BEFORE THE STATE BOARD OF EQUALIZATION

FOR THE STATE OF WYOMING

IN THE MATTER OF THE APPEAL OF )

AMOCO PRODUCTION COMPANY FROM )

AN AUDIT ASSESSMENT DECISION OF ) Docket No. 96-216

THE DEPARTMENT OF REVENUE )

(Whitney Canton, Production Years 1989 - 1992) )

_________________________________________________________________________________________________________________________

FINDINGS OF FACT

CONCLUSIONS OF LAW

DECISION AND ORDER

ON RECONSIDERATION

________________________________________________________________________________-____________________________________________



APPEARANCES

John L. Bordes, Jr. and Nicole Crighton, of Oreck, Bradley, Crighton, Adams, and Chase, for Petitioner, Amoco Production Company.

Bruce Salzburg of Herschler, Freudenthal, Salzburg, Bonds & Zerga for Intervenor, Uinta County.

Charles T. Solomon, Assistant Attorney General, at the hearing and Karl D. Anderson, Assistant Attorney General, at the time of the Decision and Order, for Respondent, Department of Revenue (DOR).



DIGEST

Pursuant to notice duly given to all parties in interest, this matter came before the State Board of Equalization (SBOE) for hearing on the 11th day of January, 1999, at 10:05 a.m. in Hearing Room 1699, Herschler Building, 122 West 25th Street, Cheyenne, Wyoming and was initially heard by Chairman Dennis Tippets and Board Member Marvin Applequist. Edmund J. Schmidt, Vice-Chairman at that time, recused himself on his own motion. Subsequently, this matter was considered and a Decision rendered on June 30, 2001, by Roberta A. Coates, Vice-Chairman and Sylvia Lee Hackl, Member, upon review of the transcript of the proceedings, exhibits, written briefs of the parties and the portion record including the stipulation of testimony contained in the record in the earlier dockets of 94-37 and 94-40 by stipulation. This appeal arises from the decision of the DOR assessing Petitioner on underpayment of severance taxes and increased gross product valuation on gas processed through the Whitney Canyon Plant in Sublette County. On July 25, 2001, the SBOE granted Petitioner's Motion for Reconsideration and allowed the parties the opportunity to file a motion to dismiss the issues presented in the appeal of the 1989 production year and the related issues of the use of the netback methodology and to further brief various legal issues raised in the Motion for Reconsideration. On August 21, 2001, the parties filed a Joint Motion to Dismiss 1989 Production Year Issues.



ALL STATUTORY CITATIONS USED IN THIS DECISION AND ORDER REFERENCE TITLE 39, PRIOR TO RECODIFICATION, WHICH WAS EFFECTIVE MARCH 6, 1998.



JURISDICTION

Upon application of any person adversely affected, the SBOE is mandated to review final decisions of the DOR concerning state-assessed property and hold hearings after due notice pursuant to the Wyoming Administrative Procedure Act and prescribed rules and regulations. For state-assessed properties, pursuant to Wyoming Statute 39-2-201(d)(i), the "person assessed" may file objections with the SBOE within 30 days of the postmark of the DOR notification. Petitioner timely filed its appeal.

In its Motion for Reconsideration the Petitioner argues, inter-alia, that the SBOE lacked jurisdiction to decide the critical issue raised by the Intervenor that the DOR's interpretation of the components of the proportionate profits formula was incorrect. For reasons discussed below the SBOE finds it had jurisdiction to grant intervention and to consider the issue raised by the Intervenor.



DISCUSSION

On September 14, 1994, the Department of Audit (DOA) engaged an audit of Petitioner's gas processed through the Whitney Canyon Plant located in Uinta County, Wyoming. This audit was for mineral production for the years 1989 through 1992. On October 25, 1996, the DOR issued a deficiency assessment based on the audit which was appealed by Petitioner on November 18, 1996.

On September 3, 1997, Uinta County filed a motion to intervene, which was granted by order of the SBOE on September 19, 1997.

On April 18, 1998, the DOR issued a "Notice of Valuation for an Appealed Assessment." Uinta County did not appeal the Notice of Valuation Change as it was already an Intervenor.

Petitioner raises procedural issues regarding the intervention of Uinta County. In particular, Petitioner argues that the SBOE should not have granted Uinta County's motion to intervene because the County was late in appealing the Notice of Valuation Change (NOVC) and the issue raised by the County is a new issue which cannot be raised before the SBOE.

Petitioner argues that the audit findings are erroneous because the DOR ignored the arms-length agreement between Amoco Production Company and Amoco Oil Company when disallowing the margins; the DOA ignored generally accepted audit standards; the DOA used an erroneous test to determine processing and transportation costs; the DOA's use of a fixed prime rate to determine the return on investment was not authorized by statute or rule; the DOR used an incorrect point of valuation because custody of the gas transferred at the inlet to the gas collection system; both penalty and interest should be waived because there was no evidence of negligence or noncompliance; and no interest should be paid until all of Petitioner's cases are resolved because Petitioner may have overpaid taxes rendering interest a nullity. In its Motion for Reconsideration, Petitioner again argues that intervention should not have been allowed, the Intervenor should not have been allowed to raise the issue of the application of the proportionate profits formula, the constitutionality of an adverse decision, and issues already addressed in the original decision.

Intervenor argues the DOA correctly calculated Petitioner's tax liability under the proportionate profits method by including royalties and production taxes in the ratio, but the DOR improperly changed this methodology. Intervenor argues that the exclusion of royalties and production taxes reduced the taxable value by more than half. Intervenor argues that royalties and production taxes are included in the term "direct costs" because case law and oil and gas accounting guidelines have considered them to be included.

The DOR argues the margins were properly disallowed because they are marketing fees by the parent company, Amoco Oil Company, and thus these fees are mere accounting transactions where no money exchanges hands. In addition, the DOR argues that margins do not beneficiate the product, there are no statutes or rules allowing such a deduction and they are arbitrary and subject to manipulation.

The DOR further argues that the expenses Petitioner took were disallowed because the DOA was unable to determine from sampling if the costs related to processing or added "value" to the product. The DOR also disallowed sulfur road and hauling costs because Petitioner did not assert these costs were transportation costs. Also, the sulfur was in a marketable condition once it left the Whitney Canyon plant and was not being processed as it was being transported to the load out facility.

The DOR argues the return on investment used in the netback method for 1989 production was proper because it was a number used by the Mineral Management Service (MMS) and obtained from the New York prime rate for the month the plant was placed in service. We do not address this issue because a Motion to Dismiss was filed by the parties subsequent to this SBOE's June 29, 2001, decision, asking that all issues relating to the 1989 production year be dismissed due to settlement of the case relating to that year.

The DOR argues that Petitioner cannot now raise the issue of interest and penalties because Petitioner failed to raise it in its notice of appeal. The DOR also argues that the SBOE previously ruled against Petitioner on these issues in Docket Numbers 94-37 et al., which includes Docket Number 94-40.

The DOR argues the Intervenor's position is incorrect because royalties and production taxes were never used in the ratio of the proportionate profits method since the legislation was passed in 1990 authorizing the method. In addition, the inclusion of production taxes in the ratio would result in double taxation.

