Source: http://taxappeals.state.wy.us/images/docket_no_200555.htm
Timestamp: 2018-08-16 21:37:32
Document Index: 371376048

Matched Legal Cases: ['§ 39', '§ 39', '§ 39', '§ 5', '§ 39', '§39', '§39', '§ 39', '§ 49', 'art. 15', '§ 3', '§ 39', 'art. 15', '§ 3', '§ 39', '§ 39', '§ 39', '§ 39', '§ 39', '§ 39', '§ 39', '§ 39', '§ 39', '§ 11', '§ 27', '§ 27', '§ 39', '§ 553', '§ 39', '§ 39', '§ 39', '§ 20', '§ 4', '§ 4', '§ 39', '§ 39', '§ 39', '§ 39', '§ 39', '§70', '§70', '§ 39', '§ 39', '§ 39', '§ 39', '§ 39', '§ 39', '§ 39', '§ 39', '§ 39', '§ 47', '§ 39', '§ 39', '§ 39', '§ 39', '§ 4', 'art. 1', '§ 34', 'art. 15', '§ 11', 'art. 3', '§ 27', 'art. 15', '§ 11', '§ 27', 'art. 15', '§ 11', '§ 34', '§ 11', '§ 27', '§ 49', '§ 39']

CHEVRON U.S.A., INC. FROM PRODUCTION )
TAX AUDIT ASSESSMENT BY THE MINERAL ) Docket No. 2005-55
(Whitney Canyon Production Years 1996-1998) )
TAX AUDIT ASSESSMENT BY THE MINERAL ) Docket No. 2005-56
(Whitney Canyon Production Year 1999) )
The Board shall review final decisions of the Department on application of any interested person adversely affected, including boards of county commissioners. Wyo. Stat. Ann. § 39-11-102.1(c). Taxpayers are specifically authorized to appeal final decisions of the Department. Wyo. Stat. Ann. § 39-14-209(b). The taxpayer’s appeal must be filed with the Board within thirty days of the Department’s final decision. Wyo. Stat. Ann. § 39-14-209(b); Rules, Wyoming State Board of Equalization, Chapter 2, § 5(a). Chevron U.S.A. Inc. timely appealed the final decisions of the Department by Notice of Appeal effective March 30, 2005, Docket No. 2005-55; and by Notice of Appeal effective March 31, 2005, Docket No. 2005-56.
These consolidated appeals concern natural gas production by Chevron in the Whitney Canyon Field, Uinta County, Wyoming, for the period January 1, 1996, to December 31, 1999, (Production Years 1996, 1997, 1998 - Docket No. 2005-55; Production Year 1999 - Docket No. 2005-56). The Department of Revenue (Department), following completion of two separate audits of the Whitney Canyon Field by the Department of Audit (DOA), issued Final Determination Letters dated March 1, 2005 (Docket No. 2005-55), and March 8, 2005 (Docket No. 2005-56). The March 1st letter assessed additional severance tax of $424,594, with interest through April 1, 2005, of $172,083, and increased the ad valorem taxable value on the properties by $7,282,898. The March 8th letter assessed additional severance tax of $395,637, with interest through April 8, 2005, of $173,796.86, and increased the ad valorem taxable value on the properties by $6,924,943. Chevron appealed both additional assessments to the State Board of Equalization (Board). The Board, Alan B. Minier, Chairman, Thomas R. Satterfield, Vice Chairman, and Thomas D. Roberts, Board Member, held a hearing December 12, 2005.
We affirm the Department’s inclusion of production taxes and royalties as direct costs of producing in the direct costs ratio of the proportionate profits valuation methodology.
The notices of appeal by Chevron challenged only the inclusion by the Department in its audit assessment calculations of production taxes and royalties as direct costs of producing in the direct cost ratio of the proportionate profits method.
Chevron, in its “Updated Summary of Contentions,” sets out two contentions as outlined below. The first contention asserts the Department’s inclusion of production taxes and royalties as direct costs of producing in the proportionate profits valuation methodology is incorrect, and lists fifteen separate arguments to support this contention. The second contention argues the imposition of interest on the additional severance tax assessed under the audit is improper as Amoco Production Company, Docket No. 96-216, June 29, 2001, 2001 WL 770800, (Wyo. St. Bd. Eq.); Amoco Production Company, Docket No. 96-216, Order on Reconsideration, Sept. 24, 2001, 2001 WL 1150220 (Wyo. St. Bd. Eq.) (hereafter Amoco 96-216) was vacated by the Wyoming Supreme Court; is thus of no precedential value; and Chevron could not be said to have known or reasonably should have known its total tax liability had not been paid when due.
4. Board Docket No. 96-216 has been vacated and the Department is bound to follow its rule and interpretation and cannot argue any contrary position.
14. Chevron’s rights to equal and uniform taxation and freedom from special laws for the assessment and collection of taxes have been violated by the Department’s inclusion of production taxes and royalties in the direct cost ratio.
Chevron, in its post-hearing brief, addresses the contentions and arguments identified above, except interest, through the argument subheadings noted hereafter. Chevron’s brief does not discuss the issue of interest, presumably based on the fact the Department, at hearing, pointed out interest on the increase in taxable value resulting from including production taxes and royalties as direct costs of producing had been calculated, as Chevron requested, from February 8, 2002.
Chevron offered for adoption into the hearing record, and the Board has agreed to consider, the prior testimony in Board Docket No. 2003-153 of R.M. “Johnnie” Burton, a former Director of the Department of Revenue [Transcript Vol. II]; Christopher L. Chambers, Manager, Upstream Property Tax, Chevron U.S.A., Inc. [Transcript Vol. III]; and Craig Grenvik [Transcript Vol. IV], as factual testimony in this matter. [Transcript Vol. I, pp. 13, 18, 24].
[x] Direct
plus[+] Nonexempt Royalties & Production Taxes
[=] Taxable value
24. The ad valorem tax returns filed by Chevron with the Department for 1996, 1997, 1998, and 1999 production used the proportionate profits method, but did not include production taxes and royalties as direct costs of producing. [Transcript Vol. I, p. 16].
25. The Department can not discern from the information supplied on severance and ad valorem tax reports as filed with the Department whether a taxpayer reporting under proportionate profits has treated production taxes and royalties as direct costs and included them in the direct cost ratio. [Transcript Vol. IV, pp. 312-313, 318-319, 371].
26. An audit of Chevron’s 1996, 1997, 1998, and 1999 Whitney Canyon production was performed by the DOA. Pursuant to the Department’s February 8, 2002, memorandum and other communications with Chevron, the Department assessment letters included production taxes and royalties as direct costs in the proportionate profits methodology. [Transcript Vol. I, pp. 16-17, 21-24; Exhibits 100, 101, 500, 501, 505, 506].
27. Chevron appealed the Department audit assessments, challenging only the inclusion of production taxes and royalties in the direct cost ratio of the proportionate profits method.
28. The only issue for Board consideration is thus the inclusion of production taxes and royalties as direct costs of producing in the proportionate profits method.
29. Chevron, in support of its assertion the oil and gas valuation statute does not require inclusion of production taxes and royalties as direct costs of producing in the direct cost ratio, presented the testimony of Ms. Johnnie Burton. Ms. Burton was Director of the Wyoming Department of Revenue from January, 1995, through early March, 2002. [Transcript Vol. II, p. 21]. Her duties as Director included ensuring the Department established a fair market value for minerals. [Transcript Vol. II, p. 23]. Ms. Burton believed the Department was charged with making policy decisions on how to implement the mineral valuation statutes. [Transcript Vol. II, p. 25].
30. The DOA, in the process of auditing gas processing plants in southwest Wyoming in 1996, raised the issue of production taxes and royalties as direct costs of producing. The auditors believed production taxes and royalties should be included as direct costs. These were the first audits of production reported after the statutory change in 1990. [Transcript Vol. II, pp. 71-72, 76, 100, Vol. IV, pp. 313-314].
31. Ms. Burton initially agreed production taxes and royalties should be included as direct costs of producing within the direct cost ratio. This decision was based at least in part on legal advice from a senior assistant attorney general stating that since the oil and gas valuation statue was silent on the issue of exclusion, production taxes and royalties could not be excluded. [Transcript Vol. II, pp. 32-33, 35-36, 38, 54, 88; Vol. IV, pp. 313-315].
32. Ms. Burton, after her initial determination production taxes and royalties should be included as direct costs, reconsidered her decision, and subsequently issued a memo in October, 1996, instructing the DOA to exclude production taxes and royalties from the direct cost ratio of the proportionate profits method. [Transcript Vol. II, pp. 32-33, 35-37, 52; Vol. IV, pp. 313-315; Exhibit 105].
