Lawrence J. Wolfe and Walter F. Eggers, III, Holland & Hart LLP, for Marathon Oil Company, Petitioner.

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

The Board shall review final decisions of the Department of Revenue (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). Marathon timely appealed the final decision of the Department.

This appeal concerns natural gas production by Marathon Oil Company (Marathon) in Big Horn and Park Counties, Wyoming, for the period of January 1, 2000, to December 31, 2000 [Production Year 2000]. The Department, following the completion of an audit of the properties by the Department of Audit (DOA), issued a Final Determination Letter on December 19, 2003. The letter assessed additional severance tax of $104,966.00 with interest through January 18, 2004, of $41,410.00, and increased the ad valorem taxable value on the properties by $1,859,095.00. Marathon 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 November 14, 2004.

Marathon, in its Notice of Appeal, challenged the Department audit assessment in three areas - (a) transportation costs; (b) production taxes and royalties; and (c) exempt royalties. Marathon and the Department stipulated at hearing the transportation cost issue had been resolved. Marathon, in its Issues of Fact and Law as well as its Summary of Contentions filed with the Board continued to include the issue of exempt royalties. [Board Record]. Marathon at hearing, however, presented no evidence or argument regarding exempt royalties. We will deem the issue to be waived.

The remaining, and thus central issue in this appeal, questions the inclusion of royalties and production taxes as direct costs of producing in the direct cost ratio of the proportionate profits methodology. 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. Marathon advocates these prior Board decisions are incorrect, and in so doing sets forth a number of assertions and questions of law in its Summary of Contentions and Issues of Fact and Law which can be consolidated into five distinct arguments:

(1) Wyo. Stat. Ann. §39-14-203(b)(vi)(D) cannot be interpreted to require inclusion of production taxes and royalties as direct costs of producing;

(2) treating production taxes and royalties as direct costs of producing is not a rational method of appraisal under the Basin Electric standard;

(3) inclusion of production taxes and royalties in the direct cost ratio results in a tax on tax and double taxation;

(4) production taxes and royalties are not direct costs of producing, but are more properly characterized as “indirect costs,” citing Powder River Coal Company v. Wyoming State Board of Equalization, 2002 WY 5, 38 P.3d 423 (Wyo. 2002); and

(5) the Department is in violation of the Uniformity of Assessment Clause of the Wyoming Constitution when it does not exclude production taxes and royalties from the direct cost ratio as is done with other mineral producers, specifically coal producers, in application of the proportionate profits method.

Marathon, in its prehearing submissions to the Board, listed three witness to testify at hearing: Mike Meyer, Lease Revenue Manager with IBM Business Consulting Services; Mike Black, Senior Facilities Engineer with Marathon Oil Company; and Susan Cowger, Accounting Supervisor in Marathon’s Cody, Wyoming office. The only witness Marathon called at the hearing was Craig Grenvik, Administrator of the Mineral Tax Division, Department.

Marathon, at hearing, did not present any testimony or evidentiary material, nor any argument with regard to the Basin Electric argument, thus it will be deemed waived.

Marathon, for the first time at hearing, asserted the Department was required to promulgate Rules with regard to inclusion of taxes and royalties as direct costs of production. The Board will address this issue as well.

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 method 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. Marathon 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 Marathon 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, ¶15.

$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 Department, on August 31, 1999, issued a notice instructing Marathon to utilize the comparable value method in filing its severance and ad valorem tax returns for the 2000 through 2002 production years. Marathon filed an objection to this method, and requested the proportionate profits method. The Department confirmed the use of proportionate profits on February 4, 2000, for the Oregon Basin Gas Plant, and Garland Gas Processing Facility. [Trans. pp. 33-34].

25. The proportionate profits method was used by Marathon to value the 2000 production at issue. Wyo. Stat. Ann. §39-14-203(b)(vi)(D). [Trans. pp. 35-36; Exhibits 105, 106, 107].

26. Marathon did not include production taxes and royalties as direct costs of producing in the direct cost ratio in the proportionate profits methodology. [Trans. p. 36; Exhibits 105, 106, 107].

