Title: RME PETROLEUM COMPANY V. WYOMING DEPARTMENT OF REVENUE; CHEVRON U.S.A., INC. V. DEPARTMENT OF REVENUE, STATE OF WYOMING; THE LOUISIANA LAND AND EXPLORATION COMPANY; and BURLINGTON RESOURCES OIL & GAS CO., LP V. WYOMING DEPARTMENT OF REVENUE; and BOARD OF COUNTY COMMISSIONERS OF THE COUNTY OF FREMONT

State: wyoming

Issuer: Wyoming Supreme Court

Document:

RME PETROLEUM COMPANY V. WYOMING DEPARTMENT OF REVENUE; CHEVRON U.S.A., INC. V. DEPARTMENT OF REVENUE, STATE OF WYOMING; THE LOUISIANA LAND AND EXPLORATION COMPANY; and BURLINGTON RESOURCES  OIL & GAS CO., LP V. WYOMING DEPARTMENT OF REVENUE; and BOARD OF COUNTY COMMISSIONERS OF THE COUNTY OF FREMONT2007 WY 16150 P.3d 673Case Number: 04-185, 04-190, 04-204Decided: 01/26/2007
OCTOBER TERM, A.D. 2006

 
 
RME PETROLEUM 
COMPANY,

 
 
Appellant

(Petitioner),

 
 
v.

 
 
WYOMING DEPARTMENT 
OF REVENUE,

 
 
Appellee

(Respondent).

 
 
CHEVRONU.S.A., INC.,

 
 
Appellant

(Petitioner),

 
 
v.

 
 
DEPARTMENT OF 
REVENUE, STATE OF WYOMING,

 
 
Appellee

(Respondent).

 
 
THE LOUISIANALAND AND EXPLORATION COMPANY; and BURLINGTON RESOURCES OIL & GAS CO., LP,

 
 
Appellants

(Petitioners),

 
 
v.

 
 
WYOMING DEPARTMENT 
OF REVENUE; and BOARD OF COUNTYCOMMISSIONERS OF THE COUNTY OF FREMONT,

 
 
Appellees

(Respondents).

 
 
W.R.A.P. 
12.09(b) Certification from the DistrictCourtofSweetwaterCounty

(No. 
04-185)

The 
Honorable Nena James, Judge

 
 
W.R.A.P. 12.09(b) Certification from the DistrictCourtofUintaCounty

(No. 04-190)

The Honorable Dennis L. Sanderson, Judge

 
 
W.R.A.P. 12.09(b) Certification from the DistrictCourtofFremontCounty

(No. 04-204)

The Honorable Nancy Guthrie, Judge

 
 
Representing Appellants RME, The LouisianaLand and Exploration Company, and 
Burlington Resources Oil & Gas Co. LP:

Lawrence J. Wolfe, Patrick 
R. Day, and Walter F. Eggers, III, of Holland & Hart, LLP, Cheyenne, Wyoming.  Argument by Mr. Wolfe.

 
 
Representing Apellant Chevron U.S.A., Inc.:

William J. Thomson, III, Randall B. Reed, and Brian J. 
Hanify, of Dray, Thomson & Dyekman, P.C., Cheyenne, 
Wyoming.  Argument by Mr. 
Thomson.

 
 
Representing Appellee:

Patrick J. Crank, Attorney General; Michael L. Hubbard, 
Deputy Attorney General; Martin L. Hardsocg, Senior Assistant Attorney General; 
Karl D. Anderson, Senior Assistant Attorney General; Cathleen D. Parker, Senior 
Assistant Attorney General.  Argument by Mr. Anderson.

 
 
Before VOIGT, 
C.J., and GOLDEN, HILL*, KITE, and BURKE, JJ.

 
 
* Chief Justice at 
time of oral argument.

 
 
BURKE, J.

 
 
[¶1]      In three consolidated 
appeals, RME Petroleum Company, Chevron U.S.A., Inc., LouisianaLand and Exploration Company, and 
Burlington Resources Oil & Gas Co., LP, ("Taxpayers"), challenge taxation 
and valuation determinations made by the Department of Revenue ("Department"). 
Taxpayers' appeals involve oil and gas production valued under the statutory 
proportionate profits method as stated in Wyo. Stat. Ann. § 
39-14-203(b)(vi)(D).  

 
 
[¶2]      Taxpayers pursued 
appeals before the Wyoming State Board of Equalization ("Board").  The Board upheld 
the Department's determinations, finding in each instance that production taxes 
and royalties must be treated as "direct costs of producing" in the 
proportionate profits formula.  We conclude the Board's interpretation of the 
statute was erroneous and reverse the orders of the Board.

 
 
ISSUES

 
 
[¶3]      LouisianaLand and Exploration Company and 
Burlington Resources Oil & Gas Co., LP, (collectively "Burlington"), present these issues:

 
 
1)         
Pursuant to properly promulgated rules the Department of Revenue has 
defined "direct costs of producing" in Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) to 
exclude taxes and royalties.  This rule is binding upon both the State 
Board of Equalization and the Department of Revenue.  Both agencies have 
chosen to ignore the rule, and thereby exceeded their statutory authority.

 
 
2)         Taxes and 
royalties are not "direct costs of producing" under the proportionate profits 
valuation method set forth in Wyo. Stat. Ann. § 39-14-203(b)(vi)(D).

 
 
3)         The Board 
erred in allowing FremontCounty to intervene in Burlington's tax appeals.

 
 
RME Petroleum Company adopts the issues presented by 
Burlington, and states three additional 
issues:

 
 

1)                 
This Court's decision in Hillard v. Big Horn 
Coal, 549 P.2d 293 (Wyo. 1976) does not 
support the Board's conclusion that taxes and royalties are "direct costs of 
producing."

 
 

2)                 
The actions of the 2002 Legislature on Senate File 69 do 
not support the Board's position.

 
 

3)                 
As a tax statute, Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) 
must be strictly construed.

 
 
Chevron U.S.A., Inc. presents the following 
issues:

 
 

1)                 
Whether the Board erred as a matter of law in concluding 
that Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) unambiguously includes exempt 
royalties, nonexempt royalties, and production taxes as a direct cost of 
producing despite the fact that the statute neither includes nor excludes them 
as a direct cost of producing.

 
 

2)                 
Whether the Board erred as a matter of law when 
interpreting Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) to include production taxes, 
exempt royalties, and nonexempt royalties as a "direct cost of producing," when 
that interpretation is contrary to the Department's rule and previous policy, is 
contrary to the legislative history of the statute, results in taxation of 
exempt federal royalties, and is contrary to canons of statutory 
construction.

 
 

3)                 
Whether Chevron was denied its constitutional right to 
uniform and equal taxation because it was treated disparately from other 
producer/processors of natural gas that reported taxable values for production 
years 1993-1995, and because oil and gas producers are treated differently from 
other mineral taxpayers within the same class.

 
 
In response, the Department of Revenue phrases the issues 
in each of the three appeals as:

 
 

1)                 
Did the State Board of Equalization properly affirm the 
Department of Revenue's application of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D), in 
which the Department classified production taxes and royalties as direct 
production costs within the direct cost ratio?

 
 

2)                 
Was the Department of Revenue required to institute new 
rules to correct its previous erroneous interpretation and application of Wyo. 
Stat. Ann. § 39-14-203(b)(vi)(D)?

 
 

3)                 
Did the Supreme Court's decision in Amoco Prod. Co. v. 
Wyoming Dep't of Revenue, 2004 WY 89, 94 P.3d 430 (Wyo. 2004), foreclose the 
Department of Revenue's determination that production taxes and royalties are a 
direct cost of producing within the direct cost ratio of the proportionate 
profits method?

 
 

4)                 
Did the State Board properly affirm the Department of 
Revenue's determination that exclusion of production taxes and royalties from 
the direct cost ratio produces an absurd result and a taxable value which is 
less than fair market value?