33. Ms. Burton, prior to issuing her October, 1996, memo, discussed exclusion of production taxes and royalties from the direct cost ratio with the Wyoming Attorney General. She informed the Attorney General she contemplated making a policy decision which conflicted with the legal advice given her by a senior assistant attorney general. The Attorney General informed her she was not breaking the law by disagreeing with the senior assistant attorney general, saying “[n]o, you have an honest disagreement.” [Transcript Vol. II, pp. 38-39; Exhibit 105].
34. Ms. Burton also discussed the issue of production taxes and royalties as direct costs with Governor Geringer at least three times in the summer of 1996, and pointed out the auditors did not agree with her position production taxes and royalties should be excluded from the direct cost ratio. The Governor told her, “[d]o what you think is right.” [Transcript Vol. II, pp. 40-41].
35. Ms. Burton also contacted Dan Sullivan and Cynthia Lummis, the co-chairs of the Joint Interim Revenue Committee, to discuss why the Legislature had excluded production taxes and royalties in the direct cost ratio for coal, but was silent about that issue for oil and gas. Sullivan, by that time a lobbyist for oil and gas interests, told Ms. Burton that he felt the proportionate profits method should be applied the same way for the two different types of minerals. [Transcript Vol. II, pp. 33-35].
36. The proportionate profits methodology for coal does not require inclusion of production taxes and royalties as direct costs of mining in the direct cost ratio. Wyo. Stat. Ann. § 39-14-103(b)(vii)(D).
39. Ms. Burton recognizes in her October 6, 1996, memo production taxes are direct costs of producing:
(Emphasis added). Her main concern was what she perceived to be “double taxation” if production taxes and royalties were included in the direct cost ratio as direct costs of producing. The memo stated: “[i]f 100% of the production taxes are set aside (subtracted) in the first step of the formula, and 100% of those taxes are brought back in (added) in the
third and last step, they cannot in any way be included in the second step or else you end up with a taxable value that includes somewhat more than 100% of taxes.” [Exhibit 105].
41. The DOA followed the policy of exclusion as set forth in the October, 1996, memo after it was issued based on the agreement between the DOA and the Department that the Department would set policy, and the DOA would audit to the policy. [Transcript Vol. II, p. 44].
42. Uinta County, in 1996, appealed Ms. Burton’s decision to exclude production taxes and royalties as direct costs of producing in a case which became this Board’s Docket No. 96-216. Amoco Production Company, June 29, 2001, 2001 WL 770800 (Wyo. St. Bd. Eq.), on reconsideration, September 24, 2001, 2001 WL 1150220; reversed on other grounds, Amoco Production Company v. Department of Revenue et. al., 2004 WY 89, 94 P.3d 430 (2004). This was the first mineral tax appeal in which the issue of classification of production taxes and royalties was raised, and addressed the first years in which the proportionate profits method was applied. [Transcript Vol. IV, pp. 312-315].
43. When the Board finally resolved Amoco 96-216 in September, 2001, deciding that production taxes and royalties were direct costs of producing, the Department did not appeal. Ms. Burton felt an appeal would not be appropriate, would not be a politically “good thing to do.” The Attorney General’s office weighed heavily in making the decision not to appeal. Ms. Burton also discussed appeal with the Governor and his staff. The consensus was the Department had done what it needed to do, had interpreted the statute; the Board disagreed; the Department was incorrect; let’s move forward. Ms. Burton changed the Department policy to include production taxes and royalties as direct costs of producing after the Board decision in Amoco, 96-216, as she believed it was the duty of the Department to apply what the Board had decided. [Transcript Vol. II, pp. 45-46, 67-68, 92-94, Vol. IV, pp. 315-316].
44. Following Amoco Production Company’s appeal of the Amoco 96-216 decision, the Wyoming Supreme Court did not address nor resolve the issue of production taxes and royalties as direct costs of producing in the direct cost ratio. Amoco Prod. Co. v. Dep’t of Revenue, et al., 2004 WY 89, 94 P.3d 430 (Wyo. 2004). Holding that Uinta County was improperly permitted to intervene, the Supreme Court affirmed the Department’s assessment in all respects. Thus, while Uinta County’s right to intervene in that appeal was determined and all other factual and legal issues were finally adjudicated, the issue of whether production taxes and royalties are properly classified as direct costs of producing remained unresolved. The Board’s determination and analysis in Amoco 96-216, as well as the Department’s application of the proportionate profits methodology which is consistent with the Board’s ruling, remain intact as the prevailing application of law. [Transcript Vol. IV, pp. 300-307, 316-317; Exhibit 107].
45. Notwithstanding its prior position in Amoco 96-216, the Department accepted the Board’s resolution on the merits, and applied the decision in valuing Chevron’s production at issue herein. [Transcript Vol. II, pp. 46, 67-68; Vol. IV, pp. 299-307, 316-318, 320-321, 334-335; Exhibit 107].
46. The Department’s current position, as expressed by Craig Grenvik, asserts production taxes and royalties should be included as direct costs of producing in the proportionate profits valuation calculation based upon the Board’s decision in Amoco 96-216; the statutes and rules, as well as other indicators such as Council of Petroleum Accountants Societies, Inc. (COPAS) Bulletins, in particular numbers 4 and 16; certain petroleum accounting texts; and the fact that production taxes and royalties were included in the proportionate profits valuation calculation for coal in 1988 and 1989 when the method was first used in Wyoming. Production taxes and royalties were excluded as direct costs for coal valuation only because of the 1990 legislation. [Transcript Vol. IV, pp. 299-307, 316-318, 334-335, 345; Exhibit 107].
47. A Joint Wyoming Legislative Interim Revenue Committee issued a Memorandum dated February 1, 1990. The Memorandum supports the conclusion the Legislature adopted a proportionate profits method for coal, and for oil and gas. It does not, however, support the conclusion the proportionate profits calculations for the two types of minerals were to be the same. The Memorandum says nothing at all about the characterization of production taxes and royalties as direct costs of producing. [Exhibit 103]. Instead, the details of the method were left to the language of specified mineral valuation bills, including “HB 148” for solid mineral valuation and “HB 149” for oil and gas valuation. Although the two bills were attached to the original Memorandum, they were not attached to the copy of the Memorandum provided to the Board. [Exhibit 103]. We nonetheless take notice of HB 148 and HB 149, both of which are a matter of public record. House Bill 148, 1990 Legislature, 50th Session (Wyo. 1990); House Bill 149, 1990 Legislature, 50th Session (Wyo. 1990).
48. The valuation of coal using the proportionate profits methodology for production years 1988 and 1989 included production taxes and royalties as direct costs of producing. Production taxes and royalties were excluded as direct costs only after enactment of the 1990 valuation legislation for coal. [Transcript Vol. IV, pp. 372-374].
49. The Department does not believe the proportionate profits valuation statute for oil and gas is ambiguous. [Transcript Vol. V, p. 301].
50. The different and very specific statements of the proportionate profits method, as that method applies to coal and to oil and gas, are the same in HB 148 and HB 149 as in the current statutes. Wyo. Stat. Ann. §39-14-103(b)(vii); Wyo. Stat. Ann. §39-14-203(b)(vi)(D). Since these different formulations already existed by the time the Memorandum was prepared, it makes no sense to claim that the general, simplified example found in the Memorandum expresses an intention which should control the very specific language of HB 148 and HB149. In fact, the Memorandum suggests the differences were intentional: “[t]o the extent possible, each mineral should be reviewed separately because each has its own uniqueness and the Committee needed to concentrate on the specific problems and challenges that reality presented.” [Exhibit 103, p. 1].
51. Senator Robert Peck, during the 2002 Legislative Session, and after the Department had notified all gas producers to include production taxes and royalties as direct costs [Exhibit 107], introduced Senate File 69 which would have excluded production taxes and royalties from the direct cost ratio within the proportionate profits valuation for oil and gas. Senate File 69 was an attempt to conform the oil and gas proportionate profits statute more closely to the coal statute. [Transcript Vol. IV, p. 307]; See 2002 Digest Senate and House Journals, p. 182.
52. Senate File 69 failed on a tie vote on third reading in the House. It failed passage, at least in part according to Chris Chambers on behalf of Chevron, because efforts by industry lobbyist ceased once it became known Governor Geringer was “probably going to veto the bill” if passed. [Transcript Vol. II, p. 74, Vol. III, p. 240].
53. Different minerals are extracted in different manners. This is one reason why valuation statutes, as well as the severance tax statutes, are different for different minerals. Coal production, for example, has more significant production than processing costs. Sour natural gas on the other hand has more significant processing costs than production costs. This is a possible reason for the difference in the way the proportionate profits methodology is used for coal as opposed to natural gas. [Transcript Vol. IV, pp. 294-296].