27. The Department issued its final determination letter on December 19, 2003. The letter asserted a severance tax deficiency of $104,966.00, plus accrued interest through January 14, 2004, in the sum of $41,410.00. [Exhibit 103].

28. The Department final assessment was calculated including production taxes and royalties as direct costs of producing in the “direct cost ratio.” [Trans. p. 34; Exhibit 102, p. 012; Exhibit103].

29. The Department used the iterative method to determine taxable value and production tax using a given set of other known values. Use of this method also takes into account various different ways a company can report production taxes to the Department for valuation purposes - accrual for the current year, general ledger balance, or actual payments made. The iterative method eliminates any problems with taxpayers reporting production taxes in any one of the three different manners. [Trans. 99. 41-43; Joint Exhibit 1, Tab B].

30. Use of the simultaneous or iterative method also has the advantage of treating all taxpayers equally notwithstanding how they may treat the additional production tax assessed as the result of an audit. A company could book the additional tax as a contingent liability, not as production tax. The additional tax would then not be reflected as a production tax on the company accounting records. Production taxes, under the proportionate profits method, are taxed at 100% by adding them back to taxable value at the last step of the calculation. The additional production tax would escape taxation if it appeared only as a contingent liability, not as production tax, on the company accounting records. [Trans. pp. 41-43; Joint Exhibit 1, Tab B].

31. The Department does not believe Wyo. Stat. Ann. §39-14-203(b)(vi)(D) is ambiguous. [Trans. pp. 117-118].

32. Marathon appealed the Department asserted deficiency on January 16, 2004. [Board Record].

33. Production taxes and royalties are considered by the Department to be included in the final phrase of Rules, Department of Revenue, Chapter 6, §4b(w) - “and other direct costs incurred prior to the point of valuation that are specifically attributable to producing mineral products” defining direct costs of producing. [Trans. pp. 48-49].

34. Oil and gas industry accounting standards include production taxes and royalties as direct costs of production. [Trans. pp. 49-52, 102-104].

35. Craig Grenvik, prior to working in the Mineral Tax Division of the Department, worked as an auditor in the Department of Audit, and during his tenure was responsible for auditing severance and ad valorem taxes for oil, gas, coal, bentonite, trona, as well as federal royalty audits. He participated in audits of 1988-1989 coal production which included production taxes and nonexempt royalties as a component of the direct cost ratio when it was first implemented. [Trans. pp. 32, 101-102].

36. The proportionate profits method was used in 1988 to value coal production, and production taxes and royalties were included as direct costs of producing. There was no question about inclusion until the 1990 legislation. Industry accounting practices considered production taxes and royalties as direct costs of producing. [Trans. pp. 49-50].

37. The Department believes costs in the coal industry tend to be more production intensive than in the processed natural gas industry. The Department’s concerns with the results of the proportionate profits method have focused on the processed natural gas industry. [Trans. pp. 102-103].

38. The failure to include production taxes and royalties as direct costs of producing, particularly when oil and gas prices are high, creates a situation wherein a taxpayer is deducting as a processing expense 200-300% of actual costs. [Trans. pp. 50-51, 105-106].

39. Former Department Director Johnnie Burton requested an attorney general opinion as to whether production taxes and royalties should be included in the direct cost ratio. The response memorandum from Ms. Vicci Colgan, of the Attorney General’s office, stated that production taxes and royalties were direct costs of producing. [Trans. pp. 57, 120-121].

40. It appears from a sentence in an October, 1996, memo, by Ms. Burton, as well as testimony at the hearing, that an August, 1996, memo by Ms. Burton originally stated a Department position that production taxes and royalties should be included in the direct cost ratio as direct costs of producing. The October memo states: “My memo of August 6, 1996, considered only the legal argument.” Ms. Burton, apparently as a policy decision, ultimately chose not to follow the advice of the attorney general memo. [Trans. pp. 54-55, 123-124, 131; Joint Exhibit 1, Tab D].

