BEFORE THE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEAL OF )
AMOCO PRODUCTION COMPANY ) Docket No. 96-216
FROM A DECISION BY THE )
DEPARTMENT OF REVENUE )
__________________________________________________________________________________________________________________________
FINDINGS OF FACT
CONCLUSIONS OF LAW
DECISION AND ORDER
___________________________________________________________________________________________________________________________
APPEARANCES
John L. Bordes, Jr. and Nicole Crighton, 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, at
the time of the Decision and Order, for Respondent, Department of Revenue.
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. Mr. Edmund Schmidt, Vice-Chairman at that time, recused himself
on his own motion. Subsequently, this matter was considered and a Decision rendered by
Roberta A. Coates, Vice-Chairman and Sylvia Hackl, Member, upon review of the transcript
of the proceedings, exhibits, written briefs of the parties and the entire record
including the stipulation of testimony contained in the record in the earlier dockets of
94-37 and 94-40. This appeal arises from the decision of the Department of Revenue
assessing Petitioner on underpayment of severance taxes and increasing gross product
valuation on gas processed through the Whitney Canyon Plant in Sublette County.
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 State Board of Equalization is
mandated to review final decisions of the Department of Revenue of 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 Wyo.
Stat. 39-2-201(d)(i), the "person assessed" may file objections with the
SBOE within 30 days of the postmark of the Department of Revenue notification. Petitioner
timely filed its appeal.
DISCUSSION
On September 14, 1994, the Department of Audit (DOA) engaged an audit of Amoco'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
Department of Revenue (DOR) issued a deficiency assessment which was appealed by Amoco 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.
Amoco raises procedural issues regarding the intervention of Uinta County. In
particular, Amoco 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.
Amoco argues that the audit findings are erroneous because the DOR ignored the arms
length agreement between Amoco Production Co. and Amoco Oil Co. 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 is 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
Amoco's cases are resolved because Amoco may have overpaid taxes rendering interest a
nullity.
Intervenor argues the DOA correctly calculated Amoco's tax liability under the
proportionate profits method by including royalties and production taxes in the ratio and
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
included.
The DOR argues the margins were properly disallowed because they are marketing fees by
the parent company, Amoco Oil Company and these fees are mere accounting transactions
where no money exchanges hands. In addition, 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 Amoco took were disallowed because 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 Amoco 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.
The DOR argues that Amoco cannot now raise the issue of interest and penalties because
Amoco failed to raise it in its notice of appeal. DOR also argues that the prior SBOE
ruled against Amoco on these issues in Docket Numbers 94-37 and 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.
For 1989 the DOR appraised Petitioner's gas production using the netback approach, Wyo.
Stat. 39-2-202. For 1990 through 1992 the DOR used the proportionate profits method. Wyo.
Stat. 39-2-208(d)(iv).
FINDINGS OF FACT
1. On September 14, 1994, the DOA engaged an audit for 1989 through 1992 of
Petitioner's gas production 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: (Exhibit 1059)
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 2,354,009 741,241
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 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 SBOE allowed Uinta County to intervene. The Petitioner failed to meet
the first filing deadline. Therefore a new Briefing Order was entered by the SBOE and the
Petitioner was to file the first brief on January 20, 1998.
6. The Petitioner filed to remove the matter from the expedited docket on November 26,
1997, and the motion was granted in January 1998.
7. Petitioner moved to continue the Hearing on July 30,1998, and an Order was entered
scheduling the hearing for January 11, 1999. The hearing was held on January 11, 1999.
8. The last closing arguments and Proposed Findings of Fact and Conclusions of Law were
filed on May 17, 1999.
9. 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).
10. 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 were allowed to submit revised findings of facts and conclusions of law to address issues raised in the Wyoming Supreme Court opinions.
Exclusion of Production Taxes and Royalty from the Direct Cost Ratio
11. Uinta County filed a motion to intervene on September 3, 1997, which was granted by
Order of Joinder of Intervention on September 19, 1997.
12. Uinta County's objection went 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 Amoco production for 1990 through 1992. The failure to include the production
taxes and the royalties results in a artificially deflated taxable value. The
proportionate profits method is calculated 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.
13. 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.
14. 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).
