Case Title: WYODAK RESOURCES DEVELOPMENT CORP. v. STATE BOARD OF EQUALIZATION

Citation: 

Docket Number: 

State: wyoming

Court: Wyoming Supreme Court

Date: 2000-08-14T00:00:00Z

Document:
WYODAK RESOURCES DEVELOPMENT CORP. v. STATE BOARD OF EQUALIZATION2000 WY 1649 P.3d 987Case Number: 99-251Decided: 08/14/2000Supreme Court of Wyoming

WYODAK RESOURCES DEVELOPMENT CORP., Appellant 
(Petitioner),

v.

THE STATE BOARD OF EQUALIZATION, for the State of 
Wyoming, and THE WYOMING DEPARTMENT OF REVENUE, Appellees 
(Respondents).

 

                                 

 

W.R.A.P. 12.09(b) Certification 
from the District Court of Laramie County

The Honorable Edward L. Grant, 
Judge

 

 

   
Representing Appellant:

 

   Timothy L. Thomas of Morrill 
Thomas Nooney & Braun, LLP, Rapid City, South

 Dakota

    
Representing Appellee:

 

   Vicci Colgan, Chief Deputy 
Attorney General; Rowena L. Heckert, Deputy Attorney General; and Karl D. 
Anderson, Assistant Attorney General

 

   
Before LEHMAN, C.J., and THOMAS, MACY,* GOLDEN & HILL, 
JJ.

  * 
Retired June 2, 2000.

 

   
MACY, Justice.

[¶1]         Appellant Wyodak Resources 
Development Corp. (Wyodak) appealed to the State Board of Equalization1 from the Department of Audit's 
findings that were adopted by Appellee Wyoming Department of Revenue.  The audit involved Wyodak's coal mining 
operations at its Campbell County mine from 1990 through 1992 and resulted in an 
increased taxable value of coal production for ad valorem tax purposes for the 
period.  The State Board of 
Equalization affirmed, and Wyodak appealed to the district court.  The district court certified the case to 
the Wyoming Supreme Court pursuant to W.R.A.P. 12.09(b).

 

 [¶2]     We 
affirm.

 

                                    
ISSUES

 

 [¶3]     Wyodak presents a 
single issue for our review:

 

   I.  Did the Wyoming State Board of 
Equalization err in affirming the Department of Revenue determination that 
Petitioner's road move expenses incurred during coal production years 1990-1992 
were direct mining costs rather than indirect costs for purposes of valuing 
Petitioner's coal production during those same years under Wyo. Stat. § 
39-2-209(d)?

 

                                    
FACTS

 

[¶4]         Wyodak operated a surface coal 
mine near Gillette.  In 1951, it 
granted a right-of-way to the State of Wyoming across a portion of its property 
to be used as a section of State Highway 51.  Under the terms of the agreement, Wyodak 
reserved the right to mine the coal located under and around the right-of-way so 
long as it provided an adequate detour satisfactory to the state at its own 
expense.

 

[¶5]         In 1988, Wyodak became interested 
in mining the coal under and around the right-of-way, and it entered into an 
agreement with the State Highway Commission of Wyoming to relocate the 
highway.  The highway was moved, 
and, in 1989, Wyodak reported $687,975 of indirect costs associated with this 
relocation in valuing its coal production for tax 
purposes.

 

[¶6]         In its 1990 production year, 
Wyodak reported an additional $54,525 of expenses that were associated with this 
relocation and again classified them as indirect costs.  In 1991, Wyodak accrued $750,839 in 
expenses that it intended to use to fund and construct the permanent replacement 
of the highway, which actually would not occur until sometime in the 
future.  Wyodak classified these 
accrued amounts as indirect costs.

 

[¶7]         In December of 1991, Wyodak sent a 
letter to the Wyoming Highway Department wherein it explained that it planned to 
begin hauling overburden on State Highway 51 across the first temporary 
relocation.  Wyodak requested 
approval for a second temporary relocation of the highway so that it could 
"maximize the removal of coal affected by State Highway 51" pursuant to the 1988 
agreement.  The Wyoming 
Transportation Commission denied Wyodak's proposed temporary detour but 
suggested an alternative detour, which Wyodak accepted and constructed in 
1992.  In 1992, Wyodak reported 
$586,026 in indirect mining costs for the expenses related to this second 
temporary relocation.

