BEFORE THE STATE BOARD OF EQUALIZATION

FOR THE STATE OF WYOMING

IN THE MATTER OF THE APPEAL OF )

CHEVRON U.S.A., INC. FROM AN AUDIT ) Docket No. 2002-50

ASSESSMENT DECISION BY THE MINERAL )

DIVISION OF THE DEPARTMENT OF )

REVENUE (Ryckman Creek, Clear Creek, )

Painter Reservoir & East Painter Reservoir )

Production Years 1993-1995) )

IN THE MATTER OF THE APPEAL OF )

CHEVRON U.S.A., INC., FROM AN AUDIT )

ASSESSMENT DECISION OF THE MINERAL ) Docket No. 2002-151

DIVISION OF THE DEPARTMENT )

OF REVENUE (Whitney Canyon, )

Production Years 1993 - 1995) )

IN THE MATTER OF THE APPEAL OF )

CHEVRON U.S.A., INC., FROM AN AUDIT )

ASSESSMENT DECISION OF THE MINERAL ) Docket No. 2002-150

DIVISION OF THE DEPARTMENT )

OF REVENUE (Carter Creek, )

Production Years 1993 - 1995) )

FINDINGS OF FACT, CONCLUSIONS OF LAW, DECISION AND ORDER

APPEARANCES

William J. Thomson, III, Randall B. Reed, and Brian J. Hanify appeared on behalf of Chevron U.S.A., Inc. (Chevron), Petitioner.

Cathleen Parker, Assistant Attorney General, and Dana David, who was an Assistant Attorney General but resigned prior to the decision, Wyoming Attorney General’s Office, appeared on behalf of the Wyoming Department of Revenue (Department), Respondent.

DIGEST

This appeal concerns oil and natural gas production by Chevron from the Whitney Canyon field and the Painter, East Painter, Ryckman Creek and Clear Creek fields located in Uinta County and the Carter Creek field located in Uinta and Lincoln counties, Wyoming, for the

period of January 1, 1993 to December 31, 1995. Following the completion of an audit of the properties by the Department of Audit, the Department of Revenue issued a Final Administration Letter and Administrative Action assessing additional severance tax and interest due from Petitioner and increasing the ad valorem taxable value on the properties. Petitioner appealed all of the additional assessments in three separate appeals. All of the appeals were consolidated. Petitioner appealed all aspects of the Department’s action to the State Board of Equalization (Board). The parties stipulated to the legal issue and many facts and on November 20, 2003, moved for the Board to consider the matter on expedited docket. The Board granted the motion to consider the matter on expedited docket and issued a Briefing Order dated November 28, 2003. This matter came before the Board consisting of, Roberta A. Coates, Chairman, Alan B. Minier, Vice Chairman, and Board Member, Thomas R. Satterfield.

JURISDICTION

The Board shall review final decisions of the Department on application of any interested person adversely affected, including boards of county commissioners. Wyo. Stat. Ann. §39-11-102.1(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); Rules, Wyoming State Board of Equalization, Chapter 2, §5(a). Petitioner timely appealed the final decisions of the Department.

DISCUSSION

The parties stipulated to a legal issue and we agree this is the issue in these matters:

Whether production taxes and royalties (both exempt and non-exempt) should be included in, or excluded from, the determination of “direct cost of producing” in valuing the minerals produced by Chevron for the production years 1993, 1994 and 1995 under the proportionate profits formula? If included, does doing so violate Chevron’s rights to uniform and equal taxation?

We conclude, as we have in five prior decisions, that royalties and production taxes must be included as direct costs of producing in the direct cost ratio of the proportionate profits methodology. See: In the Matter of the Appeal of Amoco Production Company, Docket No. 96-216, 2001 WL 770800, (June 29, 2001); In the Matter of the Appeal of Amoco Production Company, Docket No. 96-216, 2001 WL 1150220 (Order on Reconsideration, Sept. 24, 2001) (hereinafter “Amoco 96-216"); In the Matter of the Appeal of Fremont County Board of County Commissioners, Docket No. 2000-203, 2003 WL 21774604 (April 30, 2003) (hereinafter “Fremont County 2000-203"); In the Matter of the Appeal of RME

Petroleum Company, Docket No. 2002-52, 2003 WL 22814612 (November 20, 2003) (hereinafter “RME 2002-52"); In the Matter of the Appeal of Amoco Production Company, Docket No. 2001-56, 2003 WL 23164222 (December 30, 2003) (hereinafter “Amoco 2001-56"), In the Matter of the Appeal of Burlington Resources Oil and Gas Co., Docket Nos. 2002-49 et. al., _____ (May10, 2004)(hereinafter “Burlington 2002-49 et.al.,") .

