West Virginia Code of State Rules › Agency 110 - Tax › Title 110 - LEGISLATIVE RULE STATE TAX DEPARTMENT › Series 110-01I - Valuation Of Active And Reserve Coal Property For Ad Valorem Property Tax Purposes › Section 110-1I-4 - Valuation Methods

Current through Register Vol. XLI, No. 28, July 12, 2024
4.1.
				Valuation of active mining property.
4.1.1.
				General. -- The value of active mining property is the sum of the value of
				active acres and reserves that are included in the active mining property. In
				no case shall the value per active acre on a coal bed be less than the
				applicable present value per acre on the coal bed. Unmineable, mined-out and
				barren acres will not be valued on active mining property.
4.1.2. Determination of active mining
				property. -- The designation of Active mining property areas shall be
				determined as follows:
4.1.2.a. An operator
				may designate or assign a portion of the properties to an active mining
				property when only that portion is suitable for the particular mining purposes.
				For purposes of determining the actual area of the active mining property, all
				contiguous properties or portions of properties containing the mineable coal
				beds that are under lease, regardless of ownership, that fall within the mining
				portion, shall be included. Properties not leased or owned (adverse), that fall
				within the mining portion of active mining property shall have the requisite
				mineable beds of coal valued as reserves;
4.1.2.b. Any mining operation producing coal
				from one coal bed shall be designated as an active mining property. If the
				mining operation is producing coal from multiple coal beds under a single
				permit, then each coal bed shall be designated as a separate Active mining
				property;
4.1.2.c. Any mining
				operation producing coal from one (1) coal bed at different portals and/or
				high-walls under one (1) specific permit, shall be designated as one (1) Active
				mining property. If the production of coal involves different mining techniques
				(e.g. surface/auger or underground mining method), or if mining sites are
				separate and generally independent, then each site shall be designated as a
				separate Active mining property;
4.1.2.d. If more than one permitted mining
				operation is mining a given coal bed on the same land or mineral property, then
				each mining operation is a separate Active mining property. Under no
				circumstances shall the sum of the active acres for all mining operations on
				each bed exceed the total property acres. As necessary, the Commissioner shall
				apportion the number of acres for each mining operation, based upon a review of
				relevant taxpayer and/or operator information and leases, and the respective
				rates of average annual production;
4.1.2.e. If the permitted mining operation
				has not begun production by the July 1 assessment date, the mineable coal shall
				be reported on the Annual Appraisal Report for Production of Coal and valued as
				reserves. Once a property or portions of a property have been assigned or
				designated to an Active mining property, it shall continue to be listed on an
				Annual Appraisal Report until such time as the permit has been
				retired;
4.1.2.f. If the mine
				ceases production before the July 1st assessment date, and there is mineable
				coal remaining in the coal bed, the remainder shall be valued as reserves for
				the current tax year; and
4.1.2.g.
				The maximum active mining portion for each coal bed shall be fifteen (15) years
				for underground mines and five (5) years for surface mines multiplied by the
				annual acres mined. If the available mineable acreage of the coal bed being
				mined is less than the maximum amounts listed above, then the total available
				acreage shall be considered for designation as the active mining
				portion.
4.1.3.
				Determination of annual production. -- Annual production shall be determined as
				follows:
4.1.3.a. An arithmetic mean shall be
				taken of tonnage as reported by producers and verified by the Commissioner
				through research of West Virginia Office of Miners' Health, Safety, and
				Training records and/or audit-derived information, for the three most recent
				calendar years preceding the July 1 assessment date; and
4.1.3.b. If production has not occurred in
				either the second or third most recent years, the arithmetic mean of the
				available one or two years production shall be used.
4.1.4. Value per active acre. -- In the
				application of the valuation formula to an Active mining property, the
				appropriate calculation shall be based upon the actual market to which the coal
				from the bed is currently being sold, whether it is metallurgical and/or steam.
				The factors to be used for the valuation formula are: the coal thickness in
				feet (Thk), 1800 tons per acre foot (1800), the clean coal recovery rate (RR),
				the Steam Coal royalty rate, underground or surface (SRoy), the Steam Coal
				Market (SCM), a net present value multiplier (M) and the mine life in years
				(ML); and the coal thickness in feet (Thk), 1800 tons per acre foot (1800), the
				clean coal recovery rate (RR) the Metallurgical Coal royalty rate, underground
				or surface (MRoy), the Metallurgical Coal Market (MCM), a net present value
				multiplier (M), and the mine life in years (ML). The formula used to determine
				the value per active acre ($/ac) is found at Appendix A, Formula 3 of this
				rule.
4.1.5. Thickness (ft.) --
				Thickness shall be determined as follows:
4.1.5.a. An arithmetic mean shall be taken of
				thickness as reported by producers and verified by the Commissioner through
				review of audit-derived information, for the three most recent calendar years
				preceding the July 1st assessment date.
4.1.5.b. If production has not occurred in
				either the second or third most recent years, the arithmetic mean of the
				available one or two years thickness shall be used.
4.1.6. Royalty rate. The royalty rates to be
				used in Formula 3 (Appendix A), shall be determined for each of the following
				four (4) different types of coal mining operations.
4.1.6.1. Underground mines, steam
				coal;
4.1.6.2. Underground mines,
				metallurgical coal;
4.1.6.3.
				Surface and/or auger mines, steam coal; and
4.1.6.4. Surface and/or auger mines,
				metallurgical coal.
