Lawrence J. Wolfe, Walter F. Eggers, III, Holland & Hart, LLP, for Burlington Resources, Petitioner. (Burlington)

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

The State Board of Equalization (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). Burlington timely appealed the final decision of the Department by Notice of Appeal effective February 4, 2005.

This appeal concerns natural gas production by Burlington in Fremont County, Wyoming, for the period January 1, 2002, to December 31, 2003 (Production Years 2002 and 2003). The Department refused to accept Burlington’s amended annual gross products and severance tax returns dated September 23, 2004, for Burlington’s 2002 and 2003 natural gas production for Reporting Group 15123. The Department’s justification for refusal to accept the amended returns was Burlington’s “failure to include taxes and royalties in the direct costs ratio” of the proportionate profits valuation methodology. Burlington appealed the Department’s final determination to the Board. The Board, Alan B. Minier, Chairman, Thomas R. Satterfield, Vice Chairman, and Thomas D. Roberts, Board Member, held a hearing October 31, 2005.

We affirm the refusal by the Department to accept and process the amended returns filed by Burlington for the 2002 and 2003 natural gas production at issue.

Burlington raised only two issues through its Notice of Appeal and Updated Summary of Contentions:

(a) Whether production taxes and royalties are direct production costs in the direct cost ratio of the proportionate profits formula; and

(b) The amount of interest, if any, which should be assessed if the Board rules in favor of the Department.

Burlington, in its closing brief, sets out three main arguments in support of its position that production taxes and royalties are not direct production costs in the direct cost ratio of the proportionate profits formula:

(a) Royalties and production taxes are not “direct costs of producing” for purposes of the direct cost ratio.

(b) The Board in Amoco, 96-216 and the Department in this appeal have acted outside their statutory authority and contrary to law.

Burlington’s closing brief does not discuss the issue of interest, presumably based on the agreement by the Department at the hearing that interest on any increase in taxable value resulting from including production taxes and royalties as direct costs of producing should be calculated from February 8, 2002.

The only witness Burlington presented at the hearing was Anthony Fasone, a senior advisor in the royalty compliance department of Burlington. The testimony from a prior hearing of Johnnie Burton, a former Director of the Department, was adopted into this record by the parties for consideration by the Board, and included as Volume II of the hearing transcript. [Transcript Vol. I, pp. 85-86]. The only witness the Department presented at the hearing was Craig Grenvik, Administrator of the Mineral Tax Division of the Department.

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. Burlington 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 Burlington 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. Findings ¶ 13.

$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. This appeal arises from Burlington filing amended annual gross product tax returns (4201 MTD) dated September 23, 2004, and amended Severance Tax Reports (Form 300) dated September 23, 2004, for 2002 and 2003 gas production in Wyoming for Reporting Group Number 15123. The returns were rejected by the Department for Burlington’s “failure to include taxes and royalties in the direct cost ratio.” [Parties’ Stipulation of Facts, (Stipulation) ¶ 1; Transcript Vol. I, pp. 15-16].

25. The gas production at issue was produced from the Madden Deep Unit (MDU), and processed at the Lost Cabin Plant (Plant). The Plant and related wells are both located in Fremont County, approximately 100 miles west of Casper, and are operated by Burlington. [Stipulation, ¶ 2].

26. Two wells were drilled in the 1980s nearly one mile deeper than other wells into the Madison formation in Fremont County. The gas produced from these wells contained a high concentration of hydrogen sulfide which needed to be removed. The wells were shut-in as there was no processing facility available to process this sour gas. [Stipulation, ¶ 3; Transcript Vol. I, p. 16].

27. In 1990, a company now affiliated with Burlington, Louisiana Land and Exploration (LL&E), became operator of the wells in question, and began to develop plans with other working interest owners to build a plant to process the sour gas from the two wells. [Stipulation, ¶ 4;Transcript Vol. I, p. 17].

28. The working interest owners agreed in 1993 to construct and operate the Plant to process gas from the two wells. Construction of the Plant began in 1994, and was completed in March, 1995, at a cost of $85 million. Subsequent additions to the Plant have resulted in a total cost of approximately $480 million. [Stipulation, ¶ 5].

29. The Plant removes hydrogen sulfide gas, ammonia, water, carbon dioxide, and other contaminants from the gas stream leaving residue gas. The Plant converts the hydrogen sulfide to molten sulfur. [Stipulation, ¶ 6; Transcript Vol. I, p. 16].