 

[¶8]         In 1995, the Department of Audit 
audited Wyodak's operations for the period of 1990 through 1992.  On the basis of Wyo. Stat. Ann. § 
39-2-209(d)(ii) (Michie 1997) (repealed & recreated at § 
39-14-103(b)(vii)(B) in 1998), the Department of Audit disagreed with Wyodak's 
classification of the 1990, 1991, and 1992 costs associated with the relocation 
of State Highway 51 as indirect mining costs and reclassified them as direct 
costs for the purpose of production tax valuation.  The Department of Audit's findings 
resulted in increased severance taxes 
for the years 1990 through 1992, and the Department of Revenue issued a final 
assessment notice for the severance tax underpayments.

 

[¶9]         Wyodak appealed from this 
assessment to the State Board of Equalization, arguing that the costs should be 
classified as indirect mining costs.  
The State Board of Equalization affirmed the classification of the costs 
as direct mining costs, and Wyodak appealed to the district court.  The district court certified the case to 
the Wyoming Supreme Court pursuant to W.R.A.P. 12.09(b).

 

           
                   STANDARD 
OF REVIEW

 

[¶10]      When an administrative decision is 
certified to the Wyoming Supreme Court pursuant to W.R.A.P. 12.09(b), we apply 
the appellate standards which are applicable to the court of the first 
instance.  Petroleum Inc. v. State 
ex rel. State Board of Equalization, 983 P.2d 1237, 1239 (Wyo. 1999).  Wyo. Stat. Ann. § 16-3-114(c) (LEXIS 
1999) governs judicial review of administrative decisions.  W.R.A.P. 12.09(a); Everheart v. S & 
L Industrial, 957 P.2d 847, 851 (Wyo. 1998).  If substantial evidence supports an 
agency's findings, we will not substitute our judgment for that of the 
agency.  Peter Kiewit Sons' Co. v. 
Sheridan County Board of Commissioners (In re Dunning), 982 P.2d 704, 707 (Wyo. 
1999).  If the agency's conclusions 
of law are in accordance with the law, this Court will affirm them.  Corman v. State ex rel. Wyoming Workers' 
Compensation Division, 909 P.2d 966, 970 (Wyo. 1996). When an agency has not 
invoked or properly applied the correct rule of law, we will correct the error. 
Petroleum Inc., 983 P.2d  at 1239.

 

                                  
DISCUSSION

 

[¶11]      The single issue to be resolved in 
this case is whether the expenses associated with the movement of State Highway 
51 should be classified as direct or indirect costs in the computation of the 
taxable value of Wyodak's coal production.  
Of significant impact on our analysis of this case is the 1988 agreement 
Wyodak entered into with the State Highway Commission regarding the extraction 
of the coal beneath and surrounding the right-of-way. That agreement provided in 
pertinent part:

 

Under the terms of the right-of-way easement the 
grant is subject to a condition and reservation of the grantor, the successor in 
interest of which is the Company, wherein the grantor reserved the right to own 
and mine the coal by either underground or surface operations as located under 
and around State Highway 51 and right-of-way; provided, the right to mine is on 
the condition that the grantor at its own cost and expense shall first provide a 
detour satisfactory to the State for use by the public as a highway in lieu of 
the portion of said right-of-way which would be rendered unsafe or unfair for 
public highway purposes because of the mining operations, and that upon 
completion of such operations, the grantor is to replace the highway at a 
similar or same location.

 

[¶12]      The legislature provided 
significant guidance for the determination of whether costs incurred by a coal 
producer are direct or indirect mining costs when it enacted Wyo. Stat. Ann. § 
39-2-209(d) (Michie 1997) (repealed & recreated at § 39-14-103(b)(vii)(A-D) 
& § 39-14-101(a)(viii) in 1998).  
Under this statute, which applied to all mineral production on or after 
January 1, 1990, the terms "direct costs" and "indirect costs" were specifically 
defined. Before its repeal and recreation in 1998, § 39-2-209(d) provided in 
pertinent part:

 

(d)  For 
coal sold away from the mouth of the mine pursuant to a bona fide arms-length 
sale, the department shall calculate the fair cash market value of coal by 
multiplying the sales value of extracted coal, less transportation to market 
provided by a third party to the extent included in sales value, all royalties, 
ad valorem production taxes, severance taxes, black lung excise taxes and 
abandoned mine lands fees, by the ratio of direct mining costs to total direct 
costs.  Nonexempt royalties, ad 
valorem production taxes, severance taxes, black lung excise taxes and abandoned 
mine lands fees shall then be added to determine fair market value.  For purposes of this 
subsection:

 

                        
. . .