15 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 further 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).
16. 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
(Bentonite Valuation -2).
17. The legislature did not specifically provide for the exclusion of production taxes or royalties from the direct production cost for oil and gas valuation. Wyo. Stat. 39-2-208.
18. The Wyoming Attorney General issued a letter of advice on July 1, 1996, to the
mineral tax division of the DOR advising that production taxes and royalties should be
included in the ratio as set forth in Wyo. Stat. 39-2-208(d)(iv). [Exhibit.
501; Trans., Vol. I, p. 34-36].
19. Although the proportionate profits method was used since 1990, there was still a
question by DOR in 1996 on how the proportionate profits method worked. [Trans.,
Vol. I, p. 36].
20. When the DOA originally audited Petitioner, DOA included production taxes and
royalties in the ratio. [Exhibit. 1058; Trans., Vol. I, pp. 37- 39].
21. The DOA revised its audit and excluded the production taxes and royalties after the
DOR consulted with Petitioner which responded in writing to the Attorney General's advice.
[Exhibit. AM 111; Exhibit 1059; Trans., Vol. I, p. 41, 42].
22. The DOR had not included production taxes and royalties in calculating the ratio
for all minerals. [Trans., Vol. I, p. 48; Trans., Vol. I, p. 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
statute does not.
23. In order to determine if production taxes and royalties should be included in the
ratio, the director of DOR talked with the chairs of both the House and Senate revenue
committees. [Trans., Vol. I, p. 53].
24. 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].
25. The direct cost ratio in the proportionate profits method is simply a fraction of
1. [Trans., Vol. I, p. 56].
26. The auditor for DOA believed that DOR's rules included royalties and production
taxes in the direct costs of producing. [Trans., Vol. I, p. 73].
27. 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, p. 78, pp. 79-84, p. 85].
28. The DOR never instructed Amoco 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].
29. 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].
30. 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. 484-487, p. 488].
31. Amoco's value 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]. However, some of the decrease was attributable to a decline in
revenues received by Amoco. [Trans., Vol. III, p. 519].
32. 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].
33. 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
34. The parties stipulated that the testimony in dockets 94-37 and 94-40 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.
35. 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 how the entire account would look. [Trans.,
Vol. III, p. 501].
36. In conducting the audit the auditors reviewed as many source documents as possible.
[Trans., Vol. III, p. 415].
37. When the DOA reviewed an account, it would look 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, p. 501; p. 502].
38. The DOA did not have sufficient information to verify the numbers in the various
accounts. [Trans., Vol. III, p. 453; p. 456, 457; p. 458; p. 462; p. 463, p. 464].
39. DOA disallowed the processing deductions taken by Amoco 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).
40. 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
looked at was whether or not the expense was directly related to the processing of the gas
stream. [Trans., Vol. II., p. 290].
41. The DOA used a similar test to determine if costs were allowable under the netback
method. The test was whether the expenses were necessary and reasonable, as well as
justifiable and reconcilable. [94-40 Trans., Vol. IV, pp. 620-621]. The
expenses had to be tied into a return or an expense calculation. [94-40 Trans.,
Vol. IV, pp. 620-621]. The final part of the test was whether the cost had
anything to do with the processing of the natural gas stream. If the expense did not meet
any part of the test the expense was disallowed. [94-40 Trans., Vol. IV, p. 621].
42. The charges from the other company locations, Account 9272-1, were disallowed under
both the netback method of assessment and the proportionate profits method. 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 netback method the expenses failed
because they were field overhead. [94-40 Trans., Vol. IV, pp. 637-640].
Under the proportionate profits method numerous expenses were tied to the "Evanston
District". The "Evanston District" includes 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 processing the gas stream. [Trans., Vol. III, p.
451].
43. 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 state auditors did not provide information on how the mileage expenses
were calculated and 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].
44. 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 auditors did not tie the radio
expense to the processing function. [Trans., Vol. II, p. 287, p. 316, Vol. III, p.
462].
45. 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
the expenses were not allowed. [Trans., Vol. II, p. 387].
