_____________________________________________________________________________________________________________

William J. Thomson, Randall B. Reed, and Brian Hanify, Dray, Thomson & Dyekman, P.C., for Chevron U.S.A. Inc, Petitioner.

Martin L. Hardsocg, Senior Assistant Attorney General, Karl D. Anderson, Senior Assistant Attorney General, for the Wyoming Department of Revenue, Respondent.

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. Wyo. Stat. Ann. §39-14-209(b). 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); Rules, Wyoming State Board of Equalization, Chapter 2, §5(a). Chevron U.S.A. Inc. timely appealed the final decision of the Department by Notice of Appeal effective December 10, 2003.

This appeal concerns natural gas production by Chevron U.S.A. Inc. (Chevron) in the Painter Complex, Uinta County, Wyoming, for the period January 1, 1996, to December 31, 1998 (Production Years 1996, 1997, 1998). The Department of Revenue (Department), following the completion of an audit of the properties by the Department of Audit (DOA), issued a Final Determination Letter postmarked November 10, 2003. The letter assessed additional severance tax of $995,013.06, with interest through November 19, 2003, of $749,134.00, and increased the ad valorem taxable value on the properties by $18,270,508.00. Chevron appealed the additional assessments to the State Board of Equalization (Board). The Board, Alan B. Minier, Chairman, Thomas R. Satterfield, Vice Chairman, and Thomas D. Roberts, Board Member, held a hearing January 10, 11, 12, 2005.

We affirm the Department’s inclusion of production taxes and royalties as direct costs in the direct costs ratio of the proportionate profits valuation methodology, and remand for a revised assessment as discussed hereafter.

The notice of appeal by Chevron challenged a number of audit findings which formed the basis of the Department’s assessment. The Department and Chevron have mutually agreed to resolve every disputed issue within the audit assessment, except whether production taxes and royalties were properly included as direct costs of producing in the direct cost ratio of the proportionate profits method.

Chevron, in its “Updated Summary of Contentions,” sets out fourteen distinct issues addressing its assertion the Department’s inclusion of production taxes and royalties as direct costs of producing in the proportionate profits valuation methodology is incorrect. Chevron, in its post-hearing brief, states the arguments identified by the subheadings noted hereafter cover all fourteen issues.

A. The Department’s Rules and Regulations do not include taxes and royalties as direct costs of producing.

B. The Department may not change its own settled interpretation of a statute and implementing rules and regulations without legislative approval or notice and comment rulemaking under the Wyoming Administrative Procedures Act.

F. Chevron contends that more than 100% of production taxes and nonexempt royalties are being subjected to taxation by inclusion in the direct cost ratio.

G. Chevron contends that the direct cost ratio without inclusion of production taxes and royalties does not produce absurd results.

H. The Legislature has specifically determined that royalties and production taxes are not direct costs of production, and any Wyoming case law to the contrary has been legislatively abrogated.

I. Chevron rights to equal and uniform taxation and freedom from special laws for the assessment and collection of taxes have been violated by the Department actions.

J. Interest caused by including production taxes and royalties in the direct cost ratio must be reduced.

Chevron, in its prehearing submissions to the Board, listed five witness to testify at hearing: Christopher L. Chambers, Manager, Upstream Property Tax, Chevron U.S.A., Inc.; Dan Sullivan, a former Wyoming State Senator; R.M. “Johnnie” Burton, a former Director of the Department of Revenue; Paul Grannis, Accounting Financial Analysts, ChevronTexaco; and Melba Armstrong, Analyst, Chevron Services Company. The only witnesses Chevron presented at the hearing were Ms. Burton, Mr. Sullivan, and Mr. Chambers.

1. The controversy in this case turns in part on a formula. To provide context for our findings, we first address how the formula works. We will then place the parties’ dispute in the context of the formula.

2. The Wyoming Legislature, in 1990, adopted proportionate profits as one of four methods to establish the taxable value of natural gas which must be processed before it can be sold. Such processing typically removes impurities such as carbon dioxide or hydrogen sulfide.

3. The proportionate profits method sets the fair market value using this formula:

(I) 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

Wyo. Stat. Ann. §39-24-203(b)(vi)(D). We can express these words graphically:

Direct Costs of Producing

divided by Direct Costs of Producing, Processing, & Transportation

equals

[=]

Direct

Cost

Ratio

4. The calculation begins with the total revenue from sale of the processed natural gas in question.

5. From the total revenue, one subtracts two different kinds of royalties – exempt and non-exempt. Generally speaking, exempt royalties are paid to the United States, the State of Wyoming, or an Indian tribe. Rules, Wyoming Department of Revenue, Chapter 6, §4(o). Non-exempt royalties are paid to private individuals. Rules, Wyoming Department of Revenue, Chapter 6, §4(p). The difference is important because exempt royalties, once subtracted from total revenue at this stage, are not added back in the last step to determine taxable value. Exempt royalties, therefore, never become part of the taxable value of the mineral.

6. Production taxes are generally state severance and county ad valorem taxes on mineral production. Rules, Wyoming Department of Revenue, Chapter 6, §4(n). These taxes can only be calculated once the taxable value of the natural gas production is known. The proportionate profits method is therefore somewhat circular. To determine production taxes, we need to know taxable value. To determine taxable value, we need to know production taxes. While this is not an insurmountable problem, it is an inescapable feature of the proportionate profits method as enacted by the Legislature.

7. The revenue left after subtracting production taxes and royalties is further reduced when it is multiplied by a fraction. The numerator, or upper portion of the fraction, is equal to the direct costs of producing the mineral. There are two terms of art in the phrase, “direct costs of producing.” One is direct costs, as distinguished from indirect costs. The other is producing, which must be distinguished from processing and transportation.

8. The denominator, or lower portion of the fraction, is equal to the direct costs of producing plus the direct costs of processing and transporting the mineral. The statutory definition maintains the distinction between direct and indirect costs for the elements of the denominator.

9. We can see how this works with a simplified example. We will, for this example, ignore what is included in direct costs of producing. Revenue, in the example, can be greater than production taxes, royalties and direct costs, because what is left over can be indirect cost and profit. Here is the example:

Revenue from sale of gas	$13
Production taxes	$1
Exempt royalty	$1
Non-exempt royalty	$1
Direct costs of producing	$3
Direct costs of processing and transportation	$5

10. The first step in determining taxable value is to subtract production taxes and royalties from revenue; that is, $13 minus $3 equals adjusted revenue of $10.

$13.00

minus

[-]

$1.00

equals

[=]

$10.00

11. The second step is to calculate a direct cost ratio. In this case, that means $3 divided by the sum of $3 plus $5, or $3 divided by $8, which equals .375, or 37.5%.

$3.00

divided by

$3.00 + $5.00

($8.00)

equals

[=]

37.5%

12. The third step is to multiply the adjusted revenue of $10 by the direct cost ratio, 37.5%, for a result of $3.75.

$10

times

[x]

37.5%

equals

[=]

$3.75

13. The last step is to add back production taxes of $1.00 and non-exempt royalties of $1.00, to reach a taxable value of $5.75.

$3.75

plus

[+]

$1.00

equals

[=]

$5.75

$3.00

divided by

$3.00 + $5.00

($8.00)

equals

[=]

37.5%

15. The final taxable value may require further recalculation to account for changes to production taxes.

16. We can now illustrate the issue at stake. Chevron reads “direct costs of producing” to include only those operational expenses which occur between the wellhead and the commencement of processing, such as the operating cost, including depreciation, of a gathering system. The Departments of Audit and Revenue read “direct costs of producing” to also include production taxes and royalties as direct costs of producing.

17. Let us assume Chevron reported its gas production based on its reading of the statute, and that report listed the same figures shown in our example. On audit, the Department would insist that direct costs of producing had been understated by the $3.00 of production taxes and royalties. If we temporarily ignore problems of calculation, the Department’s revised calculation would look something like this:

Revenue from sale of gas	$13
Production taxes	$1
Exempt royalty	$1
Non-exempt royalty	$1
Direct costs of producing	$3+$1+$1+$1
Direct costs of processing and transportation	$5

18. The first step in determining taxable value is once again to subtract production taxes and royalties from revenue; that is, $13 minus $3 equals adjusted revenue of $10.

$13.00

minus

[-]

$1.00

equals

[=]

$10.00

19. The second step is to calculate a direct cost ratio. In this case, that now means $6 divided by the sum of $6 plus $5, or $6 divided by $11, which equals .545, or 54.5%.

$3.00 + $1.00 + $1.00 + $1.00

($6.00)

divided by

$3.00 + $1.00 + $1.00 + $1.00+ $5.00 ($11.00)

equals

[=]

54.5%

20. The third step is to multiply the adjusted revenue of $10 by the direct cost ratio (54.5%), the result of which equals $5.45.

$10

times

[x]

54.5%

equals

[=]

$5.45

21. The last step is to add back production taxes of $1.00 and non-exempt royalties of $1.00, to reach a taxable value of $7.45, as compared to the $5.75 originally calculated in our example. Supra, ¶??.

$5.45

plus

[+]

$1.00

equals

[=]

$7.45

$3.00 + $1.00 + $1.00 + $1.00

($6.00)

divided by

$3.00 + $1.00 + $1.00 + $1.00+ $5.00 ($11.00)

equals

[=]

54.5%

23. This higher value would have the effect of increasing production taxes, which in turn would both reduce the adjusted gross revenue (because more tax is subtracted against the original $13) and increase the direct cost ratio (because production tax is a component of direct costs of producing, and direct costs of producing are in both the numerator and denominator of the fraction). This effect eventually reaches a mathematical limit at which no further adjustments are necessary.

24. The ad valorem tax returns filed by Chevron with the Department for 1996, 1997, and 1998 production used the proportionate profits method, but did not include production taxes and royalties as direct costs of producing. The returns also were not accompanied by any supporting documentation showing Chevron’s proportionate profits calculation. [Trans. Vol. II, pp. 282, 289].

25. Chevron did not refer to the coal valuation statute in order to file its ad valorem production reports using proportionate profits methodology for the 1996, 1997, 1998 oil and gas production at issue. [Trans. Vol. II, pp. 211-212].

26. The Department can not discern from the information supplied on severance and ad valorem tax reports as filed with the Department whether or not a taxpayer reporting under proportionate profits has treated production taxes and royalties as direct costs and included them in the direct cost ratio. [Trans. Vol. II, pp. 312-313, 318-319; Vol. III, p. 371].

27. An audit of Chevron’s 1996, 1997, and 1998 Painter production was performed by the DOA. Pursuant to the Department’s February 8, 2002, memorandum and other communications with Chevron, the Department assessment letter included production taxes and royalties as direct costs in the proportionate profits methodology. [Trans. Vol. II, pp. 223, 316-317, 321-322; Exhibits 107, 500].