30. Burlington, as plant operator, filed all tax returns and paid all taxes on behalf of the working interest owners who own an interest in both the wells and the Plant. Burlington reported 100% of the volumes and values of the gas produced from the wells in the MDU relevant to this matter. The original tax returns included production taxes and royalties as directs costs in accordance with the Department February, 2002, memo requiring inclusion, citing the Board decision in Docket No. 96-216. 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) (hereafter, Amoco 96-216). The amended returns filed on September 23, 2004, reported and valued production under the proportionate profits methodology excluding production taxes and royalties in the direct cost ratio of the proportionate profits formula as Burlington believed the Board decision in Amoco 96-216 had been overturned by the Wyoming Supreme Court. Wyo. Stat. Ann. § 39-14-203(b)(vi)(D). [Stipulation, ¶ 7; Transcript. Vol. I, pp. 17-18, 61, 64-66, 70, 89-90; Exhibits 103, 104].

a senior advisor in the royalty compliance department of Burlington. [Transcript Vol. I, p. 14]. He testified on behalf of Burlington, setting out what is essentially his, and thus Burlington’s, opinion of how the oil and gas proportionate profits statute should be interpreted, and their view of the legislative intent. We accept his testimony as a statement of Burlington’s position regarding the policies we should take into account when rendering our decision.

32. Fasone stated Burlington’s view that production taxes and royalties should not be included in the direct cost ratio based on the Legislature’s direction in the oil and gas valuation statute that such taxes and royalties should be subtracted from sales revenue before the allocation using the direct cost ratio. He asserts this conclusion is reinforced by the fact the Department Rules do not list production taxes and royalties as production costs. He also believes the legal rule of ejusdem generis as stated by the Wyoming Supreme Court in Powder River Coal Company v. Wyoming State Board of Equalization, 2002 WY 5, ¶¶ 146-151, 38 P.3d 423 (Wyo. 2002) (hereafter Powder River Coal). is applicable and supports the view production taxes and royalties are not direct costs. [Transcript Vol. I, pp. 21-22, 25-26].

33. The inclusion of production taxes and royalties, both exempt and non-exempt, as direct costs increases taxable value. Fasone argues exempt royalties should not be included as direct costs since to do so improperly increases taxable value based on inclusion of an interest otherwise exempt from taxation. It is illogical, according to Fasone, in that inclusion of an exempt royalty, which is not subject to tax, causes taxable value, and thus the tax amount to increase. [Transcript Vol. I, pp. 27-28].

34. Fasone further asserts production taxes and royalties are not profit-bearing costs, and as such should not be included as direct costs. If such taxes and royalties are included as direct costs, they end up “getting” a higher percentage of profit than the other items which are expended to physically produce and process the gas. [Transcript Vol. I, pp. 32-43; Exhibit 115].

35. Fasone stated Burlington believes royalty is an ownership interest, not a production expense. The portion of sales value attributable to royalty does not appear as revenue on Burlington’s books. Burlington only shows on its books revenue net of any royalty. [Transcript Vol. I, pp. 24-25].

36. Fasone asserts the COPAS Bulletins, as relied on by the Department to support its position, are relevant only to joint interest billings, not to the question of whether production taxes and royalties are direct costs of production. [Transcript Vol. I, pp. 43-44; Exhibit 503].

37. Fasone asserts the specific language in the coal valuation statute which requires production taxes and royalties be excluded from the direct cost ratio is fairly pointless and does not mean anything. [Transcript Vol. I, pp. 47-49].

38. Fasone did agree however even exempt royalties are a cost Burlington incurs to produce the mineral in question, the natural gas. [Transcript Vol. I, pp. 74-75].

39. Burlington, 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 the testimony of Ms. Johnnie Burton. Ms. Burton was Director of the Wyoming Department of Revenue from January, 1995, through early March, 2002. [Transcript Vol. II, p. 21]. Her duties as Director included ensuring the Department established a fair market value for minerals. [Transcript Vol. II, p. 23]. Ms. Burton believed the Department was charged with making policy decisions on how to implement the mineral valuation statutes. [Transcript Vol. II, p. 25].

40. The Department of Audit (DOA), in the process of auditing gas processing plants in southwest Wyoming in 1996, raised the issue of including 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 for production reported after the 1990 statutory change in valuation methods. [Transcript Vol. I, pp. 93-94; Vol. II, pp. 71-72, 76, 100].