54. The Department asserts there is nothing in the oil and gas valuation statute which directs oil and gas be valued using the proportionate profits formula set forth in the coal valuation statute. The Department asserts the valuation statute for each mineral stands on its own, and should be interpreted as such. [Transcript Vol. IV, pp. 290, 292].
55. The exclusion of production taxes and royalties as direct costs of producing in the proportionate profits valuation calculation can lead to what the Department has characterized as “an absurd result.” It can allow a producer-processor of natural gas a processing deduction three to four times the actual costs incurred to process the gas, whereas a producer whose gas is processed in a plant in which it does not own an interest is allowed to deduct only the actual expense of processing. This situation can occur with gas production from the same well bore which is owned both by producers who own an interest in the processing plant, and those who do not. [Transcript Vol. IV, pp. 296-297, 346].
56. Tax exempt royalties are deducted from gross sales value, thus such royalties are not taxed under the proportionate profits valuation methodology. Inclusion of exempt royalties as direct costs of producing in the direct costs ratio does not subject such royalties to any tax. [Transcript Vol. IV, pp. 319-320].
57. Additionally, as noted by Craig Grenvik, royalties are specifically treated as direct costs of producing within the field of oil and gas accounting as indicated by COPAS Bulletins 4 and 16. [Transcript Vol. IV, pp. 300-301, 345; Exhibit 504]. COPAS is an organization which establishes accounting guidelines, model form interpretations, best practices, training, and reference publications for mineral industry participants.
See, http://www.copas.org/About.aspx.
58. The disagreement between the Department and Chevron with regard to use of the proportionate profits methodology is to a great extent a difference in judgement as to whether the method allows excessive processing deductions. [Transcript Vol. IV, p. 376].
59. Any portion of the Statement of the Case or Contentions and Issues set forth above, or any portion of the Conclusions of Law - Principles of Law or the Conclusions of Law - Application of Principles of Law set forth below which includes a finding of fact, may also be considered a Finding of Fact and, therefore, is incorporated herein by reference.
60. The role of this Board is strictly adjudicatory:
61. 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).
62. “The burden of proof is on the party asserting an improper valuation.” Amoco Production Company v. Wyoming State Board of Equalization, 899 P.2d 855, 858 (Wyo. 1995); Teton Valley Ranch v. State Board of Equalization, 735 P.2d 107, 113 (Wyo. 1987); Britt v. Fremont County Assessor, 2006 WY 10, ¶ 17, 126 P.3d 117, 123 (Wyo. 2006). The Board’s Rules provide that:
63. The Board, in interpreting a statute, follows the same guidelines as a court:
“Determining the lawmakers’ intent is our primary focus when we interpret statutes. Initially, we make an inquiry respecting the ordinary and obvious meaning of the words employed according to their arrangement and connection. We construe together all parts of the statute in pari materia, giving effect to each word, clause, and sentence so that no part will be inoperative or superfluous. We will not construe statutes in a manner which renders any portion meaningless or produces absurd results.” In re WJH, 2001 WY 54, ¶ 7, 24 P.3d 1147, ¶ 7 (Wyo. 2001).
64. The Board considers the omission of certain words intentional on the part of the Legislature, and we may not add omitted words. “[O]mission of words from a statute is considered to be an intentional act by the legislature, and this court will not read words into a statute when the legislature has chosen not to include them.” BP America Production Co. v. Department of Revenue, 2005 WY 60 ¶ 22, 112 P.3d 596, 607 (Wyo. 2005), quoting Merrill v. Jansma, 2004 WY 26, ¶ 29, 86 P.3d 270, 285 (Wyo. 2004). See also Parker v. Artery, 889 P.2d 520 (Wyo. 1995); Fullmer v. Wyoming Employment Security Comm’n., 858 P.2d 1122 (Wyo. 1993). The language which appears in one section of a statute but not another, will not be read into the section where it is absent. Matter of Adoption of Voss, 550 P.2d 481 (Wyo. 1976).
65. It is an elementary rule of statutory interpretation that all portions of an act must be read in pari materia, and every word, clause and sentence of it must be considered so that no
part will be inoperative or superfluous. Also applicable is the oft-repeated rule it must be presumed the Legislature did not intend futile things. Hamlin v. Transcon Lines, 701 P.2d 1139, 1142 (Wyo. 1985).
66. “Affidavits by legislators or other persons involved in the enactment of a statute are not a proper source of legislative history.” Independent Producers Marketing Corp. v. Cobb, 721 P.2d 1106, 1108 (Wyo. 1986); Greenwalt v. RAM Restaurant Corporation of Wyoming, 2003 WY 77, ¶ 52, 71 P.3d 717, 735 (Wyo. 2003).
67. Agency rules and regulations adopted pursuant to statutory authority have the force and effect of law, and courts will defer to an agency’s construction of its own rules unless such construction is clearly erroneous or inconsistent with the plain meaning of the rules. Doidge v. State Board of Charities and Reform, 789 P.2d 880, 883-884 (Wyo. 1990); Swift v. Sublette County Board of County Commissioners, 2002 WY 32, ¶ 10, 40 P.3d 1235, 1238 (Wyo. 2002).
68. Legislative inaction following a contemporaneous and practical interpretation is evidence the legislature does not differ with such an interpretation. “Where action upon a statute or practical and contemporaneous interpretation has been called to the legislature’s attention, there is more reason to regard the failure of the legislature to change the interpretation as presumptive evidence of its correctness.” 2B Norman J. Singer, Statutes and Statutory Construction § 49:10, pp. 117-118, fn. 6 (6th ed., 2000 Revision).
69. “Equal protection in Wyoming requires a law to operate alike upon all persons or property under the same circumstances and conditions.” W. W. Enterprises, Inc., v. City of Cheyenne, 956 P.2d 353, 356 (Wyo. 1998), (emphasis in original).
70. Wyoming’s severance tax is an excise tax imposed upon the privilege of severing the mineral. Belco Petroleum Corp. v. State Bd. of Equalization, 587 P.2d 204, 210 (Wyo. 1978).
71. The county ad valorem tax upon minerals is a property tax upon the value of the mineral imposed in lieu of the tax which would otherwise be imposed upon the surface estate. Wyo. Const., art. 15, § 3. “An ad valorem tax is a property tax imposed upon the value of the mineral produced.” Wyoming State Tax Comm’n v. BHP Petroleum Co. Inc., 856 P.2d 428, 434 (Wyo. 1993).
72. The Wyoming Supreme Court recently set out the process used to value mineral production:
Board of County Commissioners of Sublette County v. Exxon Mobil Corporation, 2002 WY 151, ¶ 11, 55 P.3d 714 (Wyo. 2002). (Commencing January 1, 2003, the time frame for audits was reduced. See Wyo. Stat. Ann. § 39-14-208(b)(vii).)
73. The Wyoming Supreme Court recently summarized the procedure the Board must follow when an oil and gas taxpayer challenges the fair market value determined by the Department:
74. The Wyoming Constitution requires the gross product of mines to be taxed “in proportion to the value thereof” and “uniformly valued for tax purposes at full value as defined by the legislature.” Wyo. Const. art. 15, §§ 3, 11. For oil and gas, the “[v]alue of the gross product ‘means fair market value as prescribed by W. S. 39-14-203(b) less any deductions and exemption allowed by Wyoming law or rules.’” Wyo. Stat. Ann. § 39-14-201(a)(xxix).
75. The Department is required to annually value oil and gas at fair market value. Wyo. Stat. Ann. § 39-14-202(a)(i). The Department may also rely on final audit findings, taxpayer amended returns, or department reviews of value in valuing oil and gas production. Wyo. Stat. Ann. § 39-14-208(b)(iii).
76. The fair market value for natural gas must be determined “after the production process is completed.” Wyo. Stat. Ann. § 39-14-203(b)(ii). “[E]xpenses incurred by the producer prior to the point of valuation are not deductible in determining the fair market value of the mineral.” Wyo. Stat. Ann. § 39-14-203(b)(ii).
77. “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 of the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first.” Wyo. Stat. Ann. § 39-14-203(b)(iv).
78. The Department may employ only one of four methods to determine fair market value of natural gas not sold prior to the point of valuation. Wyo. Stat. Ann. § 39-14-203(b)(vi). The relevant method in this matter is proportionate profits:
79. A valuation method may yield a deduction so low that the method is constitutionally impermissible. If “an artificially low price were utilized for purposes of taxation, the result would be a lower tax for operators (with the excessive deduction) than that paid by other operators. That lack of uniformity would be unacceptable because ‘the Wyoming Constitution mandates that all [minerals] shall be uniformly taxed on the value of their gross product.’ Amax Coal West, Inc., 896 P.2d at 1332.” Wyodak Resources Development Corporation v. Wyoming Department of Revenue, 2002 WY 181, ¶ 34, 60 P.3d 129, 142 (Wyo. 2002).