The DOR appraised Petitioner's gas production using the proportionate profits method for 1990 through 1992. Wyo. Stat. 39-2-208(d)(iv)



FINDINGS OF FACT

1. On September 14, 1994, the DOA engaged an audit of Petitioner's gas production for 1989 through 1992 from the Whitney Canyon plant and field located in Uinta County. (Trans., Vol. III, p. 416)

2. On October 25, 1996, based on the DOA audit, the DOR issued a deficiency assessment for severance and ad valorem taxes as follows:

Additional Severance Tax

Year    Additional Tax Value    Tax Due

1992        $2,284,122               $137,047

1991         3,071,775                  184,306

1990         2,670,534                  160,233

1989       12,354,009                  741,241

TOTALS $20,380,440            $1,222,827

Additional Ad Valorem Taxable Value

YEAR      UINTA COUNTY      TOTAL TAXABLE VALUE

1992             $2,284,122               $2,284,122

1991               3,071,775                3,071,775

1990               2,670,534                 2,670,534

1989            12,354,009               12,354,009

TOTALS $20,380,440               $20,380,440

(Exhibit 1059)

3. On November 18, 1996, Petitioner appealed the DOR's deficiency assessment.

4. The SBOE entered a briefing order in August, 1997, ordering the Petitioner to file a brief on October 13, 1997.

5. On September 3, 1997, Uinta County filed a motion to intervene in accordance with the SBOE rules. The motion for intervention was granted on September 19, 1997.

6. The Petitioner failed to meet the first filing deadline. A new Briefing Order was entered by the SBOE, directing Petitioner to file a first brief by January 20, 1998. The Petitioner filed to remove the matter from the expedited docket on November 26, 1997, which Motion was granted in January, 1998.

7. On April 18, 1998, the DOR issued to the Intervenor a "Notice of Valuation Change for an Appealed Assessment." Intervenor did not appeal the Notice of Valuation Change as it was already an Intervenor in the instant matter.

8. Intervenor filed its Preliminary Statement on May 5, 1998, setting forth the issue that the DOR had improperly applied the proportionate profits methodology. This filing was more than seven months prior to the hearing.

9. On July 30,1998, Petitioner moved to continue the Hearing, and an Order was entered scheduling the hearing for January 11, 1999. The hearing was held on January 11, 1999.

10. The parties final closing arguments and Proposed Findings of Fact and Conclusions of Law were filed on May 17, 1999.

11. The SBOE on its own motion stayed consideration of the matter because similar issues and facts were pending in the Wyoming Supreme Court from August 12, 1999, to July 5, 2000. The Wyoming Supreme Court provided guidance in Amoco Production Company v. Wyoming State Board of Equalization, 12 P.3d 668 (Wyo. 2000) and Amoco Production Company v. Wyoming State Board of Equalization, 7 P.3d 35 (Wyo. 2000).

12. After the Supreme Court rulings, the SBOE lifted the stay and held a scheduling conference on February 5, 2001. As a result of the scheduling conference the parties submitted revised findings of facts and conclusions of law to address issues raised in the Wyoming Supreme Court opinions.

13. The SBOE issued its Findings of Fact, Conclusions of Law Decision and Order on June 29, 2001.

14. Petitioner filed a Motion for Reconsideration on July 9, 2001, and the SBOE granted the Motion for Reconsideration on July, 25, 2001.





Exclusion of Production Taxes and Royalty from the Direct Cost Ratio

15. The Intervenor, Uinta County, objected to the failure of the DOR to include royalties and production taxes in the direct cost ratio when using the proportionate profits methodology to value Petitioner production for 1990 through 1992. The failure to include the production taxes and the royalties results in an artificially deflated taxable value. The proportionate profits method is calculated from Wyoming Statute 39-2-208(d)(iv) as follows:

Total Sales Revenue - (exempt and nonexempt royalties + production taxes) X direct cost ratio + (nonexempt royalties + production taxes) = taxable value. The direct cost ratio is calculated by dividing the direct production costs by the direct costs of production plus the costs of processing and transportation.

16. Because the production taxes and royalties were not included in the ratio, Uinta County alleged there was an undervaluation of $8,465,533 for 1990 through 1992. When the DOA included production taxes and royalties in the direct cost ratio, Petitioner was assessed additional taxable value of $16,491,964 for production years 1990-1992. [Exhibit 1058]. When the production taxes and royalties were excluded from the direct cost ratio, the additional taxable value decreased to $8,026,431. [Exhibit 1059].

17. The Wyoming State Legislature passed a number of mineral valuation statutes for valuing minerals sold away from the point of valuation at the same time it passed the proportionate profits formula for oil and gas. Each statute provides a unique formula for valuing different types of minerals. The coal proportionate profit formula is different from the oil and gas formula. Wyo. Stat. 39-2-209. The uranium statute, Wyoming Statute 39-2-210, the bentonite statute, Wyoming Statute 39-2-211, the sand and gravel statute, Wyoming Statute 39-2-212, the trona statute, Wyoming Statute 39-2-202 all have different procedures and components.

18. The use of the proportionate profits methodology to value mineral production was authorized by the legislature in 1990. 1990 Wyo. Sess. Laws Chapter 54 (Oil and Gas Valuation) and 1990 Wyo. Sess. Laws Chapter 53 (Solid Mineral Valuation).

19. The legislature provided that coal sold away from the mouth of the mine may be valued by the DOR using the proportionate profits methodology, and specifically provided that "[i]ndirect 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 . . .." Wyo. Stat. 39-2-209(d)(iv).

20. During the same legislative session, the legislature specifically provided that royalty and production taxes were excluded from the mine mouth costs used in valuing bentonite. Wyo. Stat. 39-2-211(d)(i)(c). 1990 Wyo.Sess.Laws Chapter 55.

21. The legislature did not specifically provide for the exclusion of production taxes or royalties from the direct cost ratio for oil and gas valuation. Wyo. Stat. 39-2-208.

22. On July 1, 1996, the Office of the Attorney General issued a letter to the mineral tax division of the DOR advising that production taxes and royalties should be included in the ratio as set forth in Wyoming Statute 39-2-208(d)(iv). [Exhibit. 501; Trans., Vol I, pp. 34-36].

23. Although the proportionate profits method has been used since 1990, there was still a question by the DOR in 1996 on how the proportionate profits method worked. [Trans., Vol. I, p. 36].

24. When the DOA originally audited Petitioner, the DOA included production taxes and royalties in the ratio. [Exhibit. 1058; Trans., Vol I, pp. 37- 39].

25. The DOA revised its audit and excluded the production taxes and royalties after the DOR consulted with Petitioner who responded to the DOR disputing the Attorney General's advice. [Exhibit. AM 111; Exhibit 1059; Trans., Vol. I, pp. 41, 42].

26. The DOR had not included production taxes and royalties in calculating the ratio for all minerals. [Trans., Vol. I, pp. 48, 51]. The statute setting forth the proportionate profits formula for valuing coal specifically excludes production taxes and royalties. Wyo. Stat. 39-2-209. But the oil and gas proportionate profits statute does not. Wyo. Stat. 39-2-208.

27. In order to determine if production taxes and royalties should be included in the ratio, the director of the DOR talked with the chairmen of both the House and Senate revenue committees. [Trans., Vol. I, p. 53].

28. The DOR's rules do not give guidance on the issue of inclusion of production tax and royalties in the proportionate profits ratio. [Trans., Vol I, p. 55].

29. The auditor for the DOA believed the DOR's rules included royalties and production taxes in the direct costs of producing. [Trans., Vol. I, p. 73].

30. The Council of Petroleum Accountants Societies issues bulletins as to accounting procedures. These bulletins indicate that both royalty payments and production taxes should be treated as direct costs. [Trans., Vol. I, pp. 78- 85].

31. The DOR never instructed Petitioner or any other taxpayer to report production taxes and royalties in the direct cost ratio when using the proportionate profits method. [Trans., Vol I, p. 150].

32. The direct cost ratio in the proportionate profits method is simply a fraction of one and therefore the total taxable value can never equal the revenue. [Trans., Vol. I, p. 56]. The inclusion of royalties and production taxes in the direct cost part of the proportionate profit formula results in a fraction of one and is applied to the value of the mineral net of production taxes. [Trans., Vol. II, pp. 247-248]. It is not double taxation to create a fraction using the royalties and production taxes.

33. When an industry's processing costs are high, the direct cost ratio becomes smaller as compared to the ratio which gets larger when processing costs are low. [Trans., Vol. II, p. 236]. Thus, when the processing costs increase or are higher, the direct cost ratio (fraction) always becomes lower. [Trans., Vol. II, p. 239].