FINDINGS OF FACT

Whitney Canyon

1. In 1993 through 1995, Petitioner held leases on and produced oil and gas from properties located in the Whitney Canyon field in Uinta County, Wyoming. [Stipulations of Fact, ¶¶C1, C2].

2. The production was reported by Petitioner and valued under the proportionate profits methodology. Wyo. Stat. Ann. §39-1-108 (d)(iv). [Stipulations of Fact, ¶C3].

3. The Department did not require Petitioner to include royalties or production taxes in the direct cost ratio when it initially filed its tax reports for its production. [Stipulations of Fact, ¶C4].

4. On or about February 4, 1999, the Department of Audit initiated an audit of Petitioner’s Whitney Canyon properties for the 1993-1995 production years. On October 19, 2001, the Department of Audit issued a final findings letter notifying Petitioner of its audit findings. The Department of Revenue issued a final determination letter on October 11, 2002, assessing additional severance tax, interest and increasing ad valorem taxable value. [Stipulations of Fact, ¶A1]. Petitioner appealed the audit findings on November 11, 2002. The Notice of Appeal contained multiple issues which have been resolved with the exception of the issue presented here. [Stipulations of Fact, ¶¶C8b, C9].

Painter Properties

5. In 1993 through 1995, Petitioner held leases on and produced oil and gas from properties located in the Ryckman Creek field, Clear Creek field, Painter Reservoir field, and the East Painter Reservoir field, the “Painter Properties,” all in Uinta County, Wyoming. [Stipulations of Fact, ¶¶C1, C2].

6. On or about February 4, 1999, the Department of Audit initiated an audit of Petitioner’s Painter properties for the 1993-1995 production years. On November 7, 2001, the Department of Audit issued a final findings letter notifying Petitioner of its audit findings. The Department of Revenue issued a final determination letter on March 29, 2002, assessing additional severance tax, interest and increasing ad valorem taxable value. [Stipulations of Fact, ¶A1]. In an April 12, 2002, letter, the Department agreed the March 29, 2002, letter was not a final determination until May 29, 2002. Petitioner appealed the audit findings and assessment final decision on May 29, 2002. The Notice of Appeal contained multiple issues which have been resolved with the exception of the issue presented here. [Stipulations of Fact, ¶8].

Carter Creek

7. In 1993 through 1995, Petitioner held leases on and produced oil and gas from properties located in the Carter Creek field in Uinta and Lincoln counties, Wyoming. [Stipulations of Fact, ¶¶1, 2].

8. The production was reported by Petitioner and valued under the proportionate profits methodology. Wyo. Stat. Ann. §39-1-108 (d)(iv). [Stipulations of Fact, ¶3].

9. The Department did not require Petitioner to include royalties or production taxes in the direct cost ratio when it initially filed its tax reports for its production. [Stipulations of Fact, ¶4].

10. On or about February 4, 1999, the Department of Audit initiated an audit of Petitioner’s Carter Creek properties for the 1993-1995 production years. On October 19, 2002, the Department of Audit issued a final findings letter notifying Petitioner of its audit findings. The Department of Revenue issued a final determination letter on October 10, 2002, assessing additional severance tax, interest and increasing ad valorem taxable value. [Stipulations of Fact, ¶A]. Petitioner appealed the audit findings on November 11, 2002. The Notice of Appeal contained multiple issues which have been resolved with the exception of the issue presented here. [Stipulations of Fact, ¶C9].

General Findings

11. Upon completion of the audit, the Department issued a final assessment for all of the properties and included production taxes and royalties in the “direct cost ratio.” [Stipulations of Fact, ¶C6].

12. Several of the issues contained in Petitioner’s original Notices of Appeal were resolved, and the parties moved to consolidate the three above-referenced dockets. The three dockets were consolidated by the Board on November 28, 2003, and placed on the expedited docket to be briefed by the parties.

13. The proportionate profits method for valuation provides:

Proportionate profits - The fair market value is:

(A) The total amount received from the sale of the minerals minus exempt royalties, nonexempt royalties and production taxes times the quotient of the direct cost of producing the mineral divided by the direct cost of producing, processing and transporting the mineral; plus

(B) Nonexempt royalties and production taxes.