28. Chevron appealed the Department audit assessment, challenging numerous audit findings. The Department and Chevron have resolved every disputed issue within the audit assessment, except for the issue of inclusion of production taxes and royalties in the direct cost ratio of the proportionate profits method. The Department and Chevron have stipulated, upon resolution by the Board of the production taxes and royalties issue, this matter should be remanded to the Department for a revised assessment consistent with the Board’s ruling. [Trans. Vol. I, pp. 9-11]. Remand is necessary given the assessment calculations could not be finalized without resolution of whether production taxes and royalties are direct production costs. [Trans. Vol. I, pp. 9-11].

29. The only remaining issue for Board consideration is thus the inclusion of production taxes and royalties as direct costs of producing in the proportionate profits method. [Trans. Vol. II, pp. 283, 289, 378].

30. Chevron, in support of its assertion the oil and gas valuation statute does not require inclusion of production taxes and royalties as direct costs of producing in the direct cost ratio, presented Ms. Johnnie Burton as a witness. Ms. Burton was Director of the Wyoming Department of Revenue from January, 1995, through early March, 2002. [Trans. Vol. I, p. 21]. Her duties as Director of the Department included ensuring the Department established a fair market value for minerals. [Trans. Vol. I, p. 23]. Ms. Burton believed the Department was charged with making policy decisions on how to implement the mineral valuation statutes. [Trans. Vol. I, p. 25].

31. The DOA, in the process of auditing gas processing plants in southwest Wyoming in 1996, raised the issue of production taxes and royalties as direct costs of producing. The auditors believed production taxes and royalties should be included as direct costs. These were the first audits of production reported after the statutory change in 1990. [Trans. Vol. I, pp. 71-72, 76, 100, Vol. II, pp. 313-314].

32. Ms. Burton initially agreed production taxes and royalties should be included as direct costs of producing within the direct cost ratio. This decision was based at least in part on legal advice from a senior assistant attorney general stating that since the oil and gas valuation statue was silent on the issue of exclusion, production taxes and royalties could not be excluded. [Trans. Vol. I, pp. 32-33, 35-36, 38, 54, 88; Vol. II, pp. 313-315].

33. Ms. Burton, after her initial determination production taxes and royalties should be included as direct costs, reconsidered her decision, and subsequently issued a memo in October, 1996, instructing the DOA to exclude production taxes and royalties from the direct cost ratio of the proportionate profits method. [Trans. Vol. I, pp. 32-33, 35-37, 52; Vol. II, pp. 313-315; Exhibit 105].

34. Ms. Burton, prior to issuing her October, 1996, memo, discussed the exclusion of production taxes and royalties from the direct cost ratio with the Wyoming Attorney General. She informed the Attorney General she contemplated making a policy decision which conflicted with the legal advice given her by a senior assistant attorney general. The Attorney General informed her she was not breaking the law and said, “No, you have an honest disagreement.” [Trans. Vol. I, pp. 38-39; Exhibit 105].

35. Ms. Burton also discussed the issue of production taxes and royalties as direct costs with Governor Geringer at least three times in the summer of 1996, and pointed out the auditors did not agree with her position production taxes and royalties should be excluded from the direct cost ratio. The Governor told her, “Do what you think is right.” [Trans. Vol. I, pp. 40-41]

36. Ms. Burton also contacted Dan Sullivan and Cynthia Lummis, the co-chairmen of the Joint Interim Revenue Committee, to discuss why the Legislature had excluded production taxes and royalties in the direct cost ratio for coal, but was silent about that issue for oil and gas. Sullivan, by that time a lobbyist for oil and gas interests, told Ms. Burton that he felt the proportionate profits method should be applied the same way for the two different types of minerals. [Trans. Vol. I, pp. 33-35;Vol. II, pp. 142-146].

37. The proportionate profits methodology for coal does not require inclusion of production taxes and royalties as direct costs of mining in the direct cost ratio. [Trans. Vol. II, pp. 136, 153-154, 157]; Wyo. Stat. Ann. §39-14-103(b)(vii)(D).

38. Ms. Burton felt the proportionate profits methodology had to be applied the same for oil and gas as it was applied to coal. She believed the proportionate profits method should be applied the same to all minerals. [Trans. Vol. I, pp. 28, 61].

39. The DOA disagreed with Ms. Burton on exclusion of production taxes and royalties from the direct cost ratio. The interpretation by DOA was production taxes and royalties should be included in the ratio as direct costs of production. [Trans. Vol. I, pp. 43-44].

40. Ms. Burton recognizes in her October 6, 1996, memo production taxes are direct costs of production:

I would certainly agree with including production taxes in the ratio if they weren’t present elsewhere in the formula. But you can’t have it both ways in the same formula. This is not denying that production taxes are a direct cost of production. The formula (applied without taxes in the ratio) recognizes that fact since 100% of the taxes are included in the taxable value.

(Emphasis added). Her main concern was what she perceived to be “double taxation” if production taxes and royalties were included in the direct cost ratio as direct costs of producing. The memo stated: “[i]f 100% of the production taxes are set aside (subtracted) in the first step of the formula, and 100% of those taxes are brought back in (added) in the third and last step, they cannot in any way be included in the second step or else you end up with a taxable value that includes somewhat more than 100% of taxes.” [Exhibit 105].

41. Ms. Burton, as director of the Department at the time of the October, 1996, memo, did not deem it necessary to draft Rules to incorporate the decision to include production taxes and royalties as direct costs. [Trans. Vol. I, p. 68].

42. The DOA followed the policy of exclusion as set forth in the October, 1996, memo after it was issued based on the agreement between the DOA and the Department that the Department would set policy, and the DOA would audit to the policy. [Trans. Vol. I, p. 44].

43. Uinta County, in 1996, appealed Ms. Burton’s decision to exclude production taxes and royalties as direct costs of producing in a case which became this Board’s Docket No. 96-216. Appeal of Amoco Production Company, June 29, 2001, 2001 WL 770800 (Wyo. St. Bd. Eq.), on reconsideration, September 24, 2001, 2001 WL 1150220; reversed on other grounds, Amoco Production Company v. Department of Revenue et. al., 2004 WY 89, 94 P.3d 430 (2004). This was the first mineral tax appeal in which the issue of classification of production taxes and royalties was raised, and addressed the first years in which the proportionate profits method was applied. (Trans. Vol. II, pp. 312-314).

44. When the Board finally resolved Docket No. 96-216 in September, 2001, deciding that production taxes and royalties were direct costs of producing, the Department did not appeal. Ms. Burton felt an appeal would not be appropriate, would not be a politically “good thing to do.” The Attorney General’s office weighed heavily in making the decision not to appeal. Ms. Burton also discussed appeal with the Governor and his staff. The consensus was the Department had done what it needed to do, had interpreted the statute; the Board disagreed; the Department was incorrect; let’s move forward. Ms. Burton changed the Department policy to include production taxes and royalties as direct costs of production after the State Board decision in Amoco, 96-216, as she believed it was the duty of the Department to apply what the State Board had decided. [Trans. Vol. I, pp. 45-46, 67-68, 92-94, 315-316].

45. Following Amoco Production Company’s appeal of the Docket No. 96-216 decision, the Wyoming Supreme Court did not address nor resolve the issue of production taxes and royalties as direct costs of producing in the direct cost ratio. Amoco Prod. Co. v. Dep’t of Revenue, et al., 2004 WY 89, 94 P.3d 430 (Wyo. 2004). Holding that Uinta County was improperly permitted to intervene, the Supreme Court affirmed the Department’s assessment in all respects. Thus, while Uinta County’s right to intervene in that appeal was determined and all other factual and legal issues were finally adjudicated, the issue of whether production taxes and royalties are properly classified as direct costs of production remained unresolved. The State Board’s determination and analysis in Docket No. 96-216, as well as the Department’s application of the proportionate profits methodology which is consistent with the State Board’s ruling, remain intact as the prevailing application of law. [Trans. Vol. II, pp. 300-307, 316-317; Exhibit 107].

46. Notwithstanding its prior position in Docket No. 96-216, the Department accepted the State Board’s resolution on the merits, and applied the decision in valuing Chevron’s production at issue herein. [Trans. Vol. I, pp. 46, 67-68; Vol. II, pp. 299-307, 316-318, 320-321; Vol. III, pp. 334-335; Exhibit 107].

47. The Department’s current position, as expressed by Craig Grenvik, asserts production taxes and royalties should be included as direct costs of producing in the proportionate profits valuation calculation based upon the Board’s decision in Amoco, 96-216; the statutes and rules, as well as other indicators such as Council of Petroleum Accountants Societies, Inc. (COPAS) Bulletins, in particular numbers 4 and 16; certain petroleum accounting manuals; and the fact that production taxes and royalties were included in the proportionate profits valuation calculation for coal in 1988 and 1989 when the method was first used in Wyoming. Production taxes and royalties were excluded as direct costs for coal valuation only because of the 1990 legislation. [Trans. Vol. II, pp. 299-307, 316-318; Vol. III, pp. 334-335, 345; Exhibit 107]. See, Facts Infra, ¶¶ 54, 57.

48. Chevron, in challenging the inclusion of production taxes and royalties as direct costs of producing, presented evidence which reached back to the original passage of the proportionate profits statute in 1990. Chevron called as a witness Dan Sullivan, who in 1990 was a member of the Wyoming State Senate, as well as chairman of the Senate Revenue Committee and co-chairman of the Joint Interim Revenue Committee. [Trans. Vol. II, pp. 119-120]. In late 1990, Sullivan left public office to become a lobbyist for oil and gas companies. [Trans. Vol. II, pp. 144-147]. We find these longstanding business affiliations unavoidably introduce an element of bias in Sullivan’s testimony.

49. Sullivan testified that when the Joint Interim Revenue Committee defined the proportionate profits method in the coal statutes, it was defining the proportionate profits method for other minerals as well. [Trans. Vol. II, pp. 136-137]. In support of this view, Sullivan referred to a Memorandum of February 1, 1990, entitled “Mineral Taxation Report,” which the Committee prepared and circulated to the members of the Legislature. [Exhibit 103]. Sullivan signed the February 1, 1990, Joint Revenue Committee Report as chairman, and was responsible for its contents which represented the consensus of the Committee. The purpose of the Report was to explain the Committee’s year-long review of mineral statutes, and introduce and explain recommended legislation which was attached to the Report. It was the front end of the process which would end up with various bills for very specific industries. There is no documentation or report which indicates the entire 1990 Legislature agreed with the Joint Committee report. [Trans. Vol. II, pp. 120-121, 127, 148-151, 173; Exhibit 103].

50. One of the goals of the proposed legislation which accompanied the Report was to provide some stability and certainty in mineral tax policy, keeping in mind the minerals have a value to the State of Wyoming, for which it should receive compensation regardless of the profitability of the extractive industry. [Trans. Vol. II, pp. 130-132].

51. Sullivan directed the Board’s attention to the Memorandum’s description of the proportionate profits method for oil and gas, which says, “basically the same method as used by coal producers (see the explanation for coal).” [Exhibit 103, p. 6]. The simplified example of the proportionate profits method for coal states, that, “[u]nder this concept, the sales price of the coal is multiplied by the ratio determined by dividing the mining cost by the total cost (mining plus processing cost)....” [Exhibit 103, p. 5]. This was followed by a brief example, which showed how to use a sales price, mining cost, and total cost to reach a taxable value. [Exhibit 103, p. 5].