 
 
FACTS

 

The Board's decision in Amoco 96-216

            

[¶4]      In this case the 
parties and the Board refer to earlier proceedings involving a different 
taxpayer that addressed the issue presented in the instant case.  In order to 
understand the procedural developments that led to these appeals and for ease of 
reference throughout this opinion, we will briefly describe what is referred to 
as "Amoco 
96-216."  
In an administrative appeal concerning Amoco Production Company's 
WhitneyCanyon production for years 1990 through 
1992, the Board considered the classification of direct costs of production in 
the oil and gas proportionate profits formula.  See Amoco Production Co. v. Dept. of Revenue, 2004 WY 
89, ¶¶ 3-4, 94 P.3d 430, 434-35 (Wyo. 2004).  The Board allowed UintaCounty to intervene and argue that 
production taxes and royalties should be treated as direct costs of producing in 
the statutory proportionate profits formula.  In proceedings before the Board, the 
Department aligned with the taxpayer and argued that production taxes and 
royalties should not be included in the direct cost ratio.  The Board issued 
its decision, Amoco 
96-216, on June 29, 2001.  The Board rejected the approach urged by 
Amoco and the Department and concluded that royalties and production taxes are 
direct costs of producing for purposes of applying the oil and gas proportionate 
profits formula. Id., ¶ 5, 94 P.3d  at 
435.

 
 
[¶5]      When Amoco 96-216 was 
appealed to this Court, the Department changed its position and accepted the 
ruling of the Board.  
Upon review, we concluded that the county should not have been allowed to 
intervene.  Amoco Production 
Co., ¶ 26, 94 P.3d  at 442.  For that reason, we vacated the portion of 
the Board's decision that addressed the direct cost ratio issue raised by the 
county without specifying how royalties and production taxes should be treated 
under the proportionate profits formula in Wyo. Stat. Ann. § 
39-14-203(b)(vi)(D).  
Id., ¶ 54, 94 P.3d  at 450.  Although Amoco 96-216 was 
vacated, the Department thereafter administered Wyo. Stat. Ann. § 
39-14-203(b)(vi)(D) in accordance with the Board's decision.

 
 
#04-185 RME

 
 
[¶6]      During production 
years 1996 and 1997, RME was the operator of the Brady Unit in SweetwaterCounty.  RME's oil and gas production from the Brady 
Unit was valued by the Department under the proportionate profits method.  When RME reported 
its production, it did not classify production taxes and royalties as direct 
costs of production.  
Following an audit and the Board's decision in Amoco 96-216, the 
Department assessed additional severance taxes, based upon an inclusion of 
production taxes and royalties as direct costs of production under the 
proportionate profits valuation method.  RME appealed to the State Board of 
Equalization.  
The appeal was expedited, and the parties stipulated to the pertinent 
facts.  RME 
asserted that production taxes and royalties should not be considered direct 
costs of producing in applying the proportionate profits formula.  The Board rejected 
RME's position and issued its Findings of Fact, Conclusions of Law, Decision and 
Order on November 20, 2003.

 
 
#04-190 Chevron

            

[¶7]      From 1993 to 1995, 
Chevron produced oil and gas from property in Uinta and LincolnCounties.1  Production from these areas was valued under 
the proportionate profits method.  Chevron did not include royalties or 
production taxes in the direct cost ratio when it reported its production for 
1993, 1994, and 1995, in accordance with the Department's policy at the 
time.  In 1999, 
the Department of Audit initiated audits of Chevron's production for the tax 
years 1993-1995.  
While the final results of the audit were pending, the Board issued Amoco 96-216.2  Subsequently, the Department of Audit issued 
its final determination letters, including production taxes and royalties in the 
direct cost ratio.  
The Department of Revenue assessed additional severance taxes, interest, 
and increased the ad valorem taxable value of the properties.

 
 
[¶8]      In three appeals to 
the State Board of Equalization, Chevron challenged the additional assessments 
for the 1993-1995 production years.  Chevron's appeals were consolidated and were 
placed on the Board's expedited docket to be decided on stipulated facts and 
briefing by the parties.3  The Board issued its Findings of Fact, 
Conclusions of Law, Decision and Order on June 2, 2004, upholding the 
Department's determinations but ordering that interest accrue only from the date 
Amoco 96-216 was 
issued.

 
 
#04-204 Burlington

            

[¶9]      Burlington operates the Lost Cabin Gas 
Plant in FremontCounty where it 
processes its production from the Madden Deep Unit.  In 2002, the 
Department valued Burlington's 2001 mineral 
production for assessment purposes under the proportionate profits formula.  The Department 
included production taxes and royalties as direct costs of producing in the 
formula.  
Burlington appealed to the Board.  Two other appeals 
before the Board related to amended returns Burlington filed with the Department for oil 
and gas production in 1998 and 1999.  Subsequently, the Department notified 
Fremont and NatronaCounties of valuation changes for 1998 and 
1999.  The 
Department's valuation treated royalties and production taxes as direct costs of 
producing under the proportionate profits formula.  Burlington objected to the notices.  

 
 
[¶10]   The three appeals were consolidated, 
and the Board allowed FremontCounty to 
intervene.  The 
parties waived a contested case hearing, and the cases were assigned to the 
Board's expedited docket to be decided upon stipulated facts and the parties' 
briefs.  The 
Board issued its Findings of Fact, Conclusions of Law and Order on May 10, 
2004.  It 
upheld the Department's treatment of royalties and production taxes under the 
proportionate profits formula and determined that FremontCounty's intervention had been proper. 

 
 
[¶11]   In each of its decisions against 
Taxpayers, the Board relied upon its decision in Amoco 96-216 and 
determined that Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) requires royalties and 
production taxes to be treated as direct costs of production.  RME appealed to the 
Third Judicial District in SweetwaterCounty.  Chevron appealed to the Third Judicial 
District in UintaCounty.  Burlington appealed to the Ninth 
Judicial District in FremontCounty.  Those district 
courts certified the cases to this Court pursuant to W.R.A.P. 12.09(b).  We accepted each of 
the cases as certified and consolidated them for argument and decision.

 
 
STANDARD OF REVIEW

 
 
[¶12]   When reviewing cases certified pursuant 
to W.R.A.P. 12.09(b), we apply the appellate standards which are applicable to 
the court of the first instance.  Powder River Coal v. State Bd. of Equalization, 2002 WY 
5, ¶ 5, 38 P.3d 423, 426 (Wyo. 2002).  Our review is governed by Wyo. Stat. Ann. § 
16-3-114(c) (LexisNexis 2005), which provides:

 
 
(c)        To the 
extent necessary to make a decision and when presented, the reviewing court 
shall decide all relevant questions of law, interpret constitutional and 
statutory provisions, and determine the meaning or applicability of the terms of 
an agency action.  
In making the following determinations, the court shall review the whole 
record or those parts of it cited by a party and due account shall be taken of 
the rule of prejudicial error.  The reviewing court shall:

 
 
(i)         
Compel agency action unlawfully withheld or unreasonably delayed; and

(ii)        Hold 
unlawful and set aside agency action, findings and conclusions found to be:

(A)       Arbitrary, 
capricious, an abuse of discretion or otherwise not in accordance with law;

(B)       Contrary to 
constitutional right, power, privilege or immunity;

(C)       In excess of 
statutory jurisdiction, authority or limitations or lacking statutory right;

(D)       Without 
observance of procedure required by law; or

(E)       Unsupported by 
substantial evidence in a case reviewed on the record of an agency hearing 
provided by statute.

 
 
[¶13]   At issue in this case is the proper 
interpretation of the statutory proportionate profits formula.  This presents a 
question of law which we review de novo.  Chevron U.S.A., Inc. v. State, 918 P.2d 980, 983 
(Wyo. 1996).  We affirm an agency's conclusions of law when 
they are in accordance with the law.  Powder 
River Coal, ¶ 6, 38 P.3d  at 426.  However, when the agency has failed to 
properly invoke and apply the correct rule of law, we correct the agency's 
error.  
Id.  

 
 
DISCUSSION

            

[¶14]   Wyoming taxes mineral production pursuant to 
Article 15, Section 11 of the Wyoming Constitution.4  The legislature is directed to define full 
value for the classes of property and to enact laws securing "a just valuation 
for taxation of all property . . . ." Id.  All taxation must 
be "equal and uniform within each class of property."  Id.  In fulfillment of 
these constitutional mandates, the legislature has charged the Department of 
Revenue with determining the fair market value of oil and gas production for 
severance tax purposes. Wyo. Stat. Ann. § 
39-14-202(a)(i) (LexisNexis 2005).  The Department's determination of fair market 
value also establishes fair market value for ad valorem tax purposes.  Wyo. Stat. Ann. § 39-13-103(b)(iv) (LexisNexis 
2005).5  The Department must value oil and gas in 
accordance with Wyo. Stat. Ann. § 39-14-203(b).6  Wyo. 
Stat. Ann. § 39-11-101(a)(vi) (LexisNexis 2005).