41. 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 statute was silent on the issue of exclusion, production taxes and royalties could not be excluded. [Transcript Vol. II, pp. 32-33, 35-36, 38, 54, 88; Exhibit 109].

42. 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. [Transcript Vol. II, pp. 32-33, 35-37, 52; Exhibit 101].

43. 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, “[n]o, you have an honest disagreement.” [Transcript Vol. II, pp. 38-39; Exhibit 101].

44. 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, pointing 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, “[d]o what you think is right.” [Transcript Vol. II, pp. 40-41]

45. 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. [Transcript Vol. II, pp. 33-35].

46. Ms. Burton felt the proportionate profits methodology had to be applied the same for oil and gas as it was applied to coal, despite the differences in the statutes. She believed the proportionate profits method should be applied the same to all minerals. [Transcript Vol. II, pp. 28, 61].

47. The DOA still disagreed with Ms. Burton on exclusion of production taxes and royalties from the direct cost ratio. The interpretation by the DOA continued to be that production taxes and royalties should be included in the ratio as direct costs of production for oil and gas taxpayers. [Transcript Vol. II, pp. 43-44].

48. Ms. Burton does in fact recognize in her October 6, 1996, memo that 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.

49. Ms. Burton’s 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 101].

50. 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 exclude production taxes and royalties as direct costs. [Transcript Vol. II, p. 68].

51. 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 adhere to the policy. [Transcript Vol. II, p. 44].

52. 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). [Transcript Vol. I, pp. 96-97].

53. When the Board finally resolved Amoco 96-216 in September, 2001, deciding that production taxes and royalties were direct costs of producing, the Department chose not to 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, i.e., 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 Board’s decision in Amoco 96-216, as she believed it was the duty of the Department to apply what the Board had decided. [Transcript Vol. I, p. 97; Vol. II, pp. 45-46, 67-68, 92-94].

54. Notwithstanding its prior position in Amoco 96-216, the Department accepted the Board’s resolution on the merits, and applied the decision in valuing Burlington’s production at issue herein. [Transcript Vol. I, p. 98; Vol. II, pp. 46, 67-68].

55. The Department position that production taxes and royalties should be included as direct costs of producing, was articulated by Craig Grenvik, Administrator of the Mineral Tax Division of the Department, the only Department witness. Grenvik noted that prior to the enactment of the 1990 valuation statutes, the Department valued coal production with production taxes and royalties as direct costs of production in the direct cost ratio. [Transcript Vol. II, p. 92].

56. Grenvik also stated the Department’s position is supported by Hillard v. Big Horn Coal Co., 549 P.2d 293 (Wyo. 1976), an opinion by an assistant attorney general indicating production taxes and royalties should be included, and by the fact the statutory construction does not specifically exclude production taxes and royalties as direct costs under the oil and gas valuation statutes while under the coal valuation statues such taxes and royalties are specifically excluded. [Transcript Vol. I, pp. 100-101; Exhibit 109].

57. The production and processing of coal is physically different from oil and gas. Gas is generally produced by the natural energy found in the reservoir. Coal has to be physically removed. Processing sour gas into a marketable condition requires intensive capital investment and many processes, while getting coal into a marketable condition simply requires crushing it to size, getting it into silos, and loading it onto trains. Coal production thus has more significant production costs than processing costs, while sour natural gas is just the reverse, it has more significant processing costs than production costs. [Transcript Vol. I, pp. 101-102].

58. Grenvik stated the exclusion of production taxes and royalties as direct costs undervalues gas, particularly in times of high prices. The allowed deduction is multiple times greater than the actual expenses. [Transcript Vol. I, pp. 103-104].

59. Additionally, as noted by 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. [Transcript Vol. I, p. 108; Exhibit 503].

60. The Department agrees interest on any increase in value resulting solely from 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 that production taxes and royalties should be included as direct costs. [Transcript Vol. I, p. 113; Exhibit 102].

61. 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.

63. 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).

64. “The burden of proof is on the party asserting an improper valuation.” Williams Production RMT Co. v. State Dept. of Revenue, 2005 WY 28, ¶ 7, 107 P.3d 179, 183 (2005); 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:

[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 . . ..

65. 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).

‘Determining the lawmakers’ intent is our primary focus when we interpret statutes. Initially, we make an inquiry respecting the ordinary and obvious meaning of the words employed according to their arrangement and connection. We construe together all parts of the statute in pari materia, giving effect to each word, clause, and sentence so that no part will be inoperative or superfluous. We will not construe statutes in a manner which renders any portion meaningless or produces absurd results.’ In re WJH, 2001 WY 54, ¶ 7, 24 P.3d 1147, ¶ 7 (Wyo. 2001).