52. Sullivan’s Memorandum supports the conclusion the Legislature adopted a proportionate profits method for coal, and for oil and gas. It does not, however, support the conclusion that the proportionate profits calculations for the two types of minerals were to be the same. The Memorandum says nothing at all about the characterization of production taxes and royalties as direct costs of producing. [Exhibit 103]. Instead, the details of the method were left to the language of specified mineral valuation bills, including “HB 148” for solid mineral valuation and “HB 149” for oil and gas valuation. Although the two bills were attached to the original Memorandum, they were not attached to the copy of the Memorandum provided to the Board. [Exhibit 103]. We nonetheless take notice of HB 148 and HB 149, both of which are a matter of public record. House Bill 148, 1990 Legislature, 50^th Session (Wyo. 1990); House Bill 149, 1990 Legislature, 50^th Session (Wyo. 1990).

53. The February 1, 1990, Joint Interim Revenue Committee Report does not contain any discussion on the issue of treatment of production taxes and royalties for the various minerals. The tax and royalty issue was discussed in the context of each of the industry specific bills with the Legislature taking input from affected industry representatives as to the language of each bill. [Trans. Vol. II, pp. 175-179; Exhibit 103].

54. The valuation bills for coal and bentonite as enacted by the 1990 Legislature specifically and knowingly exclude royalty and production taxes as direct mining costs in the proportionate profits methodology; the bill for oil and gas does not. Each proposed bill was worked in detail by the Joint Committee. [Trans. Vol. II, pp. 192-193, 205].

55. Each of the mineral industry segments, oil and gas, coal, trona, bentonite, etc, have slightly different economic structures with which the 1990 Legislature was concerned, thus the need for separate valuations bills. [Trans. Vol. II, p. 187].

56. The oil and gas valuation bill had little or no change as enacted from what was proposed as an appendix to the Joint Interim Revenue Committee Report. [Trans. Vol. II, pp. 134-135, 180, 199-200, 262].

57. The valuation of coal using the proportionate profits methodology for production years 1988 and 1989 included production taxes and royalties as direct costs of producing. Production taxes and royalties were excluded as direct costs only after enactment of the 1990 valuation legislation for coal. [Trans. Vol. III, pp. 372-374].

58. Mr. Sullivan does not believe the oil and gas proportionate profits statute is ambiguous. [Trans. Vol. II, p. 169].

59. The Department does not believe the proportionate profits valuation statute for oil and gas is ambiguous. [Trans. Vol. II, p. 301].

60. The different and very specific statements of the proportionate profits method, as that method applies to coal and to oil and gas, are the same in HB 148 and HB 149 as in the current statutes. Wyo. Stat. Ann. §39-14-103(b)(vii); Wyo. Stat. Ann. §39-14-203(b)(vi)(D). Since these different formulations already existed by the time the Memorandum was prepared, it makes no sense to claim that the general, simplified example found in the Memorandum expresses an intention which should control the very specific language of HB 148 and HB149. In fact, the Memorandum suggests the differences were intentional: “[t]o the extent possible, each mineral should be reviewed separately because each has its own uniqueness and the Committee needed to concentrate on the specific problems and challenges that reality presented.” [Exhibit 103, p. 1]. Sullivan stated that the affected industrial citizens helped the Committee understand their respective businesses. [Trans. Vol. II, pp. 133-134].

61. At the hearing, Dan Sullivan stated his view that if direct costs of producing include production taxes and royalties, the result is a taxable value greater than one hundred percent. [Trans. Vol. II, p. 167]. He did not, however, try to defend this view during the hearing. [Trans. Vol. I, pp. 188-189]. As we have already seen from our examples of how the proportionate profits method is calculated, this cannot be so, because the direct cost ratio is applied against revenue excluding production taxes and royalties. Supra, ¶¶3, 10, 18. Since the purpose of the ratio is to reduce taxable value, a calculation which includes production taxes and royalties as direct costs of producing reduces taxable value less than a calculation which does not. Supra, ¶¶10, 18. With either calculation, the direct cost ratio still produces a smaller taxable value than using one hundred percent of adjusted revenue. The Department’s current view is that the ratio is simply part of a formula. [Trans. Vol. II, pp.

319-320]. The Department’s view makes sense to us. The view of Dan Sullivan is not well-grounded in fact or law.

62. Senator Robert Peck, during the 2002 Legislative Session, and after the Department had notified all gas producers to include production taxes and royalties as direct costs [Exhibit 107], introduced Senate File 69 which would have excluded production taxes and royalties from the direct cost ratio within the proportionate profits valuation for oil and gas. Amendments offered during consideration of the bill demonstrate it was a specific response to the State Board’s ruling in Docket No. 96-216. Senate File 69 was an attempt to conform the oil and gas proportionate profits statute more closely to the coal statute. [Trans. Vol. II, pp. 170-172, 307]; See 2002 Digest Senate and House Journals, p. 182.

63. Senate File 69 failed on a tie vote on third reading in the House. It failed passage, at least in part according to Chris Chambers on behalf of Chevron, because efforts by industry lobbyist ceased once it became known Governor Geringer was “probably going to veto the bill” if passed. [Trans. Vol. I, p. 74; Vol. II, p. 240].

64. Different minerals are extracted in different manners. This is one reason why valuation statutes, as well as the severance tax statutes, are different for different minerals. Coal production, for example, has more significant production than processing costs. Sour natural gas on the other hand has more significant processing costs than production costs. This is a possible reason for the difference in the way the proportionate profits methodology is used for coal as opposed to natural gas. [Trans. Vol. II, pp. 294-296].

65. The Department asserts there is nothing in the oil and gas valuation statute which directs oil and gas be valued using the proportionate profits formula set forth in the coal valuation statute. The Department asserts the valuation statute for each mineral stands on its own, and should be interpreted as such. [Trans. Vol. II, pp. 290, 292].

66. The exclusion of production taxes and royalties as direct costs of producing in the proportionate profits valuation calculation can lead to what the Department has characterized as “an absurd result.” It can allow a producer-processor of natural gas a processing deduction three to four times the actual costs incurred to process the gas, whereas a producer whose gas is processed in a plant in which it does not own an interest is allowed to deduct only the actual expense of processing. This situation can occur with gas production from the same well bore which is owned both by producers who own an interest in the processing plant, and those who do not. [Trans. Vol. II, pp. 296-297; Vol. III, p. 346].

67. Tax exempt royalties are deducted from gross sales value, thus such royalties are not taxed under the proportionate profits valuation methodology. Inclusion of exempt royalties as direct costs of producing in the direct costs ratio does not subject such royalties to any tax. [Trans. Vol. II, pp. 319-320].

68. Additionally, as noted by Craig Grenvik, royalties are specifically treated as direct costs of production within the field of oil and gas accounting as indicated by COPAS Bulletins 4 and 16. [Trans. Vol. II, pp. 300-301; Vol. III, p. 345]. COPAS is an organization which establishes accounting guidelines, model form interpretations, best practices, training, and reference publications for mineral industry participants. See, http://www.copas.org/About.aspx.

69. The disagreement between the Department and Chevron with regard to use of the proportionate profits methodology is to a great extent a difference in judgement as to whether the method allows excessive processing deductions. [Trans. Vol. III, p. 376].

70. The Department agrees interest on any increase in value resulting solely from the inclusion of production taxes and royalties as direct costs of producing in the proportionate profits valuation calculation should be calculated from February 8, 2002, the date of the memo from then Mineral Division Director Randy Bolles notifying all producers production taxes and royalties should be included as direct costs. [Trans. Vol. II, pp. 306-307; Vol. III, pp. 327-328].

71. Any portion of the Statement of the Case or Contentions and Issues set forth above, or any portion of the Conclusions of Law - Principles of Law or the Conclusions of Law - Application of Principles 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.

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 for review can be resolved successfully without invading the statutory prerogatives of the Department.

Amoco Production Company v. Wyoming State Board of Equalization, 12 P.3d 668, 674 (Wyo. 2000). The Board’s duty is to adjudicate the dispute between taxpayers and the Department.

73. 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).

74. “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....

75. The Board, in interpreting a statute, follows 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).

76. The Board considers 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). The language which appears in one section of a statute but not another, will not be read into the section where it is absent. Matter of Adoption of Voss, 550 P.2d 481 (Wyo. 1976).

77. It is an elementary rule of statutory interpretation that all portions of an act must be read in pari materia, and every word, clause and sentence of it must be considered so that no

part will be inoperative or superfluous. Also applicable is the oft-repeated rule it must be presumed the Legislature did not intend futile things. Hamlin v. Transcon Lines, 701 P.2d 1139 (Wyo. 1985); Fall v. State, 963 P.2d 981 (Wyo. 1998).

78. "Affidavits by legislators or other persons involved in the enactment of a statute are not a proper source of legislative history." Independent Producers Marketing Corp. v. Cobb, 721 P.2d 1106, 1108 (Wyo. 1986); Greenwalt v. RAM Restaurant Corporation of Wyoming, 2003 WY 77, 71 P.3d 717 (2003).

79. Agency rules and regulations adopted pursuant to statutory authority have the force and effect of law, and courts will defer to an agency’s construction of its own rules unless such construction is clearly erroneous or inconsistent with the plain meaning of the rules. Doidge v. State Board of Charities and Reform, 789 P.2d 880, 883-884 (Wyo. 1990); Swift v. Sublette County Board of County Commissioners, 2002 WY 32, ¶10, 40 P.3d 1235, 1238 (2002).

80. Legislative inaction following a contemporaneous and practical interpretation is evidence the legislature does not differ with 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 Norman J. Singer, Statutes and Statutory Construction §49:10, pp. 117-118, fn. 6 (6th ed., 2000 Revision).

81. “Equal protection in Wyoming requires a law to operate alike upon all persons or property under the same circumstances and conditions.” W. W. Enterprises, Inc., v. City of Cheyenne, 956 P.2d 353, 356 (emphasis in original text).

82. Wyoming’s severance tax is an excise tax imposed upon the privilege of severing the mineral. Belco Petroleum Corp. v. State Bd. of Equalization, 587 P.2d 204, 210 (Wyo. 1978).

83. The county ad valorem tax upon minerals is a property tax upon the value of the mineral imposed in lieu of the tax which would otherwise be imposed upon the surface estate. Wyo. Const., art. 15, §3. “An ad valorem tax is a property tax imposed upon the value of the mineral produced.” Wyoming State Tax Comm’n v. BHP Petroleum Co. Inc., 856 P.2d 428, 434 (Wyo. 1993).

84. The Wyoming Supreme Court recently set out the process used to value mineral production:

The process of “valuing” mineral production for tax purposes is lengthy, involving these steps:

1. The taxpayer files monthly severance tax returns. Wyo. Stat. Ann. §39-14-207(a)(v) (LexisNexis 2001).

2. The taxpayer files an ad valorem tax return by February 25 in the year following production, and certifies its accuracy under oath. Wyo. Stat. Ann. §39-14-207(a)(i) (LexisNexis 2001).