These royalty rates shall be established annually by the Tax
				  Commissioner after a review of both recorded and unrecorded, willing
				  seller-willing buyer coal property leases that have occurred in the State of
				  West Virginia and appropriate portions of adjacent states during at least the
				  last five (5) years prior to the July 1 assessment date, and through inspection
				  of any other appropriate information. The Tax Commissioner shall maintain a
				  data base on royalty rates and file a preliminary summary of results in the
				  State Register on or before July 1 of each year; shall accept written public
				  comment on the results until August 1 of each year; and shall issue the final
				  royalty rates on or before September 1 of each year. From this survey, the Tax
				  Commissioner shall select the royalty rates that best typify the coal property
				  leases. In order to convert decimal royalty rates into specific dollars per ton
				  rates, the Tax Commissioner shall separately conduct a review of West Virginia
				  coal selling prices, and select specific selling price rates based on prices
				  best typifying activity in each appraisal year. The selected selling prices per
				  ton when multiplied by the decimal royalty shall result in the specific dollar
				  per ton royalty.
4.1.7. Determination of capitalization rate.
				-- For use in determining the net present value multiplier (M) used in Formula
				3, prescribed in this Section 4, a single statewide capitalization rate for
				coal shall be determined annually by the Tax Commissioner through the use of
				generally accepted methods of determining those rates. The rate shall be based
				on the assumption of a level, non-inflating income series. The capitalization
				rate used to value coal shall be developed considering (1) a discount rate
				determined by the summation technique, (2) a recapture component, and (3) a
				property tax rate.
The Commissioner shall conduct a study to develop components
				  for determining the capitalization rate annually and the preliminary results
				  shall be filed in the State Register on or before July 1st of each year. Public
				  comment on the study shall be accepted until August 1st of each year, and final
				  results to be used shall be issued on or before September 1st of each year and
				  filed in the State Register.
4.1.7.1.
				Determination of discount component. -- The summation technique shall be used
				in developing a discount component of the capitalization rate. The Commissioner
				shall determine the sum of the safe rate, the nonliquidity rate, the risk rate,
				and the management rate, and subtract the inflation rate from the sum. The five
				subcomponents of the discount component are as follows:
4.1.7.1.a. Safe Rate. -- The safe rate shall
				reflect a rate of return that an investor could expect on an investment of
				minimal risk. It shall be developed by averaging interest rates offered on
				thirteen-week United States Constant Maturity Treasury Yields for a period of
				three (3) calendar years prior to the appraisal date.
4.1.7.1.b. Nonliquidity rate. -- The
				nonliquidity rate shall be developed through an annual study to determine a
				reasonable estimate of time that coal property, when exposed to the market for
				sale, remains on the market until being sold. The time thus determined shall be
				used to identify United States Constant Maturity Treasury Yields with similar
				time differentials in excess of thirteen-week Constant Maturity Treasury
				Yields. The interest differential between these securities shall be used to
				represent the nonliquidity rate. For example, if it is determined that a coal
				property remains on the market for an average of nine months (39 weeks) before
				being sold, the nonliquidity rate shall be derived by taking the rate on one
				year Constant Maturity Treasury Yields minus the rate on thirteen-week Constant
				Maturity Treasury Yields.
4.1.7.1.c. Risk rate. -- The relative degree
				of risk of an investment in coal property is difficult to determine from
				published interest rates. Interest rates required on loans for acquisition
				and/or development of coal properties shall be calculated by adding two percent
				(2%) to the Prime Rate Charged By Banks as published in the Economic Indicators
				Prepared By The Council Of Economic Advisors For The Joint Economic Committee
				for each of the three calendar years prior to the July 1 assessment date. The
				three-year average shall be compared to interest rates offered on thirteen-week
				United States Constant Maturity Treasury Yields for the same three-year period.
				The difference between the two combined with bands of investment analysis shall
				be used as a basis to estimate the risk rate.
4.1.7.1.d. Management rate. -- The management
				rate represents the cost of managing the investment, not the cost of managing
				the coal property. Because the management rate has historically been one-half
				of one percent (0.5%) of the value of investment portfolios, for purposes of
				determining the discount component the management rate shall be one-half of one
				percent (0.5%).
4.1.7.1.e.
				Inflation rate (negative). -- Nominal interest rates, including the "safe rate"
				mentioned above, are higher than real rates by an amount representing
				expectation of future inflation. However, net annual income from coal property
				is to be estimated assuming level future royalties (no inflation). Therefore,
				the capitalization rate must be a real rate, net of expectation of inflation.
				The inflation rate will be estimated through analysis of the most recent three
				calendar years of an appropriate United States Department of Labor, Bureau of
				Labor Statistics price index, as determined by the Tax Commissioner. Beginning
				in Tax Year 2003, the inflation rate shall be estimated through analysis of the
				most recent three calendar years of an appropriate United States Department of
				Labor, Bureau of Labor Statistics price index, as determined by the Tax
				Commissioner.
4.1.7.2.
				Recapture component. -- Selection of a multiplier will be accomplished through
				access of a standard mid-year Life Inwood table. The Inwood table has a
				recapture built into the table coefficients. Inclusion of a recapture component
				in the capitalization rate is therefore not appropriate.
4.1.7.3. Determination of property tax
				component. -- This component shall be derived by multiplying the assessment
				rate by the statewide average of tax rates on Class III property. At the
				present time, research indicates that royalty rates do not include property
				taxes as a component; rather, property taxes are paid by the producer as
				additional compensation. Thus, this component shall not be used in the
				capitalization rate as defined in this rule unless the general practice of the
				coal industry changes.
4.1.8. Determination of value of active
				mining portion. -- The valuation of the active mining portion (VAMP) shall be
				determined by multiplying the annual acres mined (AAM), by the mine life (ML),
				by the valuation rate of the active acre ($/ac). The formula used to determine
				the value of the active mining portion is found at Appendix A, Formula 4 of
				this rule.