80. The Department Rules, Chapter 6, Ad Valorem and Severance Taxes On Mineral Production contain the following definitions:
81. The Wyoming statute for valuation of coal is Wyo. Stat. Ann. § 39-14-103:
82. The Wyoming statute for valuation of bentonite is Wyo. Stat. Ann. § 39-14-403:
(III) Subsequent adjustments to the add-on amount as initially determined under the provisions of subdivision (II) of this subparagraph and as subsequently determined under the provisions of this subdivision shall be recalculated each year with the base year being the initial year of this act. The recalculated add-on amount per unit for each producer shall be determined by multiplying the previous, or initial, add-on percentage amount by the difference between each individual bentonite producer's percentage increase or decrease in mining costs per unit from the percentage increase or decrease in sales price per unit and then adding this amount to the initial industry wide or previous percentage add-on factor. Sales price per unit for purposes of this formula shall be the weighted average sales price per unit for each producer based on the actual arms-length sales of milled bentonite used for taconite, foundry and drilling mud applications (including crushed and dried shipments), where user destinations are known to be in the United States and Canada. Packaged sales of bentonite in these three (3) categories shall be included after deducting the packaging premium. The packaging premium shall be calculated by subtracting the weighted average sales price per ton of bulk sales in these three (3) categories from the weighted average sales price per ton of package sales in these three (3) categories. If substantial arms-length transactions, which are at least five percent (5%) of total transactions in a particular category, do not exist for a producer in a specific targeted sales category, average pricing determined from arms-length transactions in that specific category by all producers shall be imposed. 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.
83. The Wyoming Supreme Court, in Hillard v. Big Horn Coal, considered the definition of royalty as set out in Picard v. Richards, 366 P.2d 119 (Wyo. 1961), and stated:
84. The Wyoming Supreme Court, in Hillard, clearly stated reasonable classifications for tax purposes are allowed, which would include separate classifications by mineral:
85. Procedural due process is satisfied “if a person is afforded adequate notice and an opportunity to be heard at a meaningful time and in a meaningful manner.” Robbins v. South Cheyenne Water and Sewage Dist., 792 P.2d 1380, 1385 (Wyo. 1990) citing Higgins v. State ex. rel. Workers’s Compensation Div., 739 P.2d 129 (Wyo. 1987), cert. den. 484 U. S. 988 (1987).
86. The uniformity of assessment requirement mandates only that the method of appraisal be consistently applied, recognizing there will be differences in valuation resulting from application of the same appraisal method:
87. The Wyoming Supreme Court has consistently held article 15, § 11 of the Wyoming Constitution requires “only a rational method [of appraisal], equally applied to all property which results in essential fairness.” Basin Electric Power Corp. v. Department of Revenue, 970 P.2d 841, 852 (Wyo. 1988) citing Holly Sugar Corp. v. State Bd. Of Equalization, 839 P.2d 959, 964 (Wyo. 1982). See also Britt v. Fremont County Assessor, 2006 WY 10, ¶ 18, 126 P.3d 117, 123-124; 2006 WL 123267 (Wyo. 2006).
88. The Wyoming Supreme Court has also stated:
89. The Legislature may, and does in fact, have a different formula to value oil and gas than the formulae to value coal, bentonite, uranium, trona, and sand and gravel, as it is a rational conclusion the costs associated with production vary with the different minerals. The equal protection provisions of the Wyoming Constitution require only that taxpayers similarly situated be treated equally. Thunder Basin Coal Co. v. Bd. of Equalization, 896 P.2d 1336, 1340 (Wyo. 1995).
90. The Wyoming Constitution, article 3, § 27, Special and Local Laws Prohibited states:
91. The Wyoming Constitution article 3, § 27 only requires a statute operate equally on all persons in the same circumstances, that is, in this case, oil and gas producers, but the fact application of the statute may not affect all persons in exactly the same manner is not fatal:
“The prohibition against special legislation does not mean that a statute must affect everyone in the same way. It only means that the classification contained in the statute must be reasonable, and that the statute must operate alike upon all persons or property in like or the same circumstances and conditions. * * *” Mountain Fuel Supply Company v. Emerson, Wyo., 578 P.2d 1351, 1356 (1978).
92. A taxpayer “aggrieved by any final administrative decision of the Department may appeal to the state board of equalization.” Wyo. Stat. Ann. § 39-14-209(b)(i). Oil and gas taxpayers are entitled to this remedy:
93. The Wyoming Administrative Procedure Act exempts statements of general policy from the rule adoption procedures:
94. The federal Administrative Procedure Act contains the same exemption:
5 USC § 553(b).
95. This appeal is brought under statutes that do not establish any specific standard to guide the Board’s review. Wyo. Stat. Ann. § 39-14-209(b). In the absence of specific standards set by statute or rule, we judge the Department’s valuation by the general standard that the valuation must be in accordance with constitutional and statutory requirements for valuing state-assessed property. Amoco Production Company v. Department of Revenue et al., 2004 WY 89, ¶¶ 7-8, 94 P.3d 430; Wyo. Stat. Ann. § 39-14-209(b)(vi). In doing so, we must take into account “the rules, regulations, orders and instructions prescribed by the department.” Wyo. Stat. Ann. § 39-11-102.1(c)(iv). We also consider the case in the context of the Board Rule governing the burdens of going forward and of persuasion. Rules, Wyoming State Board of Equalization, Chapter 2, § 20. Chevron U.S.A., Inc., et al., Docket No. 2002-54 (January 25, 2005), 2005 WL 221595 (Wyo. St. Bd. Eq.).
97. Chevron asserts production taxes and royalties are not specifically defined by the Department Rules as “direct costs of producing.” Rules, Wyoming Department of Revenue, Chapter 6, § 4b(w). Therefore the Department is without authority to include them as direct costs in the direct cost ratio of the proportionate profits valuation methodology for oil and gas.
98. The Department, following enactment of the 1990 mineral valuation statutes, adopted a rule defining direct production costs for the oil and gas. The rule states:
“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.
99. This definition, except for changes related to the differences between coal and oil and gas production, is taken directly from the legislative definition of “direct mining costs” in the coal valuation statute. Compare Rules, Wyoming Department of Revenue, Chapter 6, § 4b(w) with Wyo. Stat. Ann. § 39-14-103(b)(vii)(B). Both Department Rules list the same types of production costs, and conclude with an equivalent catch-all phrase, “and other direct costs incurred prior to the point of valuation that are specifically attributable to producing the mineral products.”
100. The Legislature failed to include production taxes and royalties in its definition of indirect costs for coal, and specifically excluded those two items from the direct cost ratio in the proportionate profits valuation methodology for coal:
101. If production taxes and royalties are not direct costs of producing within the meaning of the catch-all phrase “and other direct costs…” in the coal valuation statutes and Department’s Rule, then it would be superfluous for the Legislature to specifically exclude such items from the direct cost ratio in the proportionate profits calculation, particularly since those items are not defined as indirect costs. We must presume the specific exclusion of production taxes and royalties by the Legislature was not a futile or superfluous act. Conclusions, ¶ 65.
102. It is thus reasonable for the Department to interpret the catch-all phrase in its Rule to include production taxes and royalties as direct costs of producing in the proportionate profits valuation methodology.
103. The Department’s interpretation is particularly appropriate as to royalties. The Wyoming Supreme Court, in Hillard v. Big Horn Coal, considered the definition of royalty as set out in Picard v. Richards, 366 P.2d 119 (Wyo. 1961), and stated:
104. Even a conclusion the Department’s Rule is silent on the issue of production taxes and royalties as direct costs does not bar the Department from including those items in the direct cost ratio. A reasonable interpretation of Wyo Stat. Ann. § 39-14-203(b)(vi)(D) as compared to other proportionate profits methodology statutes supports such inclusion. “It is fundamental in administrative law that a silent rule is not a bar to agency action which is authorized by statute.” Powder River Basin Resource Council v. Wyoming Environmental Quality Council, 869 P.2d 435, 437 (Wyo. 1994).
105. Chevron argues the Department was required to follow Wyoming Administrative Procedure Act (APA) rule adoption procedures in order to “change” its position on inclusion of production taxes and royalties in the direct cost ratio. Chevron argues, in effect, that after the Burton memo in October, 1996, directing production taxes and royalties be excluded from the ratio, the Department was committed to such a position, and in order to make any change the Department must follow rule adoption procedures. Chevron argues the Department was simply not free to change its position regardless of this Board’s decision in Amoco 96-216. The implication of this argument is that the February 8, 2002, memo from the Department notifying gas producers to include production taxes and royalties as direct costs of producing in the proportionate profits methodology is void as it was not promulgated using rule adoption procedures. [Exhibit 107].