Wyo. Stat. Ann. §39-2-208(d)(iv).

14. The parties stipulated that Petitioner was the only producer/processor of natural gas in Wyoming for which the Department determined during the audit that production taxes and exempt and non-exempt royalties should be included as “direct costs of producing” in the direct cost ratio under the proportionate profits formula for the production years 1993 through 1995. [Stipulations of Fact, ¶C7]. However, there are other producer/processors that have been ordered to include production taxes and exempt and non-exempt royalties should be included as “direct costs of producing” in the direct cost ratio under the proportionate profits formula for the production years 1993 through 1995.

15. This Board has ruled that taxpayers must pay the increased taxes caused by including taxes and royalties in the direct cost ratio. In Amoco 96-216, supra, the Petitioner was ordered to pay the increased taxes for its 1989 through 1992 production at the Whitney Canyon facility. In Fremont County 2000-203, supra, the Board ruled that Louisiana Land and Exploration Company was responsible for the increased taxes for its 1995-1997 production at the Lost Cabin Plant. In Amoco 2001-56, supra, the Petitioner was ordered to pay increased taxes for 1993-1995 production from the Beaver Creek field. In RME 2002-52, supra, the Board affirmed the Department’s decision that the Petitioner pay increased taxes as a result of an audit for its 1996 and 1997 production from the Brady Unit. In Burlington 2002-49, supra, the Board affirmed the Department’s decision to increase Petitioner’s amended valuation for 1998, 1999 and 2001 gas production when it amended its tax reports.

16. Petitioner points to other cases filed with the Board to demonstrate the extent of litigation for this issue. Petitioner directs us to the following Dockets: UPRC 2000-147; Chevron 2000-151; Amoco 2000-154; Chevron 2001-114; Amoco 2001-149 (not Coastal Oil and Gas as indicated in Petitioner’s brief); UPRC 2000-149; Chevron 2000-150; Amoco 2000-155; Chevron 2001-113; Amoco 2001-150; Amoco 2000-156; Ponderosa 2001-156; Chevron 2000-152; and Chevron 2001-112. However, all of these cases involve a completely different issue. In thirteen of these cases the Department valued the minerals using the comparable value method not the proportionate profit method. One case cited by Petitioner, Ponderosa 2001-156, is a county board of equalization case arising from the County Assessor’s valuation of a residence in Weston County. The issues are not the same as this case. The Board has other matters pending concerning this issue besides the cases listed in Findings, ¶ 15, Docket Numbers: BP America Production Company 2003-102, and BP America Production Company 2003-114. Also, the Uinta County Commissioners, in Docket Number 2001-203, have requested an examination by the Board of all valuation of mineral production in Uinta County for production years 1992 to 2001. The Board has delayed any action on this examination. There may be other cases with the same issue pending.

17. The Petitioner and the Department argue about the uniform treatment of taxpayers but neither party presented evidence in this matter about how other parties reported and paid their production for this time period. This Board will not take notice of facts alleged in the briefs that are not presented in this matter.

18. Petitioner cites evidence presented to the Board in other matters to support their argument in this matter. The only evidence presented in this matter was the stipulation of the parties. The Board will not accept as evidence in this matter testimony or exhibits presented in other cases. Therefore, a letter to former Governor Sullivan and testimony of the former Director of the Department are not evidence in this matter and will not be considered even if they are attached to a brief.

19. Any Discussion set forth above or Conclusion of Law set forth below which includes a Finding of Fact may also be considered a finding of fact and, therefore, is incorporated herein by reference.

CONCLUSIONS OF LAW

General Law

20. Petitioner’s notices of appeal were timely filed within thirty days after the Department’s final administrative decision. Rules, Wyoming State Board of Equalization, Chap. 2, §5(e). The Board has jurisdiction to determine this matter. Wyo. Stat. Ann. §39-11-102.1(c); Wyo. Stat. Ann. §39-14-209(b); Antelope Valley Imp. v. State Bd. of Equalization for State of Wyo., 992 P.2d 563 (Wyo. 1999).

21. The role of this Board is strictly adjudicatory:

It is only by either approving the determination of the Department, or by disapproving the determination and remanding the matter to the Department, that the issues brought before the Board can be resolved successfully without invading the statutory prerogatives of the Department.

Amoco Production Company v. Wyoming State Board of Equalization, 12 P.2d 668, 674 (Wyo. 2000). The Board’s duty is to adjudicate the dispute between the taxpayers and the Department.

