Title: Enron Oil & Gas Co. v. Department of Revenue and Taxation, State of Wyo.

State: wyoming

Issuer: Wyoming Supreme Court

Document:

Enron Oil & Gas Co. v. Department of Revenue and Taxation, State of Wyo.1991 WY 144820 P.2d 977Case Number: 91-3, 91-4Decided: 11/18/1991Supreme Court of Wyoming
ENRON OIL & GAS 
COMPANY, APPELLANT (INTERVENOR),

v.

DEPARTMENT OF REVENUE 
AND TAXATION, STATE OF WYOMING; NANCY FREUDENTHAL, MARVIN APPLEQUIST 
AND CHARLES BROWN, III, COMMISSIONERS THEREOF, APPELLEES 
(DEFENDANTS).

W.A. MONCRIEF, JR., 
APPELLANT (PLAINTIFF),

v.

 DEPARTMENT OF REVENUE 
AND TAXATION, STATE OF WYOMING; NANCY FREUDENTHAL, MARVIN APPLEQUIST 
AND CHARLES BROWN, III, COMMISSIONERS THEREOF, APPELLEES 
(DEFENDANTS).

 Appeal from the District 
Court, LaramieCounty, Edward L. Grant, 
J.

 Loyd E. Smith and J. Kent 
Rutledge of Lathrop, Rutledge & Michael, Cheyenne, Dante L. Zarlengo, 
Denver, Colo., for appellant Enron Oil & Gas Co.

 Morris R. Massey and 
Peter J. Young of Brown & Drew, Casper, for appellant 
Moncrief.

 Joseph B. Meyer, Atty. 
Gen., Michael L. Hubbard, Sr. Asst. Atty. Gen., Cheyenne, for 
appellees.

 Before URBIGKIT, C.J., 
THOMAS, CARDINE and GOLDEN, JJ., and BROWN, C.J., Retired.

 GOLDEN, Justice.

 [¶1.]     In this case, we review 
a summary judgment entered by the district court which determined the Department 
of Revenue and Taxation (Department) could, in accordance with governing 
Wyoming 
statutes, properly charge severance taxes on ad valorem tax reimbursements 
received by Enron Oil & Gas Company (Enron) and W.A. Moncrief, Jr. 
(Moncrief), received from purchasers of their natural gas products.

 [¶2.]     We affirm.

 ISSUES

 [¶3.]     Enron raises this 
issue:

 Did the trial court err 
in ruling that ad valorem tax reimbursements received by appellant [Enron] from 
its natural gas purchasers are subject to severance tax under Wyo. Stat. §§ 
39-6-301, et seq.

 [¶4.]     Moncrief states the 
issue this way:

 The final order from 
which this appeal is taken requires severance taxes to be paid on the value of 
the purchasers' reimbursements to natural gas sellers of ad valorem production 
taxes paid by the sellers. The resulting issues which are presented to this 
court can be stated as follows:

      (1) Whether, in 
construing the severance tax statutes as requiring the tax to be paid on the 
value of ad valorem reimbursements, the District Court erred in disregarding the 
receipt driven reporting and payment requirements of these statutes?

      (2) Whether the 
reimbursements are required to be included and reported as an element of value 
received, on which the severance tax must be computed and paid?

 [¶5.]     In his reply brief, 
Moncrief restates the issue thus:

 Assuming arguendo that ad 
valorem tax reimbursements are a component of value for which the gas is sold, 
must this component have been returned as part of the gross revenues received or 
credited for sale of the gas and the severance tax calculated and paid 
thereon?

 [¶6.]     In defense of the 
favorable ruling it received from the district court, the Department perceives 
the issue to be:

 Did the district court 
err in declaring that ad valorem tax reimbursements are part of the fair cash 
market value of natural gas for Wyoming severance tax purposes?

  FACTS AND 
PROCEEDINGS

 [¶7.]     The significant 
procedural events are that Moncrief filed a complaint, pursuant to the Wyoming 
Uniform Declaratory Judgments Act, W.S. 1-37-101, et seq. (June 1988 Repl.), 
seeking a ruling that W.S. 39-6-301 et seq., (1985 Cum.Supp.)1 does not authorize or permit 
imposition of severance taxes on reimbursements paid by natural gas purchasers 
to gas producers for county ad valorem taxes paid by the producers. The 
Department answered the complaint on May 10, 1990, and, shortly thereafter, 
Enron was permitted to intervene in the proceedings. All parties filed motions 
for summary judgment, and on October 31, 1990, the district court granted 
summary judgment in favor of the Department. Because of its thorough treatment 
of the issues, we shall refer to the district court's decision letter in more 
detail in our discussion and resolution of this appeal.