66. The Board considers the omission of certain words intentional on the part of the Legislature, and we may not add omitted words. "[O]mission of words from a statute is considered to be an intentional act by the legislature, and this court will not read words into a statute when the legislature has chosen not to include them." BP America Production Co. v. Department of Revenue, 2005 WY 60 ¶ 22, 112 P.3d 596, 607 (Wyo. 2005), quoting Merrill v. Jansma, 2004 WY 26, ¶ 29, 86 P.3d 270, 285 (Wyo. 2004). See also, 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, 485 (Wyo. 1976).

67. 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 that it must be presumed the Legislature did not intend futile things. Hamlin v. Transcon Lines, 701 P.2d 1139, 1142 (Wyo. 1985).

68. “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 ¶ 52, 71 P.3d 717, 735 (Wyo. 2003).

69. 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 (Wyo. 2002).

70. 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).

71. “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 (Wyo. 1998), (emphasis in original).

72. 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).

73. 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).

74. 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, 719 (Wyo. 2002). (Commencing January 1, 2003, the time frame for audits was reduced. See Wyo. Stat. Ann. § 39-14-208(b)(vii).)

75. The Wyoming 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., supra, 2003 WY 114 at ¶ 13, 76 P.3d at 348.

76. 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).

77. 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).

78. The fair market value for natural gas must be determined “after the production process is completed.” Wyo. Stat. Ann. § 39-14-203(b)(ii). “[E]xpenses 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).

79. “The production process for natural gas is completed after extracting from the well, gathering, separating, injecting, and any other activity which occurs before the outlet of the initial dehydrator. When no dehydration is performed, other than within a processing facility, the production process is completed at the inlet of the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first.” Wyo. Stat. Ann. § 39-14-203(b)(iv).

80. 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.

81. 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).

82. The Department Rules, Chapter 6, Ad Valorem and Severance Taxes On Mineral Production contain 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;

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.

84. 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).

85. 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.

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

86. 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.

87. 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’ Compensation Div., 739 P.2d 129 (Wyo. 1987), cert. den. 484 U. S. 988 (1987).

88. 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.

89. 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).

91. 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).

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

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;

94. 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...

95. This appeal is brought under statutes which 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. Chevron U.S.A., et al., Docket No. 2002-54, January 25, 2005, 2005 WL 221595 (Wyo. St. Bd. Eq.).

96. 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).

Royalties and production taxes as “direct costs of producing” for purposes of the direct cost ratio.

97. Burlington asserts that considering the “ordinary and obvious meaning” of the language of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D), and the manner in which “the words are arranged”, it is erroneous as well as an “impermissible substitution” of its view of legislative intent for the Department to include production taxes and royalties as direct costs of producing in the direct cost ratio. Burlington cites a portion of the Department closing argument in Amoco 96-216. The Board did not find such argument persuasive in 96-216, and we are not persuaded any differently in this matter.

98. Burlington continues its argument that production taxes and royalties are not direct costs by asserting (a) under the analysis set forth in Powder River Coal - what it characterizes as the “roadmap to reach the right conclusion” - the catch-all language in the Department Rules can not be interpreted to include production taxes and royalties as direct costs; (b) Hillard v. Big Horn Coal does not hold production taxes and royalties are direct costs of producing; and (c) the coal and bentonite valuation statutes do not support the Department’s interpretation of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D). We reject, for the reasons stated hereafter, Burlington’s argument on each point.

