West Virginia Rejects Natural Gas Property Tax Rule

A major roadblock has been hit following the natural gas property tax assessments brought up in the 2022 legislative session in Charleston, West Virginia. On January 9, 2022, the Rule-Making Review Committee of the West Virginia Legislature unanimously decided not to approve a rule submitted last summer by the State Tax Department. Since the rule was not approved, the standing emergency rule previously submitted by the State Tax Department will remain through the 2022 tax year.

Rule-Making Review Committee vice-chairman Del. Geoff Foster was in favor of the delay, stating, “That gives some time to sort out the difference and it gives us time as the Legislature to pass a statute.”

According to the Legislative Auditor’s Office, the State Tax Department rule exceeded the scope of House Bill 2581 passed last year that required the development of a revised methodology from the State Tax Commissioner to value oil and natural gas properties. Additionally, the agency could not retract the legislative rule which would have gone back to the previous rules in place for natural gas property valuation deemed unconstitutional in 2019 by the West Virginia Supreme Court of Appeals.

What is HB 2581?

HB 2581 requires fair valuations for oil, natural gas, and natural gas liquids that produce property based on the fair market value according to a yield capitalization model applied to the gross royalty payments for royalty interest to net proceeds once the royalties and annual operation costs are subtracted from all gross receipts.

The capitalization rate was lowered under the emergency and draft rules, eliminating the use of a three-year weighting, leaving it up to the State Tax Department to use judgment in determining a reasonable standard undefined in the rule itself of the actual revenues and expenses of the producer.

Stephen Stockton, an attorney with the State Tax Department’s Legal Division, attempted to explain why the agency went beyond the intentions of the Legislature when crafting the rule. According to Stockton, 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 beyond what other filers are claiming.

Jonathan Adler, a West Virginia Association of Counties lobbyist, said county governments and school systems in natural gas-producing counties stand to lose millions in property tax revenue under the emergency rule, and county commissioners and assessors have also been left out of the discussions on the rule, with a request for estimates on the potential cost to county governments unreleased.

The original version of HB 2581 could have resulted in a $9.1 million property tax revenue loss to county governments and school systems, affecting eight counties in the Northern Panhandle and North Central West Virginia to the tune of $7 million dollars.