41. Ms. Burton recognizes in her October 6, 1996, memo production taxes are direct costs of production. Her main concern is 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: “If 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.” [Trans. pp. 124-126; Joint Exhibit 1, Tab D].

42. Craig Grenvik stated the Department does not agree in the least with the “double taxation” argument. The direct cost ratio and its individual elements are merely components within a proportionate profits formula. The inclusion of production taxes and royalties as direct costs of producing in the ratio does not result in any tax on tax, and there is no double taxation. [Trans. pp. 108, 125-126].

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). When the Board finally resolved Docket No. 96-216 in September, 2001, by deciding that production taxes and royalties were direct costs of producing, the Department did not appeal. Craig Grenvik recalls Ms. Burton stated the Board had ruled, she had been incorrect - “We’ll move on”. [Trans. pp. 61-64, 110].

44. Randy Bolles, then Administrator of the Department Mineral Tax Division, in February, 2002, notified all producers using the proportionate profits methodology to include production taxes and royalties as direct costs of producing. [Trans. pp. 65-66; Joint Exhibit 1, Tab E].

45. The audit herein was engaged in February, 2003, by which time the necessity to include production taxes and royalties as direct costs of producing had been recognized by the Department. [Trans. pp. 122-123].

46. The oil and gas industry has not requested the Department change its Rules, Chapter 6, §4b(w), nor ever requested a clarification of §4b(w). [Trans. p. 119].

47. Marathon requests, should the Board affirm inclusion of production taxes and royalties as direct costs of producing, interest on the increase in value associated therewith be calculated from the date of the Department’s February 8, 2002, Memo to all producers indicating production taxes and royalties must be considered direct costs of producing.

48. The Department agrees interest on the increase in taxable value resulting from inclusion of production taxes and royalties as direct costs of producing should commence as of its notification to producers dated February 8, 2002. [Trans. pp. 85-86, 115].

49. 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.

51. 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).

52. “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....

53. 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).

54. 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).

55. 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).

56. “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).

57. 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)(ii)(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)).

58. 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).

59. 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).

60. 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).

61. 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).

62. “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).

63. If the producer does not sell its natural gas prior to the point of valuation “by a bona fide arms-length sale,” the Department must identify the method it intends to apply to determine fair market value, and “notify the taxpayer of that method on or before September 1 of the year preceding the year for which the method shall be employed.” Wyo. Stat. Ann. §39-14-203(b)(vi). If the Department determines fair market value in this way, it must use the same method “for three years including the year in which it is first applied or until changed by mutual agreement between the department and the taxpayer.” Wyo. Stat. Ann. §39-14-203(b)(viii).

64. 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:

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

65. 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.

66. 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).

67. 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;

69. 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].

70. 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].

71. 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.

72. 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.

73. 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).

75. 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).

76. 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;

78. 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...

79. 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).

80. 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).

81. The Department and Marathon stipulated at hearing the transportation costs issue is resolved.

(A) Wyo. Stat. Ann. §39-14-203(b)(vi)(D) cannot be interpreted to require inclusion of taxes and royalties as direct costs of production.

82. 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) (hereinafter “Amoco 96-216"); In the Matter of the Appeal of Fremont County Board of County Commissioners, Docket No. 2000-203, 2003 WL 21774604 (April 30, 2003); 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 (May10, 2004); In the Matter of the Appeal of BP America Production Company, Docket No. 2003-102, 2005 WL 558991 (March 5, 2005).

83. Support for this conclusion by the Board comes, in part, from a review of Wyo. Stat. §39-14-203(b)(vi)(D). This statute is not ambiguous.

84. 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. §39-14-103(b)(vii). Supra, ¶71. Likewise, the Legislature specifically excluded royalties and production taxes as direct costs to be used in the formula calculation for valuation of bentonite. Wyo. Stat. § 39-14-403(b)(iv)(A)(III). Supra, ¶72.

85. 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).

86. 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.

87. 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, 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. . . .

88. 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.

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

90. 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.

(B) Treating taxes and royalties as direct costs of production is not a rational method of appraisal under the Basin Electric standard.