46. The miscellaneous account was assigned Account 9272-80. This included various
charges such as safety processing personnel, first aid kits, and snow removal charges. [Trans.,
Vol. II, p. 288]. The witness for Amoco could not decipher the invoices charged
to the account but he noted "but 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 not the Whitney Canyon plant and there
is no documentation that nitrogen was used at Whitney Canyon but the testimony of the
Petitioner's main witness was that we "have to trust" it was used at the Whitney
plant. [Trans., Vol. II, p. 377-379]. One of the invoices was for a
port-a-potty and two invoices were for unknown reasons. [Trans., Vol. II, p. 322].
Another invoices was for a the lease where the "slug catcher" is
located but Amoco's witness did not know what a "slug catcher" was or how it
related to processing. [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]. None of the invoices could be tied to processing oil and gas at the Whitney
Canyon plant.
47. Petitioner used Account 9635, sub. 71 to account for 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
48. Amoco processes the gas from the Whitney Canyon field at the Whiney Canyon plant
into residue gas and byproducts, including sulfur and natural gas liquids. [Exhibit.
1057].
49. During the audit period, Amoco sold the sulfur and natural gas liquids to Amoco Oil
Company. [Exhibit 1057]. Amoco 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).
50. The Petitioner has built an extensive road and load out system to carry sulfur from
the processing plant via special trucks to keep the sulfur in its molten state to a
storage facility for eventual loading onto the purchaser's railroad cars to be carried to
the purchaser's market. The road, the trucks, and the loading facilities
are all owned and maintained by Amoco Production Company. [Trans., Vol. II, p.
367, 94-40 Trans., XIII, p. 2673, 2682]. The auditor 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].
51. The sulfur must remain in its molten state to meet the purchaser's contract
specifications. [94-40 Trans., Vol. XIII, pp. 2673-2674].
Return on Investment Under the Netback Methodology
52. When using the netback method of valuation the DOA uses a rate of Return on
Investment, ROI, to determine the processing allowance. The ROI used was 12.52% which was
obtained from the method used by the United States Department of Interior's Mineral
Management Service, and was the prime rate for the month that the plant was built.
[Trans., Vol. III, p. 471].
53. DOA calculated the return on investment rate to be expected using the same rate of
the Mineral Management Service as prescribed in the Code of Federal Regulation for federal
oil and gas leases. DOR accepted the rate in determining value of Petitioner's natural gas
under the netback method. [Trans., Vol. III, pp. 471, 536-537].
54. DOA accepted and utilized the rate used by the Mineral Management Service. This
was the short-term Federal Reserve interest rate for the month the Whitney Canyon
Plant was put in service. [Trans., Vol. III, pp. 471, 536-537]. The rate
was 12.52%. [Trans., Vol. III, pp. 471, Exhibit 1057].
55. DOR used the same approach to determine the Return on Investment for all other
plants where natural gas was processed in Wyoming for the 1989 production year. [Trans.,
Vol. III, pp. 471-472, 537].
56. Amoco's witness in the earlier case, Dr. Ronald W. Spahr, opined the prime rate was
not an appropriate measure for Return On Investment. [94-40 Trans., Vol. XIV, pp.
2787 - 2788]. Dr. Spahr testified that in his opinion a Return on Investment
should be calculated each year for different risk industries. [94-40 Trans., Vol.
XIV, pp. 2773 - 2778, 2783].
57. Amoco argued the appropriate Return on Investment rate should be 13% for the 1989 tax year. It based its argument on the rate Dr. Spahr had developed for 1988. Amoco did not consult with Dr. Spahr for a new rate for 1989, nor did it present Dr. Spahr in the hearing on this matter so no new calculations were presented by Amoco for tax year 1989. [Trans., Vol. II, p. 327, 366].
Gathering
58. Amoco 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, Amoco 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, Amoco 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, Amoco 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, Amoco 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. For the years covered by this audit, Amoco retained title to its natural gas
production and sold the products at the tailgate of the Whitney Canyon plant. [Trans.,
Vol. II, p. 368].
63. As a producer Amoco 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].
64. After extraction from the well, Amoco'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, transported the gas to a compressor station and then
to the inlet to the 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 Amoco as the
plant operator. [94-40 Exhibit 1351, Trans., Vol. II p. 327].