3. The Department of Revenue values the production at its fair market value based on the taxpayer’s ad valorem return. Wyo. Stat. Ann. §39-14-202(a)(ii) (LexisNexis 2001).

4. The Department of Revenue then certifies the valuation to the county assessor of the county the minerals were produced in to be entered on the assessment rolls of the county. Wyo. Stat. Ann. §39-14-202(a)(iii) (LexisNexis 2001).

5. The taxpayer then has one year to file an amended ad valorem return requesting a refund. Wyo. Stat. Ann. §39-14-209(c)(i) (LexisNexis 2001).

6. The Department of Audit has five years from the date the return is filed to begin an audit, and must complete the audit within two years. Wyo. Stat. Ann. §39-14-208(b)(iii), (v)(D), (vii) (LexisNexis 2001).

7. Any assessment resulting from the audit must be issued within one year after the audit is complete. Wyo. Stat. Ann. §39-14-208(b)(v)(E) (LexisNexis 2001).

Board of County Commissioners of Sublette County v. Exxon Mobil Corporation, 2002 WY 151, ¶11, 55 P.3d 714 (Wyo. 2002). (Commencing January 1, 2003, the time frame for audits was reduced. See Wyo. Stat. Ann. §39-14-208(b)(vii).)

85. The Supreme Court recently summarized the procedure the Board must follow when an oil and gas taxpayer challenges the fair market value determined by the Department:

The Department’s valuations for state-assessed property are presumed valid, accurate, and correct. Chicago, Burlington & Quincy R.R. Co. v. Bruch, 400 P.2d 494, 498-99 (Wyo. 1965). This presumption can only be overcome by credible evidence to the contrary. Id. 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. Id.

The petitioner has the initial burden to present sufficient credible evidence to overcome the presumption, and a mere difference of opinion as to value is not sufficient. Teton Valley Ranch v. State Board of Equalization, 735 P.2d 107, 113 (Wyo. 1987); Chicago, Burlington & Quincy R.R. Co., 400 P.2d 499. If the petitioner successfully overcomes the presumption, then the Board is required to equally weigh the evidence of all parties and measure it against the appropriate burden of proof. Basin [Electric Power Coop. Inc. v. Dep’t of Revenue, 970 P.2d 841,] at 851 [(Wyo. 1998)]. Once the presumption is successfully overcome, the burden of going forward shifts to the Department to defend its valuation. Id. The petitioner however, by challenging the valuation, bears the ultimate burden of persuasion to prove by a preponderance of the evidence that the valuation was not derived in accordance with the required constitutional and statutory requirements for valuing state-assessed property. Id.

Amoco Production Company v. Department of Revenue et al, 2004 WY 89, ¶¶7-8, 94 P.3d 430, 435-436 (2004); accord, Airtouch Communications, Inc. v. Department of Revenue, State of Wyoming, 2003 WY 114, ¶12, 76 P.3d 342, 348 (2003); Colorado Interstate Gas Company v. Wyoming Department of Revenue, 2001 WY 34, ¶¶9-11, 20 P.3d 528, 531 (2001). The presumption the Department correctly performed the assessment rests in part on the complex nature of taxation. Airtouch Communications, Inc., 2003 WY 114, ¶13, 76 P.3d 342, 348 (2003).

86. 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. For oil and gas, the “[v]alue of the gross product ‘means fair market value as prescribed by W. S. 39-14-203(b) less any deductions and exemption allowed by Wyoming law or rules.’” Wyo. Stat. Ann. §39-14-201(a)(xxix).

87. The Department is required to annually value oil and gas at fair market value. Wyo. Stat. Ann. §39-14-202(a)(i). The Department may also rely on final audit findings, taxpayer amended returns, or department reviews of value in valuing oil and gas production. Wyo. Stat. Ann. §39-14-208(b)(iii).

88. The fair market value for natural gas must be determined “after the production process is completed.” Wyo. Stat. Ann. §39-14-203(b)(ii). Expenses “incurred by the producer prior to the point of valuation are not deductible in determining the fair market value of the mineral.” Wyo. Stat. Ann. §39-14-203(b)(ii).

89. “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.” Wyo. Stat. Ann. §39-14-203(b)(iv). “When no dehydration is performed, other than within a processing facility, the production process is completed at the inlet of the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first.” Wyo. Stat. Ann. §39-14-203(b)(iv).

90. The Department may employ only one of four methods to determine fair market value of natural gas not sold prior to the point of valuation. Wyo. Stat. Ann. §39-14-203(b)(vi). The relevant method in this matter is proportionate profits:

(I) 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

Wyo. Stat. Ann. §39-14-203(b)(vi)(D). The Legislature prescribed this method in 1990. 1990 Wyo. Sess. Laws, Ch. 54.

91. The use of any direct cost ratio as a multiplier within a proportionate profits formula simply allocates the net sales value of the mineral between the costs incurred in production, and those incurred in processing and transportation. The theory which underlies the method is that “each dollar of total costs paid or incurred to produce, sell and transport the first marketable product . . . earns the same percentage of profit.” Powder River Coal Co. v. Wyoming State Bd. of Equalization, 2002 WY 5, ¶ 8, 38 P.3d 423 (Wyo. 2002).

92. A valuation method may yield a deduction so low that the method is constitutionally impermissible. If “an artificially low price were utilized for purposes of taxation, the result would be a lower tax for operators (with the excessive deduction) than that paid by other operators. That lack of uniformity would be unacceptable because ‘the Wyoming Constitution mandates that all [minerals] shall be uniformly taxed on the value of their gross product.’ Amax Coal West, Inc., 896 P.2d at 1332.” Wyodak Resources Development Corporation v. Wyoming Department of Revenue, 2002 WY 181, ¶34, 60 P.3d 129, 142 (Wyo. 2002).

93. The Department Rules, Chapter 6, Ad Valorem and Severance Taxes On Mineral Production contains the following definitions:

Section 4. Definitions-General. The definitions set forth in Title 39 of the 1977 Wyoming Statutes, as amended, are incorporated by reference in this chapter. In addition, the following definitions shall apply:

(n) “Production taxes” means the severance tax authorized by W. S. 39-6-302 and the Ad Valorem (Gross Products) Tax authorized by W. S. 39-2-201, the Oil and Gas Conservation tax authorized by W. S. 30-5-116, black lung excise tax authorized by 26 USC Section 4121 and the abandoned mine lands fee authorized by 30 USC Section 1232, as determined on the accrual basis of accounting in accordance with generally accepted accounting principles.

(o) “Exempt royalty” means royalty expense, as determined on the accrual basis accounting in accordance with generally accepted accounting principles, for interests owned by the United States, the State of Wyoming, or an Indian tribe.

(p) “Nonexempt royalty” means royalty expense, as determined on the accrual basis accounting in accordance with generally accepted accounting principles, for all royalty expense other than exempt royalty.

(w) “Direct costs of producing” includes labor for field and production personnel whose primary responsibility is extraction of crude oil, lease condensate, natural gas and other mineral products removed from the production stream before processing; materials and supplies used for and during the production process; depreciation expense for field equipment used to take the production stream from the wellhead to the point of valuation; fuel, power and other utilities used for production and maintenance; gathering and transportation expenses from the wellhead to the point of valuation; ad valorem taxes on production and transportation equipment; intangible drilling costs, including dry hole expense; and other direct costs incurred prior to the point of valuation that are specifically attributable to producing mineral products.

(x) “Direct costs of producing, processing and transporting” includes the direct cost of producing determined under paragraph (w) of this section plus transportation and processing plant or facility labor whose primary purpose is transporting or processing crude oil, plant condensate, natural gas and other mineral products removed from the production stream; materials and supplies used for transporting and processing; depreciation expense for equipment used for transportation and processing; fuel, power and other utilities used for transportation and processing and maintenance of the transporting and processing plant or facilities; transportation from the point of valuation to the processing plant or facility to the extent included in the price and provided by the producer; ad valorem taxes on the transporting equipment and processing plant or facility; and any other direct costs incurred that are specifically attributable to the transporting or processing of mineral products contained in the production stream.

(vii) For coal sold away from the mouth of the mine pursuant to a bona fide arms-length sale, the department shall calculate the fair market value of coal by multiplying the sales value of extracted coal, less transportation to market provided by a third party to the extent included in sales value, all royalties, ad valorem production taxes, severance taxes, black lung excise taxes and abandoned mine lands fees, by the ratio of direct mining costs to total direct costs. Nonexempt royalties, ad valorem production taxes, severance taxes, black lung excise taxes and abandoned mine lands fees shall then be added to determine fair market value. For purposes of this paragraph:

(B) Direct mining costs include mining labor including mine foremen and supervisory personnel whose primary responsibility is extraction of coal, supplies used for mining, mining equipment depreciation, fuel, power and other utilities used for mining, maintenance of mining equipment, coal transportation from the point of severance to the mouth of the mine, and any other direct costs incurred prior to the mouth of the mine that are specifically attributable to the mining operation;

95. The Wyoming statute for valuation of bentonite is Wyo. Stat. Ann. §39-14-403:

(iii) In the event the bentonite is not sold at the mouth of the mine by bona fide arms-length sale, or, except as hereafter provided, if the product of the mine is used without sale, the department shall determine the fair market value of bentonite in accordance with paragraph (iv) of this section;

(iv) The department shall determine the value of bentonite for severance and ad valorem tax purposes as follows:

(A) For bentonite sold away from the mouth of the mine, the taxable value shall be calculated by adding to each producer's actual direct cost of mining per unit, an allocation of indirect costs, overhead and profit, per unit, as determined by the method prescribed in subdivision (I) of this subparagraph plus nonexempt royalty and production taxes per unit:

(III) Subsequent adjustments to the add-on amount as initially determined under the provisions of subdivision (II) of this subparagraph and as subsequently determined under the provisions of this subdivision shall be recalculated each year with the base year being the initial year of this act. The recalculated add-on amount per unit for each producer shall be determined by multiplying the previous, or initial, add-on percentage amount by the difference between each individual bentonite producer's percentage increase or decrease in mining costs per unit from the percentage increase or decrease in sales price per unit and then adding this amount to the initial industry wide or previous percentage add-on factor. Sales price per unit for purposes of this formula shall be the weighted average sales price per unit for each producer based on the actual arms-length sales of milled bentonite used for taconite, foundry and drilling mud applications (including crushed and dried shipments), where user destinations are known to be in the United States and Canada. Packaged sales of bentonite in these three (3) categories shall be included after deducting the packaging premium. The packaging premium shall be calculated by subtracting the weighted average sales price per ton of bulk sales in these three (3) categories from the weighted average sales price per ton of package sales in these three (3) categories. If substantial arms-length transactions, which are at least five percent (5%) of total transactions in a particular category, do not exist for a producer in a specific targeted sales category, average pricing determined from arms-length transactions in that specific category by all producers shall be imposed. In no event shall the value of the bentonite product include any processing functions or operations regardless of where the processing is performed. As used in this subsection, direct mining costs include but are not limited to mining labor including mine foremen and supervisory personnel whose primary responsibility is extraction of bentonite, supplies used for mining, mining equipment, fuel, power and other utilities used for mining, maintenance of mining equipment, depreciation of mining equipment, reclamation, ad valorem property taxes on mining equipment, transportation of bentonite from the point of severance to the point of valuation and any other costs incurred prior to the point of valuation that are directly and specifically attributable to the mining operation. Royalty and production taxes shall be excluded from mine mouth cost for purposes of computation. In no event and under no circumstances shall the value of bentonite be less than the direct mining costs plus nonexempt royalty and production taxes; [Emphasis added].