  

[¶15]   We have recognized that the Department 
has been assigned administrative functions relating to taxation and revenue that 
were previously the responsibilities of the Board.  Amoco Production 
Co., ¶ 22, 94 P.3d  at 440; Union Pacific Resources Co. v. State, 839 P.2d 356, 363 
(Wyo. 1992).  Currently, the Board is "an independent 
quasi-judicial organization with constitutional and statutory duties to equalize 
valuation and decide disagreements regarding statutory provisions affecting the 
assessment, levy and collection of taxes."  Amoco Production Co., ¶ 22, 94 P.3d  at 440; Amoco Production Co. v. 
Wyoming State Bd. of Equalization, 12 P.3d 668, 672 (Wyo. 2000).  The legislature has 
limited the Department's methodology to selection of one of four statutory 
methods, or to another method agreeable to the Taxpayer.  BP America Production 
Co. v. Dept. of Revenue, 2005 WY 60, ¶ 5, 112 P.3d 596, 600 (Wyo. 2005); 
Wyo. Stat. Ann. § 39-14-203(b) (LexisNexis 
2005).7  The Department must notify the taxpayer of 
the method selected, or the taxpayer selects a method, and the selected method 
will then be used for three consecutive tax years. Wyo. Stat. Ann. § 
39-14-203(b)(viii) and (ix).

 
 
[¶16]   The proportionate profits method of 
valuation is one of the methods authorized by statute to value crude oil, lease 
condensate, or natural gas production not sold in a bona fide arms-length sale 
at or prior to the point of valuation. Wyo. 
Stat. Ann. § 39-14-203(b)(vi).  That method is set forth at Wyo. Stat. Ann. § 
39-14-203(b)(vi)(D), which states:

 

(D) Proportionate profits - The fair market value is:

 

(I) 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

 
 
(II) Nonexempt royalties and production taxes.

 
 
The parties use the term "direct cost ratio" as shorthand 
for the statutory language: "the quotient of the direct cost of producing the 
minerals divided by the direct cost of producing, processing and transporting 
the minerals." 

 
 
[¶17]   The language of Wyo. Stat. Ann. § 
39-14-203(b)(vi)(D) is perhaps better understood when expressed as a mathematical 
formula:

 
 

 
 
The issue in this case is whether royalties (both exempt 
and non-exempt) and production taxes are "direct costs of producing," properly 
included in both the numerator and denominator of the direct cost ratio.  

 
 
[¶18]   The components of the direct cost ratio 
are not defined within Wyo. Stat. Ann. § 39-14-203(b).8   "Production taxes" are not defined in 
the statute, but the parties here do not dispute what is meant by that term.9  The statute also does not define royalties, 
but "[w]e assume the legislature was well aware of the accepted legal definition 
and usage of the term royalty" as a universally recognized real property 
right.  
Powder 
River Coal, ¶ 17, 38 P.3d  at 429.  Royalties and 
production taxes are specifically addressed in other parts of the formula, 
before and after the direct cost ratio is applied.  Royalties and 
production taxes are subtracted before application of the direct cost ratio, 
then non-exempt royalties and production taxes are added back in as the final 
step in the formula.10

 
 
[¶19]   The proportionate profits method 
arrives at a taxable value for oil and gas by providing for a cost ratio of 
direct expenses to apply to a taxpayer's sales revenue.  We have explained 
the general operation of the formula: "[U]nder the proportionate profits method 
of valuation, any increase in direct production costs increases tax 
liability."  Amoco Production 
Co., ¶ 28, 94 P.3d  at 442.  We observe, for purposes of this opinion, 
that including production taxes and royalties in the direct cost ratio as direct 
costs of production results in greater tax liability.

 
 
[¶20]   The Department promulgated a rule 
defining "direct costs of producing" not long after Wyo. Stat. Ann. § 
39-14-203(b)(vi)(D) was enacted.  Section 4b of Chapter 6 of the Department's 
rules and regulations provides: 

 
 
(w) "Direct costs of producing" includes labor for field 
and production personnel whose primary responsibility is extraction of crude 
oil, lease condensate, natural gas and other mineral products removed from the 
production stream before processing; 
materials and supplies used for and during the production process; depreciation 
expense for field equipment used to take the production stream from the wellhead 
to the point of valuation; fuel, power and other utilities used for production 
and maintenance; gathering and transportation expenses from the wellhead to the 
point of valuation; ad valorem taxes on production and transportation equipment; 
intangible drilling costs, including dry hole expense; and other direct costs 
incurred prior to the point of valuation that are specifically attributable to 
producing mineral products.

 
 
DOR Rules, Ch. 6, § 4b(w) ("Rule § 4b").  The language of the 
rule, which does not mention royalties or production taxes, has remained 
unchanged.  
011-000-006 Weil's Code Wyo. R. § 4b(w) (1995).  For a number of 
years following the enactment of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) and the 
promulgation of Rule § 4b, the Department did not view production taxes and 
royalties as fitting within the definition provided by the rule. 

 
 
[¶21]   However, when the Board's decision in 
Amoco 96-216 was 
appealed, the 
Department abandoned its prior administration of the proportionate profits 
formula.  As we 
noted in Amoco, 
the Department informed the Court that it "accepted the ruling of the Board on 
this issue and has informed all affected taxpayers to include production taxes 
and royalties as direct production costs."  Amoco Production Co., ¶ 26, 94 P.3d  at 441.  Without altering 
the language of Rule 4b, the Department thereafter treated royalties and taxes 
as "direct costs of producing."  Taxpayers' consolidated appeals arose in the 
midst of this administrative about-face.  

 
 
[¶22]   In Taxpayers' appeals challenging the 
Department's current approach to the direct cost ratio, the Board reiterated the 
reasoning it employed in Amoco 96-216.  The Board found the language of Wyo. Stat. 
Ann. § 39-14-203(b)(vi)(D) unambiguous in requiring that royalties and taxes are 
direct costs of producing and must be included as such in the direct cost 
ratio.  
Taxpayers made varying arguments to the Board, resulting in three orders 
which are not identical but share the same ultimate conclusion.  

 
 
[¶23]   As support for its decision in each of 
Taxpayers' cases, the Board quoted and relied upon findings from its order in Amoco 96-216, 

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

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. 

 
 
[¶24]   In these consolidated appeals, 
Taxpayers have taken different approaches to challenging the Board's ultimate 
conclusion, coordinating their arguments to cover a spectrum of sub-issues.  In our discussion, 
a reference to an argument asserted by Taxpayers may be one which was only 
briefed by one Appellant but is not unfairly generalized to reflect Taxpayers' 
position overall.  
Ultimately, Taxpayers argue that the Board misinterpreted Wyo. Stat. Ann. 
§ 39-14-203(b)(vi)(D). 

 
 
[¶25]   We have not previously construed Wyo. 
Stat. Ann. § 39-14-203(b)(vi) to determine the components of the direct cost 
ratio.  We turn 
to our well-established rules of statutory interpretation.  The paramount 
consideration is to determine the legislature's intent, which must be 
ascertained initially and primarily from the words used in the statute.  State ex rel. State 
Department of Revenue v. Union Pac. R.R. Co., 2003 WY 54, ¶ 12, 67 P.3d 1176, 1182 (Wyo. 2003).  We look first to the plain and ordinary 
meaning of the words to determine if the statute is ambiguous.  Id.  A statute is 
clear and unambiguous if its wording is such that reasonable persons are able to 
agree on its meaning with consistency and predictability.  Conversely, a 
statute is ambiguous if it is found to be vague or uncertain and subject to 
varying interpretations.  Id.  If we determine 
that a statute is clear and unambiguous, we give effect to the plain language of 
the statute.  
Petroleum 
Inc. v. State Bd. of Equalization, 983 P.2d 1237, 1240 (Wyo. 1999).