66. Amoco claimed a deduction for the costs associated with the gas gathering system,
which the DOR denied for each of the years under appeal. For 1989 production, the DOR
treated the gathering system expenses as non-deductible production expenses under the
netback method. [94-40 Trans., Vol. VII, p. 1183; Trans., Vol. III, pp. 432-433,
437-438]. For 1990 through 1992 production, 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. Amoco 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 Amoco, 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 Amoco'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.
71. The DOR has never allowed a deduction for gathering expenses. It has been treated
as a production expense because it does not relate to processing. [94-40 Trans.,
Vol. VII p. 1183-1184].
Marketing Fees (Margins)
72. By contract, Amoco 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 Amoco, 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].
73. No money changed hands. [94-40 Trans., Vol. XIII, p. 2552]. Amoco
did not receive the margin amount; the amount was deducted from the purchase price by the
buyer, Amoco Oil Company.
74. The DOR accepted DOA's calculation of the purchase price. DOA added the margin
deduction back into the sum Amoco received from Amoco Oil Company to determine the revenue
component of both the netback and proportionate profits formulae. This addition resulted
in a higher revenue than was received by Amoco.
75. 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) neither the statutes nor rules applicable to the netback or
proportionate profits methods allowed (in DOA opinion) 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.
76. DOA has encountered the marketing fee mechanism before and has uniformly added the
fees back into determine revenue. [Trans., Vol. III, pp. 428, 532 and 94-40
Trans., Vol. V, pp. 823, 833, 1181].
77. The same pricing mechanism employed by Amoco Oil Company with respect to third
parties was used in negotiations with Amoco Production Company. [94-40 Trans.,
Vol. IX, p. 1678].
78. Amoco Oil Company, in general, paid more favorable prices to Amoco than to other
third parties from which it purchased natural gas liquids (NGL). [94-40 Trans.,
Vol. IX, p. 1680].
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. Wyoming
State Board of Equalization Rules, 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. Petitioner 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 pursuant to 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 Wyo. Stat. 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. We hold as a matter of law that an appraisal method, such as proportionate profits,
must not allow more processing costs as a deduction from value than those which were
actually incurred.
89. The Wyoming Supreme Court has already held that only actual costs can be used in a
formula to determine the value of mine products pursuant to Wyo. Stat. 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).
90. 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.
91. 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 like that
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].
92. 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.
93. 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].
94. 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.
95. Additional support for the inclusion of royalties and production taxes as a direct
cost in calculating the direct cost ratio comes from a review of Wyo. Stat. 39-2-208.
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 in 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).
96. 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).
97. 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.
98. 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.
INTERVENOR STATUS - AFFIRMED
99. Amoco argues that the County 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).
100. However, the general law concerns intervention in courts wherein the rules of
civil procedure are applicable. This 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, Section 13.
101. 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.
MARGINS - REVERSED AND REMANDED
102. The DOA looked at the purchase agreement between the sister companies of Amoco Oil
Company to purchase from Amoco Production Company. In that contract the price paid was
inflated by a "marketing fee" or "margin". [Trans., Vol. III,
pp. 425-426].
103. DOA increased the price reported by Amoco by the "margins" to derive
value. The DOR accepted the procedure of DOA. Such procedure must be fully supported by
the evidence in the record and must not be arbitrary nor capricious. The sale between
Amoco 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. There was testimony that Amoco 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.
104. Even if DOA routinely adds "margins" back into the price paid to derive
value, the fact 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. The
SBOE concluded in that case margins should not be added back in. We reach the same
conclusion here.
105. 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).
106 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
107. 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].
108. The sub-accounts disallowed by the auditors, and subsequently by DOR did not
clearly demonstrate the expenses in the accounts were for processing at Whitney Canyon.
Amoco failed to keep complete and accurate records with respect to the claimed deductions.
Amoco 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. Amoco failed to meet its burden of demonstrating the error in DOR's
valuation.
109. Amoco alleged the auditor's method of sampling account invoices is flawed and does
not meet generally accepted auditing standards. Amoco failed to demonstrate it was
prejudiced by such a procedure. Amoco also failed to point to any statute or rule
demanding strict adherence to such standard. Without clear statutory guidance or rules
this SBOE is loath to meddle in the internal affairs of another agency and is not willing
to set aside an audit based on such allegations.