96. The Wyoming Supreme Court, in Hillard v. Big Horn Coal, considered the definition of royalty as set out in Picard v. Richards, 366 P.2d 119 (Wyo. 1961), and stated:

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).

97. The Wyoming Supreme Court, in Hillard, clearly stated reasonable classifications for tax purposes are allowed, which would include separate classifications by mineral:

The law of the State of Wyoming, however, justifies reasonable classification for purposes of taxation (State v. Willingham, 9 Wyo. 290, 62 P. 797 (1900)), and we therefore limit our treatment of the issues presented in this case to the application of the valuation method to the mining of coal which, as the trial court found, is a reasonable classification for these purposes.

98. Procedural due process is satisfied “if a person is afforded adequate notice and an opportunity to be heard at a meaningful time and in a meaningful manner.” Robbins v. South Cheyenne Water and Sewage Dist., 792 P.2d 1380, 1385 (Wyo. 1990) (citing Higgins v. State ex. rel. Workers’s Compensation Div., 739 P.2d 129 (Wyo. 1987), cert. den. 484 U. S. 988 (1987).

99. The uniformity of assessment requirement mandates only that the method of appraisal be consistently applied, recognizing there will be differences in valuation resulting from application of the same appraisal method:

The Board contends that reliance upon hypothetical costs is required because of the mandates for uniform assessment (Art. 15, § 11) and equal uniform taxation (Art. 1, § 28) found in the Constitution of the State of Wyoming. These provisions do not require, however, that all minerals of the like kind be assigned the same value. Uniformity of assessment requires only that the method of appraisal be consistently applied. Hillard v. Big Horn Coal Company, supra. It is an intrinsic fact in mineral valuation that differences in values result from the application of an appraisal method.

100. The Wyoming Supreme Court has consistently held article 15, §11 of the Wyoming Constitution requires "only a rational method [of appraisal], equally applied to all property which results in essential fairness." Basin Electric Power Corp. v. Department of Revenue, 970 P.2d 841, 852 (Wyo. 1988) citing Holly Sugar Corp. v. State Bd. Of Equalization, 839 P.2d 959, 964 (Wyo. 1982).

For example, it has long been recognized that, even though mineral products are one class of property, different valuation methods should be applied to different types of minerals. Oil is not valued by using the same method as is used in valuing coal or uranium. See, e.g., Pathfinder Mines Corporation v. State Board of Equalization, 766 P.2d 531 (Wyo.1988) (recognizing that uranium is valued by using a different method than is used in valuing other mineral products).

Amoco Production Co. v. Wyoming State Board of Equalization, 899 P.2d 855, 860 (Wyo. 1995).

102. The Legislature may, and does in fact have, a different formula to value oil and gas than the formulae to value coal, bentonite, uranium, trona, and sand and gravel, as it is a rational conclusion the costs associated with production vary with the different minerals. The equal protection provisions of the Wyoming Constitution require only that taxpayers similarly situated be treated equally. Thunder Basin Coal Co. v. Bd. of Equalization, 896 P.2d 1336, 1340 (Wyo. 1995).

103. The Wyoming Administrative Procedure Act exempts from the rule adoption procedures statements of general policy.

W.S. §16-3-103 Adoption, amendment and repeal of rules; notice; hearing; emergency rules; proceedings to contest; review and approval by governor.

(a) Prior to an agency's adoption, amendment or repeal of all rules other than interpretative rules or statements of general policy, the agency shall:

(b) General notice of proposed rule making shall be published in the Federal Register, unless persons subject thereto are named and either personally served or otherwise have actual notice thereof in accordance with law. The notice shall include–

(1) a statement of the time, place, and nature of public rule making proceedings;

(3) either the terms or substance of the proposed rule or a description of the subjects and issues involved.

Except when notice or hearing is required by statute, this subsection does not apply–

(A) to interpretative rules, general statements of policy, or rules of agency organization, procedure, or practice;

105. A taxpayer “aggrieved by any final administrative decision of the Department may appeal to the state board of equalization.” Wyo. Stat. Ann. §39-14-209(b)(i),(vi). Oil and gas taxpayers are entitled to this remedy:

Following [the Department’s] determination of the fair market value of... natural gas production the department shall notify the taxpayer by mail of the assessed value. The person assessed may file written objections to the assessment with the state board of equalization within thirty (30) days of the date of postmark and appear before the board at a time specified by the board...

106. This appeal is brought under statutes that do not establish any specific standard to guide the Board’s review. Wyo. Stat. Ann. §39-14-209(b). In the absence of specific standards set by statute or rule, we judge the Department’s valuation by the general standard that the valuation must be in accordance with constitutional and statutory requirements for valuing state-assessed property. Amoco Production Company v. Department of Revenue et al, 2004 WY 89, ¶¶7-8, 94 P.3d 430; Wyo. Stat. Ann. §39-14-209(b)(vi). In doing so, we must take into account “the rules, regulations, orders and instructions prescribed by the department.” Wyo. Stat. Ann. §39-11-102.1(c)(iv). We also consider the case in the context of the Board Rule governing the burdens of going forward and of persuasion. Rules, Wyoming State Board of Equalization, Chapter 2, §20. In the Matter of the Appeals of Chevron U.S.A., Inc., BP America Production Company and ME Petroleum Corp., (Production Year 2001, Whitney Canyon), Docket No. 2002-54, 2005 WL 221595 (January 25, 2005).

107. Interest shall be added to all delinquent severance taxes. 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).

A. The Department’s Rules and Regulations - Production taxes and royalties as direct costs of producing.

108. Chevron asserts production taxes and royalties are not specifically defined by the Department Rules as “direct costs of producing” Rules, Wyoming Department of Revenue, Chapter 6, §4b(w), therefore the Department is without authority to include them as direct costs in the direct cost ratio of the proportionate profits valuation methodology for oil and gas.

109. The Department, following enactment of the 1990 mineral valuation statutes, adopted a rule defining direct production costs for the oil and gas. The rule states:

“direct costs of producing” includes labor for field and production personnel whose primary responsibility is extraction of crude oil, lease condensate, natural gas and other mineral products removed from the production stream before processing; materials and supplies used for and during the production process; deprecation expense for field equipment used to take the production stream from the wellhead to the point of valuation; fuel, power and other utilities used fro production and maintenance; gathering and transportation expenses from the wellhead to the point of valuation; ad valorem taxes on production and transportation equipment; intangible drilling costs, including dry hole expenses; and other direct costs incurred prior to the point of valuation that are specifically attributable to producing mineral products.

110. This definition, except for changes related to the differences between coal and oil and gas production, is taken directly from the legislative definition of “direct mining costs” in the coal valuation statute. Compare Rules, Wyoming Department of Revenue, Chapter 6, §4b(w) with Wyo. Stat. Ann. § 39-14-103(b)(vii)(B). Both Department Rules list the same types of production costs, and conclude with an equivalent catch-all phrase, “and other direct costs incurred prior to the point of valuation that are specifically attributable to producing the mineral products.”

111. The Legislature failed to include production taxes and royalties in its definition of indirect costs for coal, and specifically excluded those two items from the direct cost ratio in the proportionate profits valuation methodology for coal.

Indirect costs, royalties, ad valorem production taxes, severance taxes, black lung excise taxes and abandoned mine lands fees shall not be included in the computation of the ratio set forth in this paragraph. 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 operational function without allocation. (emphasis added)

112. If production taxes and royalties are not direct costs of producing within the meaning of the catch-all phrase “and other direct costs . . . ” in the coal valuation statutes and Department’s Rule, then it would be superfluous for the Legislature to specifically exclude such items from the direct cost ratio in the proportionate profits calculation, particularly since those items are not defined as indirect costs. We must presume the specific exclusion of production taxes and royalties by the Legislature was not a futile or superfluous act. Supra, Conclusions ¶77.

113. It is thus not unreasonable for the Department to interpret the catch-all phrase in its Rule to include production taxes and royalties as direct costs of producing in the proportionate profits valuation methodology.

114. The Department’s interpretation is particularly appropriate as to royalties. The Wyoming Supreme Court, in Hillard v. Big Horn Coal, considered the definition of royalty as set out in Picard v. Richards, 366 P.2d 119 (Wyo. 1961), and stated:

115. Even a conclusion the Department’s Rule is silent on the issue of production taxes and royalties as direct costs does not bar the Department from including those items in the direct cost ratio. A reasonable interpretation of Wyo Stat. Ann. §39-14-203(b)(vi)(D) as compared to other proportionate profits methodology statutes supports such inclusion. “It is fundamental in administrative law that a silent rule is not a bar to agency action which is authorized by statute.” Powder River Basin Resource Council v. Wyoming Environmental Quality Council, 869 P.2d 435, 437 (Wyo. 1994).

116. Chevron argues the Department was required to follow Wyoming Administrative Procedure Act (APA) rule adoption procedures in order to “change” its position on inclusion of production taxes and royalties in the direct cost ratio. Chevron argues that after the Burton memo in October, 1996, directing production taxes and royalties be excluded from the ratio, the Department was committed to such a position, and in order to make any change the Department must follow rule adoption procedures. The implication of this argument is that the February 8, 2002, memo from the Department notifying gas producers to include production taxes and royalties as direct costs of producing in the proportionate profits methodology is void as it was not promulgated using rule adoption procedures. [Exhibit 107].

117. Such an argument by Chevron chooses to overlook the fact that this Board, in Amoco 96-216, supra, stated quite clearly the Burton October, 1996, memo directing production taxes and royalties be excluded from the ratio was contrary to law. The Department thereafter correctly recognized its previous interpretation of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) and application of Section 4b(w), Chapter 6 of its Rules was incorrect. [Trans. Vol. III, pp. 334-335]. The Department also concluded its previous interpretation of the proportionate profits method did not return a fair market value for tax purposes as required pursuant to Wyo. Stat. Ann. § 39-14-202(a)(i). [Trans. Vol. II, pp. 299-300; Vol. II, p. 345].

118. The Department was required to remedy its previous erroneous application of the proportionate profits method which it now knew to be incorrect. “[T]he state can not be estopped in the collection of its revenue by an unauthorized rule or regulation of its officers.” Hercules Powder Co. v. State Bd. of Equalization, 210 P.2d 824, 826 (Wyo. 1949). The Department is required to enforce the law as set forth by the Legislature, notwithstanding a prior incorrect statutory interpretation. See D.L. Cook v. Wyoming Oil and Gas Conservation Comm’n, 880 P.2d 583, 585 (Wyo. 1994).

