Opinion ID: 723905
Heading Depth: 2
Heading Rank: 2

Heading: The Colorado and Wyoming Taxes2

Text: 35 The MPSC, while agreeing with the Commission's interpretation of § 110, urges that the FERC incorrectly applied its own criteria when it allowed recovery of the Colorado and Wyoming taxes. In the Williams Order, the Commission stated that the Wyoming ad valorem tax qualifies for recovery ... in that it is assessed on the volume or the value of the gas which is produced rather than upon the value of gas reserves or lease-hold property. Hence, the tax varies directly, and exclusively, with actual production. 69 FERC at 62,408. The Commission adopted the same rationale in deciding that the Colorado tax could be recovered under § 110. Id. at 62,410. The MPSC asserts that this rationale conflates a production-based tax with a property tax. 36 According to the MPSC, the Wyoming and Colorado taxes are based upon proceeds, not upon production. Taxing authorities administer a proceeds tax as they do a property tax: the underlying property is placed on both state and local tax rolls and aggregated with other property to determine the appropriate state and local ad valorem tax rates. A production tax, by contrast, is a state-wide levy subject to a single state-wide rate, administered by and for the benefit of the state and not of the locality. The MPSC contends that the Wyoming and Colorado taxes differ from a typical property tax only in that they [320 U.S.App.D.C. 26] grant a preference to natural gas property over other types of property. In Wyoming, the preference arises by taxing gas property only once, which is to say when the gas is extracted. In Colorado, gas reserves are taxed annually but their value is assumed to equal a specified percentage of the value of the prior year's production. Otherwise, according to the MPSC, the Wyoming, Colorado, and Kansas taxes are similar and ought to be treated similarly under § 110; the Wyoming and Colorado legislatures may be free to favor gas producers over other property owners, but the Congress did not intend to favor gas producers in states with a tax based upon proceeds over gas producers in states that impose upon them a traditional property tax. 37 The Commission responds, first, that the Wyoming ad valorem tax meets the criteria set forth in the Colorado Interstate Remand Order and applied in the Williams Order, 69 FERC at 62,408. The tax is assessed upon the volume of gas removed from the well, Wyo. Stats. § 39-2-208; payable one time only ... as a result of production, Union Pac. Resources Co. v. State, 839 P.2d 356, 372 (Wyo.1992); and based upon the full value of the gas when produced, id. at 372 n. 7. Second, that the tax may benefit local taxing units is not pertinent; a tax imposed by any political subdivision of a State is recoverable under § 110. 15 U.S.C. § 3320(c)(2). Third, as this court has recognized, a tax nominally on property may be functionally identical to a production tax, Colorado Interstate, 850 F.2d at 772. Fourth, a tax need not be labeled a severance tax in order to be recoverable within the meaning of § 110; the term severance tax is to be construed broadly, and may include an ad valorem tax, H.R. CONF. REP. NO. 95-1752 at 91, U.S.Code Cong. & Admin.News 1978 at 8861, as well as any similar tax, fee, or other levy imposed on the production of natural gas, 15 U.S.C. 3320(c). 38 Finally, the Commission argues that administrative differences between a tax based upon production and an ad valorem tax are irrelevant to the question whether the tax may be recovered under § 110. Indeed, Wyoming has a separate severance tax, which no one here doubts is recoverable within the meaning of § 110. In distinguishing that tax from the state's ad valorem tax based upon proceeds, the Wyoming Supreme Court observed: [T]he severance tax is an excise tax upon the current and continuing privilege of extracting minerals.... An ad valorem tax is a property tax which taxes the value of the minerals produced. Wyoming State Tax Comm'n v. BHP Petroleum Co., Inc., 856 P.2d 428, 434 (1993). This characterization of the Wyoming ad valorem tax supports the Commission's conclusion that it is based upon production. 39 Colorado, too, imposes a severance tax in addition to an ad valorem tax. The Indicated Producers point out, however, that 87.5% of the ad valorem tax may be taken as a credit against the severance tax. This, say the Indicated Producers, proves that the two taxes are directed at the same activity and intended to accomplish the same purpose, i.e., to tax production as it occurs. Moreover, as the Tenth Circuit noted--albeit in the course of determining whether the Colorado tax is a real estate or a personal property tax, not whether it is sufficiently similar to either a severance or other production-related tax to be recovered under § 110--[p]ast production is used in the Colorado ad valorem tax system only as a gauge for the valuation of the mineral interest. Use of this admittedly imperfect gauge does not rule out the conclusion that the mineral interest itself is being taxed. Federal Land Bank of Wichita v. Board of County Comm'rs, 788 F.2d 1440, 1442 (1986). 40 The Commission nonetheless argues persuasively that the Colorado ad valorem tax varies directly with production and is assessed only against gas that is severed from the ground. Williams Order, 69 FERC at 62,410. The irreducible fact is that the tax is computed as a set percentage of the market value of the gas removed from a well during the tax year. Colo.Rev.Stat. §§ 39-7-101 and 39-7-102. As we stated in Colorado Interstate: When computing the value of property, [i]f a state sought to capitalize the annual production (or revenue) enjoyed by each producer by multiplying it by a single fixed figure, the [property] tax [320 U.S.App.D.C. 27] would plainly be similar enough to a production tax to qualify under § 110. 850 F.2d at 772. That is precisely how the Colorado tax is computed. 41 In sum, the clear weight of the arguments supports the Commission's determination. Both the Colorado and Wyoming ad valorem taxes are based upon production and as such may be recovered under § 110 of the NGPA.