91. Marathon presented no testimony, evidentiary material or argument regarding this issue, thus we deem it waived.

92. Marathon 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. Supra, ¶44. [Joint Exhibit 1-D].

93. 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 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, 4, 15, 16, 24, 25, 45, 68.

94. 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.

95. Interpretive rules or general statements of policy such as the Burton 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).

96. 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).

(D) Taxes and royalties are not direct costs of production, but are more properly characterized as “indirect costs,” citing Powder River Coal Company v. Wyoming State Board of Equalization, 2002 WY 5, 38 P.3d 423 (Wyo. 2002).

97. Marathon requests the Board reverse its prior decisions with regard to production taxes and royalties based on Powder River Coal Co. v. Wyo. State Board of Equalization, 2002 WY 5, 38 P.3d 423 (Wyo.2002).

98. The Wyoming Supreme Court, in Powder River Coal Co., reasoned federal lease bonus payments were not to be included as direct costs of mining in the proportionate profits calculation for coal. The Court, applying the doctrine of ejusdem generis, concluded the federal lease bonus payments were not direct mining costs. Id. at ¶19.

99. Unlike the situation in Powder River Coal Co. 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. 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 thus not applicable to the issues in this matter.

100. Marathon also calls attention to the Department’s Rule defining “direct costs of producing,” and points out the Rule does not include specific reference to royalties and production taxes. The Department Rules, Chapter 6, § 4(b), mirror the legislative definition of “direct mining costs” in the coal valuation statute. Compare: Rules, Wyoming Department of Revenue Chapter 6, § 4(b) with Wyo. Stat. Ann. §39-14-103(b)(vii)(B). Since these are the same sort of costs listed by the Legislature for coal, we cannot conclude there was a specific intent to exclude other recognized direct costs of production. Our analysis of the significance of the Legislature’s failure to exclude production taxes and royalties for oil and gas while doing so for coal applies here as well.

101. The October, 1996, memo by Ms. Burton itself also lends support to the conclusion production taxes are a direct cost of production. The memo, while in error on the issue of “double taxation,” does in fact correctly recognize production taxes are a direct cost 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.

(E) The Department is in violation of the Uniformity of Assessment Clause of the Wyoming Constitution when it does not exclude production taxes and royalties from the direct cost ratio as is done with other mineral producers, specifically coal producers, in application of the proportionate profits method.

102. 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." Marathon 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 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.

103. Although mineral products are one class of property, different valuation methods should be applied to different types of minerals. Amoco Production Co. v. Wyoming State Board of Equalization, 899 P.2d at 860.

104. 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.

105. 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.

106. The inclusion of production taxes and royalties as direct costs of producing in the proportionate profits valuation methodology does not violate article 15, §11 of the Wyoming Constitution.

107. Marathon presented no testimony, evidentiary material or argument regarding this issue, thus we deem it waived.

108. Marathon, for the first time at hearing, argued 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. [Trans. pp. 150-151]. Marathon specifically asserts the February, 2002, memo by then Mineral Director Randy Bolles, stating the Department position to require inclusion of production taxes and royalties in the ratio, is invalid. Marathon 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.

109. Such an argument by Marathon chooses to overlook the fact that this Board, in Amoco 96-216, supra, stated quite clearly the Burton memo in October, 1996, directing production taxes and royalties be excluded from the ratio was contrary to law. The February, 2002, memo simply provides clear guidance as to the applicable law with regard to proportionate profits calculations as set forth by the Board in Amoco 96-216, supra, for all mineral producers, including those who may not have previously been aware of the Board’s decision.

110. The rule adoption procedures argument by Marathon is also faulty even presuming for argument purposes only the Board decision in Amoco 96-216, supra, did not completely resolve the issue. The argument is, on its face, a bit anomalous since the October, 1996, memo was issued without any rule adoption procedures, and itself 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”. Supra, ¶43.

