Photo by Steven Allen Adams The West Virginia Legislature’s Rule-Making Review Committee decided against approving a new rule for natural gas property tax assessments, punting the issue to the full Legislature
CHARLESTON — Lawmakers will have to start from scratch in developing a process for natural gas property tax assessments during the 2022 legislative session.
The West Virginia Legislature’s Rule-Making Review Committee moved Sunday to not approve a legislative rule submitted by the State Tax Department over the summer regarding assessments of natural-gas producing property. The motion was approved by a unanimous voice vote.
By not approving the agency-submitted rule, the emergency rule submitted by the State Tax Department remains in place for tax year 2022. Any new rule would have had to been developed and approved by Saturday, Jan. 15 — an impossibility due to tight timeframe.
“It will still remain active as an emergency rule until the final action of the Legislature,” said Del. Geoff Foster, R-Putnam, the vice chairman of the Rule-Making Review Committee. “That gives some time to sort out the difference and it gives us time as the Legislature to pass a statute.”
Foster said the Legislative Auditor’s Office determined the State Tax Department rule exceeded the scope of House Bill 2581 – passed last year – requiring the State Tax Commissioner to develop a revised methodology to value oil and natural gas properties.
Foster said the agency also couldn’t pull the legislative rule, which would have reverted to the previous rules for natural gas property valuation, which were ruled unconstitutional by the West Virginia Supreme Court of Appeals in 2019.
“If they were to withdraw the rule, then they would have to revert to whatever the previous rule was,” Foster said. “From my understanding with the Tax Commissioner, that’s not possible.”
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 and 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.
Del. Brandon Steele, R-Raleigh, questioned Stephen Stockton, an attorney with the State Tax Department’s Legal Division, about why the agency went beyond the intentions of the Legislature when crafting the rule.
“I don’t think it could have gotten any clearer,” Steele said. “You’re telling me that the Tax Commission doesn’t feel that the Legislature got it quite right, so you’re going to fix it for us?”
“No sir, we’re just trying to implement what the Legislature told us to do,” Stockton replied.
“You think the ‘reasonableness’ is implied,” Steel asked.
“Yes. We’re just making it explicit in this rule,” Stockton answered.
Stockton explained that a reasonableness standard allows the department to set parameters to gauge whether a tax filer is making claims on the value of their natural gas property outside what other filers are claiming.
“This is a way to not audit as many people,” said Del. Barbara Fleischauer, D-Monongalia. “If something that comes up out of the norm, you can use your limited staff to conduct audits.”
“I think that is one aspect of it,” Stockton said. “When we set up norms and someone falls outside of them, they will know they will get audited and they’ll be required to provide further information. If they want to avoid that, they’re going to need to come within a certain set of guidelines that would be considered reasonable.”
Phil Reale, a lobbyist with the Gas and Oil Association of West Virginia (GO-WV), said larger natural gas companies are already required to produce accurate revenue numbers and expenses to shareholders and the Securities and Exchange Commission. The emergency rule allows state tax officials to base assessments on reasonableness if a company’s tax filing paperwork is incomplete, such as missing or incomplete information.
“These companies cannot afford to take the risk of doing an intention misstatement of their actual revenues and actual expenses,” Reale said. “To do so would put them out of business and in trouble much more significantly than what it’s going to be if they missed an address or a whatever on a form that causes them to be put in a pile where reasonableness would be determined by someone else.”
Jonathan Adler, a lobbyist with the West Virginia Association of Counties, said county governments and school systems in natural gas-producing counties stand to lose millions of dollars in property tax revenue under the State Tax Department emergency rule.
“We’re frustrated that we’ve never been a part of the process,” Adler said. “There is a lot of concern and confusion…there needs to be clarity as well. There needs to be clarity for use. There needs to be clarity for industry.”
Adler said county commissioners and assessors have been left out of the discussions on the rule, and a request for estimates on the potential cost to county governments has never been released. The original version of HB 2581 would have resulted in a $9.1 million property tax revenue loss to county governments and county school systems, with $7 million of that cost hitting eight counties in the Northern Panhandle and North Central West Virginia.
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January 11, 2022 at 12:14PM
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