June 18, 2019
According to state justices, the tax commissioner of West Virginia was in violation of state regulations regarding recent limitations placed on gas producers. The limitations capped the amount of property tax deductions gas producers could take in relation to their operating expenses.
What is the Supreme Court decision?
The Supreme Court of Appeals for the state of West Virginia announced on Wednesday that the Tax Department was not allowed to impose the limitation, which barred gas producers from deducting more than $5,000 in operating expenses for conventional gas wells.
In court was Consol Energy, Inc. doing business as CNX Gas Co. LLC, and Antero Resources Corp. The court ruled in these companies’ favors, agreeing that the limitation was unfair to higher-production wells while not equally effecting low-production wells. Therefore, they ruled the limitation as a violation against the “equal and uniform” requirements set forth in the state constitution. They also found it in violation of the equal protection provisions within the U.S. Constitution.
How has the state of West Virginia historically handled it?
Previously, the department issued a notice allowing for an operating expense deduction for conventional gas wells. The notice explained that this deduction would be calculated by estimating operating expenses to be about 30% of gross receipts, but placed an overall cap at the amount of $5,000. The same notice provided a 20% deduction for a different kind of well, called a Marcellus horizontal well, and capped that deduction at $150,000 in 2016. In 2017, that cap was raised to $175,000.
The high court explained that for the purpose of property appraisals, state regulations do not permit any upper limit or cap on operating expense deductions. Rather, they highlighted that the language of state regulations only permits a “simple deduction of the ‘average annual industry operating expenses.'” The court summarized their verdict, saying the following.
The court went on to state that it was “fairly inarguable” that the department’s interpretation and application of the regulations created inequality. They found that some wells would receive the deduction’s full benefit while others were denied it. To this, the department argued that the $5,000 cap represented the average operating expense for a conventional gas well and was the “monetary representation” of the 30% deduction.
The court remarked that this statement was “logically inscrutable” because using a percentage for the deduction means a variable number, so trying to place a static, non-variable limitation on that deduction “does not maintain a pro rata relationship to the gross receipts as the percentage does.”
The high court closed with the statement that there was “as little authority” for using the 30% percentage guideline as there was for imposing the $5,000 cap. They concluded that state regulations called for a lump sum monetary average and remanded to the lower court. No representatives or speakers from the companies involved were available to comment on the issue.