111. It further appears from the October memo, as well as testimony at the hearing, the August memo stated a Department position production taxes and royalties should be included in the direct cost ratio. Supra, ¶43. The October memo states: “[m]y memo of August 6, 1996, considered only the legal argument.” Supra, ¶43. Mr. Grenvik testified at hearing an assistant attorney general had written a memorandum stating production taxes and royalties should be included in the ratio. Supra, ¶42. The attorney general memo is apparently the “legal argument” to which Ms. Burton referred in her October memo, and supports the inference the August memo in fact set forth a Department position production taxes and royalties should properly be included in the direct cost ratio.

112. If Marathon were correct the February, 2002, Bolles memo cannot affect a policy change by the Department because it was not adopted 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 Marathon now agrees, should be subject to the same rule adoption requirements as the February, 2002, memo with which Marathon disagrees. Acceptance of Marathon’s argument with regard to the February, 2002, memo would thus render not only that memo invalid, but also the October, 1996, and even the August, 1996, memos as well. The end result would be no stated Department position, at least as appears from the record herein, on the issue of inclusion of production taxes and royalties in the direct cost ratio.

113. Marathon, in support of its argument the February, 2002, memo is invalid since it was not adopted as a rule pursuant to the Wyoming APA, cites only two federal cases, Paralyzed Veterans of America v. D.C. Arena, L.P., 117 F.3d 579 (D.C. Cir. 1997) and Monmouth Medical Center v. Thompson, 257 F.3d 807 (D.C. Cir. 2001), 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.

114. 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 necessary as the Wyoming Supreme Court has on two occasions addressed the same issue raised by Marathon herein.

115. 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 Marathon has asserted herein, the change in the valuation process by the Department was subject to the rule adoption procedures of the Wyoming APA.

116. 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 Marathon 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).

117. 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).

118. 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).

119. 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, ¶¶79, 80.

120. In addition, even the cases cited by Marathon do not support the argument the February 2002, memo must be adopted as a Rule to be effective.

121. 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.

122. 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.

123. 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 (CFR) an interpretation, the interpretation can only be changed the same as the regulation - through notice and comment rule adoption.

124. The D.C. Circuit Court of Appeals, in addressing this argument, discusses 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 points out that only a change in a substantive rule requires notice and comment. The Court concludes 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, notes 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).

125. 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.

126. Monmouth Medical Center v. Thompson cited by Marathon is even less applicable to its assertion with regard to rule adoption. In Monmouth, the United States Department of Health and Human Services (HHS) had adopted, by rule, a formal position regarding when a Medicare provider was allowed to, in effect, “appeal” or re-open a denial of payment for services. HHS attempted to change its previously stated formal position through a Health Care Financing Administration Ruling 97-2 (HCFAR 97-2) without a notice and comment procedure. The D.C. Circuit Court concluded the prior formal position taken by HHS, as a rule, was a substantive legal standard, thus a notice and comment procedure were required to adopt HCFAR 97-2 which changed the standard. “The Medicare Act places notice and comment requirements on the Secretary's substantive rulemaking similar to those created by the APA. See 42 U.S.C. §1395hh(b); 5 U.S.C. §553(b).” Monmouth Medical Center v. Thompson, 257 F.3d 807, 814 (D.C. Cir. 2001).

127. The substantive legal standard in this matter is the Department Rules on direct costs, the direct cost ratio, and the proportionate profits method. Supra, ¶¶67, 70. The February, 2002, memo in no manner attempts to make and change to this substantive legal standard. This memo, as well as the prior memos by Ms. Burton, are simply policy statements by the Department.

128. The final authority cited by Marathon 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.

129. 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 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 it long-standing 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.

130. The situation at bar is significantly different. The Department is not attempting to change the interpretation of such a commonly accepted term as “purchase.” The Department, by the memo in question, is simply stating its policy position as to the relevant statute and Rules.

131. 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.

132. Hercules provides no authority for the assertion the Department must provide notice and comment when it issues a policy memo.

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

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 Marathon’s 2000 gas production from fields located in Big Horn and Park counties, Wyoming, is affirmed; and

b. This matter is remanded to the Department to recalculate taxable value and interest as a result of resolution of the transportation costs issue; and 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.