119. Chevron asserts the Board is obligated to apply the Department’s previous, incorrect interpretation of its rules and Wyo. Stat. Ann. § 39-14-203(b)(vi)(D). “It is true, . . . that we generally defer to an agency’s construction of its own rules and regulations. However, it is equally true that ‘where the agency’s interpretation is clearly erroneous or inconsistent with the rule or regulation’s plain meaning, we must disregard it.’” Swift v. Sublette County Bd. of County Comm’rs, 2001 WY 44 ¶ 10, 40 P.3d 1235, 1238 (Wyo. 2002). Chevron’s attempt to foreclose the Department’s correct application of Wyoming tax law is clearly inappropriate.

120. The rule adoption assertion by Chevron is also faulty even presuming for argument purposes the Board decision in Amoco 96-216, supra, did not completely resolve the issue. Such argument is, on its face, a bit anomalous since the October, 1996, memo was itself issued without any rule adoption procedures, and changes a prior Department position, also set forth by Ms. Burton, in an August 6, 1996, memo. The October memo references the August memo, and states: “[t]his memorandum will supercede and cancel the policy directions given to you in my memo dated August 6, 1996, regarding the above referenced subject.” The “above-referenced” subject is “Proportionate Profits Formula.” [Exhibit 105].

121. It further appears from the October memo, as well as testimony at the hearing, the August memo stated a Department position that production taxes and royalties should be included in the direct cost ratio. Supra, Facts ¶32. The October memo states: “[m]y memo of August 6, 1996, considered only the legal argument.” [Exhibit 105]. An assistant attorney general had written a memorandum stating production taxes and royalties should be included in the ratio. Supra, Facts ¶32. The attorney general memo is the “legal argument” to which Ms. Burton referred in her October memo, and supports the conclusion the August memo in fact set forth a Department position production taxes and royalties should properly be included in the direct cost ratio.

122. If Chevron were correct in its argument the Department cannot affect a policy change except through rule adoption procedures, then the same argument applies to the October, 1996, memo by Burton, and the August, 1996, memo as well. The October, 1996, memo, which changes the Department policy to a position with which Chevron now agrees, should be subject to the same rule adoption requirements. Acceptance of Chevron’s argument would thus render invalid the October, 1996, and even the August, 1996, memos as well. The end result would be no written Department position for the production years in question, at least as appears from the record herein, on the issue of inclusion of production taxes and royalties in the direct cost ratio.

123. Chevron, in support of its argument any Department policy change must be adopted as a rule pursuant to the Wyoming APA, cites two federal cases, Paralyzed Veterans of America v. D.C. Arena, L.P., 117 F.3d 579 (D.C. Cir. 1997) and Appalachian Power Company v. Environmental Protection Agency, 208 F.3d 1015, 341 U.S. App. D.C. 46 (D.C. Cir. 2000), both decided under the federal APA, and one Wyoming decision, Hercules Powder Co. v. State Board of Equalization, 66 Wyo. 268, 208 P.2d 1096 (1949), decided before the Wyoming APA was adopted in 1965.

124. While the Wyoming APA may be patterned to some extent on the federal APA, see Scarlett v. Town Council, Town of Jackson, Teton County, 463 P.2d 26, 28, fn. 4 (Wyo. 1969), reliance on federal case authority is not helpful as the Wyoming Supreme Court has on two occasions addressed the same issue raised by Chevron herein.

125. The Department, for as long as twenty (20) years prior to 1986, valued uranium using a federal pricing system known as “Circular 5 Modified.” The Department, in April, 1986, notified by letter all uranium producers in Wyoming it was discontinuing use of Circular 5, and instead would value ore based on the price received less $35.00 per ton processing costs, haulage and taxes. Pathfinder Mines Corporation appealed, asserting in part, as Chevron has asserted herein, the change in the valuation process by the Department was subject to the rule adoption procedures of the Wyoming APA.

126. The Wyoming Supreme Court, in rejecting this argument, stated compliance with the Wyoming APA was not required as long as statutory and constitutional rights to protest had been afforded. The Court also noted the anomaly facing Pathfinder similar to the anomaly facing Chevron herein regarding the prior Department memos:

In first analysis, Taxpayer is presented with an obvious anomaly considering that Circular 5, although applied for at least 20 years, was not adopted by rule itself. Essentially, the system appears to have first happened and then continued after initiation without consideration of changed circumstances engendered by the passing of time until 1986. This court has not previously required that a valuation system adaptation and pricing mechanisms within the Department require promulgation by the regularized rule processes of the WAPA, W.S. 16-3-102(b), as long as statutory and constitutional rights to protest and contest are afforded to the taxpayer. Appeal of Paradise Valley Country Club, 748 P.2d 298; Wyoming Min. Ass'n v. State, 748 P.2d 718 (Wyo.1988).

We concur with the Board in the contention that the basic decision letters as issued by the Department do not constitute rules and need not be adopted pursuant to the WAPA.

Pathfinder Mines Corporation v. State Board of Equalization, 766 P.2d 531, 535-536 (Wyo. 1988).

127. The Court also recognized another possible issue mitigating against requiring compliance with rule adoption procedures for every mineral valuation decision by the Department:

If we determine that every valuation decision of the Department or Board requires a rule adaptation, then we individually involve the Governor with each taxing incident since the Governor must approve all rules and the requirement will cause him to become a direct administrative participant in the tax collection process. See W.S. 16-3-103(d).

128. The Court reaffirmed the Pathfinder conclusions in a 1995 appeal wherein Amoco Production Co. challenged the use by two county assessors of the 1993 Oil & Gas Drilling Rigs & Field Equipment Schedule issued by the Department. Amoco argued reliance on the Schedule was improper as it had not been adopted as a Rule pursuant to the Wyoming APA. The Court, quoting from its Pathfinder decision, rejected Amoco’s argument, and stated “Amoco has been afforded the opportunity in this case to contest the valuation methodology.” Amoco Production Co. v. Wyoming State Board of Equalization, 899 P. 2d 855, 860 (Wyo. 1995).

129. Another basis not mentioned by the Wyoming Supreme Court which indicates the February, 2002, memo need not be subject to rule adoption procedures is the fact it is, in effect, a policy statement which is exempt from such procedures under the Wyoming, as well as the federal APA. Supra, Conclusions ¶¶103, 104.

130. In addition, even the cases cited by Chevron do not support its Rules argument.

131. Paralyzed Veterans concerns “line-of-sight” regulations applicable to the construction of an indoor arena in Washington, D.C. The Department of Justice (DOJ), as part of its Title III and Americans With Disabilities Act (ADA) regulatory responsibility, published a Technical Assistance Manual to interpret certain Code of Federal Regulation (CFR) provisions adopted in connection with the ADA. The Manual contained exceedingly detailed requirements for compliance with the Title III, the ADA, and the CFR provisions. The initial Manual and several annual supplements did not, however, discuss sight lines over standing spectators, or the CFR “line-of-sight” requirements. The DOJ then published, without notice or comment, a subsequent supplement to the original Manual, which set forth very explicit interpretation of the CFR “line-of-sight” requirements.

132. Paralyzed Veterans of America (Veterans) filed suit in federal district court under the ADA to require “line-of-sight” areas for wheelchairs which would provide sight lines over any standing spectators. The district court concluded most, but not all, wheel chair seating areas were required to provide sight lines over standing spectators. Veterans appealed.

133. Veterans, on appeal, asserted the DOJ Manual supplement interpreting the CFR “line-of-sight” requirements was invalid, arguing that once an agency gives a regulation an interpretation, the interpretation can only be changed the same as the regulation - through notice and comment rule adoption.

134. The D.C. Circuit Court of Appeals, in addressing this argument, discussed the difference, under federal law, between an interpretation of a rule, and the substantive rule itself, which has the force and effect law. The Court pointed out that only a change in a substantive rule requires notice and comment. The Court concluded the Manual supplement at issue is an interpretation, not a substantive rule, thus notice and comment before a change is not required. The Court, in reaching its conclusion, noted an agency’s ability to interpret a relevant statute gives rise by analogy to an agency’s ability to interpret its own regulations. And such latitude is not a barrier to an agency altering its interpretation to even one based on a new policy response generated by a new administration. The APA requires rule adoption only if a regulation is repealed or amended. Paralyzed Veterans of America v. D.C. Arena, L.P., 117 F.3d 579, 586 (D.C. Cir. 1997).

135. The policy memos issued by the Department do not rise to the level of substantive rules, and do not amend or repeal any existing Rules. The memos are interpretations of existing statutes and rules defining direct costs of producing. Paralyzed Veterans of America thus does not lend support to the rule adoption argument.

136. Appalachian also does not support Chevron’s rules argument. In Appalachian, the Environmental Protection Agency (EPA) issued a “guidance”document in connection with state operating permit programs under the federal Clean Air Act. The guidance controversy centered on what EPA asserted were non-binding provisions with regard to “periodic testing” of the stack emissions of permitees. The Petitioners, electric power companies and trade associations representing the chemical and petroleum industries, argued the guidance greatly broadened the underlying EPA rule, 40 C.F.R. 70.6(a)(3), and was thus void absent compliance with formal rulemaking procedures. The Court, quoting from Paralyzed Veterans, recognized the necessity of determining whether the guidance carried the force and effect of law, or whether its requirements fell within the scope of the regulation it purported to construe. Appalachian Power Company, 208 F.3d at 1024.

137. The Court analyzed in depth the guidance and its effect on the periodic monitoring requirement as originally set forth in 40 C.F.R. §70.6(a)(3). The Court concluded the guidance broadened the scope of the regulation by giving state regulators significantly more authority to in effect change state and federal clean air standards by using the permit system to amend, supplement, or exceed the extent and frequency of periodic testing of emissions. The Court further recognized the test methods and frequency of testing are substantive requirements. The Court concluded the guidance went far beyond a mere policy interpretation of an existing rule or regulation.

138. The Department’s change in policy - the change in its interpretation of statutes and regulations with regard to production taxes and royalties as direct costs of producing - does not broaden the reach of either statutes or rules, and particularly not to the extent engendered by the guidance issued by the EPA in Appalachian Power Company.

139. The substantive legal standard in this matter is the Department Rules on direct costs, the direct cost ratio, and the proportionate profits method. Supra, Conclusions ¶93. The Department has made no attempt to change to this substantive legal standard. The Department has revised a policy interpretation of a statute and Rule in light of this Board’s decision in Amoco, 96-216, as well as other information. Supra, Facts, ¶¶46, 47.

140. The final authority cited by Chevron is Hercules Powder Co. v. State Board of Equalization. The State Board of Equalization had assessed Hercules sales tax on its deliveries into the state even though Hercules had no office nor salesmen in Wyoming. Anyone wishing to purchase a product from Hercules had to call or write to an office located outside of the state. Hercules asserted in response it was liable only for use tax under which at least some of its sales to Wyoming purchasers would be exempt. The main issue presented on appeal to the Wyoming Supreme Court concerned the Board’s interpretation of the term “purchase” as used in the Board Rules.