34. The proportionate profits method results in a number which allows a higher expense deduction than the actual expenses incurred by the taxpayer. [Trans., Vol. III, pp. 484-488].

35. The value of Petitioner's Whitney Canyon production decreased from $28.7 million in 1989 to $13.9 million in 1990, which decrease was partially related to using the proportionate profits method. [Trans., Vol. III, p. 498]. Derek Weekley, an employee of the DOA, testified under cross-examination that from 1989 to 1990, Petitioner's taxable value decreased from $28.7 million using the netback method, to $13.9 million using the proportionate profits method, and this sort of reduction in taxable value was typically associated with the change in methodology. [Trans., Vol. III, p. 498]. However, some of the decrease was attributable to a decline in revenues received by Petitioner. [Trans., Vol. III, p. 519].

36. For 1990, the proportionate profits method allowed a deduction of $33,311,000 from the sales price of the gas. However, the actual processing expenses were only $16,500,000. Thus, the actual processing allowance was twice what was actually incurred by Petitioner. [Trans., Vol. III, pp. 502-503].

37. Although Petitioner does not know the amount of taxes at the time of production, it does know the amount of taxes sometime within the year following the year of production. [Trans., Vol. II, p. 275].

Processing Expenses

38. The parties stipulated that the testimony in dockets 94-37 et al., would be used in this proceeding. [Stipulation for Admission of Evidence Introduced in Docket Number 94-40]. Portions of the transcript from the prior proceeding will be referenced in this decision and referred to as 94-40 Trans. or 94-40 Exhibit.

39. The parties stipulated that numerous volumes of Exhibits from a prior audit case of Petitioner's would be introduced for evidence in the instant matter. We find those numerous volumes of exhibits to be irrelevant to the period of time for this audit. Those exhibits that will not be included in the consideration of this matter are: 94-40, Exhibit 1336 which contains invoices for production year 1984, 94-40, Exhibit 1337 which contains invoices for production year 1985, 94-40, Exhibit 1338 which contains invoices for production year 1986, 94-40, Exhibit 1339 which contains invoices for 1987, 94-40, Exhibit 1340 which contains invoices for 1988.

40. The DOA did not review all the invoices for the accounts because it used a sampling method. [Trans., Vol. III, p 450]. The sampling method is typical when conducting an audit for oil and gas. [Trans., Vol. III, p. 500]. The sampling method gives a good indication of what items the entire account would contain. [Trans., Vol. III, p. 501].

41. In conducting the audit, the auditors reviewed as many source documents as possible. [Trans., Vol. III, p. 415].

42. When the DOA reviewed an account, it looked at the majority of invoices in that one account and if the majority of invoices were not allowable expenses, then all of the account would be disallowed. This procedure is typical when auditing oil and gas producers. [Trans., Vol. III, pp. 501- 502].

43. The DOA was not provided sufficient information to verify the numbers in the various accounts. [Trans., Vol. III, pp. 453; 456 - 458, 462- 464].

44. The DOA disallowed the processing deductions taken by Petitioner in Account 9272-1 (charges from other company locations), 9272-10 (truck and service equipment expenses), 9272-11 (automobile expenses), 9272-29 (radio communication expenses), 9272-34 (personnel transfers), 9272-80 (other expenses), and 9635-71 (payroll taxes and employee plan expenses). These accounts were disallowed because the auditor was unable to determine through Petitioner's evidence whether the expenses in those various accounts actually were related to the processing function at Whitney Canyon. [Trans., Vol. III, pp. 447 - 471].

45. The DOA used a three-part process to determine whether the sub-account expenses should be allowed under the proportionate profits method. The DOA first tried to identify the expense and allocate it directly back to the Whitney Canyon Processing Plant and not just to the Whitney Canyon Field, because the field consisted of areas of production as well as processing. Then the DOA would look at the statutes to determine if the expenses fell within the definition of processing and transportation. The third and last area examined was whether or not the expense was directly related to the processing of the gas stream. [Trans., Vol. II., p. 290].

46. The charges from the other company locations, Account 9272-1, were disallowed. The charges from other locations consisted of the salaries of employees not physically located at the plant, but who performed services for the employees at the plant such as bookkeeping services. The salaries for these employees were allocated to locations such as the Whitney Processing Plant based on time studies of the "Total weighted well month." [Trans., Vol. II, pp. 308, 348]. Under the proportionate profits method numerous expenses were tied to the "Evanston District." The "Evanston District" included the Whitney Canyon Gas Plant, the Painter Gas Plant, the Anschutz Gas Plant, the Whitney Canyon fields, the Painter fields, the Anschutz fields, the Ryckman Creek fields, the Clear Creek fields, and the Carter Creek fields. Therefore, the expenses failed under the proportionate profits method because they could not be tied to processing at the Whitney Canyon Plant. [Trans., Vol. II, p. 284, Vol. III, p. 451]. Even when the personnel could be tied to the plant, they could not be tied to the processing of the gas stream. [Trans., Vol. III, p. 451].

47. The expenses for Accounts 9272-10 (truck and service equipment expenses) and 9272-11 (automobile expenses) were disallowed as processing expenses. The vouchers provided to the DOA did not provide information on how the mileage expenses were calculated, where the vehicles were located or how the vehicles were being used. The expenses were charged to the "Evanston District"; however, there was not sufficient documentation to tie the expenses to gas processing. [Trans., Vol. III, p. 315, Vol. II, pp. 458-463; 94-40 Trans., Vol. IV pp. 650-652].

48. The expenses in Account 9272- 29 were for hand-held radios, truck-mounted radios and cell phones. The auditor saw the radios being used at the well site during the production phase of the product. The documentation provided the DOA did not tie the radio expense to the processing function. [Trans., Vol. II, p. 287, p. 316; Vol. III, p. 462].

49. Personnel transfer expense was contained in Account 9272-34. This account was used to pay expenses and tax consequences of transferring employees. The auditors could not tie the personnel to the work functions, in particular to the processing functions, and thus the expenses were not allowed. [Trans., Vol. II, p. 387].

50. The miscellaneous account was Account 9272-80. The auditor found:

On 80, the vast majority by far were unallowable expenses. There were a few that I could tie back to the plant, but it was very minimal and the vast majority of that account were disallowable (sic) expenses. So I disallowed Account 80 based on the fact of my sampling proved that the vast majority of Account 80 was unallowable. And I figured since I was also allowing accounts that I found some unrelated or unallowable accounts, it kind of balanced out.

[Trans., Vol. III, p.467].

51. The invoices the DOA reviewed for the audit included a vast array of "catch-all" charges such as safety processing personnel, first aid kits, snow removal charges and janitorial-type contracting. [Trans., Vol. II, p. 288, Vol. III, p. 464]. The witness for Petitioner could not decipher the invoices charged to the account but he noted "a person in authority signed off so it must be Whitney Canyon." [Trans., Vol. II, p. 320]. A portion of the charges to the account was for nitrogen. Nitrogen can be used to put a cap on the vessel to avoid an explosion in processing gas. [Trans., Vol. II, p. 321]. However, the nitrogen was delivered to the Ryckman Creek Plant and the Painter Field, not the Whitney Canyon plant. Furthermore, there was no documentation that nitrogen was used at Whitney Canyon just the testimony of the Petitioner's main witness who said we "have to trust" it was used at the Whitney plant. [Trans., Vol. II, pp. 377-379, Exhibit 102; Bates 15097, 15114 - 15116]. One of the invoices was for a port-a-potty [Exhibit 102; Bates 15090]. Two were for unknown reasons [Exhibit 102; Bates 15091, 15101; Trans., Vol. II, p. 322]. Many of the invoices were for safety inspections and training. [Exhibit 102; Bates 15092-15096, 15098-15100, 15102, 15104, 15119- 15127]. Another invoice was for a the lease where the "slug catcher" was located but Petitioner's witness did not know what a "slug catcher" was or how it related to processing. [Exhibit 102; Bates 15108, Trans., Vol. II, p. 324]. Other invoices were for the lease of the sulfur haul road property and the property for the sulfur load out facility. [Trans., Vol. II, p. 324]. The lease for the land where the plant was located was not allowable in the auditor's opinion. [Trans., Vol. II, p. 288]. The lease expenses, and others, were indirect expenses and not direct gas processing expenses. Most of the other invoices could not be tied to processing oil and gas at the Whitney Canyon plant.