 [¶8.]     The dispute arose upon 
audit of production from units operated by Moncrief from January 1, 1979 through 
December 31, 1986. Moncrief admitted that, in the past, he paid severance taxes 
on severance tax reimbursements he himself received, as well as taxes for other 
interest owners in his capacity as a unit operator. However, he had not paid 
severance taxes on reimbursements received for ad valorem taxes though he had 
received, or had invoiced, some purchasers for those taxes as provided for in 
his sales contracts. By letter dated January 26, 1990, Moncrief was informed 
that he owed the sum of $2,367,147 in additional severance taxes, interest and 
penalties.

 [¶9.]     Enron was audited for 
production for the period 1984 through 1986 and it too had paid severance taxes 
on severance tax reimbursements, but not on ad valorem tax reimbursements. By 
letter dated February 1, 1989, Enron was informed that it owed an additional 
assessment of $671,925 in taxes, interest and penalties.

 [¶10.]  During the years 1979 through 1986, it 
was the policy of the Department to include both severance tax and ad valorem 
tax reimbursements in the value of the gas for severance tax 
purposes.

 STANDARD OF 
REVIEW

 [¶11.]  In the resolution of these issues we 
employ our usual tests for construing a statute. Vandehei Developers v. Public 
Service Commission of Wyoming, 790 P.2d 1282, 1285 (Wyo. 1990); BHP Petroleum 
Co., Inc. v. State, 784 P.2d 621, 624-27 (Wyo. 1989); and see Amax Coal Company 
v. Wyoming State Board of Equalization, 819 P.2d 834 at 837-838 (Wyo. 1991); 
Amax Coal Company v. State Board of Equalization, 819 P.2d 825, 828-829 (Wyo. 
1991).

 DISCUSSION

 [¶12.]  Both Moncrief and Enron sell natural gas. 
The natural gas industry is regulated by the federal government, in part by the 
Natural Gas Policy Act (NGPA), 15 U.S.C.A. §§ 3301 et seq. (West 1982). The 
general rule is that producers may not sell natural gas for more than the 
maximum price set under the NGPA. However, 15 U.S.C.A. § 3320 provides certain 
exceptions:

 § 3320. Treatment of 
State severance taxes and certain production-related costs

      (a) Allowance for 
State severance taxes and certain production-related costs. - Except as 
provided in subsection (b) of this section, a price for the first sale of 
natural gas shall not be considered to exceed the maximum lawful price 
applicable to the first sale of such natural gas under this part if such first 
sale price exceeds the maximum lawful price to the extent necessary to recover. 
-

 (1) State severance taxes 
attributable to the production of such natural gas and borne by the seller, but 
only to the extent the amount of such taxes does not exceed the limitation of 
subsection (b) of this section; and 

 (2) any costs of 
compressing, gathering, processing, treating, liquefying, or transporting such 
natural gas, or other similar costs, borne by the seller and allowed for, by 
rule or order, by the Commission.

 (b) Limitation on State 
severance taxes. - The State severance 
tax allowable under subsection (a)(1) of this section with respect to the 
production of any natural gas may not include any amount of State severance 
taxes borne by the seller which results from a provision of State law enacted on 
or after December 1, 1977, unless such provision of law is equally applicable to 
natural gas produced in such State and delivered in interstate commerce and to 
natural gas produced in such State and not so delivered.

 (c) Definition of State 
severance tax. - For purposes of this 
section, the term "State severance tax" means any severance, production, or 
similar tax, fee, or other levy imposed on the production of natural gas 
-

 (1) by any State or 
Indian tribe (as defined in section 3316(b)(2)(B)(ii) of this title); 
and

 (2) by any political 
subdivision of a State if the authority to impose such tax, fee, or other levy 
is granted to such political subdivision under State law.