141. The Supreme Court noted the term “purchase” had been interpreted by the Board for a significant number of years, from enactment of the Sales and Use Tax Acts in 1937, to the assessment at issue in 1947, to exclude from tax liability those sales by businesses in the same position of Hercules. The Court noted similar prior sales had been subject only to use tax liability. The Court concluded Hercules was entitled to rely on the Board’s long-standing interpretation of the term “purchase.” The Board could not change its interpretation without first “clarifying” its position for the benefit of all taxpayers. A sudden change in a long term interpretation of a unambiguous term without any prior notice would not be allowed.

142. The situation before the Board is significantly different. The Department is not attempting to change the interpretation of such a commonly accepted term as “purchase.” The Department is simply stating its policy position as to the relevant statute and Rules.

143. It should also be noted, apparently contrary to what the Board did in Hercules, this Board’s decision in Amoco 96-216, supra, provided all mineral producers clear notice production taxes and royalties were to be include as direct costs in the direct cost ratio of the proportionate profits valuation methodology.

144. Hercules provides no authority for the assertion the Department must provide notice and comment when it changes a policy position.

145. Chevron asserts the Wyoming Supreme Court decision in Amoco Production Company v. Department of Revenue et. al., 2004 WY 89, 94 P.3d 430 (2004), vacated the Board decision in Amoco 96-216, supra, on the issue of production taxes and royalties, and as such, it is of no precedential value. The Department, under Chevron’s argument, thus has no authority to include production taxes and royalties as a direct cost of producing.

146. This argument chooses to overlook the fact the Wyoming Supreme Court did not address the issue of production taxes and royalties as direct costs of producing, nor the underlying factual findings. The Court simply ruled Uinta County did not have standing to intervene in Docket No. 96-216, and thus had to be dismissed from the appeal. Amoco Production Company, 2004 WY 89, ¶¶9-27. Uinta County had originally raised the issue of whether production taxes and royalties are direct costs of producing. Because Uinta County was dismissed, the Court refused to consider the merits of the Board’s ruling on that issue. Amoco Production Company, 2004 WY 89, ¶26.

We have already held that Uinta County had no authority to intervene. We have also held that Uinta County cannot legally challenge the initial decision by the Department on this issue. Thus, this issue has no place in this particular proceeding at this stage. Judicial economy cannot be invoked as a pretext for this Court to issue an advisory opinion. We decline to review the issue on the merits. [emphasis added].

Amoco Production Company v. Department of Revenue et al, 2004 WY 89, ¶26, 94 P.3d 430, 442 (2004).

147. The requirement to include production taxes and royalties as direct costs of producing is still good law from the perspective of the Department and the Board.

148. The question of inclusion of production taxes and royalties as direct costs of producing is not new. The Board has concluded, on a number of prior occasions, royalties and production taxes must be included as direct costs of producing in order to properly reach fair market value for the mineral in question, primarily processed natural gas. E.g. 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); In the Matter of the Appeal of Fremont County Board of County Commissioners, Docket No. 2000-203, 2003 WL 21774604 (April 30, 2003); In the Matter of the Appeal of ME Petroleum Company, Docket No. 2002-52, 2003 WL 22814612 (November 20, 2003); In the Matter of the Appeal of Amoco Production Company, Docket No. 2001-56, 2003 WL 23164222 (December 30, 2003); In the Matter of the Appeal of Burlington Resources Oil and Gas Co., Docket Nos. 2002-49 et. al., 2004 WL 1174649 (May 10, 2004); In the Matter of the Appeal of BP America Production Company, Docket No. 2003-102, 2005 WL 558991 (March 5, 2005); In the Matter of the Appeal of BP America Production Company, Docket No. 2003-114, 2005 WL 676580 (March 17, 2005); In the Matter of the Appeal of Marathon Oil Company, Docket No. 2004-08, 2005 WL 794788 (March 29, 2005).

149. Chevron challenges the conclusion royalties and production taxes must be included as direct costs of producing in order to properly reach fair market value, asserting basically three arguments. First, the inconsistent interpretations of Wyo. Stat. Ann. §39-14-203(b)(vi)(D) since its adoption in 1990 by the Department indicates the statute is ambiguous, and thus cannot be interpreted to require inclusion of production taxes and royalties as direct costs of producing. Second, the action by the Wyoming Legislature with regard to Senate File 69 introduced in the 2002 Legislative Session indicates production taxes and royalties should not be considered direct costs of production. And third, the coal proportionate profits methodology statute is controlling for oil and gas relying by implication on the February 1, 1990, Joint Interim Revenue Committee Report to the Wyoming Legislature. We find none of these arguments to be persuasive.

150. A review of Wyo. Stat. §39-14-203(b)(vi)(D) itself in the context of other mineral valuation statutes confirms it is not ambiguous.

151. The Legislature specifically excluded royalties and production taxes from the definition of direct costs in the direct cost ratio used in valuing coal under the proportionate profits methodology. Wyo. Stat. Ann. §39-14-103(b)(vii). Supra, Conclusions ¶94. 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. Ann. § 39-14-403(b)(iv)(A)(III). Supra, Conclusions ¶95. It is worth noting these valuation methods for coal and bentonite, which expressly direct production taxes and royalties not be considered direct costs of producing, were enacted simultaneously with Wyo. Stat. §39-14-203(b)(vi)(D) for oil and gas which omits any such directive.

152. By excluding taxes and royalties as costs in the other mineral valuation statutes, the Legislature clearly evidenced its understanding that royalties and production taxes are direct costs of production. The failure of the Legislature to exclude royalties and production taxes from the direct cost of production of oil and gas is an unambiguous indication said royalties and taxes were to be included. Parker v. Artery, 889 P.2d 520 (Wyo. 1995); Matter of Voss Adoption, 550 P.2d 481 (Wyo. 1976).

153. 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 apparent.

154. Chevron asserts the valuation statute at issue, Wyo. Stat. Ann. §39-14-203(b)(vi)(D), is ambiguous because the Department has, over time, changed its position on inclusion of production taxes and royalties as direct costs of producing. The statute is clearly not ambiguous, and the Department changing its position on inclusion does not create ambiguity:

. . . . [W]e deem it important to consider Allied-Signal's contention that the statute under which the tax was assessed is ambiguous when incorporation transfers are involved and stock is the consideration for the purchase because the Department failed to enforce it in that way for the first forty-five years of its existence and then chose to so enforce it only for approximately the last five years. Allied-Signal relies upon Tenneco and argues that such a diametrical interpretation by the Board demonstrates that the statute is ambiguous and must be construed by the courts as a matter of law. As we have noted, this argument is presented in an effort to refute the clear and unambiguous language that we perceived in the statute.

. . . .Tenneco, whatever its perceived similarities may be, does not control to the point of establishing a mechanism to override clear statutory language. Its teachings go no further than identifying and describing a tool that a court may use to resolve an ambiguity once one has been found to be present. That evidentiary tool, in and of itself, should not establish the ambiguity, and we do not understand that the holding in Tenneco is any different.

Our rationale for this observation is found essentially in the realization that inconsistent statutory interpretations often are the product of circumstances that do not really involve an ambiguity. An inconsistent interpretation could be the product of simple error, a change in circumstances, a change in philosophy by the decision makers, or even a change in their identity. Because of the varying possibilities that may lead to inconsistent statutory applications, we do not choose to establish a precedent in which those differing interpretations establish an ambiguity that will justify invoking rules of construction based on extrinsic considerations.

Allied-Signal, Inc. v. Wyoming State Board of Equalization, 813 P.2d 214, 221-222 (Wyo.1991).

155. Additional support for inclusion of royalties and production taxes as direct costs of producing comes from the Wyoming Legislature’s actions (or possibly more accurate, inaction) following issuance of the 2001 Board decision in Amoco 96-216, supra. 2B Norman J. Singer, Statutes and Statutory Construction § 49:10, pp. 117-118, fn. 6 (6th ed., 2000 Revision). Senate File 69, introduced during the 2002 Legislative Session after the Department February 8, 2002, memo was issued directing production taxes and royalties be included as direct costs of producing, offered in pertinent part an amendment to Wyo. Stat. Ann. §39-14-203(b)(iv)(D)(II):

(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. . . .

156. Senate File 69 provided an opportunity for the Legislature to specifically exclude production taxes and royalties as direct costs of producing from the direct cost ratio used in the proportionate profits valuation method for oil and gas. The bill failed passage. Supra, Fact ¶63.

157. The Legislature’s failure to enact Senate File 69 is evidence of the accuracy of the Board interpretation reflected in Amoco 96-216, supra. Supra, Conclusions ¶80.

158. There have, in addition, been three intervening legislative sessions, 2003, 2004, and 2005, since the 2001 Board decision and the failure of Senate File 69 in 2002. There has been no further legislative action to exclude production taxes and royalties as direct costs of producing from the direct cost ratio for oil and gas.

159. Chevron argues, without citation to any authority, inclusion of exempt federal royalties as direct costs in the direct cost ratio of the proportionate profits calculation in some manner subjects those royalties to taxation. Chevron attempts to support this assertion with a simple mathematical example which does, in fact, correctly indicate inclusion of exempt royalty as a direct cost results in a higher taxable value than if the exempt royalty is excluded. Such a result does not, however, support the assertion an exempt royalty is being subject to tax.

160. The proportionate profits valuation statute for oil and gas specifically requires all royalties, both exempt and non-exempt, as well as production taxes, be deducted from gross sales revenue. Supra, Facts ¶¶3, 10, 18. The direct cost ratio is then applied to the remaining revenue. Supra, Facts ¶¶3, 12, 20. Taxable value is then determined by adding to the remaining value the amount of production taxes and non-exempt royalty. Supra, Facts ¶¶3, 13, 20. Any exempt royalties, which are not added to the remaining value to which the tax rate is applied, are obviously not included in taxable value, and thus not subject to any taxation.

161. All exempt royalties are, however, properly included in the direct cost ratio in order to accurately determine what amount of gross sales value should be attributed to production costs which are subject to tax. Royalties, including exempt royalties, must be included in the direct cost ratio to properly determine the allocation of costs and profit.

162. The purpose of the proportionate profits formula is to allocate production and processing costs to arrive at a taxable value. The theory which underlies the method is that “each dollar of total costs paid or incurred to produce, sell and transport the first marketable product . . . earns the same percentage of profit.” Powder River Coal Co. v. Wyoming State Bd. of Equalization, 2002 WY 5, at ¶ 8, 38 P.3d 423 (Wyo. 2002). “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) (emphasis added). The Wyoming Supreme Court has recognized a royalty is a direct cost of production. Hillard v. Big Horn Coal Co., 549 P.2d 293, 301-02 (Wyo. 1976). Royalties are therefore a cost of production to be properly included in the direct cost ratio of the proportionate profits method.

163. The direct cost ratio is a mathematical formula which attempts to reach taxable value by apportioning revenue, net of taxes and royalties, to production costs which are taxable, and processing costs which are not. Exempt royalties in the direct cost ratio function simply as a component of a mathematical equation, and nothing more. Exempt royalties are thus not taxed when used simply as part of a formula.