106. Such an argument by Chevron chooses to overlook the fact that this Board, in Amoco 96-216, stated quite clearly the Burton October, 1996, memo directing production taxes and royalties be excluded from the ratio was contrary to law. The Department thereafter correctly recognized Burton’s interpretation of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) and application of Section 4b(w), Chapter 6 of its Rules was incorrect. [Transcript Vol. IV, pp. 334-335]. The Department also concluded Burton’s interpretation of the proportionate profits method did not return a fair market value for tax purposes as required by Wyo. Stat. Ann. § 39-14-202(a)(i). [Transcript Vol. IV, pp. 299-300, 345].
107. The Department was required to remedy its previous erroneous application of the proportionate profits method which it now knew to be incorrect. “[T]he state can not be estopped in the collection of its revenue by an unauthorized rule or regulation of its officers.” Hercules Powder Co. v. State Bd. of Equalization, 210 P.2d 824, 826 (Wyo. 1949). The Department is required to enforce the law as set forth by the Legislature, notwithstanding a prior incorrect statutory interpretation. See D.L. Cook v. Wyoming Oil and Gas Conservation Comm’n, 880 P.2d 583, 585 (Wyo. 1994).
108. Chevron asserts, at least by implication if not directly, the Board is obligated to apply the Department’s previous, incorrect interpretation of its rules and Wyo. Stat. Ann. § 39-14-203(b)(vi)(D). “It is true,… that we generally defer to an agency’s construction of its own rules and regulations. However, it is equally true that ‘where the agency’s interpretation is clearly erroneous or inconsistent with the rule or regulation’s plain meaning, we must disregard it.’” Swift v. Sublette County Bd. of County Comm’rs, 2001 WY 44 ¶ 10, 40 P.3d 1235, 1238 (Wyo. 2002). Chevron’s attempt to foreclose the Department’s correct application of Wyoming tax law is incorrect as a matter of law.
109. The rule adoption assertion by Chevron is also faulty even presuming for argument purposes the Board decision in Amoco 96-216 did not completely resolve the issue. Such argument is, on its face, anomalous since the October, 1996, memo was itself issued without any rule adoption procedures, and changes a prior Department position, also set forth by Ms. Burton, in an August 6, 1996, memo. The October memo references the August memo, and states: “[t]his memorandum will supercede and cancel the policy directions given to you in my memo dated August 6, 1996, regarding the above referenced subject.” The “above-referenced” subject is “Proportionate Profits Formula.” [Exhibit 105].
110. It further appears from the October memo, as well as testimony at the hearing, the August memo stated a Department position that production taxes and royalties should be included in the direct cost ratio. Facts ¶ 31. The October memo states: “[m]y memo of August 6, 1996, considered only the legal argument.” [Exhibit 105]. An assistant attorney general had written a memorandum stating production taxes and royalties should be included in the ratio. Facts ¶ 31. The attorney general memo is the “legal argument” to which Ms. Burton referred in her October memo, and supports the conclusion the August memo in fact set forth a Department position production taxes and royalties should properly be included in the direct cost ratio.
111. If Chevron were correct in its argument the Department cannot affect a policy change except through rule adoption procedures, then the same argument applies to the October, 1996, memo by Burton, and the August, 1996, memo. The October, 1996, memo, which changes the Department policy to a position with which Chevron now agrees, should be subject to the same rule adoption requirements. Acceptance of Chevron’s argument would thus render invalid the October, 1996, memo and even the August, 1996. The end result would be no written Department position for the production years in question, at least as appears from the record herein, on the issue of inclusion of production taxes and royalties in the direct cost ratio.
112. Chevron, in support of its argument any Department policy change must be adopted as a rule pursuant to the Wyoming APA, cites two federal cases, Paralyzed Veterans of America v. D.C. Arena, L.P., 117 F.3d 579 (D.C. Cir. 1997) and Appalachian Power Company v. Environmental Protection Agency, 208 F.3d 1015, 341 U.S. App. D.C. 46 (D.C. Cir. 2000), both decided under the federal APA, and one Wyoming decision, Hercules Powder Co. v. State Board of Equalization, 66 Wyo. 268, 208 P.2d 1096 (1949), decided before the Wyoming APA was adopted in 1965.
113. While the Wyoming APA may be patterned to some extent on the federal APA, see Scarlett v. Town Council, Town of Jackson, Teton County, 463 P.2d 26, 28, fn. 4 (Wyo. 1969), reliance on federal case authority is not helpful as the Wyoming Supreme Court has on two occasions addressed the same issue raised by Chevron herein.
114. The Department, for as long as twenty (20) years prior to 1986, valued uranium using a federal pricing system known as “Circular 5 Modified.” The Department, in April, 1986, notified by letter all uranium producers in Wyoming it was discontinuing use of Circular 5, and instead would value ore based on the price received less $35.00 per ton processing costs, haulage and taxes. Pathfinder Mines Corporation appealed, asserting in part, as Chevron has asserted herein, the change in the valuation process by the Department was subject to the rule adoption procedures of the Wyoming APA.
115. The Wyoming Supreme Court, in rejecting this argument, stated compliance with the Wyoming APA was not required as long as statutory and constitutional rights to protest had been afforded. The Court also noted the anomaly facing Pathfinder similar to the anomaly facing Chevron herein regarding the prior Department memos:
116. The Court also recognized another possible issue mitigating against requiring compliance with rule adoption procedures for every mineral valuation decision by the Department:
117. The Court reaffirmed the Pathfinder conclusions in a 1995 appeal wherein Amoco Production Company challenged the use by two county assessors of the 1993 Oil & Gas Drilling Rigs & Field Equipment Schedule issued by the Department. Amoco argued reliance on the Schedule was improper as it had not been adopted as a Rule pursuant to the Wyoming APA. The Court, quoting from its Pathfinder decision, rejected Amoco’s argument, and stated “Amoco has been afforded the opportunity in this case to contest the valuation methodology.” Amoco Production Co. v. Wyoming State Board of Equalization, 899 P. 2d 855, 860 (Wyo. 1995).
118. Another basis not mentioned by the Wyoming Supreme Court which indicates the February, 2002, memo need not be subject to rule adoption procedures is the fact it is, in effect, a policy statement which is exempt from such procedures under the Wyoming, as well as the federal APA. Conclusions, ¶¶ 93-94
119. In addition, even the cases cited by Chevron do not support its Rules argument.
120. Paralyzed Veterans concerns “line-of-sight” regulations applicable to the construction of an indoor arena in Washington, D.C. The Department of Justice (DOJ), as part of its Title III and Americans With Disabilities Act (ADA) regulatory responsibility, published a Technical Assistance Manual to interpret certain Code of Federal Regulation (CFR) provisions adopted in connection with the ADA. The Manual contained exceedingly detailed requirements for compliance with the Title III, the ADA, and the CFR provisions. The initial Manual and several annual supplements did not, however, discuss sight lines over standing spectators, or the CFR “line-of-sight” requirements. The DOJ then published, without notice or comment, a subsequent supplement to the original Manual, which set forth very explicit interpretation of the CFR “line-of-sight” requirements.
121. Paralyzed Veterans of America (Veterans) filed suit in federal district court under the ADA to require “line-of-sight” areas for wheelchairs which would provide sight lines over any standing spectators. The district court concluded most, but not all, wheel chair seating areas were required to provide sight lines over standing spectators. Veterans appealed.
122. Veterans, on appeal, asserted the DOJ Manual supplement interpreting the CFR “line-of-sight” requirements was invalid, arguing that once an agency gives a regulation an interpretation, the interpretation can only be changed the same as the regulation - through notice and comment rule adoption.
123. The D.C. Circuit Court of Appeals, in addressing this argument, discussed the difference, under federal law, between an interpretation of a rule, and the substantive rule itself, which has the force and effect law. The Court pointed out that only a change in a substantive rule requires notice and comment. The Court concluded the Manual supplement at issue was an interpretation, not a substantive rule, thus notice and comment before a change is not required. The Court, in reaching its conclusion, noted an agency’s ability to interpret a relevant statute gives rise by analogy to an agency’s ability to interpret its own regulations. And such latitude is not a barrier to an agency altering its interpretation based on a new policy response generated by a new administration. The APA requires rule adoption only if a regulation is repealed or amended. Paralyzed Veterans of America v. D.C. Arena, L.P., 117 F.3d 579, 586 (D.C. Cir. 1997).
124. The policy memos issued by the Department do not rise to the level of substantive rules, and do not amend or repeal any existing Rules. The memos are interpretations of existing statutes and rules defining direct costs of producing. Paralyzed Veterans of America thus does not lend support to the rule adoption argument.