 

(ii)  
Direct mining costs include mining labor including mine foremen and 
supervisory personnel whose primary responsibility is extraction of coal, 
supplies used for mining, mining equipment depreciation, fuel, power and other 
utilities used for mining, maintenance of mining equipment, coal transportation 
from the point of severance to the mouth of the mine, and any other direct costs 
incurred prior to the mouth of the mine that are specifically attributable to 
the mining operation;

 

(iii)  
Total direct costs include direct mining costs determined under paragraph 
(ii) of this subsection plus mineral processing labor including plant foremen 
and supervisory personnel whose primary responsibility is processing coal, 
supplies used for processing, processing plant and equipment depreciation, fuel, 
power and other utilities used for processing, maintenance of processing 
equipment, coal transportation from the mouth of the mine to the point of 
shipment, coal transportation to market to the extent included in the price and 
provided by the producer, and any other direct costs incurred that are 
specifically attributable to the mining, processing or transportation of coal up 
to the point of loading for shipment to market;

 

(iv)  
Indirect costs, royalties, ad valorem production taxes, severance taxes, 
black lung excise taxes and abandoned mine lands fees shall not be included in 
the computation of the ratio set forth in this subsection.  Indirect costs include but are not 
limited to allocations of corporate overhead, data processing costs, accounting, 
legal and clerical costs, and other general and administrative costs which 
cannot be specifically attributed to an operational function without 
allocation[.]

 

 This method attempted to value coal 
production at the "mouth of the mine" in order to establish the value of the 
coal that was solely attributable to the mining operations.  Amax Coal Company v. Wyoming State Board 
of Equalization, 819 P.2d 825, 827 (Wyo. 1991).

 

[¶13]      Wyodak asserts that the road 
relocation costs were better classified as indirect costs which "cannot be 
specifically attributed to an operational function without allocation." We 
disagree.  The agreement dictates 
that, before Wyodak could mine the coal under and around the right-of-way, it 
had to incur relocation and replacement expenses.  They were necessary expenses of 
extracting the coal and were, therefore, specifically attributable to Wyodak's 
mining operation.

 

[¶14]      Wyodak also contends that the 
relocation costs should not be considered direct costs because they were 
extraordinary, amounting to "almost half of the total overburden removal costs 
for the entire 1990 production year." The term "extraordinary expenses" has not 
been defined, nor have extraordinary expenses been specifically exempted from 
the definition of direct costs.  We 
are not convinced that Hillard v. Big Horn Coal Company, 549 P.2d 293, 298 (Wyo. 
1976), supports Wyodak's argument that extraordinary expenses should be treated 
as indirect costs.  As the 
Department of Revenue points out, although the opinion does acknowledge that 
coal producers do incur indirect costs not attributable to their mining, the 
case does not declare extraordinary costs as indirect costs in nature.  We conclude that the fact that the 
relocation costs were substantial is inconsequential to whether they were 
properly classified as direct or indirect costs.

 

[¶15]      Wyodak complains that the 
reclassification of these costs from indirect to direct was inconsistent with 
how they were treated in 1989 when most of the costs associated with the first 
relocation were categorized as indirect costs.  Any concern we had about this 
inconsistency was resolved once we realized that § 39-2-209(d), which 
specifically defined the two types of costs, did not go into effect until the 
1990 production year.

 

[¶16]      Wyodak next asserts that the 1991 
expenses were actually accruals of expenses that will be incurred to move State 
Highway 51 back to its original location, which will not occur until sometime in 
the future.  It insists that these 
accruals should not be classified as direct costs because they could not have 
been incurred prior to the mouth of the mine.  The Department of Revenue counters that 
the accrued costs were, by virtue of the agreement, specifically attributable to 
the mining operations to extract the coal under and around the 
right-of-way.