52. Petitioner used Account 9635-71 to explain the payroll taxes and employee benefits. The amount calculated was 23.9% of the employees' salaries. This account was disallowed because it was not possible to identify which function the employees served in the processing and some of the employees included were not identified in the processing plant. [Trans., Vol. III, p. 469].

Sulfur Haul Road and Load Out Facility

53. Petitioner processes the gas from the Whitney Canyon field at the Whitney Canyon plant into residue gas and byproducts, including sulfur and natural gas liquids. [Exhibit. 1057].

54. During the audit period, Petitioner sold the sulfur and natural gas liquids to Amoco Oil Company. [Exhibit 1057]. Petitioner and Amoco Oil Company are wholly owned subsidiaries of the Amoco Corporation. State ex. rel. Department of Revenue v. Amoco Production Company, 7 P.3d 35 (Wyo. 2000).

55. The Petitioner built an extensive road and load out system to carry sulfur from the processing plant via special trucks. The trucks keep the sulfur in its molten state while the sulfur is transported to a storage facility for eventual loading onto the purchaser's railroad cars. The sulfur must remain in its molten state to meet the purchaser's contract specifications. [94-40 Trans., Vol. XIII, pp. 2673-2674].

56. The road, the trucks, and the loading facilities are all owned and maintained by Petitioner. [Trans., Vol. II, p. 367, 94-40 Trans., XIII, p. 2673, 2682]. The DOA did not allow the road and load out facility expense because the sulfur did not change composition and the transportation did not enhance marketability. [Trans., Vol. II, p. 445].

57. Petitioner attempted to gain credit in the proportionate profits formula by including the costs associated with the sulfur haul road and load out facility in the denominator of the direct cost ratio. The DOA correctly disallowed this attempt to include the costs in the formula. However, the auditor stated he would have disallowed the costs associated with the sulfur haul road and load out facility as a deduction from revenue. [94-40 Trans., Vol. V, p. 779]. The sulfur haul road and load out facility are necessary expenses prior to sale and as such should be deducted from the revenue of the sulfur.

Gathering

58. Petitioner is a producer of gas processed through the Whitney Canyon gas processing plant, a part owner of the Whitney Canyon gas processing plant and the operator of the Whitney Canyon gas processing plant. [94-40 Exhibit 1351].

59. As a producer, Petitioner has the right to have its gas processed by the plant owners through the Whitney Canyon plant. In return for the processing of its gas at the Whitney Canyon plant, Petitioner pays the plant owners a fee of 25% of its condensate, liquid hydrocarbons, sulfur and residue gas processed through the plant. [94-40 Exhibit 1351].

60. As one of the plant owners, Petitioner receives a proportionate share (based on its ownership interest in the plant) of the 25% fee charged the producers for gas processing and is required to pay its proportionate share of the processing costs. [94-40 Exhibit 1351].

61. By agreement among the plant owners, Petitioner also operates the Whitney Canyon plant and recovers from the plant owners the actual costs of plant operation and maintenance plus a fee as compensation for acting as the operator. [94-40 Exhibit 1351].

62. As a producer Petitioner paid the Whitney Canyon plant owners a fee of 25% of its condensate, liquid hydrocarbons, sulfur and residue gas processed through the plant. As the plant operator it paid the plant's operation and maintenance expenses and was reimbursed by the plant owners. As an owner it paid a share of the plant expenses based on its ownership interest in the plant. [94-40 Exhibit 1351; Trans., Vol. II, p. 392].

63. For the years covered by this audit, Petitioner retained title to its natural gas production and sold the products at the tailgate of the Whitney Canyon plant. [Trans., Vol. II, p. 368].

64. After extraction from the well, Petitioner's gas passed through a well location meter, was heated to prevent the formation of hydrates and placed in the gathering system at a plant process control valve. The gathering system collected the production from the wells served by the Whitney Canyon plant and transported the gas to a compressor station and then to the inlet to the Petitioner's Whitney Canyon plant. [94-40 Trans., Vol. XIII pp. 2595-2597, 2599-2600].

65. The gas gathering system is owned by the plant owners and operated by Petitioner as the plant operator. [94-40 Exhibit 1351, Trans., Vol. II p. 327].

66. Petitioner claimed a deduction for the costs associated with the gas gathering system, which the DOR denied for each of the years under appeal. It has been treated as a production expense because it does not relate to processing. [94-40 Trans., Vol. VII pp. 1183-1184]. The DOR has never allowed a deduction for gathering expenses. The DOA disallowed the gas gathering expenses from the wellhead to the inlet of the initial transportation related compressor under the proportionate profits method. [Trans., Vol. III, pp. 438, 440-443].

67. Petitioner claimed the volume meters at the well site were custody transfer meters and the costs associated with the gathering system from the meters to the initial compressor were deductible under the proportionate profits method as processing costs. [Trans., Vol. II p. 270, 327, 367].

68. Mr. Bill Warren, the production tax state royalty and fee royalty audit coordinator for Petitioner, testified the meters at the wellhead were not sales meters. "In theory, for state tax purposes, it's a custody transfer meter. In theory only, for the simple reason that the products that's going through that meter are unprocessed." [Trans., Vol II, p. 368].

69. The products recovered through the processing of Petitioner's gas production were sold at the tailgate of the Whitney Canyon plant. [Trans., Vol. II, p. 368].

70. There was no evidence that dehydration was performed prior to the processing plant.

Marketing Fees (Margins)

71. By contract, Petitioner sold all its sulfur and natural gas liquids produced at the Whitney Canyon plant to Amoco Oil Company for resale on the open market. The price paid by Amoco Oil Company to Petitioner, called a "settlement price," was based upon the price received by Amoco Oil Company for its sulfur sales, less costs related to transportation to market, costs associated with any further processing of the natural gas liquids, and a marketing fee also called a "margin." [Trans., Vol III, pp. 425-426]. The marketing fee or "margin represents Amoco Oil Company's sales expenses, administrative expenses, working capital relating to inventory, tank car maintenance expenses, and capital charges." [94-40 Trans., Vol. IV, p. 720; Exhibit. 2100].

72. No money changed hands. [94-40 Trans., Vol XIII, p. 2552]. Petitioner did not receive the margin amount; the amount was deducted from the purchase price by the buyer, Amoco Oil Company.

73. The DOR accepted the DOA's calculation of the purchase price. The DOA added the margin deduction back into the sum Petitioner received from Amoco Oil Company to determine the revenue component under both the netback and proportionate profits formula. This addition resulted in a higher revenue than was actually received by Petitioner.

74. The DOA disallowed the deduction from revenue for the "margin" because: (1) the "margin" did not beneficiate the product [94-40 Trans., Vol. V, p. 823]; (2) in the DOA's opinion neither the statutes nor rules applicable to the proportionate profits method allowed such a reduction [94-40 Trans., Vol. III, p. 425-426, 549]; and (3) the "margin" is arbitrary and is easily subject to manipulation, especially amongst related parties.

75. The DOA has encountered the marketing fee mechanism before and has uniformly added the fees back into determine revenue. [Trans., Vol. III, pp. 428, 532; 94-40 Trans., Vol. V, pp. 823, 833, 1181].