125. Appalachian Power Company also does not support Chevron’s rules argument. In Appalachian, the Environmental Protection Agency (EPA) issued a “guidance”document in connection with state operating permit programs under the federal Clean Air Act. The guidance controversy centered on what EPA asserted were non-binding provisions with regard to “periodic testing” of the stack emissions of permitees. The Petitioners, electric power companies and trade associations representing the chemical and petroleum industries, argued the guidance greatly broadened the underlying EPA rule, 40 C.F.R.§70.6(a)(3), and was thus void absent compliance with formal rulemaking procedures. The Court, quoting from Paralyzed Veterans, recognized the necessity of determining whether the guidance carried the force and effect of law, or whether its requirements fell within the scope of the regulation it purported to construe. Appalachian Power Company, 208 F.3d at 1024.
126. The Court analyzed in depth the guidance and its effect on the periodic monitoring requirement as originally set forth in 40 C.F.R. §70.6(a)(3). The Court concluded the guidance broadened the scope of the regulation by giving state regulators significantly more authority to in effect change state and federal clean air standards by using the permit system to amend, supplement, or exceed the extent and frequency of periodic testing of emissions. The Court further recognized the test methods and frequency of testing are substantive requirements. The Court concluded the guidance went far beyond a mere policy interpretation of an existing rule or regulation.
127. The Department’s change in policy - the change in its interpretation of statutes and regulations with regard to production taxes and royalties as direct costs of producing - does not broaden the reach of either statutes or rules, and particularly not to the extent engendered by the guidance issued by the EPA in Appalachian Power Company.
128. The substantive legal standard in this matter is the Department Rules on direct costs, the direct cost ratio, and the proportionate profits method. Conclusions, ¶80. The Department has made no attempt to change to this substantive legal standard. The Department has revised a policy interpretation of a statute and Rule in light of this Board’s decision in Amoco 96-216, as well as other information. Facts, ¶ 46.
129. The final authority cited by Chevron is Hercules Powder Co. v. State Board of Equalization. The State Board of Equalization had assessed Hercules sales tax on its deliveries into the state even though Hercules had no office nor salesmen in Wyoming. Anyone wishing to purchase a product from Hercules had to call or write to an office located outside of the state. Hercules asserted in response it was liable only for use tax under which at least some of its sales to Wyoming purchasers would be exempt. The main issue presented on appeal to the Wyoming Supreme Court concerned the Board’s interpretation of the term “purchase” as used in the Board Rules.
130. The Supreme Court noted the term “purchase” had been interpreted by the Board for a significant number of years, from enactment of the Sales and Use Tax Acts in 1937 to the assessment at issue in 1947, to exclude from tax liability those sales by businesses in the same position of Hercules. The Court noted similar prior sales had been subject only to use tax liability. The Court concluded Hercules was entitled to rely on the Board’s long-standing interpretation of the term “purchase.” The Board could not change its interpretation without first “clarifying” its position for the benefit of all taxpayers. A sudden change in a long term interpretation of an unambiguous term without any prior notice would not be allowed.
131. The situation before the Board is significantly different. The Department is not attempting to change the interpretation of such a commonly accepted term as “purchase.” The Department is simply stating its policy position as to the relevant statute and Rules.
132. It should also be noted, apparently contrary to what the Board did in Hercules, this Board’s decision in Amoco 96-216, supra, provided all mineral producers clear notice production taxes and royalties were to be included as direct costs in the direct cost ratio of the proportionate profits valuation methodology.
133. Hercules provides no authority for the assertion the Department must provide notice and comment when it changes a policy position.
134. Chevron asserts the Wyoming Supreme Court decision in Amoco Production Company v. Department of Revenue et al., 2004 WY 89, 94 P.3d 430 (Wyo. 2004), vacated the Board decision in Amoco 96-216 on the issue of production taxes and royalties, and as such, it is of no precedential value. The Department, under Chevron’s argument, thus has no authority to include production taxes and royalties as a direct cost of producing.
135. This argument chooses to overlook the fact the Wyoming Supreme Court did not address the issue of production taxes and royalties as direct costs of producing, nor the underlying factual findings. The Court simply ruled Uinta County did not have standing to intervene in Amoco 96-216, and thus had to be dismissed from the appeal. Amoco Production Company, 2004 WY 89, ¶¶ 9-27. Uinta County had originally raised the issue of whether production taxes and royalties are direct costs of producing. Because Uinta County was dismissed, the Court refused to consider the merits of the Board’s ruling on that issue:
We have already held that Uinta County had no authority to intervene. We have also held that Uinta County cannot legally challenge the initial decision by the Department on this issue. Thus, this issue has no place in this particular proceeding at this stage. Judicial economy cannot be invoked as a pretext for this Court to issue an advisory opinion. We decline to review the issue on the merits.
Amoco Production Company v. Department of Revenue et al., 2004 WY 89, ¶ 26, 94 P.3d 430, 442 (2004), (emphasis added).
136. The requirement to include production taxes and royalties as direct costs of producing is still good law from the perspective of the Department and the Board.
137. Chevron asserts this Board’s decision in Amoco 96-216 is no longer “good law,” and the Department’s inclusion of production taxes and royalties as direct costs is incorrect as a matter of law. Chevron cites as its authority a Laramie County District Court decision in an action filed by ExxonMobil which contradicts this Board’s position on production taxes and royalties in the proportionate profits methodology. ExxonMobil Corp. v Wyoming Department of Revenue, Civil Action No. 165-46, Laramie County District Court. Retired District Judge Spangler, sitting by designation, in a brief order which cites no authority, did state his opinion that production taxes and royalties were not direct costs of producing under Wyo. Stat. Ann. § 39-14-203(b)(vi)(D). An appeal by the Department of this district court decision is pending with the Wyoming Supreme Court under Docket No. 05-90, thus there is not a final judgement or decision which is binding on either this Board or the Department. And while Chevron in its post hearing brief does not contend the principles of collateral estoppel and res judicata apply, and cannot reasonably do so in light of V-1 Oil Company v. People, 799 P. 2d 1199, 1203-1204 (Wyo. 1999), Chevron does assert the ExxonMobil order by Judge Spangler is binding on the Board as a decision made by a court of higher level than the Board, by an appellate level court, citing W. R. A. P. 12.03. What Chevron fails to consider is that ExxonMobil was an original declaratory judgement action filed in the First Judicial District Court, rather than an appeal from a decision of this Board. In fact, the only appropriate appellate level district court for similar issues is the district court in the county where in the property at issue is situated, which is not the First Judicial District. State ex rel. Department of Revenue v. Buggy Bath Unlimited, Inc., 18 P.3d 1182 (Wyo. 2001). Any decision of the First Judicial District Court is thus not binding on this Board under W.R.A.P. Rule 12.03.
E. Production taxes and royalties are not direct costs of producing
138. The question of inclusion of production taxes and royalties as direct costs of producing is not new. The Board has concluded, on a number of prior occasions, royalties and production taxes must be included as direct costs of producing in order to properly reach fair market value for the mineral in question, primarily processed natural gas. E.g. Amoco Production Company, Docket No. 96-216, June 29, 2001, 2001 WL 770800, (Wyo. St. Bd. Eq.); Amoco Production Company, Docket No. 96-216, Order on Reconsideration, Sept. 24, 2001, 2001 WL 1150220 (Wyo. St. Bd. Eq.); Fremont County Board of County Commissioners, Docket No. 2000-203, April 30, 2003, 2003 WL 21774604 (Wyo. St. Bd. Eq.); RME Petroleum Company, Docket No. 2002-52, November 20, 2003, 2003 WL 22814612 (Wyo. St. Bd. Eq.); Amoco Production Company, Docket No. 2001-56, December 30, 2003, 2003 WL 23164222 (Wyo. St. Bd. Eq.); Burlington Resources Oil and Gas Co., Docket Nos. 2002-49 et. al., May 10, 2004, 2004 WL 1174649 (Wyo. St. Bd. Eq.); BP America Production Company, Docket No. 2003-102, March 5, 2005, 2005 WL 558991 (Wyo. St. Bd. Eq.); BP America Production Company, Docket No. 2003-114, March 17, 2005, 2005 WL 676580 (Wyo. St. Bd. Eq.); Marathon Oil Company, Docket No. 2004-08, March 29, 2005, 2005 WL 794788 (Wyo. St. Bd. Eq.); Chevron U.S.A. Inc., Docket No. 2003-153, May 12, 2005, 2005 WL 1177542 (Wyo. St. Bd. Eq.); Burlington Resources/LL&E, Docket No. 2004-24, August 25, 2005, 2005 WL 2100264 (Wyo. St. Bd. Eq.); BP America Production Company, Docket No. 2004-130, November 10, 2005, 2005 WL 3072921 (Wyo. St. Bd. Eq.); BP America Production Company, Docket No. 2004-129, November 18, 2005, 2005 WL 3126198 (Wyo. St. Bd. Eq.); Chevron USA, Inc., Docket No. 2005-07, February 9, 2006, 2006 WL 870315 (Wyo. St. Bd. Eq.); Burlington Resources Oil & Gas Co. LP., Docket No. 2005-06, February 2, 2006, 2006 WL 308470 (Wyo. St. Bd. Eq.); BP America Production Company, Docket No. 2005-05, January 18, 2006, 2006 WL 189773 (Wyo. St. Bd. Eq.).
