Opinion ID: 1734842
Heading Depth: 1
Heading Rank: 7

Heading: whether the assessment was arbitrary and capricious because it was inconsistent with the commision's prior advisories on the issue and, as well, with the commission's treatment of similar gas.

Text: ¶ 25. This Court has stated: The terms arbitrary and capricious are open-textured and not susceptible of precise definition or mechanical application. Arbitrary means fixed or done capriciously or at pleasure. An act is arbitrary when it is done without adequately determining principle; not done according to reason or judgment, but depending upon the will alone,absolute in power, tyrannical, despotic, non-rational, implying either a lack of understanding of or a disregard for the fundamental nature of things. Capricious means freakish, fickle, or arbitrary. An act is capricious when it is done without reason, in a whimsical manner, implying either a lack of understanding of or a disregard for the surrounding facts and settled controlling principles. Mississippi State Dep't of Health v. Southwest Miss. Reg'l Med. Ctr., 580 So.2d 1238, 1240 (Miss.1991) (quoting In re Housing Authority of City of Salisbury, 235 N.C. 463, 468, 70 S.E.2d 500, 503 (1952)). ¶ 26. OXY contends that the actions of the Commission in reaching its interpretation of the production exemption and assessing taxes were arbitrary and capricious. It bases its contention on a series of letters between OXY and the Commission; disparate treatment between OXY gas that was produced and re-injected and gas OXY purchased which was also reinjected; and the fact that Southern Natural Gas Company has consistently produced for a second time gas from its Muldon Gas Storage Field yet has never been assessed a severance tax. ¶ 27. The three letters read in pertinent part: May 1, 1987 ... Because all gas produced from a qualified well is exempt from severance tax, the need to distinguish between nonexempt and exempt production does not exist. (Letter to OXY from State Tax Commission). July 2, 1990 ... Section 27-25-703(3) allowed an exemption from severance tax on all production for two years from gas wells during the same spud period [March 15, 1987 through June 30, 1990]. The two year exemption begins from the date of first sale. (Letter to OXY from State Tax Commission). May 11, 1993 ... Mississippi State Oil and Gas Board told OXY to report the gas from the subject leases [purchased gas] as injection and not to pay taxes (severance and maintenance) until the gas is returned and sold at the Thanksgiving Field Unit, (unless the gas when returned is exempt because of STEP, etc.) Per our conversations May 6, 1993, each of you has confirmed that the gas produced from the subject wells was not subject to taxes as long as the gas was being injected into a reservoir and not sold.... You both state also that taxes will need to be paid when the gas is reproduced and sold from the Thanksgiving Oil Field Unit (Tuscaloosa Sand) (unless exempt because of STEP). [OXY contends that STEP is an internal reference to the Severance Tax Exemption Program under § 27-25-703(3). See Appellant's Brief at 28 n. 10.] (Letter to Mississippi Oil and Gas Board and State Tax Division from OXY). ¶ 28. OXY argues that these letters constitute an admission by the Commission that OXY's produced gas which was reinjected that all gaswas exempt under § 27-25-703(3). OXY contends that these advisory letters are in direct conflict with the Commission's later decision and rationale to assess severance taxes. The Commission asserts that the letters reveal a consistent position, explaining that referring to all gas as being exempt was accurate because between the two-year production exemption of § 27-25-703(3) and the long-standing use exemption of § 27-25-703(2) all gas was exempt during the two year window. ¶ 29. OXY also points out that the Commission initially espoused a sale or use oriented argument before finally relying upon the produced for a second time argument. This, however, merely examples a change in statutory interpretation from the Board of Review to the Commission's final interpretation and decision, which was affirmed by the Chancellor. ¶ 30. OXY also challenges the treatment of gas produced by OXY which was then refined into pipeline quality and re-injected into Thanksgiving Field compared to the pipeline quality gas which was purchased by OXY and then re-injected. The OXY gas was assessed severance taxes under the secondary production rationale while the purchased gas was assessed no taxes. The Commission asserts that the purchased gas was sold to OXY thus the tax accrued to the producer [2] and not OXY. This is the proper application for gas sold to another for the purpose of re-pressurization according to § 27-25-703(3). ¶ 31. There is, however, the question of secondary production. The purchased gas accrued tax liability only once yet was produced a second time. According to the Commission, the severance tax is only assessed once even though gas may be twice produced. This practice contradicts the secondary production interpretation. ¶ 32. According to practice, gas produced during the exemption period accrues tax liability which is then exempt under the production exemption. That same gas can then be sold, re-injected, retrieved (second production) and sold again without tax accruing or being assessed. Such practice is a logical contradiction of the second production rule affirmed by the Chancellor. ¶ 33. With OXY, however, there was a different scenario. OXY produced gas during the exemption period which was later found to be exempt under the production exemption statute by the Chancellor. The gas was then refined, re-injected, retrieved and sold. The only difference between OXY's gas and the purchased gas was that severance taxes were assessed against OXY. Both gases accrued tax liability upon production. Both were afforded tax exemption under the production exemption at this time. Both were produced a second time. Both were then sold, but only the OXY gas was taxed. The disparity cannot be reconciled. ¶ 34. OXY offers further evidence of disparate treatment of similar gas by pointing out the tax treatment of gas from the Southern Natural Gas Company's Muldon Gas Storage Field. Since 1971 produced gas refined into pipeline quality has been pumped into Muldon Field and then later withdrawn a second time and sold. At no time has this second produced gas been assessed taxes. Under the secondary production argument such gas would be taxed. ¶ 35. Based upon past acts and arguments, as well as present rationales, the Commission apparently views the Production Exemption as applying only to gas produced for sale or sold during the exemption period. [3] Such application is in fact contrary to the Commission's own final argument which was affirmed by the Chancellor. The tax assessment by the Commission is arbitrary and capricious as applied to OXY.