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
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).
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.
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.
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
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
3. On November 18, 1996, Petitioner appealed the DOR's deficiency
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,
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
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
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.
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
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
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.
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,
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,
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
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].
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
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.
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
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,
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.
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
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
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
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
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
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,
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.
Exclusion of Production Taxes and Royalties - Reversed and
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
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
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
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
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
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.
Sulfur Haul Road and Load out Facility - Reversed and
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
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
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.
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
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
Wendy Soto, Executive Secretary