99. 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. Amoco Production Company, Docket No. 96-216, June 29, 2001 2001 WL 770800, (Wyo. St. Bd. Eq.); Amoco Production Company, Docket No. 96-216, Order on Reconsideration, Sept. 24, 2001, 2001 WL 1150220 (Wyo. St. Bd. Eq.) (hereafter Amoco 96-216); Fremont County Board of County Commissioners, Docket No. 2000-203, April 30, 2003, 2003 WL 21774604 (Wyo. St. Bd. Eq.); RME Petroleum Company, Docket No. 2002-52, November 20, 2003, 2003 WL 22814612 (Wyo. St. Bd. Eq.); Amoco Production Company, Docket No. 2001-56, December 30, 2003, 2003 WL 23164222 (Wyo. St. Bd. Eq.); Burlington Resources Oil and Gas Co., Docket Nos. 2002-49 et. al., May 10, 2004, 2004 WL 1174649 (Wyo. St. Bd. Eq.); BP America Production Company, Docket No. 2003-102, March 5, 2005, 2005 WL 558991 (Wyo. St. Bd. Eq.); BP America Production Company, Docket No. 2003-114, March 17, 2005, 2005 WL 676580 (Wyo. St. Bd. Eq.); Marathon Oil Company, Docket No. 2004-08, March 29, 2005, 2005 WL 794788 (Wyo. St. Bd. Eq.); Chevron U.S.A. Inc., Docket No. 2003-153, May 12, 2005, 2005 WL 1177542 (Wyo. St. Bd. Eq.); Burlington Resources/LL&E, Docket No. 2004-24, August 25, 2005, 2005 WL 2100264 (Wyo. St. Bd. Eq.); BP America Production Company, Docket No. 2004-130, November 10, 2005, 2005 WL 3072921 (Wyo. St. Bd. Eq.); BP America Production Company, Docket No. 2004-129, November 18, 2005, 2005 WL 3126198 (Wyo. St. Bd. Eq.).

100. Burlington focuses its argument on the “catch-all” phrase found in the Department Rules on oil and gas valuation - “and other direct costs incurred prior to the point of valuation that are specifically attributable to producing mineral products.” Rules, Wyoming Department of Revenue, Chapter 6, § 4b(w). Burlington argues this phrase, as used for oil and gas valuation, can not be interpreted to include production taxes and royalties as direct costs of production. Burlington attempts to buttress this argument by reference to the Wyoming Supreme Court decision in Powder River Coal, asserting this decision provides a “road map” for consideration of the catchall language. We do not agree. Burlington’s assertion is not persuasive under an appropriate interpretation of the Department Rules and the oil and gas valuation statute, Wyo. Stat. Ann. § 39-14-203(b)(vi)(D), as well as other distinctions with regard to the applicability of Powder River Coal, infra, Conclusions, ¶¶ 122-125.

101. 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 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 expenses; and other direct costs incurred prior to the point of valuation that are specifically attributable to producing mineral products.

102. 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). Conclusions, ¶¶ 82-83. Both the Department Rules and the statute 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.”

103. The Legislature did not include production taxes and royalties in the 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:

104. 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. Conclusions ¶¶ 65, 67.

105. 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.

106. 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:

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

107. Even a conclusion that 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).

108. The Wyoming Supreme Court, in Powder River Coal, supra, as relied upon by Burlington, 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.

109. In Powder River Coal, 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.

110. 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. Powder River Coal, ¶¶ 19-20.

111. Unlike the situation in Powder River Coal where there was no statutory reference to federal lease bonus payments, the Legislature has recognized and excluded 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. Conclusions, ¶¶ 83-84. 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, supra, is simply not applicable to the issues in this matter.

112. 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 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. 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 “[i]n the case of severance taxes, any person extracting crude oil, lease condensate or natural gas . . . [is] 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. Wyo. Stat. Ann § 39-14-203(c)(i).

113. Production taxes thus become due and owing at the moment the mineral is physically extracted by Burlington. 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 Chapter 6 § 4(b) of the Department’s Rules. 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.” RME Petroleum Company, Docket No. 2002-52, November 20, 2003, 2003 WL 22814612 (Wyo. St. Bd. Eq.).

114. Burlington asserts, while the Hillard decision supports the view that production taxes and royalties must be included in final taxable value, such decision does not provide any support for the conclusion such items should be included as direct costs in the direct cost ratio. Burlington argues incorrectly, as discussed previously, production taxes and royalties attach only after the act of producing is complete. Conclusions, ¶¶ 112-113.

115. Burlington further presents only snippets of language from Hillard to support its argument with regard to royalties as direct costs. The disjointed quotations from the Hillard decision do not fully and accurately reflect the Court’s decision as discussed hereafter.

116. Burlington also makes an argument the Hillard decision is not good authority because the royalties at issue therein were private and a fixed amount per ton of coal produced. Burlington suggests this fact somehow affects how royalty should be viewed in the proportionate profits methodology when it is revenue based as Burlington implies is the case herein. The Hillard decision, however, contains no hint whatsoever that the nature of the royalty had an effect on how the Court viewed royalty as a direct cost of producing.