164. Chevron argues the inclusion of royalties and production taxes in the direct cost ratio would cause more than 100% of royalties and production taxes to be included in the taxable value, citing in support the October, 1996, memorandum from Ms. Burton, the former Director of the Department. [Exhibit 105].

165. This October memo indicates a bit of a misunderstanding of the function of the direct cost ratio in the proportionate profits valuation methodology. The direct cost ratio is merely a multiplier within a proportionate profits formula. It simply allocates the net sales value of the mineral between the costs of production, which are part of taxable fair market value, and those costs incurred in processing and transportation which are not subject to taxation. All production taxes and royalties are first removed from the sales revenue. The direct cost ratio is then applied to the remaining value to apportion costs. Production taxes and non-exempt royalties are only then added back to the resulting value to arrive at fair market value for the mineral. Supra, ¶¶3, 10, 12, 13, 18, 20, 21.

166. Use of production taxes and royalties in the direct cost ratio does not in any manner expose either of those components to taxation. Their use in the ratio is nothing more than as an element of a mathematical application which then ultimately assists the Department in arriving at fair market value for the mineral in question. The direct cost ratio is purely a mathematical formula which apportions the revenues of the producer, net of taxes and royalties.

167. Interpretive rules or general statements of policy such as the Burton October, 1996, memorandum “. . . do not establish binding norms which are finally determinative of anyone’s rights.” Wyoming Mining Assoc. v. State, 748 P.2d 718, 724 (Wyo. 1988). Such interpretative rules or general statements of policy are only valid to the extent they correctly construe the statute, and are subject to review. Battlefield, Inc. v. Neely, 656 P.2d 1154, 1159-1160 (Wyo. 1983).

168. The Board has the statutory duty to decide all questions concerning the construction of any statute affecting the assessment, levy or collection of taxes. Wyo. Stat. Ann. §39-11-102.1(c)(iv). The Board has previously rejected the position stated in the October, 1996, memorandum as an erroneous interpretation of the applicable statutes. In the Matter of the Appeal of Amoco Production Company, Board Docket No. 96-216, 2001 WL 770800 (June 29, 2001) and decision on reconsideration, 2001 WL 1150220 (September 24, 2001); In the Matter of the Appeal of Fremont County, Board Docket No. 2000-203, 2003 WL 21774604 (April 30, 2003); In the Matter of the Appeal of ME Petroleum Company, Board Docket No. 2002-52, 2003 WL 22814612 (November 20, 2003); In the Matter of the Appeal of Amoco Production Company, Board Docket No. 2001-56, 2003 WL 23164222 (December 30, 2003). The Board rejects Chevron’s contention.

169. As a response to the Department’s avowed preference for the results of the proportionate profits method when direct costs of producing include production taxes and royalties, Chevron asks us to accept the testimony of Mr. Sullivan regarding the origins of the proportionate profits statute. [Petitioner’s Brief, pp. 17-18]. We cannot accept Mr. Sullivan’s testimony as legislative history. Supra, Independent Producers Marketing Corp, Conclusions ¶78. At the same time, Chevron has no cause for concern on this point, because our decision does not rest on a characterization of the results of the proportionate profits method depending on its interpretation.

170. We decide this case based on our interpretation of the statute and regulations, without regard for the results that follow. Direct costs of producing include production taxes and royalties because that is the correct interpretation of the statute and regulations. The Department has selected the proportionate profits method for the production years at issue, and is bound by whatever results are properly generated by that selected method.

171. The Department is never free to ignore the proper interpretation of the statute simply because the Department’s Director prefers a result other than that required by the statute and the Department’s regulations. Mrs. Burton was not free to ignore the statute and regulations because she preferred an alternative result. The current Administrator of the Mineral Tax Division is similarly bound.

172. Chevron, in support of its assertion the Wyoming Legislature has specifically determined production taxes and royalties are not direct costs to be included in the direct cost ratio of the proportionate profits method, cites only two Wyoming Supreme Court decisions, Hillard v. Big Horn Coal Co., 549 P.2d 293 (Wyo. 1976), and Powder River Coal Co. v. Wyoming State Bd. of Equalization, 2002 WY 5, 38 P.3d 423 (Wyo. 2002). Neither decision supports Chevron’s assertion.

173. Hillard was decided in 1976, some fourteen years prior to the 1990 Wyoming Legislative Session which adopted the oil and gas proportionate profits valuation method at issue. The two coal companies appealing in Hillard asserted it was improper for any portion of production and severance tax from the prior year be attributed to mining costs. The Hillard Court affirmed the decision of the district court on only the issue which was before it, to wit, whether attributing any portion of production and severance tax to mining costs was proper. The Court declined to go beyond the issue presented and decide whether production taxes should in fact be considered indirect costs at all, although it clearly indicated a philosophy such taxes are mining costs, and questioned why the State Board at that time would allocate the same:

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 . . . [emphasis added].

174. The Wyoming Supreme Court decision in Hillard supports the conclusion that production taxes are direct costs of producing.

175. In Powder River Coal Co., 2002 WY 5, the Court addressed whether a federal lease bonus payment was to be treated as an exempt federal royalty pursuant the coal valuation statute and, if not, whether it was an indirect cost of mining. The Court held, first, that the lease bonus payment was not a royalty and, second, that it was to be treated as an indirect, rather than direct, cost of mining. Id. at ¶ 23. Only the second holding is relevant to the present appeal.

176. Applying the doctrine of ejusdem generis and its prior decision in Wyodak Res. Dev. Corp. v. State Bd. of Equalization, 9 P.3d 987 (Wyo. 2000), the Court held that lease bonus payments can be attributed to the mining function only by allocation. Id., ¶¶ 19-20.

177. Unlike the situation in Powder River Coal Co., supra where there was no statutory reference to federal lease bonus payments, the Legislature has recognized production taxes and royalties as direct costs of production in both the coal and bentonite valuation statutes. Wyo. Stat. Ann. §§39-14-103; 39-14-403, supra, Conclusions ¶¶94, 95. It is therefore not necessary to resort to such concepts as ejusdem generis to resolve an issue of statutory construction. 2A Norman J. Singer, Statutes and Statutory Construction §47.22 (6th ed., 2000 Revision). The Court’s reasoning in Powder River Coal Co., supra, is not applicable to the issues in this matter.

178. Severance taxes are levied on the privilege of extracting (or severing) the mineral from the earth. Wyo. Stat. Ann. §39-14-203(a)(i). Even though the taxable value is calculated at a statutorily defined point where the mining or production process is complete, that physical location only determines which expenses are deductible and those which are not. The point of valuation for oil and gas is the statutorily defined point where the production process ends. Wyo. Stat. Ann. §39-14-203(b). It does not identify the point at which the tax liability arises. Chevron incorrectly argues that since the point of valuation is at the end of the production process, the incurrence of production taxes is not a direct production expense. [Trans. Vol. II, pp. 237, 255-256]. Chevron however fails to grasp that the point of valuation is merely the location where the Department must establish the fair market value of the mineral, not the place where the tax liability arises. Tax liability actually arises at the time and place when the mineral is extracted from the ground. The Legislature has directed that “[i]n the case of severance taxes, any person extracting crude oil, lease condensate or natural gas . . . are liable for the payment of severance taxes . . .” Wyo. Stat. Ann §39-14-203(c)(ii). Ad valorem taxes are likewise due upon production, the amount of such liability determined upon sale and applying point of valuation concepts. See Wyo. Stat. Ann §39-14-203(c)(i). Supra, Conclusions, ¶¶82, 83.

179. Production taxes become due and owing at the moment the mineral is physically extracted by the Chevron. See Belco Petroleum Corp. v. State Bd. of Equalization, 587 P.2d 204, 210 (Wyo. 1978). Such an incident surely falls within the confines of the catch-all phrase in Rules, Wyoming Department of Revenue Chapter 6 §4(b). This Board previously concluded: “[t]he 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 the value by the ad valorem tax. Both production taxes are imposed on and are directly related to the producing of the mineral.” In the Matter of Appeal of ME Petroleum Co., Docket No. 2002-52, ¶30 (Nov. 20, 2003)

180. Chevron asserts the inclusion of production taxes and royalties as direct costs of producing in the methodology creates an unconstitutional inequity as compared to other similarly situated taxpayers which, according to Chevron, are all other mineral producers in Wyoming. Wyo. Const. art. 15, §11.

181. Chevron also asserts the inclusion of production taxes and royalties as direct costs of producing violates the Wyoming Constitution article 3, §27 prohibition against special laws for assessment and collection of taxes. Neither constitutional argument is persuasive.

182. The plain language of Wyoming Constitution article 15, §11 requires property be valued at “full value” and the Legislature is given the power to prescribe regulations to determine a “just valuation.” Chevron has alleged, in effect, this provision demands the same formula be used for all mineral valuation, and therefore because royalties and production taxes are excluded for other minerals (coal and bentonite), they should be excluded as well for oil and gas. The opposite is in fact true. The purposeful inclusion of royalties and production taxes as direct costs in the valuation for oil and gas actually leads to closer uniformity of valuation of various minerals.

183. The uniformity of assessment requirement mandates only that the method of appraisal be consistently applied, recognizing there will be differences in valuation resulting from application of the same appraisal method. Appeal of Monolith Portland Midwest Co., Inc., 574 P.2d at 761.

184. The Wyoming Constitution article 3, §27 only requires a statute operate equally on all persons in the same circumstances, that is, in this case, all oil and gas producers. The fact that application of the statute may not affect all similarly situated persons in exactly the same manner is not fatal. Meyer v. Kendig, 641 P.2d at1240.

185. The overall goal is always the constitutional mandate to achieve full and just valuation of the property to be taxed. Wyo. Const. art. 15, §11.

186. The inclusion of production taxes and royalties as direct costs of producing in the proportionate profits valuation methodology violates neither article 15, §11, nor article 3, §27 of the Wyoming Constitution.

187. Chevron requests, should the inclusion of production taxes and royalties as direct costs of producing be affirmed, interest on the increase in value associated therewith be calculated from the date of the Department February 8, 2002, Memo to all producers indicating production taxes and royalties must be considered direct costs. The Department has agreed interest accrual should begin on February 8, 2002, on any increase in value resulting from inclusion of production taxes and royalties as direct costs of producing in the direct costs ratio of the proportionate profits methodology. Supra, Facts ¶70.

a. The inclusion of 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 processed natural gas production from the Painter Complex in Uinta County, Wyoming, between January 1, 1996, and December 31, 1998 [Production Years 1996, 1997, 1998], is affirmed; and

(1) for a revised final assessment pursuant to prior resolution of all audit issues other than inclusion of royalties and production taxes as direct costs of producing in the direct cost ratio of the proportionate profits method; and

(2) with respect only to the issue of including production taxes and royalties as direct costs of producing, for calculation of interest from February 8, 2002, on the increase in taxable value resulting from such inclusion.

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.