 
 
[¶26]   Taxpayers assert that the statute is 
ambiguous because direct costs of producing are not defined.  They contend the 
ambiguity should be resolved in their favor and in accordance with Rule § 
4b.  
Alternatively, if we find the statute unambiguous, Taxpayers argue that 
the Board's interpretation was wrong.  According to Taxpayers, the specific mention 
of royalties and production taxes in the first and final steps of the statutory 
formula demonstrates that those items are not intended to be included in the 
direct cost ratio.  

 
 
[¶27]   In response, the Department argues that 
the statute is not ambiguous in requiring royalties and taxes to be included in 
the direct cost ratio.  The Department reasons that direct costs of 
producing must include those items which are required to be paid in order for 
oil and gas to be produced, and producing oil and gas results in the payment of 
royalties and taxes.  
Adopting the reasoning of the Board, the Department argues that the 
specific exclusion of royalties and production taxes from the direct cost 
definitions in similar statutes for coal and bentonite reflects an unambiguous 
intent that those items be included in the oil and gas direct cost ratio.   

 
 
[¶28]   We have recognized that 
divergent opinions among parties as to the meaning of a statute may be 
evidence of ambiguity but is not conclusive.  UPRC, ¶ 12, 67 P.3d  at 1182-83.  Additionally, the 
Department's struggle to administer Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) seems 
to indicate a lack of clarity concerning the statute's meaning.  However, 
administrative ambivalence, alone, does not create ambiguity.  Amoco v. State Bd. of 
Equalization, 797 P.2d 552, 555 (Wyo. 
1990) ("Whether the statute was applied in an inconsistent manner is a different 
question from whether the statute itself is ambiguous.").  Ultimately, whether 
a statute is ambiguous is a matter of law to be determined by the court.  UPRC, ¶ 12, 67 P.3d  
at 1183.

 
 
[¶29]   The plain language of Wyo. Stat. Ann. § 
39-14-203(b)(vi)(D) does not specify that royalties and production taxes are to 
be either included or excluded as direct costs of producing.  Neither of the 
interpretations urged by the parties is unreasonable, and either reading of the 
statute supplies a plausible legislative intent.  Accordingly, we find the statutory 
proportionate profits formula susceptible to varying meanings, and therefore, 
ambiguous.  

 
 
[¶30]   The Department makes several arguments 
in support of the Board's finding of an unambiguous legislative intent to 
include royalties and production taxes in the direct cost ratio.  We will address 
these arguments in order to explain why the Board's finding was in error.  First, the 
Department asserts that we can find a clear statement of legislative intent by 
comparing the language in the statutory formulas for coal and bentonite with 
Wyo. Stat. Ann. § 39-14-203(b)(vi)(D).  Sections 39-14-103(b)(vii) (LexisNexis 2005) 
and 39-14-403(b)(iv)(A) (LexisNexis 2005) of the Wyoming Statutes authorize 
proportionate profits methods to value coal and bentonite.  These provisions 
were enacted in the same legislative session as Wyo. Stat. Ann. § 
39-14-203(b)(vi)(D), as part of the overhaul of Wyoming's taxation system.  1990 Wyo. Sess. Laws ch. 54.11  We are able to 
discern some cohesive and harmonious intent reflected in the statutes pertaining 
to mine product taxes from the parallel structure of Chapter 14 of Title 39 of 
the Wyoming Statutes.12  However, 
comparative review of these other formulas only confirms the ambiguity presented 
by Wyo. Stat. Ann. § 39-14-203(b)(vi)(D).

 
 
[¶31]   We have had several opportunities to 
delve into classification of costs under Wyo. Stat. Ann. § 39-14-103(b), the 
statutory proportionate profits formula for coal.  Powder River Coal v. Dept. of Revenue, 2006 WY 137, 145 P.3d 442 (Wyo. 2006); Powder River Coal, 38 P.3d 423; Wyodak Resources Dev. 
Corp. v. State Bd. of Equalization, 9 P.3d 987, 990 (Wyo. 2000).13  We have recognized 
that the proportionate profits formula for coal is a modification of a method 
used by the Internal Revenue Service, with the stated objective of ascertaining 
"gross income from mining by applying the principle that each dollar of the 
total costs paid or incurred to produce, sell, and transport the first 
marketable product . . . earns the same percentage of profit. 26 C.F.R. § 
1.613-4(d)(4) (2001)." Powder 
River Coal, ¶ 8, 38 P.3d  at 427.  Recently, we 
commented:

 
 
While we can assume the legislature believed it was putting 
to rest all of the debate concerning mineral valuation when it completely 
revamped the mineral taxation statutes in 1990, the industry, the responsible 
agencies, and the courts continue to be faced with a seemingly never-ending 
series of scenarios calling into question what the legislature intended with 
regard to the categorization of costs in the context of the proportionate 
profits method of valuation. Given our charge is to discern legislative intent, 
we must glean what we can from the sometimes meager statutory language.

 
 

Powder River Coal, ¶ 12, 145 P.3d  at 447.

 
 
[¶32]   Our task in this case is even more 
challenging because the language of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) is 
scant compared to that of its coal counterpart.  The coal formula is set forth in Wyo. Stat. 
Ann. § 39-14-103(b)(vii), which provides:

 
 
For coal sold away from the mouth of the mine pursuant to a 
bona fide arms-length sale, the department shall calculate the fair 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.

 
 
Unlike the oil and gas proportionate profits formula, the 
components of the coal formula are defined by the statute:

 
 
For purposes of this paragraph:

 

(A) The sales value of extracted coal shall be the selling 
price pursuant to an arms-length contract. To the extent not included in the 
selling price pursuant to an arms-length contract, and to the extent that the 
following represent partial consideration for the value of the coal, sales value 
shall include the value per ton attributable to the extracted coal for any 
consideration provided to the seller in the form of heat content adjustments, 
price escalations or de-escalations, expense reimbursements, capital, facilities 
or equipment, services for mining, handling, processing or transporting the coal 
at or near the mine site, or any payment received for the current or past sale 
of extracted coal, by or on behalf of the purchaser. Sales value per ton shall 
include consideration provided for the deferral of extraction and sale in the 
taxable period in which the purchaser receives credit for the payment as a 
result of subsequent extraction and sale of the deferred production;

 

(B) 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;

 

(C) Total direct costs include direct mining costs 
determined under subparagraph (B) of this paragraph 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;

 

(D) 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 paragraph. 
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.

 
 
Wyo. Stat. Ann. § 39-14-103(b)(vii) (emphasis added).14  We found this 
statute unambiguous and were able to determine whether a particular cost is a 
"direct mining cost," by looking to the statutory list of such costs.  Powder River Coal, ¶ 13, 145 P.3d  at 447.  
However, as we have noted, Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) does not 
provide a list of "the direct costs of producing" nor any definitions for the 
components of the formula.

 
 
[¶33]   Although we agree with the Department 
that the coal and bentonite statutory formulas express a clear legislative 
intent to exclude royalties and production taxes as direct costs, we do not view 
the comparative silence in Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) as a clear 
statement of legislative intent.  The three statutory formulas are not 
identical.  All 
contain slightly different elements.  One critical difference is that the oil and 
gas formula does not define its components.  The specific exclusions of royalties and 
taxes in both the coal and bentonite statutes are set forth in expansive 
subsections defining the components of the formula.  These explanatory, 
or definitional, subsections are absent from the oil and gas formula.  Instead of 
recognizing the void in the language of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D), 
the Board found intent where none was expressed.  The Board's conclusion that the legislature 
knew how to exclude items from various parts of the formula, but chose not to do 
so for oil and gas, goes too far.  It is more accurate to say the legislature 
knew how to provide definitions for the various components of a proportionate 
profits statute, but chose not to do so for oil and gas.  Rather than omit a 
specific exclusion from Wyo. Stat. Ann. § 39-14-203(b)(vi)(D), the legislature 
failed to provide any exclusions, definitions, or directions to identify the 
direct cost of producing oil and gas.  This distinction is important.  If the oil and gas 
proportionate profits formula contained similar, or at least as extensive, 
definitional subsections, then we might find a comparison to the coal and 
bentonite formulas more helpful. 