 

[¶17]      Wyodak relies on a State Board of 
Equalization opinion in In re Appeal of Exxon Coal U.S.A., Inc., No. 93-107, 
1994 WL 569436 (Wyo. St. Bd. Eq. Oct. 6, 1994), to support its argument that 
accrued costs should not be classified as direct costs.  In that case, the issue presented was 
whether Exxon Coal's final reclamation accruals should have been classified as 
indirect costs pursuant to § 39-2-209(d)(iv).  The State Board of Equalization 
concluded:

 

7.  The 
crux of the issue presented concerns interpretation of whether final reclamation 
accruals by Petitioner "are specifically attributable" to mining, processing or 
transportation of coal" [W.S. 39-2-209 (d) (ii), 209 (d) (iii)], or "cannot be 
specifically attributed to an operational function without allocation," W.S. 
39-2-209 (d) (iv).  If the accruals 
are "specifically attributable" to one of the three described functions, they 
are considered "direct" costs and are utilized in deriving a direct cost 
ratio.  On  the other hand, if the accruals "cannot 
be specifically attributed . . . without allocation," the same are indirect 
costs and are allocated by the direct cost ratio. It is our conclusion these 
reclamation accruals cannot be attributed to an operational function without 
allocation, and therefore are indirect costs to be allocated to taxable value by 
the direct cost ratio.

 

8.  
Initially we should emphasize the costs at issue are "final reclamation 
accruals," as opposed to the costs of annual, on-going reclamation, which both 
the Department and Petitioner agree are 
direct costs, and thus utilized in the direct cost ratio.  Final reclamation accruals differ 
however in that they are not current, out-of-pocket expenses, but rather 
estimates of the final costs for 
reclaiming the entire mine site upon the secession of mining operations . . . 
.

 

In re Appeal of Exxon Coal 
U.S.A., Inc., 1994 WL 569436, at *2-*3.

 

[¶18]      In that case, Exxon Coal made 
yearly accruals for its final reclamation costs.  In re Appeal of Exxon Coal, U.S.A., 
Inc., 1994 WL 569436, at *2.  In the 
case at bar, the accrued expenses were not an estimate for reclaiming the entire 
mine site.  As the State Board of 
Equalization pointed out in its order in this case, "reclamation by definition 
indicates the process of returning something to a natural state. . . . [S]ince 
Petitioner was returning a man-made object, specifically State Highway 51, to a 
prior location, a reclamation argument is inapposite." We concur and add that 
the 1988 agreement forces the conclusion that the relocation and replacement 
expenses were direct costs because they were or will be incurred as a condition 
of mining the specific coal under and around the right-of-way.  Wyodak moved the highway so that it 
could mine the coal.  The fact that 
ongoing mining operations precluded the highway's immediate and permanent 
replacement, resulting in the accrual of the final replacement costs, does not 
change the logical conclusion that the costs were specifically attributable to 
the mining operations.

 

[¶19]      Wyodak contends that the costs 
associated with the second relocation occurred over a previously mined and 
reclaimed area and, therefore, could not have been incurred prior to the mouth 
of the mine.  It also insists that 
these costs were incurred because of the Wyoming Transportation Commission's 
safety and convenience concerns.  
The Department of Revenue replies that this second relocation was in no 
way different from the first and that the costs associated therewith should be 
treated accordingly.

 

 [¶20]  The relevant provision of the 1988 
agreement stated:

 

2.2  
Second Temporary Relocation.  
The State acknowledges that in order for the Company to maximize the 
removal of coal affected by State Highway 51 . . . it will be necessary to cause 
the State to relocate State Highway 51 to the Second Temporary Relocation in 
approximately 5 years after State Highway 51 is relocated to the First Temporary 
Relocation.  The State does not at 
this time approve the relocation of State Highway 51 to the Second Temporary 
Relocation, but does agree to seriously consider giving such permission at a 
later time when required by the Company to continue its mining 
operations.

 

Although the Wyoming 
Transportation Commission denied Wyodak's proposed relocation site, it proposed 
an alternative route to the south, which Wyodak accepted.  Wyodak would have incurred the expenses 
regardless of which route was utilized.  
This relocation was, by agreement, for the purpose of allowing Wyodak to 
maximize the removal of the coal, and it necessarily follows that the associated 
expenses were properly classified as direct costs.

 

                                  
CONCLUSION

 

[¶21]      The expenses at issue in this case 
were, by agreement, specifically attributable to the mining operation rather 
than general and administrative costs which could not be specifically attributed 
to an operational function without allocation.  They were, therefore, properly 
classified as direct costs and correctly considered in determining the taxable 
value of the coal production from this mine.

 

 [¶22]  Affirmed.

 

  

FOOTNOTES

1 
Although the State Board of Equalization is listed as a party in the caption of 
this case, it properly did not file a brief or appear at oral arguments in 
accordance with our directives in Antelope Valley Improvement v. State Board of 
Equalization for State of Wyoming, 992 P.2d 563 (Wyo. 1999), and our opinion on 
the petition for clarification, No. 98-352, 2000 WL 365086 (Wyo. Apr. 10, 
2000).