76. The same pricing mechanism employed by Amoco Oil Company with respect to third parties was used in negotiations with Petitioner. [94-40 Trans., Vol. IX, p. 1678].

77. Amoco Oil Company, in general, paid more favorable prices to Petitioner than to other third parties from which it purchased natural gas liquids (NGL). [94-40 Trans., Vol. IX, p. 1680].

78. The parties filed a Joint Motion to Dismiss 1989 Production Year Issues on August 21, 2001.

79. Any discussion above or Conclusion of Law below which includes a finding of fact may also be considered a Finding of Fact and, therefore, is incorporated herein by this reference.



CONCLUSIONS OF LAW

80. Petitioner's notice of appeal was timely filed and the SBOE has jurisdiction to determine this matter.

81. Petitioner has the burden of going forward and the ultimate burden of persuasion. Rules, Wyoming State Board of Equalization, Chapter 2, 19.

82. The applicable constitutional provisions which are determinative in this matter provide, in relevant part:

Wyo. Constitution Art. 15 3. Taxation of mines and mining claims.

All mines and mining claims from which gold, silver and other precious metals, soda, saline, coal, mineral oil or other valuable deposit, is or may be produced shall be taxed in addition to the surface improvements, and in lieu of taxes on the lands, on the gross product thereof, as may be prescribed by law; provided, that the product of all mines shall be taxed in proportion to the value thereof.

Wyo. Constitution Art. 15 11: Uniformity of assessment required.

(a) All property, except as in this constitution otherwise provided, shall be uniformly valued at its full value as defined by the legislature, in three classes as follows:

(i) Gross production of minerals and mine products in lieu of taxes on the land where produced;

* * *

(f) All taxation shall be equal and uniform within each class of property. The legislature shall prescribe such regulations as shall secure a just valuation for taxation of all property, real and personal.

83. The DOR's valuation established for state assessed property is presumed valid, accurate, and correct, a presumption which survives until overturned by credible evidence. In the absence of evidence to the contrary, it is presumed that the officials charged with establishing value, be it a county assessor or a DOR appraiser, exercise honest judgment in accordance with the applicable statutes, rules, regulations, and other directives, which presumption survives until overturned by credible evidence. Chicago Burlington & Quincy Railroad Co. v. Bruch, 400 P.2d 494, 498-499 (Wyo. 1965).

84. A party challenging an assessment has the initial burden to present credible evidence to overcome the presumption. A mere difference of opinion as to value is not sufficient. Teton Valley Ranch v. State Board of Equalization, 735 P.2d 107 (Wyo. 1987); Hillard v. Big Horn Coal Company, 549 P. 293 (Wyo. 1976); Weaver v. State Board of Equalization, 511 P.2d 97 (Wyo. 1973); CF&I Steel Corporation v. State Board of Equalization, 492 P.2d 529 (Wyo. 1972); Chicago Burlington & Quincy Railroad v. Bruch, 400 P.2d 494 (Wyo. 1965); J. Ray McDermott & Co. v. Hudson, 370 P.2d 363 (Wyo. 1962) and Certain-Teed Products Corporation v. Comily, 87 P.2d 21 (Wyo. 1939).

85. All taxable property shall be annually valued at its fair market value. Wyo. Stat. 39-2-102.

86. Oil and gas shall be annually valued at fair market value. Wyo. Stat. 39-2-208.

Exclusion of Production Taxes and Royalties - Reversed and Remanded

87. One method of valuation of oil and gas is the proportionate profits method as set forth in Wyoming Statute 39-2-208(d)(iv):

(iv) Proportionate profits - The fair cash market value is :

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

(B) Nonexempt royalties and production taxes.

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

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

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

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

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

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

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

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

As Justice Brown said:

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

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

92. The Intervenor is not requesting the SBOE substitute the DOR's method of valuing minerals by the proportionate profits method. Rather, the Intervenor is requesting a ruling about the proper interpretation as to what components are included in the numerator and dominator of the direct cost ratio. This does not change the method but only interprets the application of the statutory formula similar to the action of the court in Pacificorp v. State Department of Revenue, 2001 WL 84, Wyo. 2001.

93. The Wyoming Supreme Court held that only actual costs can be used in a formula to determine the value of mine products pursuant to Wyoming Statute. 39-2-202. State ex rel. State Bd. of Equalization v. Monolith Portland Midwest Co., 574 P.2d 757 (Wyo.1978) and Amoco Production Company v. Wyoming State Board of Equalization, 12 P.3d 668 (Wyo. 2000).

94. We believe that if the DOR is precluded from including hypothetical costs in production to increase the value, it is likewise precluded from using a formula which creates hypothetical costs in processing to decrease the value. We refer to the term hypothetical costs not because of the word "hypothetical" used by a witness in demonstrating the formula but because the fraction in the formula is not a complete appraisal analysis but is an estimate of the costs to produce, process and transport oil and gas. Even though the fraction is based on real numbers it only estimates costs.

95. We are not holding that the proportionate profits methodology can never be used. To the contrary it has worked in the past on coal and other minerals. We are merely holding that it should be carefully scrutinized when the ratio produces absurd results as in this case. It is difficult to imagine that a fair cash market value can ever be achieved when the allowed costs of processing grossly exceed the actual costs by more than two times. In 1990, the actual costs were $16,500,000 while the proportionate profits formula excluding production taxes and royalty resulted in a deduction of $33,311,000. [Trans., Vol. III, pp. 502-503].

96. Failure to arrive at a fair cash market value also violates the Wyoming Constitution, Article 15, Section 11(d) which provides that: "[a]ll taxation shall be equal and uniform within each class of property...." It would be unfair to use the proportionate profits method on one gas producer and issue a lower value because the processing costs were grossly exaggerated, and at the same time use another valuation method on a second gas producer which method did not exaggerate the processing costs.

97. We also hold that the DOR improperly failed to include royalties and production taxes in the direct cost portion of the ratio. Both royalties and production taxes are necessary costs to mine. Both case law, Amax v. State Board of Equalization, 819 P.2d 825 (Wyo. 1991), Hillard v. Big Horn Coal Co., 549 P.2d 293 (Wyo. 1976), Enron Oil and Gas v. Dept. of Revenue, 820 P.2d 977 (Wyo. 1991) and the Wyoming Attorney General's advice support this conclusion. [Exhibit. 501].

98. We believe that inclusion of these direct costs in the ratio will produce a closer fair cash market value and will minimize the skewed results presently reached by excluding them.

99. We find Intervenor's calculations are correct that the ratio allows more than twice the actual processing costs, and the exclusion of production taxes and royalties from the ratio results in one-half the value. Consequently, requiring the inclusion of the taxes and royalties should correct the bizarre processing cost problem produced by the ratio.

100. It would violate the Wyoming Constitution Article 15 11 and Article 1 34 if other types of mineral taxpayers were to pay taxes on minerals using a formula that results in close to actual costs but then allow oil and gas taxpayers to pay taxes on greatly and artificially inflated costs. The only logical conclusion is that royalties and production taxes have to be included in the direct cost portion of the formula to result in fair market value and uniform taxation.

101. Petitioner alleges there is an inference that the legislature knew the DOR was not including the royalties and production taxes in the direct cost ratio of the proportionate profit formula. The DOR did not adopt a rule, there has been no formal ruling by the DOR and the SBOE has not had a prior opportunity to rule on the interpretation nor was the SBOE even aware of the issue. Therefore, the idea that the legislature adopted the DOR's informal practice is ill conceived.

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

103. The Wyoming Supreme Court has consistently held that this section 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).

104. "Uniformity of assessment requires only that the method of appraisal be consistently applied," but in all cases the constitutional mandate is to achieve full and just valuation of the property to be taxed. Appeal of Monolith Portland Midwest Co., Inc., 574 P.2d 575, 761 (Wyo. 1978)

105. The Legislature may have a different formula to value oil and gas than the formulas to value coal, bentonite, uranium, trona and sand and gravel because it is rational the costs associated with the costs of production vary with the different minerals. The 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).