 
 
[¶34]   Additionally, the Department contends 
that inclusion of royalties and production taxes in the direct cost ratio is 
compelled by our decision in Hillard v. Big Horn Coal Company, Wyo., 549 P.2d 293 
(1976).  The 
Board relied upon Hillard to find that, as a matter of law, royalties and 
production taxes are direct costs of producing a mineral.  Accordingly, the 
Board determined that the "direct cost of producing" in Wyo. Stat. Ann. § 
39-14-203(b)(vi)(D) unambiguously includes royalties and production taxes.   

 
 
[¶35]   In Hillard, we 
reviewed the Board's application of a formula it developed for the valuation of 
coal sold away from the mouth of the mine.  The Board adopted the formula, by a minute 
entry.  
Id., 549 P.2d  at 296.15  "The real effect of 
the minute entry, as applied, is to arrive at the value of the mineral at the 
mine by separating, as components of the total sales price, the value 
attributable to processing or transportation and the value of the mineral 
at the mine."  
Id., 549 P.2d  at 298.  Application of the 
formula resulted in a "value of the coal at the mouth of the mine  found to be 
the total of the direct mining costs plus the royalty plus the allocation of 
indirect costs and profit."  Id., 549 P.2d  at 299.16

 
 
[¶36]   Hillard involved a formula which allocated indirect 
costs, and we rejected the notion that royalties could be allocated between 
mining, processing, and transporting as indirect costs.  Our holding that 
royalties were not indirect costs does not, however, lead to the conclusion that 
they are direct costs in a different formula.  In fact, we differentiated royalties from 
other mining costs when we stated,  "the value of the coal at the mouth of the 
mine must equal the costs of mining plus royalty..."  Id., 549 P.2d  at 301 
(emphasis supplied).  
Moreover, we emphasized the definition of royalty as an ownership 
interest, which distinguishes it from other costs incurred during mining.

 
 
[¶37]   The coal companies in Hillard also argued 
that it was improper to include any of the production and severance taxes as 
mining costs.  
Taxes had been allocated as an indirect cost, and this Court did not 
second guess the decision to allocate them as indirect, rather than direct, 
costs.  Hillard did not 
hold that taxes were a direct cost of mining.  Id., 549 P.2d  at 
302.  However, 
it was recognized that taxes "are a part of the cost that necessarily must be 
covered by the value of the coal at the mouth of the mine, or otherwise the 
mining incentive might be lost."  Id.  "The value of the 
product at the mine must be enough to cover those expenses which must be paid to 
mine it and also the taxes imposed upon the product in addition to the 
royalty."  
Id.

 
 
[¶38]   To summarize, Hillard provides a 
few salient principles applicable to this case.  Royalties must be a full component of the 
taxable value of the mineral at the point of valuation, and no allocation to 
non-mining functions is appropriate.  In addition to royalties, taxes are a 
necessary expense that the value of the produced mineral must cover.  We disagree with 
the Board that the question of the proper components of the direct cost ratio in 
the proportionate profits formula was decided in Hillard.  Rather, Hillard requires 
the full value of non-exempt royalties to be included in the taxable value of 
the mineral, and suggests that production taxes should be treated 
similarly.  

 
 
[¶39]   Contrary to the Department's 
assertions, Taxpayers' reading of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) does not 
violate these principles.  The proportionate profits formula is 
consistent with Hillard, without including royalties and taxes in the 
direct cost ratio, because non-exempt royalties and taxes are not allocated 
between processing and other functions.  Non-exempt royalties and production taxes are 
added in the last step of the formula.  As a result of this last step, the resulting 
taxable value includes the full value of both non-exempt royalties and 
production taxes.  
We do not find Hillard determinative of the issue in this case.  

 
 
[¶40]   We must therefore resolve the ambiguity 
in Wyo. Stat. Ann. § 39-14-203(b)(vi)(D).  Taxpayers refer us to the Department's 
administrative interpretation of the statute as set forth in Rule § 4b.  Administrative 
rules and regulations have the force and effect of law, and an administrative 
agency must follow its own rules and regulations or face reversal of its 
action.  Painter v. Abels, 
998 P.2d 931, 938 (Wyo. 2000).  Both parties acknowledge that the Department 
is bound by its rules that are consistent with the statute.  

 
 
[¶41]   Taxpayers contend that, as defined by 
Rule § 4b, the "direct costs of producing" do not include royalties and 
production taxes.  
They assert that the Board failed to properly consider and give effect to 
Rule § 4b in rendering its decision.  We find merit in Taxpayers' position.

 
 
[¶42]   Because the Board found that Wyo. Stat. 
Ann. § 39-14-203(b)(vi)(D) unambiguously treats royalties and production taxes 
as direct costs of production, it gave minimal consideration to the Department's 
rule defining those costs.  The Board reasoned that either Rule § 4b must 
be harmonized with its interpretation of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) 
or the rule must be disregarded because it was in conflict with the clear 
meaning of the statute.  Our finding that the statute is ambiguous 
requires analysis of Rule § 4b.  The Board is required to "[d]ecide all 
questions that may arise with reference to the construction of any statute 
affecting the assessment, levy and collection of taxes, in accordance with the 
rules, regulations, orders and instructions prescribed by the 
department."  
Wyo. Stat. Ann. § 39-11-102.1(c)(iv) (LexisNexis 2005) (emphasis 
added).  "The 
legislature has developed a framework in which valuation is the unique function 
of the Department. Not even the Board can challenge that function by changing 
definitions adopted by the Department."  Amoco Production Co., ¶ 22, 94 P.3d  at 439.  The Board failed to 
recognize the significance of Rule § 4b.

 
 
[¶43]   We interpret rules in the same manner 
as statutes, looking first to the plain language.  Rule § 4b provides an extensive list of items 
which are to be considered "direct costs of producing."  Royalties and 
production taxes are not mentioned.  Prior to Amoco 96-216, the 
Department's application of the rule was consistent with this omission because 
it did not consider these items to be direct costs of producing in the 
proportionate profits formula.  Currently, the Department asserts a different 
reading of Rule § 4b.  
It maintains that royalties and taxes may be included under the catch-all 
language as "other direct costs incurred prior to the point of valuation that 
are specifically attributable to producing mineral products."  DOR Rules, Chap. 6, 
§ 4b(w).

 
 
[¶44]   We will defer to an administrative 
agency's construction of its rules unless that construction is clearly 
erroneous or inconsistent with the plain meaning of the rules.  Pinther v. Department 
of Admin. & Info., 866 P.2d 1300, 1302 (Wyo. 
1994).  The 
Department has applied different interpretations of Rule § 4b over time, 
initially taking an approach consistent with Taxpayers' position in this 
appeal.17  We are inclined to 
attribute more weight to this earlier interpretation.18  "[A]dministrative 
interpretation developed during, or shortly before, the litigation in question 
is entitled to less weight than that of a long-standing administrative 
interpretation of administrative rules."  Norman J. Singer, 1A Statutes and Statutory 
Construction § 31:6, p. 730 (6th ed. 2002).  More importantly, we must reject the 
Department's current interpretation of Rule § 4b because it is contrary to the 
rule's plain language.  

 
 
[¶45]   Again, Rule § 4b provides:

 
 
            
"Direct costs of producing" includes labor for field and production 
personnel whose primary responsibility is extraction of crude oil, lease 
condensate, natural gas and other mineral products removed from the production 
stream before processing; materials and supplies used for and during the 
production process; depreciation expense for field equipment used to take the 
production stream from the wellhead to the point of valuation; fuel, power and 
other utilities used for production and maintenance; gathering and 
transportation expenses from the wellhead to the point of valuation; ad valorem 
taxes on production and transportation equipment; intangible drilling costs, 
including dry hole expense; and other direct costs incurred prior to the point of 
valuation that are specifically attributable to producing mineral products. 

 
 
(Emphasis added.)