22. 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. Ann. §39-11-102.1(c)(iv).

23. “The burden of proof is on the party asserting an improper valuation.” Amoco Production Company v. Wyoming State Board of Equalization, 899 P. 2d 855, 858 (Wyo. 1995); Teton Valley Ranch v. State Board of Equalization, 735 P. 2d 107, 113 (Wyo. 1987). The Board’s Rules provide that:

[T]he 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....

Rules, Wyoming State Board of Equalization, Chapter 2, §20.

24. The Department’s valuation is presumed valid, accurate, and correct, a presumption which survives until overturned by credible evidence. In the absence of evidence to the contrary, it is presumed that the officials charged with establishing value, be it a county assessor or a Department official, exercise honest judgment in accordance with the applicable states, rules, regulations, and other directives, which presumption survives until overturned by credible evidence. Chicago Burlington & Quincy Railroad Co. v. Bruch, 400 P.2d 494, 498-99 (Wyo. 1965).

Inclusion of Royalties and Production Taxes in the Direct Cost Ratio

25. Oil and gas shall be annually valued at fair cash market value. Wyo. Stat. Ann. §39-2-208(a) (currently Wyo. Stat. Ann. §39-14-202(a)(i)).

26. The proportionate profits method is one of four methods the Department was authorized to use to determine the fair cash market value for oil and gas during the applicable time frame. A fifth method is available if the Department and taxpayer agree that none of the four methods produce a representative fair market value. Wyo. Stat. Ann. §39-2-208(c) and (d) (currently Wyo. Stat. Ann. §39-14-203(b)(vi) and (vii)).

27. Using the proportionate profits method, fair cash market value is calculated as follows:

(A)The total amount received from the sale of the minerals minus exempt royalties, nonexempt royalties and production taxes times the quotient of the direct cost of producing the minerals divided by the direct cost of producing, processing and transporting the minerals; plus

(B)Nonexempt royalties and production taxes.

Wyo. Stat. Ann. §39-2-208(d)(iv) (currently Wyo. Stat. Ann. §39-14-203(b)(vi)(D)).

28. The “quotient of the direct cost of producing the minerals divided by the direct cost of producing, processing and transporting the minerals” is commonly referred to as the “direct cost ratio.”

29. In Amoco 96-216, supra, we held that production taxes and royalties were direct costs of producing and, therefore, must be included in calculating the direct cost ratio of the proportionate profits method. The audit and the Department’s final determination included royalties and production taxes as direct costs of producing in the direct cost ratio of the proportionate profits method. Petitioner is advocating for the overturn of Amoco, 96-216, supra. Petitioner presented numerous arguments in support of its position that royalties and taxes should not be included as direct costs of producing in the direct cost ratio of the proportionate profits method used to value its production which we address below.

Royalties and Production Taxes Are Direct Costs of Producing

30. In support of its position that royalties and production taxes should not be included in the direct cost ratio as direct costs of producing, Petitioner first asserts that the statutes prescribing the proportionate profits formula are vague and ambiguous as to the inclusion of production taxes and royalties and accordingly the Board should rely on the long-standing contemporaneous administrative construction. This argument is contrary to the specific conclusions made by the Board in Amoco, 96-216, supra:

88.The major issue in this matter is whether royalties and production taxes should be included as a direct cost of producing in calculating the direct cost ratio. Support for the conclusion that those components must be included comes from a review of Wyoming Statute § 39-2-208. We find this statute to be unambiguous. In interpreting a statute we follow the same guidelines as a court.

We read the text of the statute and pay attention to its internal structure and the functional relationship between the parts and the whole. We make the determination as to meaning, that is, whether the statute’s meaning is subject to varying interpretations. If we determine that the meaning is not subject to varying interpretations, that may end the exercise, although we may resort to extrinsic aids to interpretation, such as legislative history if available and rules of construction, to confirm the determination. On the other hand, if we determine the meaning is subject to varying interpretations, we must resort to available extrinsic aids.

General Chemical v. Unemployment Ins. Comm’n, 902 P.2d 716, 718 (Wyo. 1995).