110. Amoco attacks the test used by the auditors in determining whether to allow
certain expenses. Amoco 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 and state taxation. We find
the test to be reasonable in the final result and therefore Petitioner again failed to
meet its burden.
SULFUR HAUL ROAD AND LOAD OUT FACILITY - REVERSED AND REMANDED
111. DOA disallowed the operating cost deduction of the sulfur haul road and load out
facility under the theory that such activity is not processing. However, Wyo. Stat.
39-2-208(d)(iv) allows transportation costs to be included in the formula. The costs
of the sulfur haul road and the load out facility were transportation costs incurred by
Amoco in selling the sulfur to Amoco Oil and as such, the costs should be included in the
proportionate profits formula.
112. 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 included in the netback formula 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. In this case the sulfur haul road and load out
facility are direct costs of transporting the sulfur for sale and are included only once
in the calculation. Therefore, they are proper expenses to be included in the formula.
RETURN ON INVESTMENT UNDER THE NETBACK METHOD - AFFIRMED
113. Amoco's production was valued by the DOR for the 1989 tax year using the netback
method of valuation. Return on Investment is a component of the netback methodology. DOR's
and DOA's initial calculation of Return on Investment was uniformly applied.
114. The rule to provide guidance to determine the appropriate rate for Return on Investment at the time of the tax was to be paid was Wyoming State Tax Commission Rule, Chapter XXI, Sec. 10. The rule provided as follows:
(c) Return on Investment may be determined by proportion of costs, the proportion of
investment, or rates prevalent in the industry.
115. DOA and DOR used a Return on Investment Rate that was the prime rate used by the
Mineral Management Service for the year the plant was put into production. [Trans.,
Vol. III, pp. 471, 536-537]. The usage of the prime rate by the Mineral
Management Service is a component of the lease rate for mining interests throughout the
United States. Despite Petitioner's contention that this rate only represents the debt
component on short term obligations, it is nevertheless a rate prevalent in the industry
throughout the country. We believe the different approaches are merely a difference of
opinion.
116. Even if this SBOE were to accept the explanation offered by Petitioner's witness,
Dr. Spahr, as presented in the prior hearings, the Petitioner failed to meet its burden in
this docket. Petitioner failed to provide information as to the appropriate Return on
Investment using the weighted cost of capital formula. Petitioner failed to provide
information for the 1989 tax year but instead relied on Dr. Spahr's calculation for the
1988 tax year. Dr. Spahr testified the Return on Investment should be calculated annually.
Amoco failed to do so. [94-40 Trans., Vol. XIV, pp. 277-278, 283].
117. Amoco argues DOA made the Return on Investment calculation, which was an
inappropriate delegation of power to DOA from DOR. There was no evidence that DOR did not
review the calculation made by DOA nor that it did not reach the same conclusion through
its own analysis. Petitioner failed to carry its burden to show the rate as recommended by
DOA and accepted by DOR was not a decision of DOR.
118. When we review Amoco's argument about the appropriate Return on Investment rate,
we believe Amoco failed to present evidence the rate as set by DOR was not an industry
rate, or another rate should be used. In fact, we find the record void of any rate
supported by calculations and theories for the 1989 tax year. The issue is a mere
difference of opinion and is not sufficient to overturn DOR's assessment. Teton Valley
Ranch v. State Board of Equalization, 735 P. 2d 107 (Wyo. 1987).
GAS GATHERING EXPENSES - REVERSED IN PART AND AFFIRMED IN PART
119. For 1989, Wyo. Stat. 39-2-202 required Amoco's gas production to be
valued for purposes of 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 is
completed.
120. For 1989 production Wyo. Stat. 39-2-202(b) provided:
(b) The ... production process is deemed completed when the mineral product is removed
from ... the well, and prior to any ... further processing is placed in storage prior to
transportation to market, or in the case of natural gas, in the pipeline for
transportation to market.