117. The two coal companies appealing in Hillard, asserted, inter alia, “royalty paid with respect to coal mined should be prorated between mining costs and processing costs in applying the formula.” Hillard, supra at 296. The Hillard companies claimed that mineral royalties were an indirect cost, subject to allocation between the mining and processing functions.

118. The Court, in rejecting this argument, considered the definition of royalty as set out in Picard v. Richards, 366 P.2d 119 (Wyo. 1961), and stated:

Hillard, 549 P.2d at 301-302, (emphasis added). The quoted language indicates quite clearly the Court determined royalty to be a direct cost, not an indirect cost.

119. Burlington also asserts the Hillard Court concluded production taxes are indirect costs. Such argument is not the complete thought expressed by the Court.

120. 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 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 that such taxes are mining costs, and questioned why the 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 . . ..

121. The Wyoming Supreme Court decision in Hillard clearly supports the conclusion that production taxes and royalties are direct costs of producing.

122. Burlington urges consideration of the coal and bentonite valuation statutes does not support the Department’s view that the oil and gas statute valuation requires inclusion of production taxes and royalties as direct costs in the direct cost ratio. The only support provided by Burlington for its theory relies on its prior arguments as to the effect of the Powder River Coal decision on the catch-all phrase in the statute, and its assertion production taxes and royalties are legal obligations which arise only after production is complete. We have previously dealt herein with both arguments, and found them unpersuasive. Conclusions, ¶¶ 108-111. The fact is both the coal and bentonite valuation statutes do provide appropriate guidance for interpreting the oil and gas statute. Wyo. Stat. Ann. § 39-14-203(b)(vi)(D).

123. 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). Conclusions, ¶ 83. Prior to this action by the Legislature in 1990, production taxes and royalties had been included as direct costs of coal production. Hillard v, Big Horn Coal, supra. See also, Amax Coal Co. v. Wyoming State Board of Equalization, 819 P.2d 834 (Wyo. 1991). 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). Conclusions, ¶ 84.

124. By excluding production taxes and royalties as costs in the other mineral valuation statutes, the Legislature evidenced an 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 such royalties and taxes are to be included. Parker v. Artery, 889 P.2d 520 (Wyo. 1995); Matter of Voss Adoption, 550 P.2d 481 (Wyo. 1976).

125. It does not require statutory interpretation to understand that royalties and production taxes are not specifically excluded as a direct cost in the oil and gas proportionate profits valuation methodology. The legislative intent is apparent.

126. 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. . . .

127. 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.

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

129. 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.

Did the Board in 96-216 and the Department in this appeal act outside their statutory authority and contrary to law?

130. Burlington asserts, based on its reading of Wyo. Stat. Ann. § 39-11-102.1(c)(iv), the Board “is bound to follow the position of the Department,” i.e., the Department’s interpretation of mineral valuation statutes and Department Rules, and therefore is bound by Ms. Burton’s decision to reject the advice of counsel and exclude production taxes and royalties from the direct cost ratio. Such an argument is nonsensical. It would eviscerate the effect of all statutes authorizing appeals to the Board from assessment decisions of the Department, including the one under which this appeal is brought. Wyo. Stat. Ann. § 39-14-203(b)(iv). If the Board is bound to the Department position in every matter -- even if the Department statutory or Rule interpretation is incorrect -- there would be no independent review of the Department actions, and the appeal statutes adopted by the Legislature would have no practical effect. The Board is not bound to apply an incorrect Department interpretation of its rules and regulations. Swift v. Sublette County Bd. of County Comm’rs, 2001 WY 44 ¶ 10, 40 P.3d 1235, 1238 (Wyo. 2002).

131. It is also important to consider that Burlington is authorized to pursue this appeal by Wyo. Stat. Ann. § 39-14-209(b) which does not establish any specific standard for Board review. We thus judge the Department action in accord with constitutional and statutory requirements for valuing state-assessed property. It is Burlington’s ultimate burden as a petitioner to prove by a preponderance of evidence the noted requirements have not been met. Conclusions, ¶¶ 64, 75. The Board must take into account Department rules, regulations and instructions, but only if they are a correct interpretation of the relevant statute. See D.L. Cook v. Wyoming Oil and Gas Conservation Comm’n, 880 P.2d 583, 585 (Wyo. 1994).