89.In determining whether royalties and production taxes are to be included as direct production costs in calculating the direct cost ratio, we consider the omission of certain words intentional on the part of the legislature, and we may not add omitted words. Parker v. Artery, 889 P.2d 520 (Wyo. 1995); Fullmer v. Wyoming Employment Security Comm’n., 858 P.2d 1122 (Wyo. 1993). Particularly, when the language appears in one section of a statute but not another, we will not read the omitted language into the section where it is absent. Matter of Voss’ Adoption, 550 P.2d 481 (Wyo. 1976). Wyoming Statute §39-2-208(d)(iv) is clear and unambiguous. It does not require statutory interpretation to understand that royalties and production taxes are not specifically excluded as a direct cost. The legislative intent is clear. Considering that inclusion of royalties and production costs in the direct cost formula reaches the closest calculation to what are actual costs, the clear reading of the statute is the most realistic result and there is no need to resort to legislative intent.

90.The legislature specifically excluded royalties and production taxes from the definition of direct costs to be used for purposes of the direct cost ratio used in valuing coal under the proportionate profits methodology. Wyo. Stat. § 39-2-209(d)(iv). Likewise, the legislature specifically excluded royalties and production taxes as direct costs to be used in the formula calculation for valuation of bentonite. Wyo. Stat. § 39-2-211(d)(i)(c). By excluding these costs in the other mineral valuation statutes, the legislature clearly evidenced its understanding that royalties and production taxes are direct costs of production. Because the legislature did not exclude royalties and production taxes from the direct cost of production of oil and gas, we conclude they must be included.

91. In its Reply to Intervenor’s Response to Motion for Reconsideration at pages 30 through 32, Petitioner argues Wyoming Statute §39-2-208 is ambiguous and the statements of the DOR and representatives of the oil and gas industry must be considered by the SBOE as evidence of the legislature’s intent. We do not agree. Because we have found the statute unambiguous, there is no reason to resort to extrinsic aids, including the search for legislative history, is unnecessary. Even if our conclusion were otherwise, we would be hesitant to accept the proffered statements from sources other than the legislature as an indication of the legislature’s intent. As the Wyoming Supreme Court has noted:

With respect to legislative history as an extrinsic aid to statutory interpretation, such history “is nearly totally unavailable for understanding the actions of the Wyoming State Legislature.” Moncrief v. Harvey, 816 P.2d 97, 111 (Wyo.1991) (Urbigkit dissenting). See also Pisano v. Shillinger, 835 P.2d 1136, 1139 (Wyo.1992); State v. Denhardt, 760 P.2d 988, 990 (Wyo.1988); and State v. Stovall, 648 P.2d 543, 546 (Wyo.1982) (Brown, J., “Because of the sparse legislative history kept in this state, peering into the past, even the very recent past, becomes as difficult as predicting the future.”.)

Parker Land & Cattle Co. v. Wyo. Game & Fish Comm’n, 845 P.2d 1040, 1044 (Wyo. 1993).

As Justice Brown said:

It may be more honest if we are straightforward about what the legislature intended and simply say we do not know. There is no useful legislative history in Wyoming.

Board of County Comm’rs v. Laramie School District No. 1, 884 P.2d 946, 956 (Wyo. 1994).

31. Another reason to decline to interpret the statute using legislative intent is that in this case there is no evidence of legislative intent. In its brief, Petitioner cites a letter that is not in this record. Petitioner also cites to a position of the Director of the Department of Revenue that is not in this record.

32. Petitioner cites to the Department’s definition of “Direct costs of production” that does not specifically include production taxes and royalties. We reject the argument that this rule dictates the decision on the issue. While an administrative body may be entitled to deference, that deference may not be afforded if contrary to the clear statutory language. The Department may not rewrite a statute through rule making. U.S. West v. Wyo. Public Service Commission, 992 P.2d 1092, 1096 (Wyo. 1999). Even if opinions may differ as to a statute’s meaning it is not conclusive of ambiguity. Allied-Signal v. State Board of Equalization, 813 P.2d 214, 219 (Wyo. 1991).

33. In addition, we believe that subsequent legislative action is a sounder basis than the Department’s prior interpretation for determining the intent of the legislature. As we concluded In the Matter of the Appeal of RME Petroleum Company, supra:

32.Additional support for the inclusion of royalties and production taxes as direct costs of producing comes from the Wyoming State Legislature’s actions following the issuance of our decision in Amoco 96-216, supra. Senate File 69, introduced during the 2002 Legislative session, provided in pertinent part for the following amendment to Wyo. Stat. Ann. § 39-14-203(b)(iv)(D)(II) (Wyo. Stat. Ann § 39-2-208(d)(iv) as recodified):

(II) Nonexempt royalties and production taxes. Exempt and nonexempt royalties, ad valorem production taxes, severance taxes, conservation taxes and indirect costs shall not be included in the computation of the quotient set forth in subdivision (I) of this subparagraph. Indirect costs include, but are not limited to, 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 operation function without allocation. . . .