 
 
[¶46]   To determine whether royalties and 
production taxes can be considered "other direct costs" contemplated by Rule § 
4b, we apply the doctrine of ejusdem generis.  "Such general words, following an enumeration 
of words with specific meanings, should be construed to apply to the same 
general kind or class as those specifically listed."  Powder River Coal, ¶ 19, 38 P.3d  at 429.  
Applying this principle to Rule § 4b, one easily concludes that the 
detailed list of costs are not in the same class or of the same nature as 
royalties or production taxes.  The rule identifies certain expenses for 
labor, materials, and supplies, depreciation for field equipment, and fuel, 
power, and other utilities that should be considered direct costs of 
producing.  
Additionally, the rule specifies "ad valorem taxes on production and 
transportation equipment."  It does not make sense that this specific 
type of tax would be listed, while the more general, and presumably greater, tax 
obligation would be relegated to the catch-all provision.  Similarly, 
royalties are a predictable and significant item likely involved in every 
production scenario.  
Given the significance of royalties and production taxes in oil and gas 
production, we would expect those items to be enumerated as direct costs of 
producing.  The 
omission of royalties and production taxes from Rule § 4b must have been 
deliberate.

 
 
[¶47]   We find the language of Rule § 4b clear 
and unambiguous.  
Royalties and production taxes are not "direct costs of producing."  Excluding these 
items from the direct cost ratio does not conflict with Wyo. Stat. Ann. § 
39-14-203(b)(vi)(D), and we find it appropriate to resolve the ambiguity in the 
statute in accordance with the plain language of the Department's rule 
interpreting it.  
Accordingly, we hold that royalties and production taxes should not be 
included as direct costs of producing in the direct cost ratio of the oil and 
gas proportionate profits formula.  

 
 
[¶48]   Moreover, resolving the ambiguity in 
Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) in a manner favorable to Taxpayers is 
appropriate.  
The formula directly impacts the amount of tax, and should be construed 
as an imposition statute.  Statutes levying taxes should not be 
extended, by implication, beyond the clear import of the language used, or their 
operations enlarged to embrace matters not specifically addressed.  Amoco Production 
Co., ¶ 18, 94 P.3d  at 438.  Article 15, Section 13 of the Wyoming 
Constitution requires that "every law imposing a tax shall state distinctly the 
object of the same, to which only it shall be applied."  We believe the 
legislature is well acquainted with the need to draw its tax statutes carefully 
and with precision.  
The legislature specified how royalties and production taxes were to be 
treated in the first and final steps of the formula.  If the legislature 
had intended royalties and production taxes to be included in every step of the 
formula, we would expect to see that intent reflected in the language of the 
statute.

 
 
[¶49]   The Department makes several other 
arguments regarding legislative intent which do not persuade us.  The Board used 
legislative inaction to confirm its decision in Amoco 96-216 and 
its interpretation of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D).  A bill introduced 
during the 2002 legislative session, "Senate File 69," proposed amendment to 
Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) to specify that non-exempt royalties and 
production taxes would be excluded from the direct cost ratio.  S. 69, 56th Leg. 
(Wyo. 2002).  
The Department adopts the Board's reasoning and argues that the bill's 
failure should be viewed as "presumptive evidence of the correctness of [its] 
interpretation reflected in Amoco 96-216." 

 
 
[¶50]   We do not find Senate File 69 that 
helpful.  We 
have described legislative inaction as "a weak reed upon which to lean' and a 
poor beacon to follow' in construing a statute."  Brown v. Arp & Hammond Hardware Co., 2006 WY 107, ¶ 
35, 141 P.3d 673, 684 (Wyo. 2006), quoting Norman J. Singer, 2B Statutes and Statutory 
Construction § 49:10, p. 112-115 (6th ed. 2000).  As Taxpayers 
correctly point out, the proposed legislation addressed topics beyond and apart 
from the components of the direct cost ratio.  It would be speculative to assume that the 
bill failed because Amoco 96-216 was correct.19  We are hard pressed 
to find a clear statement of legislative intent in the consideration of Senate 
File 69, and the Board's reliance upon it was misplaced.

 
 
[¶51]   In 
its final argument, the Department expresses concern that Taxpayers' reading of 
Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) yields absurd results.  The Department 
claims that the results of excluding royalties and production taxes from the 
direct cost ratio in calculating proportionate profits do not equate to fair 
market value.  
By contrast, Taxpayers contend, somewhat persuasively, that the 
Department's approach undermines the allocation function of the direct cost 
ratio because as prices for oil and gas rise, royalties and production taxes 
also increase.  
As a result, the direct cost ratio approaches 100% when prices are high, 
negating the purpose of allocating a portion of a taxpayer's revenue to 
non-taxable functions, i.e. processing and transporting.   Regardless, 
we have cautioned the Board to avoid making decisions based upon the tax revenue 
to be generated for the State.  Amoco 
Production Co., 12 P.3d  at 674 ("The statutory 
mandate to the Board is not to maximize revenue or to punish nettlesome 
taxpayers, but to assure the equality of taxation and fairly adjudicate disputes 
brought before it.").  

 
 
[¶52]   To 
the extent the Department argues that our interpretation of Wyo. Stat. Ann. § 
39-14-203(b)(vi)(D) results in low tax values, we believe that is a matter more 
appropriately presented to the legislature.  Taxation is a legislative power.  Rocky Mountain Oil and 
Gas Ass'n, 749 P.2d  at 240.  By enacting Wyo. Stat. Ann. § 39-14-203(b), 
the legislature has declared what fair market value of oil and gas production 
shall be.  
Proper application of the statutory formula leads to a value which, as a 
matter of law, is fair market value.20  Our role is to give 
effect to the legislature's choices expressed in the statute.  
Practically speaking, we would point out that if the 
Department does not like the results under proportionate profits, it may select 
another method to apply in the next three year period.

 
 
Other issues

            

[¶53]   Prior to our decision in Amoco Production 
Co., ¶ 20, 94 P.3d  at 439, the Board permitted FremontCounty to intervene in Burlington's cases leading to this appeal.  Our holding in Amoco was clear: "A 
county cannot challenge a decision by the Department regarding valuation 
methodology or any substantive decision regarding the application of a chosen 
valuation methodology, including the definition of inputs into valuation 
equations."  
Id., ¶ 20, 94 P.3d  at 439.  Apparently 
recognizing that holding as controlling, the county did not participate in this 
appeal and appears to have abandoned its status as intervenor.  Therefore, we need 
not address Burlington's challenge in 
that regard.  
Moreover, given our resolution of this case, it is not necessary to 
resolve Chevron's constitutional challenge or its objection to the assessment of 
interest.

  

CONCLUSION

 
 
[¶54]   The Board erroneously found that Wyo. 
Stat. Ann. § 39-14-203(b)(vi)(D) unambiguously requires royalties and production 
taxes to be included in the direct cost ratio.  This conclusion led the Board to disregard 
the Department's Rule § 4b, which was at odds with its statutory 
interpretation.  
The language of that rule is clear and does not include royalties and 
production taxes as direct costs of producing.  The Department's promulgated definition is 
not inconsistent with the statute and must be given effect.  We find that 
excluding royalties and production taxes from the direct cost ratio provides a 
more reasonable interpretation of the statute while giving effect to the 
Department's rule.  
The decisions of the Board are reversed.

 
 
FOOTNOTES

 
 

1The properties were 
identified as the Whitney Canyon field, the Painter Reservoir field, the East 
Painter Reservoir field, the Ryckman Creek field, and the Clear Creek field in 
Uinta County, and the Carter Creek field located in Uinta and Lincoln 
Counties.

 
 

2The preliminary findings 
of the audit did not include production taxes and royalties in the direct cost 
ratio. 

 
 

3Chevron and the 
Department stipulated as follows:

 
 
Chevron was the only 
producer/processor of natural gas in Wyoming for which the Department determined 
during the audit that production taxes and exempt and non-exempt royalties 
should be included as "direct costs of producing" in the direct cost ratio under 
the proportionate profits formula for the production years 1993 through 1995, 
and the only producer/processor in Wyoming that has received a tax assessment 
from the Department and/or a tax bill from a county on mineral production for 
production years 1993, 1994, and 1995 that calculates the taxable value with 
production taxes and exempt and non-exempt royalties included in the direct cost 
ratio.

 
 

4Article 15, Section 11 states:

 

(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 (3) classes as follows: 

 

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

 

(ii) Property used for industrial purposes as defined by 
the legislature; and 

 

(iii) All other property, real and personal. 

 

(b) The legislature shall prescribe the percentage of value 
which shall be assessed within each designated class. All taxable property shall 
be valued at its full value as defined by the legislature except agricultural 
and grazing lands which shall be valued according to the capability of the land 
to produce agricultural products under normal conditions. The percentage of 
value prescribed for industrial property shall not be more than forty percent 
(40%) higher nor more than four (4) percentage points more than the percentage 
prescribed for property other than minerals. 