139. Chevron broadly challenges the conclusion that royalties and production taxes must be included as direct costs of producing in order to properly reach fair market value. Chevron asserts the inconsistent interpretations of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) since its adoption in 1990 by the Department indicate the statute is ambiguous, and thus cannot be interpreted to require inclusion of production taxes and royalties as direct costs of producing. Chevron also asserts that if the statute is not ambiguous, then reference to other statutes is not necessary or allowed. Chevron further asserts the coal proportionate profits methodology statute is controlling for oil and gas, relying by implication on the February 1, 1990, Joint Interim Revenue Committee Report to the Wyoming Legislature. We find none of these arguments to be persuasive.
140. A review of Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) itself in the context of other mineral valuation statutes confirms it is not ambiguous.
141. The Legislature specifically excluded royalties and production taxes from the definition of direct costs in the direct cost ratio used in valuing coal under the proportionate profits methodology. Wyo. Stat. Ann. § 39-14-103(b)(vii). Conclusions, ¶ 81. 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. Ann. § 39-14-403(b)(iv)(A)(III). Conclusions, ¶ 82. It is worth noting these valuation methods for coal and bentonite, which expressly direct production taxes and royalties not be considered direct costs of producing, were enacted simultaneously with Wyo. Stat. Ann. § 39-14-203(b)(vi)(D) for oil and gas which omits any such directive.
142. The Legislature did not include production taxes and royalties in the definition of indirect costs for coal, and specifically excluded those two items from the direct cost ratio in the proportionate profits valuation methodology for coal. Such legislative action supports the conclusion production taxes and royalties should be included as direct costs of producing when valuing oil and gas under the proportionate profits method.
143. By excluding taxes and royalties as costs in the other mineral valuation statutes, the Legislature clearly evidenced its understanding that royalties and production taxes are direct costs of producing. The failure of the Legislature to exclude royalties and production taxes from the direct cost of producing for oil and gas is an unambiguous indication said royalties and taxes are to be included. Parker v. Artery, 889 P.2d 520 (Wyo. 1995); Matter of Voss Adoption, 550 P.2d 481 (Wyo. 1976).
144. 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 apparent.
145. Chevron asserts the valuation statute at issue, Wyo. Stat. Ann. § 39-14-203(b)(vi)(D), is ambiguous because the Department has, over time, changed its position on inclusion of production taxes and royalties as direct costs of producing. The statute is clearly not ambiguous, and the Department changing its position on inclusion does not create ambiguity:
Allied-Signal, Inc. v. Wyoming State Board of Equalization, 813 P.2d 214, 221-222 (Wyo. 1991).
F. Is a tax exempt interest taxed by the inclusion of exempt federal royalties
146. Chevron argues, without citation to any authority, inclusion of exempt federal royalties as direct costs of producing in the direct cost ratio of the proportionate profits calculation in some manner subjects those royalties to taxation.
147. The proportionate profits valuation statute for oil and gas specifically requires all royalties, both exempt and non-exempt, as well as production taxes, be deducted from gross sales revenue. Facts ¶¶ 3, 10, 18. The direct cost ratio is then applied to the remaining revenue. Facts ¶¶ 3, 12, 20. Taxable value is then determined by adding to the remaining value the amount of production taxes and non-exempt royalty. Facts ¶¶ 3, 13, 20. Any exempt royalties, which are not added to the remaining value to which the tax rate is applied, are obviously not included in taxable value, and thus not subject to any taxation.
148. All exempt royalties are, however, properly included in the direct cost ratio in order to accurately determine what amount of gross sales value should be attributed to production costs. Royalties, including exempt royalties, must be included in the direct cost ratio to properly determine the allocation of costs and profit.
149. The purpose of the proportionate profits formula is to allocate net sales value production and processing costs to arrive at a taxable value. The general stated theory said to underlie the method is that “each dollar of total costs paid or incurred to produce, sell and transport the first marketable product . . . earns the same percentage of profit.” Powder River Coal Co. v. Wyoming State Bd. of Equalization, 2002 WY 5, at ¶ 8, 38 P.3d 423 (Wyo. 2002). The Wyoming Supreme Court has recognized a royalty is a direct cost of production. Hillard v. Big Horn Coal Co., 549 P.2d 293, 301-302 (Wyo. 1976). Royalties are therefore a cost of producing to be properly included in the direct cost ratio of the proportionate profits method.
150. The direct cost ratio is a mathematical formula which attempts to reach taxable value by apportioning revenue, net of taxes and royalties, to production costs which are taxable, and processing costs which are not. Exempt royalties in the direct cost ratio function simply as a component of a mathematical equation, and nothing more. Exempt royalties are thus not taxed when used simply as part of a formula.
151. Chevron argues the inclusion of royalties and production taxes in the direct cost ratio would cause more than 100% of royalties and production taxes to be included in the taxable value, citing in support the October, 1996, memorandum from Ms. Burton, the former Director of the Department. [Exhibit 105].
152. This October memo indicates a misunderstanding of the function of the direct cost ratio in the proportionate profits valuation methodology. The direct cost ratio is a multiplier within a proportionate profits formula. It simply allocates the net sales value of the mineral between the costs of production, which are part of taxable fair market value, and those costs incurred in processing and transportation which are not subject to taxation. All production taxes and royalties are first removed from the sales revenue. The direct cost ratio is then applied to the remaining value to apportion costs. Production taxes and non-exempt royalties are only then added back to the resulting value to arrive at fair market value for the mineral. Facts ¶¶ 3, 10, 12, 13, 18, 20, 21.
153. Use of production taxes and royalties in the direct cost ratio does not in any manner expose either of those components to taxation. Their use in the ratio is nothing more than as an element of a mathematical application which then ultimately assists the Department in arriving at fair market value for the mineral in question. The direct cost ratio is purely a mathematical formula which apportions the revenues of the producer, net of taxes and royalties.
154. Interpretive rules or general statements of policy such as the Burton October, 1996, memorandum “… do not establish binding norms which are finally determinative of anyone’s rights.” Wyoming Mining Assoc. v. State, 748 P.2d 718, 724 (Wyo. 1988). Such interpretative rules or general statements of policy are only valid to the extent they correctly construe the statute, and are subject to review. Battlefield, Inc. v. Neely, 656 P.2d 1154, 1159-1160 (Wyo. 1983).
155. The Board has the statutory duty to decide all questions concerning the construction of any statute affecting the assessment, levy or collection of taxes. Wyo. Stat. Ann. § 39-11-102.1(c)(iv). The Board has previously rejected the position stated in the October, 1996, memorandum as an erroneous interpretation of the applicable statutes. Conclusions, ¶ 147. The Board rejects Chevron’s contention.
H. Testimony of Dan Sullivan
156. Chevron asserts the Board erred when it granted the Department’s motion in limine to prevent incorporation in this matter of the testimony of Dan Sullivan offered in Board Docket No. 2003-153. Chevron asserted in an offer of proof at the hearing that Sullivan’s testimony would be primarily as foundation for the Joint Interim Revenue Committee Mineral Tax Report dated February 1, 1990. The proffered testimony would indicate Sullivan prepared the Report, and that is was prepared pursuant to a statutory mandate from the Wyoming Legislature. [Transcript, Vol. I, pp. 13-15]. The Report was eventually admitted at the request of Chevron over the objection of the Department. [Transcript Vol. I, pp. 14, 26; Exhibit 103]. Foundational testimony from Sullivan to support admission was thus not necessary.
157. Sullivan’s proposed testimony is also not admissible as legislative history. Independent Producers Marketing Corp, Conclusions, ¶ 66. At the same time, Chevron has no cause for concern on this point, because our decision does not rest on a characterization of the results of the proportionate profits method depending on its interpretation.
158. We decide this case based on our interpretation of the statute and regulations, without regard for the results that follow. Direct costs of producing include production taxes and royalties because that is the correct interpretation of the statute and regulations. The Department has selected the proportionate profits method for the production years at issue, and is bound by whatever results are properly generated by that selected method.
159. Chevron, in support of its assertion the Wyoming Legislature has specifically determined production taxes and royalties are not direct costs of producing to be included in the direct cost ratio of the proportionate profits method, cites two Wyoming Supreme Court decisions, Hillard v. Big Horn Coal Co., 549 P.2d 293 (Wyo. 1976), and Powder River Coal Co. v. Wyoming State Bd. of Equalization, 2002 WY 5, 38 P.3d 423 (Wyo. 2002). Neither decision supports Chevron’s assertion.