For the first time, Senate File 69 evidenced an intent by the Legislature to exclude production taxes and royalties from the direct cost ratio used in the proportionate profits valuation method for oil and gas. The bill did not pass during the 2002 Legislative session.

33.Legislative inaction following a contemporaneous and practical interpretation is evidence that the legislature intends to adopt such an interpretation. “Where action upon a statute or practical and contemporaneous interpretation has been called to the legislature’s attention, there is more reason to regard the failure of the legislature to change the interpretation as presumptive evidence of its correctness.” 2B Singer, Sutherland Statutory Construction, § 49:10, pp. 117-118, fn. 6 (6^th ed.). We conclude the Legislature’s failure to enact Senate File 69 is presumptive evidence of the correctness of our interpretation reflected in Amoco 96-216, supra. We note that the amendment itself is consistent with our decision that the statutory definition of indirect costs did not include royalties and production taxes.

34. Additionally, both production taxes and royalties are treated as direct costs of production within the field of oil and gas accounting. Council of Petroleum Accountants Societies, Inc., Bulletins 4 and 16. We conclude that “factually” production taxes and royalties are direct costs of producing.

Production taxes are a direct cost of producing

35. Production taxes do belong in the direct cost ratio. The Wyoming Supreme Court said in Hillard v. Big Horn Coal, 549 P.2d 293, 302 (Wyo. 1976):

The coal companies argue in their brief that it is improper under the law for any portion of the production and severance taxes from the prior year to be attributed to mining costs. They insist this results in the imposition of tax upon a tax. These expenses, however, are part of the overall costs or expenses of the company. They are a part of the costs that necessarily must be covered by the value of the coal at the mouth of the mine, or otherwise the mining incentive might be lost. The value of the product at the mine must be enough to cover those expenses which must be paid to mine it and also the taxes imposed upon the product in addition to the royalty. It well may be that the Board was overly generous in allocating these taxes as a part of the indirect costs. This, however, is not an issue before us . . .

36. The interpretation of Hillard, supra, is important to understand that the Legislature chose to exclude production taxes and royalties from the direct cost ratio for coal but not for oil and gas.

37. Petitioner argues that the cost has to be a physical, hard cost to be included as a direct cost of producing in the direct cost ratio. The argument attempts to introduce language not present in the applicable statutes. Neither the adjective physical nor the adjective hard was used by the legislature in describing the direct costs of producing.

38. Production taxes include severance tax, “an excise tax [on] . . . the value of the gross product extracted upon the privilege of severing or extracting.” Wyo. Stat. Ann §39-6-302 (a), and ad valorem tax, a tax based on the fair market value of the product, after the mining or production process is complete. Wyo. Stat. Ann. §39-2-208(a). Both taxes are imposed on the value of the extracted mineral with no deduction for expenses incurred by the producer prior to the point of valuation. Wyo. Stat. Ann. §§39-2-208(a); 39-6-302(a). (Currently Wyo. Stat. Ann. §39-14-203(a)(i) and (b)(ii)). The privilege of extracting the mineral is taxed on the basis of the value of the extracted mineral by the severance tax. The mineral extracted is taxed based on its value by the ad valorem tax. Both production taxes are imposed on and are directly related to the producing of the mineral.

Inclusion of Exempt Royalties Does Not Result in Taxation of Federal Interests

39. Petitioner contends that by including exempt federal royalties in the direct cost ratio, Article 15, §12 of the Wyoming Constitution is violated. That constitutional provision exempts the property of the United States from taxation.

40. Royalty is defined for the purpose of property appraisal and assessment as a “payment made periodically or at irregular intervals to the owner of an interest in mineral land for the privilege of exploring for, and/or mining and disposing of, mineral deposits.” Glossary of Property Appraisal and Assessment, International Association of Assessing Officers (1997).

41. A royalty has been recognized by the Wyoming Supreme Court as a direct cost of mineral production.

It is thus apparent that royalty must be paid for the privilege of mining, not processing, and as has been indicated above, the value of the coal at the mine must be sufficient to pay both the costs of mining and royalty. We affirm the ruling of the district court upholding the decision of the Board that royalty is a full component of the value of the coal at the mine, and is not to be apportioned between mining and processing as indirect costs may be. (Emphasis added.)