 [¶13.]  Wyoming's severance taxes and ad valorem 
property taxes may be reimbursed in accordance with the NGPA. Enron and Moncrief 
concede that they pay severance taxes on severance tax reimbursements, but claim 
they should not have to pay them on ad valorem tax reimbursements because of the 
peculiar nature of that tax. All parties agree that the Department's assessments 
must represent the "fair cash market value" of the products assessed. W.S. 
39-2-202(a) and (b)2, and 39-6-301(a)(iv)3.

 [¶14.]  In support of its argument that the 
governing Wyoming statutes are ambiguous and, 
consequently, required to be construed in a manner most favorably to the 
taxpayer, Enron cites a New 
Mexico statute. However, the citation is only to an 
unidentified excerpt from the following (excerpt underlined):

 I. The taxable value to 
be reported for severed and saved uranium-bearing material is the sales price 
per pound of the content of U[3]O[8] contained in the severed and saved or 
processed uranium, regardless of the form in which the product is actually 
disposed of, reduced by fifty percent for the purposes of Section 7-26-7 NMSA 
1978. It is presumed, in the absence of preponderant evidence of another 
value, that the sales price means the total amount of money and the reasonable 
value of other consideration received, or either of them, for the severed 
and saved uranium ore or processed uranium "yellowcake" concentrate without 
deduction of any kind. However, if the severed and saved uranium ore or 
"yellowcake" concentrate is not sold as ore or concentrate, the sales price 
shall be the value of U[3]O[8] ore or "yellowcake" concentrate represented in 
the final product.

 N.M.Stat.Ann. § 7-26-4(I) 
(1978) (1986 Repl.).

 [¶15.]  Enron says Wyoming should have used 
language like that underscored above if the legislature, in fact, intended to 
comprehend ad valorem tax reimbursements in the severance tax. That statute has 
no pertinence to the argument Enron has propounded. The New Mexico statute which 
is most closely relevant is N.M. Stat. Ann. § 7-26-4(B) which 
provides:

 B. For all natural 
resources except potash or potash products described under Subsection C of this 
section, molybdenum or molybdenum products described under Subsection D of this 
section, copper, lead or zinc described in Subsection E of this section, gold 
described in Subsection F of this section, silver described in Subsection G of 
this section, coal and uranium, the gross value of the natural resource is the 
sales value of the severed and saved product at the first marketable point 
without any deductions.

 We are hard pressed to 
identify a difference, much less a distinction or an ambiguity, based on a 
comparative study of New 
Mexico's assessment standard. If anything, Wyoming's 
statute is clearer and more directly to the point, especially when read in light 
of Wyoming's pertinent rules and regulations, as well as the instructions which 
have been provided to these taxpayers on a regular basis.

 [¶16.]  We will quote the district court's 
paraphrase of Enron and Moncrief's position because it is ably constructed and 
is as fair an assessment of it as can be made:

      The statute [W.S. 
39-6-301(a)(iv)] requires that the tax be based on the value of gas produced 
during the quarter preceding the computation of the tax. This being the case, 
only the unit volume of price may be counted as part of the value because the ad 
valorem tax reimbursement is not made to the producer by the buyer until 
substantially after the time that the tax is computed and paid on the basis of 
the gas produced during the immediately preceding quarter. This is not the only 
statutory phrase which requires that the valuation be fixed as of the time the 
gas is produced.

      The statute [W.S. 
39-2-202] requires the computation of value to be at the time of production and 
defines that, with regard to natural gas, as the point at which the gas is in 
the pipeline ready for transportation to market. Since the tax reimbursements 
are not received until a time well after that at which the gas is placed in the 
pipeline and ready for market, that component of the sales price should not be 
included. Similarly, the timing of the reporting and payment of ad valorem taxes 
does not coincide with the time of production of gas.

      Ad valorem taxes are 
computed and paid by the producer and reimbursed to him by the buyer 
substantially after the time of production of the gas because that is the way 
the ad valorem tax statutes and the collection system operates. This means that 
in order to compute the severance tax on the gas produced during the immediately 
preceding quarter, the producers would necessarily be required to estimate the 
amount of the tax reimbursement and the statute does not expressly require 
estimation and prepayment, nor does it authorize the Department to require it. 
Also important is the statute's use of the word "cash."

