CHARLESTON — A new rule from the State Tax Department determining how to assess taxes on natural gas-producing property is making no one happy, including lawmakers who could either change or scrap the rule next month or start over from scratch in the next legislative session.
The West Virginia Legislature’s Rule-Making Review Committee will be considering making an emergency rule prepared by the State Tax Department regarding assessments of natural-gas producing property permanent when it meets for two days starting Dec. 8.
The State Tax Department submitted an emergency rule in June for how it planned to carry out House Bill 2581, requiring the State Tax Commissioner to develop a revised methodology to value oil and natural gas properties.
HB 2581 requires fair valuations for natural gas, oil, and natural gas liquids-producing property based on the fair market value based on a yield capitalization model applied to gross royalty payments for royalty interest to net proceeds once royalties and annual operating costs are subtracted from gross receipts.
However, the emergency rule and the draft rule developed by the State Tax Department lowers the capitalization rate, eliminates the use of a three-year weighting, leaves it up to the State Tax Department to use its own reasonable standard which is undefined in the rule itself instead of just the actual revenues and expenses of the producer. This sounded alarm bells from the Gas and Oil Association of West Virginia.
“The overall town of the rule seems to contradict the plan language of 2581 and place the property tax valuation, not on the taxpayer’s actual income and actual expenses as reported on its tax returns, but at the sole discretion of the Tax Commissioner,” wrote Marc Monteleone and Elizabeth Burg, co-chairs of GO-WV’s tax committee in a letter to the State Tax Department dated July 6.
“The rule fails to recognize the differences and complexities common in the industry and appears to be taking a ‘one size fits all’ approach to property tax evaluation.,” Monteleone and Burg continued. “This is simply not representative of the industry, nor will it calculate the true and actual valuation of property producing oil, natural gas, natural gas liquids, or any combination thereof for each taxpayer.”
“Inclusion of the word ‘reasonable’ in the rule simply makes explicit that which an unbiased reader would ordinarily consider implicit in the language of HB 2581, inasmuch as the Legislature should not be considered to have sanctioned the use of unreasonable costs and expenses when calculating net proceeds,” the State Tax Department wrote in a response to the public comments of Monteleone, Burg, and others.
Delegate Diana Graves, R-Kanawha, was the point person last year on HB 2581. An oil and natural gas auditor for accounting firm Arnett Carbis Toothman, Graves led stakeholder meetings with the State Tax Department, representatives of the oil and natural gas industry, and others to craft HB 2581.
Graves, a member of the Legislative Rule-Making Review Committee, said she is working with stakeholders to make changes to the rule before it comes before lawmakers during the 2022 legislative session in January.
“I think the only people or entity that is pleased with what the Tax Department has done is the administration,” Graves said in a phone interview. “The industry is not pleased. I’m certainly not pleased. They took what was a pretty clear direction with a legislative intent. There’s some people even going so far as to say that the Tax Department exceeded the scope…I’ve been trying to figure out exactly what course we should take to correct.”
The previous methodology used for determining the value of natural gas-producing property was thrown out by the West Virginia Supreme Court of Appeals in 2019 in Steager v. Consol Energy Inc, requiring lawmakers to pass HB 2581.
The version of HB 2581 passed by the House of Delegates created a formula to value oil and natural gas property by using a weighted average price from regional markets, less the actual expenses as reported by the taxpayer. The bill was amended by the state Senate who stripped out that formula and left it up to the State Tax Department to develop a formulation that the Legislature could approve through its rule-making review authority.
“We’ve tried giving leeway to the Tax Department many times to correct this issue, and somehow they always manage to twist it into something that continues to produce…unconstitutional revenue,” Graves said.
Graves, who led a subcommittee of the House Finance Committee, said she had worked on an agreement between then-State Tax Commissioner Dale Steager and natural gas industry officials for HB 2581.
“Industry was present. The Tax Commissioner and his staff were present. There was an agreement – literally a handshake agreement – and we said, yes, all sides agreed to what the bill was going to be. And then in the Senate it was gutted, and we came up with that last-minute compromise.”
State Sen. Ryan Weld, R-Brooke, sees things slightly differently. While Weld agrees that the rule of the State Tax Department is flawed, he said Graves didn’t include county assessors or other county officials in those negotiations for HB 2581. The bill was amended by the Senate to give lawmakers input before the final rule is put into place.
“In the 2021 session, there were concerns that the bill that had been crafted didn’t seek the input of county officials or legislators who represent producing areas of the state,” Weld said. “So, we in the Senate, we tried to take all that into account.”
The version of the bill passed by the House would have resulted in a $9.1 million property tax revenue loss to county governments and county school systems. Eight counties in the Northern Panhandle and North Central West Virginia would have taken a $7 million hit under the previous plan.
Weld said it’s too soon to tell what the Legislature might need to do to correct the situation in the next session. Weld is also a member of the Legislative Rule-Making Review Committee, so he expects the rule to be changed or scrapped.
“It doesn’t seem as if anybody is happy with it,” Weld said. “Sometimes with legislation, when you have a bill that no one is extremely happy with, that means you may have crafted a good compromise between different parties, but in this case that is certainly not what is happening. This is a rule that no one is happy with because it’s not good policy.”
“We’ve got our work cut out for us because what the Senate didn’t do is we didn’t authorize (the State Tax Department) to go beyond the scope of what we drafted,” Weld continued. “But also, we didn’t authorize them to create a system that was unfair to the parties involved. I’m not saying that that is exactly what they’ve done, but that’s what we’re hearing. And that’s what we’re going to have to review in our rules committee meeting in December.”
HB 2581, as amended in the Senate, passed unanimously. But nearly every member of the House of Delegates from a natural gas-producing county voted against the bill. That includes the first time the bill came up and after the Senate amended the bill.
Delegate Lisa Zukoff, D-Marshall, was a vocal opponent of the bill. She asked hard questions of the State Tax Department at legislative interim meetings and attended public hearings in the Northern Panhandle. She said the Tax Department rule is too complicated, with assessors, tax preparers, and smaller producers struggling to understand it.
“I think even the Tax Department couldn’t explain it well enough for people to truly understand,” Zukoff said. “I was at the meeting, and I don’t think they understood the questions.”
Zukoff is concerned about what the effect of the rule will have on property tax revenue for county school systems and county commission budgets. She has asked repeatedly for an estimate, as has the county assessor. No estimates have been submitted.
“I asked for that specifically,” Zukoff said. “One of my concerns initially was what the hit on our county revenues would be. And remember those county revenues pay for things, like our school system and first responders – all the basic services that are provided through the county level are impacted by those taxes.”
Whatever happens in December with the Rule-Making Review Committee or the 2022 legislative session. Zukoff said county assessors need to be included in stakeholders’ meetings. The Assessors Association of West Virginia has repeatedly said they have had no input in either the discussion of HB 2581 earlier this year or the State Tax Department rule.
The only people that were involved with the bill itself and what was being proposed from the tax perspective was the industry,” Zukoff said. “Why weren’t the assessors? Why weren’t the counties involved?”
“If you really want people at the table, you make an effort to reach out to them, let them know what’s going on, that this legislation is going to be forthcoming, and that you’d like their input in the process,” Zukoff continued. “That didn’t happen. It still hasn’t happened from the Tax Department’s perspective, and I’ve asked for that twice to happen.”
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