Hillard v. Big Horn Coal Co., 549 P.2d 293, 301-302 (Wyo.1976).

This was decided prior to enactment of the 1990 proportionate profits statue. It is with this background the legislature excluded royalties from the coal and bentonite statue but not from the oil and gas formula.

42. In determining what meaning the legislature intended by the use of the term royalty, the Wyoming Supreme Court concluded in Powder River Coal Co., 2002 WY 5 ¶17:

We assume the legislature was well aware of the accepted legal definition and usage of the term royalty and cannot conclude it intended anything other than the well accepted meaning of the term royalty when it provided for federal royalties to be deducted as exempt royalties for the sales value of coal mined within this state.

Therefore, we will also assume the legislature knew the definition of the term royalty when it chose to exclude royalties as direct costs of production for coal and bentonite but not for oil and gas. Wyo. Stat. §§39-2-209(d)(iv);39-1-211(d)(i)(C); 39-2-208(d)(iv). They must be included a direct costs of production in valuing oil and gas.

43. To evaluate Petitioner’s argument it is important to evaluate the purpose of the proportionate profits method. The fair market value for natural gas must “be determined after the production process is completed.” Wyo. Stat. Ann. §39-14-203(b)(ii). “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). All of these provisions read together provide the context within which the specific valuation methods contained in Wyo. Stat. Ann. §39-14-203(b)(vi) must be interpreted.

44. The Petitioner does not sell its natural gas at the point of production. The Department must value production using one of four methods: comparable sales, comparable value, netback or proportionate profits. If none of these methods produces a representative fair market value, a mutually acceptable alternative method may be applied. Wyo. Stat. Ann. §39-14-203(b)(vii). There was no effort to reach a mutually acceptable alternative in this case, so a mutually acceptable alternative is not available to value the processing deduction.

45. The proportionate profits formula allocates costs and profits to derive a value that is less than the gross revenue of the mineral. The profit associated with the federal royalty and the cost amount should be included. “The proportionate profits method is predicated on the assumption that every dollar of cost incurred to produce the mineral product earns the same percentage of income.” 34 Rocky Mt. Min. L. Inst., Ch. 2, §2.03[2][c](1988); see also; Powder River Coal v. State Board of Equalization, 38 P.3d 423, 427 (Wyo. 2002). The proportionate profits formula should not be confused with the netback method that deducts actual costs. The proportionate profits method estimates the costs and costs of profits and allocates those in a formula to derive value.

46. The proportionate profits method, Wyo. Stat. Ann. §39-14-203(b)(vi)(D), is removed from traditional appraisal judgment. The proportionate profits method is grounded in calculation of the depletion deduction for federal income tax purposes, not in traditional appraisal theory. The federal income tax version of the proportionate profits method is not available for oil and gas. Maxfield, Taxation of Mining Operations, §2.03[2][c] (1991); 26 C.F.R. §1.613-4(d)(4) (“Gross income from the property oil the case of minerals other than oil and gas”; “Cases where a representative market or field price cannot be ascertained; “proportionate profits method’); see: 26 C.F.R. §1.613-3. Compare 36 Rocky Mt. Min. L. Inst., Ch. 2, §2.03[1988].

47. The direct cost ratio is a mathematical formula that attempts to reach value by apportioning profit to producing and which is applied to revenues of the producer, net of taxes and royalties. Therefore, exempt royalties are not taxed they only serve to estimate the profit component of value.

48. As the Board found in Amoco, 96-216, supra,

Uniform Application of the Formula

49. Petitioner complains that it will be the only taxpayer to have its production valued under the proportionate profit method for 1993-1995 production. There is another taxpayer responsible for paying taxes on values established by including production taxes and royalties in the direct cost ratio for the 1993-1995 production years. That taxpayer is Amoco Production Company. See: Amoco 2001-56, supra. There may be other taxpayers who paid under the proportionate profits method and did not include production taxes and royalties in the direct cost ratio or there may not be. There is no evidence before the Board in this matter that indicates there were other taxpayers that were treated differently than this Taxpayer.

50. Even if the Department is foreclosed from applying our decision on the inclusion of royalties and production taxes to other taxpayers’ 1993 through 1995 production because of the applicable statute of limitations, it does not follow that the Department is foreclosed from applying our decision to this Taxpayer. The failure of the Department to collect tax from other taxpayers does not excuse this Taxpayer from liability for the tax where the applicable statute of limitations has not run. Fisher Controls Co., Inc. v. Commonwealth of Pa., 476 Pa. 119, 381 A.2d 1253, 1257 (1977).