106. Petitioner in its reply to the responses for reconsideration raises for the first time that this portion of the decision should be applied retroactively. The SBOE by articulating this decision is acting in its judicial capacity. See Antelope Valley Improvement and Service District v. State Bd. Of Equalization for the State of Wyoming, 4 P.3d 876 (Wyo. 2000). The Wyoming Supreme Court eloquently observed in Wyoming State Tax Com'n v. BHP Petroleum, 856 P.2d 428 at 439 (Wyo. 1993); "In general, 'statutes operate prospectively while judicial decisions are applied retroactively.'" The Wyoming Supreme Court has articulated the standards to be applied in determining whether a decision should be applied prospectively only. First, it must be determined if the decision established a new principle of law; explicitly overruling a prior precedent or overturned a long-standing practice. Second, it must be determined if the purposes of the decision would be furthered by retroactive application. Finally, it must be determined if hardship or injustice would be generated by the retroactive application of the decision. Hanesworth v. Johnke, 783 P. 2d 173, 176-177 (Wyo. 1989) citing Chevron Oil Company v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971). Those purposes are not met in this case and the ruling should be retroactive. The purpose of taxing minerals close to fair market value would be defeated by prospective application and there is no evidence Petitioner would experience a hardship by retroactive application. The constitutional mandate of valuing minerals at their fair market value would be defeated by prospective application.

Intervenor Status - Affirmed

107. Petitioner argues that the Intervenor should not be allowed to intervene nor should it be allowed to raise additional issues. We agree that generally an intervenor generally takes the case as he finds it, and cannot raise additional issues. Gettler v. Cities Service Co., 739 P.2d 515,518 (Okla.1987); Lima v. Chambers, 657 P.2d 279 (Utah 1982); Sell v. Douglas Tp. Zoning Hearing Bd., 613 A.2d 162,164 (Pa. Comm. 1992).

108. However, the general law concerns intervention in courts wherein the rules of civil procedure are applicable. The SBOE has specific rules which authorize intervention and which do not limit or restrict the rights of intervenors to raise and argue additional issues. Rules, Wyoming State Board of Equalization, Chapter 2, 13.

109. We cannot ignore the fact that the Intervenor is a county. In the State of Wyoming a county is in a unique position as it relates to mineral taxes. There is no doubt the county is directly affected by mineral valuation and taxation for it collects mineral ad valorem taxes and distributes the monies to various taxing entities. Counties can request and examination pursuant to Wyoming Statute 39-1-304(xiv). Exxon Corporation v. Board of County Commissioners of Sublette County, 987 P.2d 158 (Wyo. 1999). Counties are allowed to appeal a final determination of the DOR pursuant to Wyoming Statute 39-1-304(a). In fact, Wyoming Statute 39-1-304(a) provides that a board of county commissioners is equated with a person by stating:

. . . review final decisions of the department on application of any interested person adversely affected, including boards of county commissioners for the purpose of this subsection . . . (emphasis added)



110. If Uinta County were not allowed to intervene in this matter they could still question the proportionate profit formula application by requesting an examination or appealing the NOVC that would necessarily issue as a result of this decision for the portion where Petitioner prevails.

111. Petitioner has not been prejudiced by the consideration of the components of the proportionate profits formula because of ample opportunity to litigate this matter.

112. We find the decision in the case of Appeal of Municipality of Penn Hills, 546 A.2d 50 (Pa.1988), to be applicable to these proceedings. In Penn Hills the taxpayer, U.S. Steel, did not challenge its assessment which was appealed by the Municipality (Penn Hills) and the Penn Hills School District as being undervalued. After the taxing authorities filed the appeal, U.S. Steel sought and received intervenor status alleging an overvaluation. Prior to the assessing board holding a hearing, the taxing authorities withdrew their appeal. However, the assessing board held the hearing and lowered the assessment. The taxing authorities appealed the assessing board's decision to the Court of Common Pleas alleging that the assessing board lacked jurisdiction to continue with the case once the petitioners' claims were dismissed. The Court reversed the assessing board, which decision was appealed by U.S. Steel to the Commonwealth Court, which, in turn reversed the lower court's decision. The taxing authorities sought review in the Supreme Court of Pennsylvania which review was granted. The Supreme Court affirmed the decision of the Court of Common Pleas and held at page 53:

It is apparent from the above provisions that the Board's jurisdiction is not limited by the complaint asserted in the original appeal, as the Taxing Authorities would have us hold. To the contrary, the language suggests that there is no limitation on the Board's power to increase or decrease the assessment, so long as it is within the confines of the statute. Thus, the proceeding before the Board is in the nature of a de novo hearing, with the Board having the latitude to revise the assessment upwards or downwards.

113. To ignore the important issue raised by Intervenor in this case would only result in a delayed decision and the inefficient litigation. Eventually the SBOE would have to decide this issue, either in an examination or an appeal from a Notice of Valuation Change. This would defeat the primary policy of intervention that being the "efficient, speedy, inexpensive, and just determination of a controversy, and [to] encourage litigation of all claims existing between the participants of a lawsuit, without the waste of judicial resources attendant upon requiring separate trials." 26 Federal Procedure 59:407, Citing Stewart v. Warner Corp. V. Westinghouse Electric Corp., 325 R.2d 822 (2nd Cir. 1963). This issue is so pivotal to the appropriate application of the proportionate profits formula that it should not be ignored in this case only to be addressed later.

Margins - Reversed and Remanded

114. The DOA looked at the purchase agreement between the sister companies of Amoco Oil Company to purchase from Petitioner, Amoco Production Company. In that contract the price paid was inflated by a "marketing fee" or "margin". [Trans., Vol III, pp. 425-426].

115. The DOA increased the price reported by Petitioner by the "margins" to derive value. The DOR accepted the procedure of the DOA. Such procedure must be fully supported by the evidence in the record and must not be arbitrary nor capricious. The sale between Petitioner and Amoco Oil Company was not an arms length sale, but this should not be the only factor to determine the value of the sulfur and NGLs. The record demonstrates the price paid for the sulfur and NGLs was representative of the value other companies received for their product from Amoco Oil Company. There was testimony that Petitioner received a higher price for its product than other companies. The record is void of any evidence that the price was not a fair market price.

116. Even if the DOA routinely adds "margins" back into the price paid to derive value, the fact that such practice is uniformly used does not mean the practice is appropriate. The issue of whether "margins" should be added back into the price paid for the products was fully litigated in Docket Numbers 94-37, 94-40, 94-43, 94-44, and 94-53. In that case the SBOE concluded that margins should not be added back in. We reach the same conclusion here.

117. The evidence presented in this case was substantially the same as the evidence in the prior case and major portions of the prior record were incorporated in the record of the case. [Stipulation for Admission of Evidence Introduced in Docket Number 94-40]. The Wyoming Supreme Court agreed margins should not be added into the price received by Amoco Production Company in State ex. rel. Department of Revenue v. Amoco Production Company, 7 P.3d 35 (Wyo. 2001).

118. This is an issue where collateral estoppel applies. Four conditions have been met: Identical issue, prior substantive decision on the issue, participation by the parties and a full and fair opportunity to litigate the issue in the prior proceeding. In the Matter of the Appeal of Donald Bender from a Decision of the Uinta County Board of Equalization (1995 and 1996 Real Property Valuation), SBOE Docket No. 99-130 (November 30, 1999), affirmed Bender v. Uinta County Assessor, 14 P.3d 906 (Wyo. 2000); University of Wyoming v. Gressley, 978 P.2d 1146 (Wyo. 1999); Kahrs v. Board of Trustees for Platte County School Dist. No. 1, 901 P.2d 404, 406 (Wyo. 1995). We will not disturb the previous ruling that "margins" should not be added to increase value.