 

(c) The legislature shall not create new classes or 
subclasses or authorize any property to be assessed at a rate other than the 
rates set for authorized classes. 

 

(d) 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.

 
 

5Wyo. Stat. Ann. § 39-13-103(b)(iv) provides:

 
 
The fair market value 
determined by the department pursuant to W.S. 39-11-101(a)(vi) and 39-14-101 
through 39-14-711 pertaining to the valuation of the gross product of mines and 
mining claims, and paragraph (xvi) of this subsection as it pertains to the 
valuation of rail car companies, shall be the fair market value for purposes of 
the tax imposed by this chapter on the property described in W.S. 
39-13-102(m);

 
 
Pursuant to Wyo. Stat. Ann. § 39-11-101(a)(vi), the "fair 
market value of mine products shall be determined as provided by W.S. 
39-14-103(b), 39-14-203(b), 39-14-303(b), 39-14-403(b), 39-14-503(b), 
39-14-603(b) and 39-14-703(b)[.]"

 
 

6The text of Wyo. Stat. 
Ann. § 39-14-203(b) (LexisNexis 2005) provides: 

 

(b) Basis of tax. The 
following shall apply:

 

(i) Crude oil, lease 
condensate and natural gas shall be valued for taxation as provided in this 
subsection;

 

(ii) The fair market 
value for crude oil, lease condensate and natural gas shall be determined after 
the production process is completed. Notwithstanding paragraph (x) of this 
subsection, expenses incurred by the producer prior to the point of valuation 
are not deductible in determining the fair market value of the mineral;

 

(iii) The production 
process for crude oil or lease condensate is completed after extracting from the 
well, gathering, heating and treating, separating, injecting for enhanced 
recovery, and any other activity which occurs before the outlet of the initial 
storage facility or lease automatic custody transfer (LACT) unit;

 

(iv) The production 
process for natural gas is completed 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;

 

(v) If the crude oil, 
lease condensate or natural gas production as provided by paragraphs (iii) and 
(iv) of this subsection are sold to a third party, or processed or transported 
by a third party at or prior to the point of valuation provided in paragraphs 
(iii) and (iv) of this subsection, the fair market value shall be the value 
established by bona fide arms-length transaction;

 

(vi) In the event the 
crude oil, lease condensate or natural gas production as provided by paragraphs 
(iii) and (iv) of this subsection is not sold at or prior to the point of 
valuation by bona fide arms-length sale, or, except as otherwise provided, if 
the production is used without sale, the department shall identify the method it 
intends to apply under this paragraph to determine the fair market value and 
notify the taxpayer of that method on or before September 1 of the year 
preceding the year for which the method shall be employed. The department shall 
determine the fair market value by application of one (1) of the following 
methods:

 

(A) Comparable sales - 
The fair market value is the representative arms-length market price for 
minerals of like quality and quantity used or sold at the point of valuation 
provided in paragraphs (iii) and (iv) of this subsection taking into 
consideration the location, terms and conditions under which the minerals are 
being used or sold;

 

(B) Comparable value - 
The fair market value is the arms-length sales price less processing and 
transportation fees charged to other parties for minerals of like quantity, 
taking into consideration the quality, terms and conditions under which the 
minerals are being processed or transported;

 

(C) Netback - The fair 
market value is the sales price minus expenses incurred by the producer for 
transporting produced minerals to the point of sale and third party processing 
fees. The netback method shall not be utilized in determining the taxable value 
of natural gas which is processed by the producer of the natural gas;

 

(D) Proportionate profits 
- The fair market value is:

 

(I) 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

 

(II) Nonexempt royalties 
and production taxes.

 

(vii) When the taxpayer 
and department jointly agree, that the application of one (1) of the methods 
listed in paragraph (vi) of this subsection does not produce a representative 
fair market value for the crude oil, lease condensate or natural gas production, 
a mutually acceptable alternative method may be applied;

 

(viii) If the fair market 
value of the crude oil, lease condensate or natural gas production as provided 
by paragraphs (iii) and (iv) of this subsection is determined pursuant to 
paragraph (vi) of this subsection, the method employed shall be used in 
computing taxes for three (3) years including the year in which it is first 
applied or until changed by mutual agreement between the department and 
taxpayer. If the taxpayer believes the valuation method selected by the 
department does not accurately reflect the fair market value of the crude oil, 
lease condensate or natural gas, the taxpayer may appeal to the board of 
equalization for a change of methods within one (1) year from the date the 
department notified the taxpayer of the method selected;

 

(ix) If the department 
fails to notify the taxpayer of the method selected pursuant to paragraph (vi) 
of this subsection, the taxpayer shall select a method and inform the 
department. The method selected by the taxpayer shall be used in computing taxes 
for three (3) years including the year in which it is first applied or until 
changed by mutual agreement between the taxpayer and the department. If the 
department believes the valuation technique selected by the taxpayer does not 
accurately reflect the fair market value of the crude oil, lease condensate or 
natural gas, the department may appeal to the board of equalization for a change 
of methods within one (1) year from the date the taxpayer notified the 
department of the method selected;

 

(x) If crude oil is 
enhanced prior to the point of valuation as defined in paragraph (iii) of this 
subsection by either a blending process with a higher grade hydrocarbon or 
through a refining process such as cracking, then the fair market value shall be 
the fair market value of the crude oil absent the blending or refining 
process;

 

(xi) 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 department based on documentation that the costs 
are due to environmental, public health or safety considerations, or other 
unusual circumstances.

 

* * *

 
 

7In situations where a 
producer also processes gas, as do the Taxpayers, one of the methods  netback  
is not available.  
Wyo. Stat. Ann. § 39-14-203(b)(vi)(C) 
(LexisNexis 2005).

 
 

8Processing, however, is defined by Wyo. Stat. Ann. § 
39-14-201(a)(xviii) (LexisNexis 2005):

"Processing" means any activity occurring beyond the inlet 
to a natural 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;

 
 
Similar definitions for "producing" and "transporting" do 
not appear in the definitional provisions of Wyo. Stat. Ann. § 39-14-201(a).

 
 

9The Department has 
defined production taxes, and for purposes of this opinion, that includes 
severance taxes, ad valorem taxes, and oil and gas conservation taxes authorized 
by Wyoming statutes.  
DOR Rules, Ch. 6, § 
4(n).  

 
 

10Exempt royalties are not 
added back in, reflecting a clear legislative intent that exempt royalties be 
excluded from taxable value.  The exclusion of exempt royalties is 
consistent with Article 15, Section 12 of the Wyoming Constitution, which 
provides: 

 

The property of the 
United States, the state, counties, cities, towns, school districts and 
municipal corporations, when used primarily for a governmental purpose, and 
public libraries, lots with the buildings thereon used exclusively for religious 
worship, church parsonages, church schools and public cemeteries, shall be 
exempt from taxation, and such other property as the legislature may by general 
law provide.

 

11Wyoming's tax structure 
changed significantly following this Court's decision in Rocky Mountain Oil and 
Gas Ass'n v. State Bd. of Equalization, 749 P.2d 221 (Wyo. 1987) and 
subsequent constitutional amendments. See Union Pacific Resources Co., 839 P.2d  at 361.  The changes 
reflected the holding in Rocky Mountain Oil and Gas that defining taxable value 
is a legislative function that cannot be delegated. Rocky Mountain Oil and 
Gas Ass'n, 749 P.2d  at 241.  See 1990 Wyo. Sess. Laws ch. 54; 1991 Wyo. Sess. Laws ch. 174.

 
 
In 1998, the legislature 
repealed and recodified its original enactments of these provisions, as well as 
many other tax administration provisions enacted during the 1990 legislative 
session.  1998 
Wyo. Sess. Laws ch. 5, §§ 4-6; See also Wyo. Stat. Ann. § 39-2-208 (Michie 1997) 
(repealed).  
Other than renumbering and reorganization, no substantive changes 
occurred which impact our decision in this case.  Accordingly, this opinion refers to the 
current codification of the cited statutes.