51. As the Board observed in Amoco, 2001-56, supra:

97. In Wyoming State Tax Commission v. BHP Petroleum, 856 P.2d 428, 439 (Wyo. 1993), The Wyoming Supreme Court eloquently observed: “In general, ‘statutes operate prospectively while judicial decisions are applied retroactively.’”

98.The Wyoming Supreme Court has articulated the standards to be applied in determining whether a decision should be applied prospectively only. First, it must be determined if the decision established a new principle of law, explicitly overruling a prior precedent or overturning a long-standing practice. Second, it must be determined if the purposes of the decision would be furthered by retroactive application. Finally, it must be determined if hardship or injustice would be generated by the retroactive application of the decision. Hanesworth v. Johnke, 783 P. 2d 173, 176-177 (Wyo. 1989) citing Chevron Oil Company v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971).

99. Those purposes are not met in this case and the ruling should be retroactive. The purpose of taxing minerals close to fair market value would be defeated by prospective application of our decision. There is no evidence Petitioner would experience a hardship by retroactive application. The constitutional mandate of valuing minerals at their fair market value would be defeated by prospective application.

52. The plain language of Wyoming Constitution Article 15, §11(a) requires that property be valued at “full value” and that the Legislature is given the power to prescribe regulations to determine a “just valuation.” Petitioner alleges this provision demands the same formula for all mineral valuation be used and, therefore, because royalties and production taxes are excluded for other minerals they should be excluded for oil and gas. The Board disagrees and believes the purposeful inclusion of royalties and production taxes in the mineral valuation for oil and gas leads to closer uniformity of valuation of various minerals. This is the same conclusion the Board reached in Amoco, 96-216, supra.

53. The Legislature may have a different formula to value oil and gas than the formulas to value coal, bentonite, uranium, trona and sand and gravel because it is rational the costs associated with the costs of production vary with the different minerals. The Wyoming Constitution requires only that taxpayers similarly situated be treated equally. Thunder Basin Coal Co. v. Bd. of Equalization, 896 P. 1336, 1340 (Wyo. 1995). Amoco, 96-216, supra. There is no showing that similarly situated taxpayers are not being treated equally.

Imposition of Interest

54. Interest is to be assessed when taxes are delinquent. Wyo. Stat. Ann. §39-14-208(c). Taxes are deemed delinquent when the “taxpayer or his agent knew or reasonably should have known that the total tax liability was not paid when due.” Wyo. Stat. Ann. §39-14-208(c)(ii).

55. Prior to the issuance of our initial decision in Amoco, 96-216, supra, on June 29, 2001, Petitioner had reasonable cause to believe no additional taxes were due based on the failure to include royalties and production taxes as direct costs of production in the proportionate profits calculation. Therefore no interest or penalty should accrue prior to June 29, 2001, on the portion of the assessment related to inclusion of royalties and production taxes as direct costs of production in the proportionate profits calculation. Interest is due on the entire assessment from June 29, 2001, until the tax is paid.

56. We conclude that the Department correctly included royalties and production taxes as direct costs of producing in the direct cost ratio used to calculate the taxable value of Petitioner’s 1993 through 1995 production from the Painter fields, Whitney Canyon fields and Carter Creek fields in Uinta and Lincoln counties, Wyoming.

THIS SPACE INTENTIONALLY LEFT BLANK

ORDER

IT IS FURTHER ORDERED the Department’s decision to include royalties and production taxes as direct costs of producing in the direct cost ratio of the proportionate profits method used to determine the value of Petitioner’s 1993 through 1995 oil and gas production from the Ryckman Creek field, Clear Creek field, Painter Reservoir field, East Painter Reservoir field, Whitney Canyon field, and the Carter Creek field, located in Uinta and Lincoln counties, Wyoming, is affirmed.

The Department’s decision to assess interest on the additional taxes due because of the exclusion of royalties and production taxes in the proportionate profit formula that accrued prior to June, 2001 is reversed but the interest assessed by the Department from June 2001 is affirmed.

Pursuant to Wyoming Statute Section 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 2^nd day of June, 2004.

STATE BOARD OF EQUALIZATION

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Roberta A. Coates, Chairman

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Alan B. Minier, Vice-Chairman

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Thomas R. Satterfield, Board Member

ATTEST:

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Wendy J. Soto, Executive Secretary

CERTIFICATE OF SERVICE