132. Burlington’s argument also ignores the fact that neither the valuation statute, Wyo. Stat. Ann. § 39-14-203(b)(vi)(D), nor the Department Rules specifically address the issue of production taxes and royalties as direct costs in the direct cost ratio. It is interpretation of the “catch-all” phrase which is critical, and the Department is not prohibited from changing an incorrect interpretation of either that Rule or the relevant statute. Allied-Signal, Inc. v. Wyoming State Board of Equalization, 813 P.2d 214, 221-222 (Wyo. 1991).

133. Burlington further argues, based as well on its reading of Wyo. Stat. Ann. § 39-11-102.1(c)(iv), the October, 1996, Burton memo [Exhibit 101] is an “instruction” or “order” by the Department which the Board is bound to follow. The reasons for rejecting a similar argument with regard to the Department Rules applies equally to this assertion. Such an argument also overlooks the fact this Board, in Amoco 96-216, specifically concluded the October, 1996, memo conflicted with statute when it mandated the exclusion of production taxes and royalties as direct costs of producing in the direct cost ratio. This Board is not required to adhere to what might be considered a Department “instruction” or “order” if the same is contrary to statute. See D.L. Cook v. Wyoming Oil and Gas Conservation Comm’n, 880 P.2d 583, 585 (Wyo. 1994).

134. Burlington asserts 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. Burlington thus argues by implication that after the Burton memo in October, 1996, directing production taxes and royalties be excluded from the ratio, the Department was committed to such position, and in order to make any change it must follow rule adoption procedures. The further 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 102].

135. Burlington overlooks the fact this Board, in Amoco 96-216, supra, found the October, 1996, Burton memo was contrary to law. The Department thereafter acknowledged 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. Findings, ¶¶ 53-56.

136. The Department was required to remedy its previous erroneous application of the proportionate profits method which this Board determined was 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).

137. The rule adoption assertion by Burlington 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, anomalous. The October, 1996, memo was itself issued without any rule adoption procedures, and changed a prior Department position, also set forth by Ms. Burton, in an August 6, 1996, memo. The October memo referenced the August memo, and stated: “[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 101].

138. The August memo stated a Department position that production taxes and royalties should be included in the direct cost ratio. Findings, ¶ 41. An assistant attorney general had written a memorandum stating production taxes and royalties should be included in the ratio. Findings, ¶ 56 [Exhibit 109]. The attorney general memo is the “legal argument” to which Ms. Burton referred in her October memo, and supports the conclusion the August memo stated a Department position production taxes and royalties should be included in the direct cost ratio as a matter of law.

139. If Burlington were correct in its argument the Department cannot make 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 Burlington now agrees, should be subject to the same rule adoption requirements. Acceptance of Burlington’s argument would thus render invalid both the October, 1996, and the August, 1996, memos. 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.

140. Burlington, 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.

141. 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 Burlington herein.

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

143. 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 an anomaly facing Pathfinder which is similar to the anomaly Burlington faces 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, Wyo. Stat. Ann. 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).

144. 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).

145. The Court reaffirmed the Pathfinder conclusions in a 1995 appeal wherein Amoco Production Co. challenged the use by two Wyoming 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).

146. Burlington’s arguments fail for the separate reason that the Department’s February, 2002, memo is a policy statement which is exempt from rulemaking procedures under the Wyoming APA. Conclusions, ¶ 92.

147. In addition, even the cases cited by Burlington do not support its Rules argument.

148. 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 Regulations (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 a very explicit interpretation of the CFR “line-of-sight” requirements.

149. 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.

150. 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.

151. 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. 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).

152. 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.

153. Appalachian Power Company also does not support Burlington’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.

154. 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.

155. 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.

156. The substantive legal standard in this matter is the Department Rules on direct costs, the direct cost ratio, and the proportionate profits method. Conclusions, ¶ 82. 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. Findings, ¶¶ 55-58.

157. The final authority cited by Burlington is Hercules Powder Co. v. State Board of Equalization, 210 P.2d 824, 826 (Wyo. 1949). The Board, then vested with authority now vested in the Department, 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 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.

158. The Wyoming 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.

159. The situation before the Board as it considers an appeal of the Department’s action 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.

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

161. 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.

162. Burlington 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, and as such, it is of no precedential value.

163. 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 the case, and thus had to be dismissed from the appeal. Amoco Production Company, 2004 WY 89, ¶¶ 9-27. Since Uinta County had originally raised the issue of whether production taxes and royalties are direct costs of producing, the Court refused to consider the merits of the Board’s ruling on that issue:

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 [whether production taxes and royalties are direct costs of producing]. 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.