      When one refers to an 
item's cash value, that means its value right then and there, not the value it 
might have at some other time. So, that portion of the total amount of money to 
be received by the producer by way of tax reimbursements, being a deferred 
payment, that is a payment that will be made later, that component may not be 
included. It is not part of the "cash" value. Putting all of these things 
together, the statutes simply don't permit the Department to require inclusion 
of the ad valorem tax reimbursements as part of the value of the gas and the law 
allows the imposition of only those taxes expressly and clearly included in the 
statutes.

 [¶17.]  We agree with the district court. These 
arguments fail to demonstrate an ambiguity in, or a misconstruction of, the 
statutes, or an error in the assessment process employed by the Department. 
Again, quoting from the district court's decision letter:

 The issue is the value of 
gas as measured by what the seller demands and the buyer pays. The fact that 
producer will receive the money after the quarter in which the gas is produced 
and long after the gas was actually in the pipeline are facts not material to 
ascertainment of the FCMV [fair cash market value] of the gas as of those times. 
This is so because the plain language of the statutes is that they require a 
measurement of value as of the time the gas is produced, without regard to when 
the producer might receive the proceeds from its sale.

 Moreover, it is evident 
that the value of the gas to purchasers is not just the price of the gas itself. 
Purchasers, at least in the instances that are at issue here, are clearly 
willing to pay not only the maximum price permitted by the NGPA, but also a 
price enhanced by the reimbursement of both the severance and ad valorem taxes 
assessed by the State of Wyoming.

 [¶18.]  Enron also contends that the existence of 
divergent contentions concerning the meaning of a statute is evidence of 
ambiguity. Enron and Moncrief have argued somewhat different "interpretations" 
(as opposed to constructions) of the statute. SeeBasin 
Electrical Power Cooperative v. State Board of Control, 578 P.2d 557, 561 
(Wyo. 1978). 
That argument fails simply because the divergent interpretations articulated in 
their arguments are just that, divergent "interpretations," not divergent, but 
credible "constructions" of the statutes. In addition, Enron claims it could be 
subjected to "circular nonsense," an ever spiraling tax, and taxes on taxes. 
This argument is based on a conception that once it pays severance tax on the ad 
valorem taxes then it will be reimbursed and be required to pay severance tax on 
that reimbursement, etc., etc., etc., into infinity. There are no facts in the 
record to support this argument.

 [¶19.]  Much ado is made by all parties about the 
relevance of the authorities cited in the various briefs. We have reviewed The 
Council of Petroleum Accountants Societies of North America Bulletins contained 
in the record, as well as the case citations, including those from The Interior 
Board of Land Appeals. All are instructive in at least some small measure, but 
none of those disputed authorities is truly relevant to the construction of the 
Wyoming 
statutes at issue here. Suffice it to say, the Wyoming statutes themselves, read in conjunction with a 
lengthy array of Wyoming cases dealing with the construction of 
taxation statutes, convince us that we need not look beyond our own borders for 
the resolution of the issues present in the instant case.

 [¶20.]  In conclusion, tested by our 
well-established rules governing the construction of taxation statutes and 
correlative Department rules and regulations, we hold that the Department may, 
pursuant to the governing statutes discussed above, include ad valorem tax 
reimbursements as a component in the assessment process for determining the fair 
cash market value of minerals, including natural gas.

 [¶21.]  Affirmed.

 FOOTNOTES

 1 These statutes have been 
amended several times in the intervening years; however, for purposes of 
evaluating the issues raised herein we rely on the statute which governed for 
the relevant tax years.

 2 § 39-2-202. Valuation 
of mine products; exemption for collection wells.

      (a) Based upon the 
information received or procured pursuant to W.S. 39-2-201(b) or (c), the board 
shall annually value the gross product for the preceding calendar year, in 
appropriate unit measures of all mines and mining claims from which valuable 
deposits are produced, at the fair cash market value of the product at the mine 
or mining claim where produced, after the mining or production process is 
completed.

      (b) The mining or 
production process is deemed completed when the mineral product is removed from 
the pit, shaft, mine or well and prior to any benfication [beneficiation] or 
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.

 3 W.S. 39-6-301(a)(iv) 
reads:

      "Value of gross 
product" means the valuation of the gross product for the preceding calendar 
quarter of all mines and mining claims as calculated on the same basis as is 
prescribed by W.S. 39-2-202 for the determination by the department of the value 
of the gross product for the preceding calendar year.