conclusions of Law, p. 31, ¶ 56].
39. The parties agree that Wyoming Statute section 39-14-203(b)(v) is the proper statute for valuation of Petitioner’s production. [See: Finding of Fact ¶ 5]. That subsection provides that “the fair market value shall be the value established by bona fide arms-length transaction.” Wyo. Stat. Ann. § 39-14-203(b)(iv). A “bona fide arms-length sale” has been defined by the legislature as “a transaction in cash or terms equivalent to cash for specified property rights after reasonable exposure in a competitive market between a willing, well informed and prudent buyer and seller with adverse economic interests and assuming neither party is acting under undue compulsion or duress.” Wyo. Stat. Ann. § 39-14-201(a)(ii).
40. Our reading of the statute is governed by well established principles. The intent of the legislature must be ascertained initially and primarily from the words used in the statute. Where the statute is clear and unambiguous, we may not substitute our views for that expressed by the legislature. Allied-Signal, Inc. v. Wyo. State Board of Equalization, 813 P.2d 214, 219 (Wyo. 1991). Wyoming Statute section 39-14-203(b)(v) clearly provides that the fair market of Petitioner’s gas is the value established by a bona fide arms-length transaction. The contracts between Petitioner and Purchaser are bona fide arms-length transactions. [See Finding of Fact ¶ 5]. They clearly specify that Purchaser would pay and Petitioner would receive less for the gas delivered unless Petitioner met the contractual compression design capacity requirements set out in those agreements. [See Finding of Fact ¶ 8].
41. We are bound by the clear language of the applicable statute in this case. We decline to read into the statute the “penalty” exception suggested by the Department. Therefore, we conclude the compression design capacity charges must be deducted in those months in which the specified capacity was not met by Petitioner to determine the taxable value of Petitioner’s gas production. The clear statutory language requires this conclusion.
C. Non-uniform taxation.
42. Petitioner’s argument that the Department’s final determination in this case results in non-uniform taxation is based on the evidence presented at the hearing that another taxpayer was audited, that the same issues were raised during that audit, and that the issues were resolved in a different manner than in this audit. [See Finding of Fact ¶ 20]. Because of our conclusions with respect to fuel use and the compression design capacity charge, we need not address this claim. Further, we are not at liberty to address the propriety of the result reached in the other taxpayer’s audit in the context of this case. However, we would observe that one taxpayer is not entitled to be placed in the same position as another taxpayer who may have escaped taxation. AMISUB v. Board of County Commissioners of Douglas County, 244 Neb. 657, 664, 508 N.W.2d 827, 832 (1993). The Wyoming Supreme Court has noted:
[P]lainly not every discrimination should render as assessment or tax invalid, either in whole or in part. An excessive valuation constitutes, in a sense at least, a discrimination, and yet we have seen that this fact alone does not render a tax illegal. Besides officers are subject to error; mistakes are bound to occur, and the arms of government might be seriously crippled, if every discrimination, no matter how innocently or unintentionally arising, should be a sufficient cause for enjoining taxes. Recognizing this fact, it has been frequently held that omission to assess property, arising either from a mistake of law or fact, or accidentally, gives no ground to other taxpayers to enjoin the tax assessed against them. [Citations omitted.] And the principle applies equally to valuations made. A mere mistake, an accidental discrimination, does not authorize an injunction. As was said by the Supreme Court of the United States in First National Bank v. Albright, 208 U.S. 548, 28 Sup. Ct. 349, 52 L. Ed. 614:
“Accidental inequality is one thing, intentional and systematic discrimination another.”
Bunten v. Rock Springs Grazing Ass’n., 29 Wyo. 461, 215 P. 244, 251-252 (1923).
D. Impairment of contract and retro-active implementation of new policies.
43. As with Petitioner’s claim of non-uniformity, we need not address this claim because of our conclusions with respect to the fuel usage and compression design capacity issues. We note that the valuation amendment in this case resulted from an audit of Petitioner’s records. Under Wyoming’s self reporting system, the audit is the first meaningful opportunity for the State to examine a taxpayer’s return and supporting documentation for errors. The Department of Audit had the authority to conduct the audit and the Department of Revenue had the responsibility to correct any errors which were encountered during that audit. Amax Coal West, Inc. v. Wyo. State Board of Equalization, 896 P.2d 1329, 1334-1335 (Wyo. 1995).
44. Petitioner characterizes the Department’s actions in this case as the implementation of policies which would directly adversely affect Petitioner because of the enormous complications of assessing and collecting changed tax assessments. [Petitioner’s Proposed Findings of Fact Conclusions of Law and Order, ¶ 75]. We do not find evidence in the record to support that claim. Rather, we see the Department exercising its obligation to apply Wyoming statutes and Department rules to the unique circumstances presented in this case to determine whether or not the taxpayer has paid the taxes due and owing to the State of Wyoming its counties.
ORDER
IT IS THEREFORE HEREBY ORDERED:
A. The Department of Revenue’s disallowance of the deduction for fuel use is affirmed;
B. The Department of Revenue’s disallowance of the deduction for the compression design capacity charges is reversed; and
C. This matter is remanded to the Department of Revenue to recalculate taxes due, interest and penalties (if any) and ad valorem value in accordance with this decision.
Pursuant to Wyoming Statute Section 16-3-144 and Rule 12, Wyoming Rules of Appellate Procedure, any person aggrieved or adversely affected inn 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 1st day of August, 2003.
STATE BOARD OF EQUALIZATION
______________________________________
Roberta A. Coates, Chairman
________________________________________
Alan B. Minier, Vice Chairman
________________________________________
Thomas R. Satterfield, Member
ATTEST:________________________________
Wendy J. Soto, Executive Secretary