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

164. There is thus no basis for an argument the Board decision on the inclusion of production taxes and royalties as direct costs of producing is void. The requirement to include production taxes and royalties as direct costs of producing still binds the Department until overturned by the Wyoming Supreme Court.

Does including taxes and royalties in the direct costs ratio lead to mathematical errors and absurd results?

165. Burlington argues, in general terms, the inclusion of production taxes and royalties as direct costs in the direct cost ratio leads to mathematical errors, and what it concludes are “absurd” results. Burlington cites Powder River Coal as authority for its argument. The Powder River Coal decision, however, does not discuss the oil and gas proportionate profits statute at issue. It considered the proportionate profits methodology only in conjunction with coal production, and its valuation under a statute different from the oil and gas statute. Powder River Coal offers little support for Burlington’s position.

166. As a subset of its general argument with regard to mathematical errors and absurd results, Burlington asserts production taxes and royalties are not profit-generating as indicated by the fact the two items are deducted from gross sales value. Burlington attempts to support this argument by reciting its interpretation of the Wyoming Legislature’s intent in adopting the oil and gas proportionate profits statute. Burlington provides no authority for its legislative interpretation, and cites only Powder River Coal as legal authority for its argument production taxes and royalties do not generate profit, thus their inclusion as direct costs is improper. Burlington, however, does not address the fact the oil and gas statutes do not include any reference to “profit,” thus any argument which requires consideration of profit is misplaced.

167. The remainder of Burlington’s argument on the profit issue, as well as its assertion inclusion of production taxes and royalties as direct costs improperly allocates to those two components net revenue, relies solely on Burlington’s interpretation of the oil and gas statutes, and the testimony of its witness, Anthony Fasone, which testimony should more realistically be viewed in the nature of advocacy for Burlington’s statutory interpretations. Findings, ¶¶ 31-38. Both Burlington’s argument and Fasone’s testimony overlook at least two relevant factors.

168. First, the oil and gas proportionate profits statutes does not use or define the term “net revenue,” a term which Fasone apparently deems to be important in his interpretation of the statute. Second, the coal and bentonite valuation statutes specifically exclude production taxes and royalties as direct costs while the oil and gas statutes do not. Fasone, in his testimony, argues this statutory difference is of no consequence. He opines the specific language in the coal valuation statute that production taxes and royalties be excluded as direct costs is fairly pointless and does not mean anything. Findings, ¶ 37. Such an assertion runs directly counter to the established law that the Legislature is presumed not to act without purpose. Conclusions, ¶¶ 65, 67.

169. The testimony of Fasone, Findings ¶¶ 31-38, is essentially argument, an opinion, particularly since the oil and gas proportionate profits statute does not define or discuss net revenue. A difference of opinion is not sufficient to overcome the presumption of validity in favor of the Department’s determined value. Conclusions, ¶ 75.

170. The direct cost ratio is merely a multiplier within a proportionate profits formula. It is used to identify a portion of gross sales revenue, after deduction of all production taxes and royalties, as the costs of production, which is just one step in the process to determine taxable value. Production taxes and non-exempt royalties are only then added back to the resulting value to arrive at taxable value for the mineral. Findings, ¶¶ 3, 10, 13, 18, 21.

171. 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. The direct cost ratio is purely a mathematical formula which apportions the revenues of the producer, net of taxes and royalties.

172. The October, 1996, memo by Ms. Burton actually 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:

173. Burlington also asserts a declaratory judgement decision by District Court Judge Dan Spangler (retired) finding production taxes and royalties are not direct costs of producing is somehow binding on the Board. This declaratory judgement decision, as noted by Burlington, has been appealed by the Department to the Wyoming Supreme Court, thus the decision is not final and not binding until the appeal is completed. V-1 Oil Company v. People, 799 P. 2d 1199, 1203-1204 (Wyo. 1999).

174. Burlington, in summary, has not fulfilled its burden of proof or ultimate burden of persuasion.

175. Burlington 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’s February 8, 2002, Memo to all producers indicating production taxes and royalties must be considered direct costs of producing. The Department has agreed interest accrues from February 8, 2002, on any increase in value resulting from inclusion of production taxes and royalties as direct costs of producing in the direct cost ratio of the proportionate profits methodology. Findings, ¶ 60.

IT IS THEREFORE ORDERED the refusal by the Department to accept and process the amended returns filed by Burlington for the 2002 and 2003 natural gas production at issue is affirmed.

Pursuant to Wyo. Stat. Ann. § 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.