Processing Expenses - Affirmed

119. Petitioner has a clear duty to properly report their costs to the DOR and to also maintain and provide proper documentation of such costs upon audit. This includes being able to establish that claimed processing deductions actually relate to the processing function. The Wyoming legislature has in fact codified this duty. Wyo. Stat. 39-6-304(o) provides that:

Audits provided by this article shall commence within five (5) years of the reporting period and taxpayers shall keep accurate books and records of all production subject to taxes imposed by this article and determinations of taxable value as prescribed by W.S. 39-2-202 for a period of five (5) years and make them available to department examiners for audit purposes. If the examination discloses evidence of gross negligence by the taxpayer in reporting and paying the tax, the department may examine all pertinent records for any reporting period without regard to the limitations set forth in paragraphs (o) and (p) of this section. [Emphasis supplied].

120. The sub-accounts disallowed by the auditors, and subsequently by the DOR did not clearly demonstrate the expenses in the accounts were for processing at Whitney Canyon. Petitioner failed to keep complete and accurate records with respect to the claimed deductions. Petitioner does not meet its burden by merely asserting that because a person in charge signed off for the expense at Whitney Canyon, the expenses were in fact processing expenses at Whitney Canyon. There was no clear demonstration the expenses were for processing as opposed to production, or that the expenses were correctly allocated to the Whitney Canyon processing plant. Petitioner failed to meet its burden of demonstrating the error in the DOR's valuation.

121. Petitioner alleged the auditor's method of sampling account invoices is flawed and does not meet generally accepted auditing standards. Petitioner failed to demonstrate any prejudice as a result of such a procedure. Petitioner also failed to point to any statute or rule requiring strict adherence to such standard. Without clear statutory guidance or rules the SBOE is not willing to set aside an audit based on mere allegations.

122. Petitioner attacks the test used by the DOA in determining whether to allow certain expenses. Petitioner claimed the expenses were allowable under federal law. One must keep in mind that this is a state-created severance and ad-valorem tax. It is not a federal income tax. Even though certain expenses may be allowed in the federal income tax system, they may not necessarily relate to mineral production or state valuation and taxation. We find the test to be reasonable in the final result and therefore Petitioner again failed to meet its burden.

Gas Gathering Expenses - Affirmed

123. Because of the motion to dismiss filed by the parties subsequent to the issuance of our original decision in this matter, it is not necessary for us to discuss the gathering expense issue for the 1989 production. We turn then to our review of the issue under the proportionate profits methodology adopted by the legislature and applied for the first time to Petitioner's 1990 production.

124. For 1990 through 1992 Petitioner's gas production was valued for ad valorem and severance tax purposes at its fair market value at the mine or mining claim where produced, after the mining or production process was completed, as determined pursuant to Wyoming Statute 39-2-208.

125. Wyoming Statute 39-2-208 provided in pertinent part:

(a) Crude oil, lease condensate and natural gas shall be valued for taxation as provided in this section. Based upon the information received or procured pursuant to W.S. 39-2-201(b) or (c), the board shall annually value crude oil, lease condensate and natural gas for the preceding calendar year in appropriate unit measures at the fair cash market value of the product, after the mining or production process is completed. Notwithstanding subsection (j) of this section, expenses incurred by the producer prior to the point of valuation are not deductible in determining the fair cash market value of the mineral.

(b) The mining or production process is completed:

* * *

(ii) For natural gas, after extracting from the well, gathering, separating, injecting and any other activity which occurs before the outlet of the initial dehydrator. When no dehydration is performed, other than within a processing facility, the production process is completed at the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first.

* * *

(k) For natural gas, the total of all actual transportation costs from the point where the production process is completed to the inlet of the processing facility or main transmission line shall not exceed fifty percent (50%) of the value of the gross product without approval of the board based on documentation that the costs are due to environmental, public health or safety considerations, or other unusual circumstances.

* * *

(m) As used in this section:

(i) "Compressor" means a device associated with processing or transporting gas which mechanically increases the pressure of natural gas;

(ii) "Dehydrator" means a device which removes water vapor that is commonly associated with raw natural gas;

(iii) "Gathering" means the transportation of crude oil or natural gas from multiple wells by separate and individual pipelines to a central point of accumulation, dehydration, compression, separation, heating and treating or storage;

(iv) "Heating and treating" means the removal of solid, liquid and gaseous components from the well stream by chemical, mechanical and thermal processes;

(v) "Lease automatic custody transfer unit (LACT)" means a device which automatically and mechanically measures and at which point custody of crude oil transfers from the producer to the purchaser;

(vi) "Processing" means any activity occurring beyond the inlet to a gas processing facility that changes the well stream's physical or chemical characteristics, enhances the marketability of the stream, or enhances the value of the separate components of the stream. Processing includes, but is not limited to fractionation, absorption, adsorption, flashing, refrigeration, cryogenics, sweetening, dehydration within a processing facility, beneficiation, stabilizing, compression (other than production compression such as reinjection, wellhead pressure regulation or the changing of pressures and temperatures in a reservoir) and separation which occurs within a processing facility;

(vii) "Separating" means the isolation of the well stream into discrete gas, liquid hydrocarbons, liquid water and solid components;

(viii) "Sweetening" means any activity that removes acid gases, such as hydrogen sulfide and carbon dioxide, from the well stream. Sweetening includes, but is not limited to absorption, stabilization, thermal and catalytic conversions, chemical reaction and regeneration;

(ix) "Well" means a hole drilled in the earth for the purpose of finding or producing crude oil and natural gas.

126. The point of valuation for Petitioner's 1990 through 1992 production is clearly set by Wyoming Statute 39-2-208. It is the point where the production process is completed. The production process is completed "after gathering" and where there is no dehydration, "at the inlet of the initial transportation related compressor, custody transfer meter or processing facility, whichever first occurs."

127. We reject Petitioner's contention that the volume meters located at or near the wellhead and prior to the inlet to the gathering system are custody transfer meters as that term is used in Wyoming Statute 39-2-208(b)(ii). The only testimony even remotely identifying the volume meters as custody transfer meters came from Mr. Warren. He said only that they were custody transfer meters "[i]n theory only, for purposes of taxation." [Trans. Vol. II, p.368]. We find that testimony unpersuasive. We do not believe the legislature contemplated the use of a theoretical custody transfer meter as the point of valuation for taxation purposes.

128. We conclude that the custody transfer contemplated by that section is the transfer of custody from the producer to the purchaser. This interpretation is consistent with the definition of "lease automatic custody transfer meter" used by the legislature for crude oil valuation requiring a transfer from producer to purchaser. Wyoming Statute 39-2-208(m)(v). In this case transfer from producer to purchaser occurs at the tailgate of the processing plant, not at the beginning of the gathering system.

129. We reject Petitioner's argument on reconsideration that the SBOE's decision under the law in effect prior to 1990 is controlling. Petitioner's argument that stare decisis or collateral estoppel apply under the facts of this case is without merit. Wyoming Statute 39-2-208, effective for 1990 forward, authorized the use of the proportionate profits methodology and set out clearly for the first time the point where the production ends and processing begins, the point of valuation under that methodology.

130. We also reject Petitioner's argument on reconsideration that the general language of Wyoming Statute 39-2-202(a) should prevail over the specific language of Wyoming Statute 39-2-208(b). In this case, the legislature adopted a specific definition where there had previously been a general statute on the same subject. Under those circumstances, general rules of statutory construction provide that the specific statute controls over the general statute. Thunderbasin Land v. Laramie County, 2000 WY 110 30, 5 P.3d 774, 782, (2000) citing Rock Springs Ford Nissan v. State Board of Equalization, 890 P.2d 1100, 1103 (Wyo.1995). Here, the specific language of Wyoming Statute 39-2-208 controls.