 
 

12Chapter 14 of Title 39 of 
the Wyoming Statutes provides for mine product taxes, and within that chapter, 
Articles 1, 2 and 4, relate to coal, oil and gas, and bentonite, 
respectively.  
These articles are similarly structured. Each article first provides 
definitions.  
See 
Wyo. Stat. Ann. §§ 39-14-101, -201, and 
-401.  The 
second statute in each article is the administrative provision.  See Wyo. Stat. Ann. §§ 39-14-102, -202, and 
-402.  The 
third provision in each article is the imposition statute, including the 
proportionate profits formulas under subsection (b).  See Wyo. Stat. Ann. §§ 39-14-103, -203, and 
-403.

 
 

13Earlier cases also 
discussed the proportionate profits type of valuation methodology.  Such approaches to 
valuing coal predate the current mineral taxation statutory scheme. E.g., Amax Coal Co. v. Board 
of Equalization, 819 P.2d 834, 839 (Wyo. 1991); Hillard v. Big Horn Coal Company, 549 P.2d 293 (1976); 
C F & I Steel 
Corp. v. State Board of Equalization, Wyo., 492 P.2d 529 (1972).

 
 

14The bentonite formula is 
found in Wyo. Stat. Ann. § 39-14-403(b)(iv)(A):

 
 
For bentonite sold away 
from the mouth of the mine, the taxable value shall be calculated by adding to 
each producer's actual direct cost of mining per unit, an allocation of indirect 
costs, overhead and profit, per unit, as determined by the method prescribed in 
subdivision (I) of this subparagraph plus nonexempt royalty and production taxes 
per unit.

 
 
Additional guidance on 
cost allocation and the application of an industry wide factor is provided:

 
 
(I) The allocation of 
indirect costs, overhead and profit, shall be determined initially and effective 
with the implementation of this section, by first calculating a bentonite 
industry wide percentage add-on factor,  and second by multiplying this initial 
industry factor times each producer's actual average direct mining costs to 
mine-mouth per unit, excluding royalty and production taxes. This add-on amount 
shall be computed prospectively for each producer each year as prescribed in 
subdivision (III) of this subparagraph;

 

. . .

 

(III)  In no event shall 
the value of the bentonite product include any processing functions or 
operations regardless of where the processing is performed. As used in this 
subsection, direct mining costs include but are not limited to mining labor 
including mine foremen and supervisory personnel whose primary responsibility is 
extraction of bentonite, supplies used for mining, mining equipment, fuel, power 
and other utilities used for mining, maintenance of mining equipment, 
depreciation of mining equipment, reclamation, ad valorem property taxes on 
mining equipment, transportation of bentonite from the point of severance to the 
point of valuation and any other costs incurred prior to the point of valuation 
that are directly and specifically attributable to the mining operation. Royalty and production 
taxes shall be excluded from mine mouth cost for purposes of computation. In 
no event and under no circumstances shall the value of bentonite be less than 
the direct mining costs plus nonexempt royalty and production taxes;

 
 
Wyo. Stat. Ann. § 
39-14-403(b)(iv)(A) (emphasis added).

 
 

15The minute entry formula 
differed mathematically from the proportionate profits formula in Wyo. Stat. 
Ann. § 39-14-203(b)(vi)(D) and was not to be used for oil and gas. It 
provided:

 
 
Minute Entry. March 26, 1970.

The Board unanimously agreed that the value of minerals 
other than oil, gas and uranium should be determined by the following 
formula: Sales price of 
processed product f.o.b. contract or commercial carrier, minus all costs to 
point of determined sales price equals money profit. All costs to point of 
determined sales price less royalty divided into money profit equals percent of 
profit. Mining cost less royalty multiplied by percent of profit equals mine 
profit. Cost of mining plus royalty plus mine profit equals value of mineral as 
mined. If a sales price can only be obtained at a point after commercial 
transportation the price used will be that price less the commercial 
transportation charge.

Uranium shall be valued by the Circular 5 price on the 
average yearly grade of each mine, reduced or increased by the percentage of the 
average yearly sale price of U3O8   per lb. The producer's transportation cost 
shall be deducted on the basis of commercial transportation paid or actual cost 
plus a reasonable profit.

 
 
Oil, as in the past, will 
be valued at the contract or posted field price less transportation, if any, to 
the nearest pipeline tariff point.

 
 
Hillard, 549 P.2d  at 296 (emphasis added).

 
 

16The formula discussed in 
Hillard was not 
provided by statute, and mathematically speaking, it is distinguishable from the 
equation in Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) because it involved not only 
the application of a ratio, but the deduction of costs as well.  Use of these 
cost-deducting formulas was somewhat limited because, if costs were high, 
deductions could result in a negative or zero taxable value, as was noted in Hillard.  Id., 549 P.2d  at 298. 
See also Exxon Corp. v. Board of 
County Comm'rs, 987 P.2d 158, 160 (Wyo. 
1999).  In this 
regard, these formulas also resemble the netback formula. Wyo. Stat. Ann. § 39-14-203(b)(vi)(C).  The potential to 
yield no taxable value under these formulas explains the prohibition on use of 
the netback formula for producer/processors like Taxpayers in this case.  Id.  It also causes us to 
question the wisdom of applying language in Hillard to an 
entirely different formula.

 
 

17Taxpayers assert that the 
Department's change of position required it to promulgate a new rule.  We are sympathetic 
to this claim, having stated: "[I]t is unfair and unlawful for an administrative 
agency to establish a policy requiring taxation at a late hour contrary to 
plainly stated language already relied upon by taxpayers without first giving 
adequate notice and warning and clarifying its position for the benefit of 
taxpayers." UPRC, ¶ 17, 67 P.3d  at 1184.  Formal rule 
adoption also seems indicated by Wyo. Stat. Ann. § 39-11-102(d)(i) (LexisNexis 
2005).  
However, our resolution of this case makes it unnecessary to address this 
argument.

 
 

18We also reject the notion 
that the Department was simply mistaken during the first decade it administered 
Wyo. Stat. Ann. § 39-14-203(b)(vi)(D).  The Department's first interpretation of its 
rule carries more weight, as expressed by a Florida court:

 
 
Here the Department admittedly used one formula for the 
years 1974, 1975 and 1976, which did not include the severance tax as an element 
of "value"; then in 1977 the Department changed its formula by treating the 
severance tax as a cost to the taxpayer which it added to "value" of the 
minerals at the point of severance, even though there had been, in the meantime, 
no change in the statutory definition of "value," no change in administrative 
regulations pertaining to the severance tax, and no change in the industry which 
would justify a change in the computation of the taxable value of the 
phosphate. Furthermore, although amendments to the law were made in 1975 and 
1977, the legislature did not redirect the Department as to the manner of 
determining the value upon which the tax should be assessed. A rule of statutory 
construction frequently applied is that the interpretation by an agency charged 
with administering a statute is to be given substantial weight. This rule has an 
even greater application when the agency attempts to change its administrative 
interpretation of the statute without any known or readily discernable reason 
for doing so. In this instance, we give greater weight to the first 
administrative interpretation, and reject its later unsolicited revision. 
SeeHillsborough County Environmental 
Protection Commission v. Frandorson Properties, 283 So. 2d 65, 68 (Fla. 2nd 
DCA 1973); Heftler 
Construction Company v. Department of Revenue, 334 So. 2d 129 (Fla. 3rd DCA 
1976). Accordingly, we affirm the decision of the trial judge awarding a refund 
of 1977 taxes, and requiring computation without reference to the Department's 
amended formula.

 
 

Miller v. Agrico Chemical Co., 383 So. 2d 1137, 1139 (Fla. Dist. Ct. App. 1980).

    

19The digest of action 
taken on Senate File 69 does not reflect either clear approval or disapproval of 
the Board's conclusion in Amoco 96-216.  Digest Senate and House Journals, 56th Leg., 
Senate File 0069, at 180-182 (2002).  Additionally, the decision in Amoco 96-216 was 
not final because an appeal was pending before this Court.  

 
 

20We note that, unlike 
application of a cost deducting formula like that used in Hillard or the 
netback method, the proportionate profits formula will always yield some taxable 
value.  Because 
of the addition of royalties and production taxes in the last step, the result 
cannot be zero.  
The proportionate profits method may guarantee tax revenue for the State 
when prices are depressed.  See n.16.