121. The Wyoming Supreme Court has had occasion to discuss the point of valuation for
natural gas established by Wyo. Stat. 39-2-202 in detail. In Chevron U.S.A.,
Inc. v. State, 918 P.2d 980, 984 (Wyo. 1996), the Court stated:
The processes necessary for production of gas, for severance and ad valorem tax
purposes, are those necessary to sever or remove the gas from the well. (Citations
omitted.) Therefore, we hold that those processes which are not necessary to remove the
gas from the well are post-production expenses. This includes compression which is not
necessary to remove the gas from the well. (Citations omitted.)
122. We have also recently examined the deductibility of natural gas gathering expenses
in light of the Wyoming Supreme Court's ruling in Chevron U.S.A., Inc., Id.
Applying the Supreme Court's holding in Chevron, this Board concludes the gathering
expenses incurred prior to the point of first beneficiation of the . . . gas stream are
production expenses. The Board further concludes that the expenses from the point of first
beneficiation . . . are deductible processing costs under Wyo. Stat. 39-2-202(b).
In the Matter of the Appeal of Amoco Production Company, Docket No. 94-69 (November 12, 1999) quoting from In the Matter of the Appeal of Amoco Production Company and Amoco Rocmount from a Decision of the Department of Revenue, Docket Nos. 94-37, 94-40, 94-43, 94-44, 94-53 (February, 27, 1997) (reversed on other grounds: Amoco Production Company v. State Board of Equalization, 12 P.3d 668 (Wyo. 2000).
123. Consistent with our holding in those cases and the Wyoming Supreme Court's
decision in Chevron U.S.A., Inc., supra, we conclude the expenses Amoco paid for
gas gathering in 1989 are deductible in determining the fair market value of Amoco's
audited production under the netback methodology used by the DOR.
124. While it is clear from the evidence before us that the fee charged by the plant
owners for gathering and processing, 25% of the processed products, includes Amoco's
gathering costs, we are constrained by Amoco Production Company v. State Board of
Equalization, 12 P.3d 668 (Wyo. 2000) to hold that Amoco is entitled to a deduction
of the portion of the gathering expenses related to its production and actually incurred
by it as plant operator in determining the fair market value of its 1989 production.
125. For 1990 through 1992 Amoco'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 is completed as determined pursuant to Wyo.
Stat. 39-2-208.
126. For 1990 through 1992 Wyo. Stat. 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.
127. The point of valuation for Amoco's 1990 through 1992 production is clearly set by Wyo.
Stat. 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."
128. We reject Amoco'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 Wyo. Stat. 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." 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.
129. 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. See Wyo.
Stat. 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.
130. Therefore, the point of valuation selected by the DOA and used by the DOR, the
inlet to the initial transportation related compressor, is correct. Amoco is not entitled
to a deduction for gathering system expenses prior to that point. Wyo. Stat.
39-2-208(a).
INTEREST AND PENALTY - AFFIRMED
131. The calculation of interest and penalty due from Amoco based on this audit is
controlled by Wyo. Stat. 39-2-214(e) because the audit was commenced after its
effective date. See State Dept. of Revenue v. Amoco Production Co., 7 P.3d 35
(2000). Wyo. Stat. 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.
132. 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).
133. In Kunard, the Wyoming Supreme Court noted that Wyo. Stat.
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.
134. Amoco 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.
135. Amoco 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.
136. 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 Amoco would have reported their taxes
correctly. This SBOE believes Amoco had reasonable cause to believe the additional taxes
were not due and therefore no interest or penalty should accrue to the taxpayer for
additional taxes due because of DOR's decision concerning production taxes and royalty.
137. The SBOE and hereby directs DOR to calculate interest and penalties in accordance
with this decision on remand.
138. 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 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.
THIS SPACE INTENTIONALLY LEFT BLANK
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 DOR
for recalculation of taxes due;
D. DOR's adding of marketing fees to revenue to calculate taxes due is reversed
and the matter is remanded DOR to recalculate taxes due;
E. DOR's calculation of the Return on Investment under the netback method is affirmed;
F. The disallowance of the gas gathering expenses for tax year 1989 is reversed
and the matter is remanded to DOR for recalculation of taxes due, but 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.
PURSUANT TO Wyo. Stat. 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 29th day of June, 2001.
STATE
BOARD OF EQUALIZATION
Roberta A. Coates, Vice-Chairman
Sylvia Lee Hackl, Member
ATTEST:
Debbie Closson, Executive Assistant