131. The point of valuation selected by the DOA and used by the DOR, the inlet to the initial transportation related compressor, is correct. Petitioner is not entitled to a deduction for gathering system expenses prior to that point. Wyo. Stat. 39-2-208(a).







Sulfur Haul Road and Load out Facility - Reversed and Remanded

132. The sulfur is transported down the sulfur haul road and to the load out facility after it leaves the tailgate of the processing plant. [Trans., Vol. III, p. 430]. The DOA and the DOR disallowed the operating cost deduction of the sulfur haul road and load out facility under the theory that such activity is not processing. We agree the costs of the sulfur haul road and the load out facility are not expenses of processing. But they are a necessary expense.

133. The proportionate profits formula set forth in Wyoming Statute 39-2-208(d)(iv) sets forth in part:

(iv) Proportionate profits - The fair cash market value is:

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

(B) Nonexempt royalties and production taxes.



We agree the costs associated with the sulfur haul road and load out facility are not processing costs because such activity does not change the chemical or physical composition of the sulfur. No value was added to the sulfur by the haul road and load out facility. An activity constitutes processing only if it changes the oil or gas stream's physical or chemical characteristics, enhances the marketability of the stream, or enhances the value of the separate components of the stream. Wyo. Stat. 39-2-208(m)(vi). The Rules of the Department of Revenue, Ch. 6, Section 4b (x) allow only transportation costs associated with processing costs to be included in the direct cost portion of the proportionate profits formula. We agree with this rule.

134. Under Wyoming law the fair market value of oil and gas production is determined at the point when the production process has been completed. Wyo. Stat. 39-2-208(a). Most of the natural gas produced in Wyoming does not require processing in order to deliver and sell it to a pipeline or purchaser. Even when little processing is demanded, Wyoming Statutes allow the producer to deduct from the sales price the expenses of transporting the gas to market, if the transportation fees were included in the sales price. However, at Whitney Canyon, the natural gas and associated byproducts must undergo extensive processing in order to have a marketable commodity, such as condensate, propane, butane or sulfur. For this reason the amount received from the sale of oil and gas reflects the value of the product after both production and processing. In order to determine the value of the product after production only, it is necessary to deduct from the total amount received from the sale an amount reflecting the value added to the product by processing. The purpose of the direct cost ratio in the proportionate profits formula is to grant the producer a deduction for the value added by processing through adjustment of the amount received from sales by the ratio that the production costs bear to the costs of processing and production. Because transportation costs after processing bear no relevance to the value added by processing they do not belong in the direct cost ratio. The sulfur haul road and load out facility are not part of the processing function and as such should not be included in the direct cost ratio.

135. Even though the sulfur haul road expenses and load out facility are not processing costs they do occur after the production process has been completed. Therefore, the producer should be allowed to deduct the sulfur haul road and load out facility from the sales revenues received for the sulfur as part of the transportation expense .

136. The DOR's argument that Thunder Basin Coal Company v. State Board of Equalization, 896 P.2d 1336 (Wyo. 1995), stands for the proposition that transportation costs should not be deducted is incorrect. Thunder Basin Coal Company stands for the proposition that transportation costs should not be included in the formula in two places resulting in a double deduction. A deduction from revenue for the sulfur haul road and load out facility does not result in a double deduction and is appropriate.

Interest and Penalty - Affirmed

137. The calculation of interest and penalty due from Petitioner based on this audit is not controlled by Wyoming Statute 39-2-214(e) because the audit was commenced after its effective date. State Dept. of Revenue v. Amoco Production Co., 7 P.3d 35 (2000). Wyoming Statute 39-2-214(e) provides:

(e) The taxpayer is entitled to receive an offsetting credit for any overpaid gross product or severance tax identified by an audit that is within the scope of the audit period, without regard to the limitation period for requesting refunds. In calculating interest and penalty, the department or board of county commissioners shall first compute a net deficiency amount after subtracting any offsetting credit and then calculate any interest and penalty due.

138. In Moncrief v. Wyo. State Bd. of Equalization, 856 P.2d 440, 446 (Wyo. 1993) the Court held that the taxpayer has the duty to ensure the value of its mineral production is fully and accurately reported. If the taxpayer does not pay the full amount when due, the tax is delinquent at that time, not at the later date when the deficiency is discovered. See also Kunard v. Enron Oil & Gas Company, 869 P.2d 132, 135 (Wyo. 1994).

139. In Kunard, the Wyoming Supreme Court noted that Wyoming Statute 39-2-201(b) required taxpayers to file their tax returns under oath. The Court went on to outline the public policy considerations for considering a tax delinquent and assessing interest from the date the tax should have been paid rather than on the later date of notification.

If, as suggested by [Taxpayers], all taxpayers could intentionally undervalue the minerals and make an inaccurate payment on the undervaluation for severance tax purposes without fear of paying interest upon discovery, there would be no reason for the taxpayer to make the correct payment. In fact, from an economic standpoint, taxpayers would be foolish to make an accurate payment when they could make the correct payment in the future without any adjustment for the time value of the money. It is clearly a bonus to the taxpayers to be allowed to pay 1981 taxes with 1990 dollars.

Id. at 134, citing Moncrief, 856 P.2d at 445.

140. Petitioner does have additional tax liability because it classified expenses as a part of the deduction formula which could not be verified. Therefore, interest and penalty should accrue from the date the taxes should have been paid until paid.

141. Petitioner also has additional tax liability because of its treatment of the gas gathering expenses for 1990 through 1992. Therefore, interest and penalty should accrue from the date the taxes should have been paid until paid.

142. There is delinquent tax due because production taxes and royalty must be included in the direct cost ratio in the proportionate profits formula. This will result in higher taxes. Had the DOR instructed taxpayers that production taxes and royalty should be included in the direct cost ratio we presume Petitioner would have reported their taxes correctly. The SBOE believes Petitioner had reasonable cause to believe the additional taxes were not due and therefore no interest or penalty should accrue because of the DOR's decision concerning production taxes and royalty.

143. The SBOE hereby directs the DOR to calculate interest and penalties in accordance with this decision on remand.

144. Similarly, the Board of Equalization of Uinta County should collect interest at the rate of eighteen percent (18%) from the time the taxes should have been paid in conformance with this decision except interest for the additional taxes due as a result of the inclusion of production taxes and royalties in the direct ratio in the proportionate profits formula.

1989 Production Year Issues

145. The parties filed a Joint Motion to Dismiss 1989 Production Year Issues on August 21, 2001, because a settlement agreement regarding that particular production year had been entered into. Pursuant to Rules, Wyoming State Board of Equalization, Chapter 2, Section 12, the motion is granted.

ORDER

IT IS THEREFORE HEREBY ORDERED:

A. The DOR's decision to exclude production taxes and royalties from the direct cost ratio in the proportionate profits formula is reversed and the matter is remanded to recalculate taxes due;

B. The DOR properly treated the contested processing costs and its decision is affirmed;

C. The disallowance of the expense of the sulfur haul road and the sulfur load out facility is reversed and the matter is remanded to the DOR for recalculation of taxes due;

D. The DOR's adding of marketing fees to revenue to calculate taxes due is reversed and the matter is remanded to the DOR to recalculate taxes due;

F. The disallowance of the gas gathering expenses for tax years 1990 to 1992 is affirmed;

G. The SBOE decision to allow Uinta County to intervene and raise a new issue is affirmed.

H. Interest and penalties shall be recalculated in accordance with this decision.

I. The issues concerning the 1989 production years are hereby dismissed with prejudice.


PURSUANT TO Wyoming Statute 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 of review within thirty (30) days of the date of this decision.

DATED this 24th day of September, 2001.

STATE BOARD OF EQUALIZATION

Roberta A. Coates, Vice-Chairman

Sylvia Lee Hackl, Member

ATTEST:

Wendy Soto, Executive Secretary