160. Chevron argues the Board in a prior decision with regard to the proportionate profits methodology drew an incorrect assumption of legislative intent based in part on the Hillard decision by the Wyoming Supreme Court. Chevron 2000-50, ¶ 41. Chevron however offers only its alternative thoughts on possible legislative intent without any supporting authority. We are not persuaded on such a slim basis the Board’s prior thoughts were incorrect.
161. Hillard was decided in 1976, some fourteen years prior to the 1990 Wyoming Legislative Session which adopted the oil and gas proportionate profits valuation method at issue. The two coal companies appealing in Hillard asserted it was improper for any portion of production and severance tax from the prior year be attributed to mining costs. The Hillard Court affirmed the decision of the district court on only the issue which was before it, to wit, whether attributing any portion of production and severance tax to mining costs was proper. The Court declined to go beyond the issue presented and decide whether production taxes should in fact be considered indirect costs at all, although it clearly indicated a philosophy such taxes are mining costs, and questioned why the Board at that time would allocate the same:
162. The Wyoming Supreme Court decision in Hillard supports the conclusion that production taxes are direct costs of producing.
163. In Powder River Coal, supra, the Court addressed whether a federal lease bonus payment was to be treated as an exempt federal royalty pursuant the coal valuation statute and, if not, whether it was an indirect cost of mining. The Court held, first, that the lease bonus payment was not a royalty and, second, that it was to be treated as an indirect, rather than direct, cost of mining. Id. at ¶ 23. Only the second holding is relevant to the present appeal.
164. Applying the doctrine of ejusdem generis and its prior decision in Wyodak Res. Dev. Corp. v. State Bd. of Equalization, 9 P.3d 987 (Wyo. 2000), the Court held that lease bonus payments can be attributed to the mining function only by allocation. Id., ¶¶ 19-20.
165. Unlike the situation in Powder River Coal, supra, where there was no statutory reference to federal lease bonus payments, the Legislature has recognized production taxes and royalties as direct costs of producing in both the coal and bentonite valuation statutes. Wyo. Stat. Ann. §§ 39-14-103 and 39-14-403, Conclusions, ¶¶ 81-82. It is therefore not necessary to resort to such concepts as ejusdem generis to resolve an issue of statutory construction. 2A Norman J. Singer, Statutes and Statutory Construction § 47.22 (6th ed., 2000 Revision). The Court’s reasoning in Powder River Coal, supra, is not applicable to the issues in this matter.
166. Severance taxes are levied on the privilege of extracting (or severing) the mineral from the earth. Wyo. Stat. Ann. § 39-14-203(a)(i). Even though the taxable value is calculated at a statutorily defined point where the mining or production process is complete, that physical location only determines which expenses are deductible and those which are not. The point of valuation for oil and gas is the statutorily defined point where the production process ends. Wyo. Stat. Ann. § 39-14-203(b). It does not identify the point at which the tax liability arises. Tax liability actually arises at the time and place when the mineral is extracted from the ground. The Legislature has directed that “[i]n the case of severance taxes, any person extracting crude oil, lease condensate or natural gas…are liable for the payment of severance taxes…” Wyo. Stat. Ann. § 39-14-203(c)(ii). Ad valorem taxes are likewise due upon production, the amount of such liability determined upon sale and applying point of valuation concepts. See Wyo. Stat. Ann. § 39-14-203(c)(i).
167. Production taxes become due and owing at the moment the mineral is physically extracted by Chevron. See Belco Petroleum Corp. v. State Bd. of Equalization, 587 P.2d 204, 210 (Wyo. 1978). Such an incident surely falls within the confines of the catch-all phrase in Rules, Wyoming Department of Revenue Chapter 6 § 4(b). This Board previously concluded: “[t]he privilege of extracting the mineral is taxed on the basis of the value of the extracted mineral by the severance tax. The mineral extracted is taxed based on the value by the ad valorem tax. Both production taxes are imposed on and are directly related to the producing of the mineral.” RME Petroleum Company, Docket No. 2002-52, ¶ 30, November 20, 2003, 2003 WL 22814612 (Wyo. St. Bd. Eq.).
J. Equal and uniform taxation and freedom from special laws
168. Chevron asserts the inclusion of production taxes and royalties as direct costs of producing in the proportionate profits methodology creates an unconstitutional inequity as compared to other similarly situated taxpayers within the same class which, according to Chevron, are all other mineral producers in Wyoming, citing Wyo. Const. art. 1, § 34 and art. 15, § 11.
169. Chevron also asserts the inclusion of production taxes and royalties as direct costs of producing violates the Wyo. Const. art. 3, § 27 prohibition against special laws for assessment and collection of taxes. Neither constitutional argument is persuasive.
170. The plain language of Wyo. Const. art. 15, § 11 requires property be valued at “full value” and the Legislature is given the power to prescribe regulations to determine a “just valuation.” Chevron has alleged, in effect, this provision demands the same formula be used for all mineral valuation, and therefore because royalties and production taxes are excluded for other minerals (coal and bentonite), they should be excluded as well for oil and gas. The Wyoming Supreme Court however has long recognized that even though mineral products are one class of property for constitutional purposes, different valuation methods can and should be applied to different types of minerals. The Wyoming Legislature has in fact enacted different formulae to value coal, oil and gas, bentonite, uranium, trona, and sand and gravel. The equal protection provisions require only that similarly situated taxpayers be treated equally. Conclusions, ¶¶ 87, 89.
171. The uniformity of assessment requirement mandates only that the method of appraisal be consistently applied, recognizing there will be differences in valuation resulting from application of the same appraisal method. Appeal of Monolith Portland Midwest Co., Inc., 574 P.2d at 761. The purposeful inclusion of royalties and production taxes as direct costs in the valuation for oil and gas actually leads to closer uniformity of valuation of various minerals.
172. The Wyoming Constitution article 3, § 27 only requires a statute operate equally on all persons in the same circumstances, that is, in this case, all oil and gas producers. The fact that application of the statute may not affect all similarly situated persons in exactly the same manner is not fatal. Meyer v. Kendig, 641 P.2d at 1240.
173. The overall goal is always the constitutional mandate to achieve full and just valuation of the property to be taxed. Wyo. Const. art. 15, § 11.
174. The inclusion of production taxes and royalties as direct costs of producing in the proportionate profits valuation methodology violates neither article 1, § 34, article 15, § 11, nor article 3, § 27 of the Wyoming Constitution.
175. As we have expressed in previous decisions, the Wyoming Legislature’s action (or possibly more accurately, inaction) supports inclusion of production taxes and royalties as direct costs of producing. 2B Norman J. Singer, Statutes and Statutory Construction § 49:10, pp. 117-118, fn. 6 (6th ed., 2000 Revision). Senate File 69, introduced during the 2002 Legislative Session after the Board’s decision in Amoco 96-216 and the Department February 8, 2002, memo was issued directing production taxes and royalties be included as direct costs of producing, offered in pertinent part an amendment to Wyo. Stat. Ann. § 39-14-203(b)(iv)(D)(II):
176. Chevron asserts the legislative history of Senate File 69 actually supports the conclusion production taxes and royalties should be excluded as direct costs of producing even though the bill failed on a tie vote on third reading. Facts, ¶¶ 51-52. This argument, however, is based at least in part on an inaccurate reading of the bill’s legislative history. Chevron argues the bill which failed on third reading included an amendment which would have codified inclusion of production taxes and royalties as direct costs of producing. A close reading of the legislative history which Chevron attached to its post-hearing brief reveals the referenced amendment actually failed on March 11, 2002. The final bill, which would have required exclusion of production taxes and royalties as direct costs of producing then failed on third reading on a tie voting, at least in part, as expressed by Chevron’s Chris Chambers, because industry lobbyists ceased their efforts when it became known then Governor Geringer was probably going to veto the bill if it passed. Facts, ¶¶ 51-52.
177. The Legislature’s failure to enact Senate File 69 is evidence of the accuracy of the Board interpretation reflected in Amoco 96-216. Conclusions ¶ 68.
178. There have, in addition, been three intervening legislative sessions, 2003, 2004, and 2005, since the 2001 Board decision in Amoco 96-216 and the failure of Senate File 69 in 2002. There has been no further legislative action to exclude production taxes and royalties as direct costs of producing from the direct cost ratio for oil and gas.
IT IS THEREFORE ORDERED the inclusion of royalties and production taxes as direct costs of producing in the direct cost ratio of the proportionate profits method used to determine the value of processed natural gas production from the Whitney Canyon Field in Uinta County, Wyoming, between January 1, 1996, and December 31, 1999 [Production Years 1996, 1997, 1998, and 1999], is affirmed.
Dated this _____ day of March, 2006.