Cost Containment Advisors

1-203-531-0770 15 East Putnam Avenue
Greenwich, CT 06830

September 2016 Newsletter

September 1, 2016 | Newsletter
VIRGINIA – Supreme Court holds City of Richmond could not impose tax on natural gas consumed solely for purpose of generating electricity.

Virginia Electric and Power Company operates a gas-fired electric generation station located in the City of Richmond. The City sent Virginia Electric and Power tax assessments for natural gas consumed at the station between 2001 and 2008, ostensibly under Virginia Code § 58.1–3814(H). Virginia Electric and Power filed timely applications for correction for each assessment, which the City denied in final local determination letters. Virginia Electric and Power appealed the denials to the Virginia Department of Taxation, asserting among other things that it was not subject to the tax under the terms of Virginia Code §§ 58.1–2600(A) and 58.1–3814(H). The Tax Commissioner affirmed the City’s ruling that Virginia Electric and Power was subject to the tax, and the City then issued a new assessment of $7,292,957.26, which included the earlier assessments, late fees, and tax through the year 2013.

Virginia Electric and Power appealed to the Circuit Court, asserting that it was not subject to the tax and arguing that it consumes natural gas at the generation station to generate electricity, not to furnish heat or light. Accordingly, it contended, its consumption was outside the scope of Virginia Code § 58.1–3814(H).

The Circuit Court held that Virginia Electric and Power was not subject to the tax. In order to meet the definition of a pipeline distribution company, a company must transmit gas through a pipeline “for purposes of furnishing heat or light.” The General Assembly’s use of the phrase “for purposes of furnishing heat or light” makes clear that the purpose for consuming the gas is the focus of the statute. Virginia Electric and Power could not be liable for the tax, the court concluded, because it consumed gas for the purpose of generating electricity. Any heat or light created when it consumed gas at the generation station was merely incidental.

The Supreme Court affirmed, rejecting the City’s argument that the term “heat or light” is not ambiguous, so it must be given its plain meaning, and that Virginia Electric and Power’s use falls within the plain meaning of Code § 58.1–3814(H) because the evidence established that it combusts natural gas, thereby creating heat, to power electricity-generating turbines. The Supreme Court found support for the Circuit Court’s ruling from the use of the phrase “heat, light and power” in the provision of Code § 58.1–2600(A) that defines the term “commission.” The Court reasoned that the phrase “heat, light and power” in the definition of “commission” must enumerate three separate items and the word “power” must have some meaning independent of what is conveyed by the words “heat” and “light.” Otherwise, the word “power” would be rendered meaningless. Consequently, the omission of the word “power” from the statutory definition of “pipeline distribution companies” must have significance, and reflects legislative intent that the term “pipeline distribution companies” excludes companies transmitting gas consumed solely to produce electricity.

City of Richmond v. Virginia Electric and Power Company, —S.E.2d— (Va., June 30, 2016) 2016 WL 3610425

SOUTH CAROLINA – U.S. District Court rejects railroad’s claim that South Carolina Valuation Act, which limits increases in appraised values of certain industrial properties but not railroads and utility providers, violates the Railroad Revitalization and Regulatory Reform Act of 1976.

CSX Transportation, Inc. is an interstate common carrier railroad operating in 23 states, including South Carolina. CSX brought a declaratory judgment action against the South Carolina Department of Revenue, claiming that the South Carolina Valuation Act, which limits increases in appraised values of certain commercial and industrial properties but not railroads and utility providers, violates the Railroad Revitalization and Regulatory Reform Act of 1976.

In South Carolina, all property that is subject to taxation is valued at its fair market value. There are a variety of methods for calculating fair market value, but in the case of railroad property, S.C. Code Ann. § 12-4-540 requires that the Department of Revenue employ the unit valuation concept to calculate fair market value.

South Carolina applies a statutory assessment ratio so as to tax property at a percentage of its fair market value, and the ratios differ for various types of property. The statutory assessment ratio for railroad property is 9.5% see S.C. Code Ann. § 12-43-220(g). An equalization factor is then applied, which is a reduction afforded only to transportation companies for hire, such as CSX, to account for disparities between the fair market valuation of railroads and other properties. See S.C. Code Ann. § 12-43-220(g). South Carolina applies an equalization factor of 20% to arrive at a final property tax assessment. A percentage of the final property tax assessment is then apportioned to individual counties in South Carolina, based on where a company’s property is located. CSX has property in thirty-nine of the state’s forty-six counties. Each county applies a local tax rate to CSX’s tax assessment, and then each county individually bills CSX.

In 2006, the South Carolina Valuation Act was adopted, codified at S.C. Code §§ 12-37-3110 to 12-37-3170. The Act generally limits the permissible increases in appraised values of commercial and industrial real properties to no more than 15% within a five-year period for property tax purposes, but does not apply to “[r]eal property valued by the unit valuation concept.” Railroad companies, along with utility providers such as water, sewer, and power companies, are valued under the unit valuation concept, and thus the valuation of their real property is not afforded the 15% cap. CSX challenged the South Carolina Valuation Act on the basis that it violates the Railroad Revitalization and Regulatory Reform Act of 1976, now codified at 49 U.S.C. § 11501, which bars discriminatory taxation against railroads. Specifically, CSX argued that the South Carolina Valuation Act “imposes another tax that discriminates,” citing 49 U.S.C. § 11501(b)(4).

The District Court rejected CSX’s claim. To bring a successful challenge under Subsection (b)(4), the plain language of the statute and the weight of authority suggest that there must first be a tax imposed. The District Court observed that the South Carolina Valuation Act does not impose a tax within the meaning of Subsection (b)(4). Instead, the Act introduces one particular element, a cap on increases in appraised values, to an already-existing tax scheme. The Act simply offers a benefit to properties valued under a certain methodology but does not extend that benefit to properties valued under the unit valuation methodology. South Carolina values railroad properties under the unit valuation concept, and thus, the benefits afforded to properties under the Valuation Act do not apply to railroad properties.

CSX also argued that its real property should be separated from its personal property, lifted from the unit valuation methodology, and afforded the 15% cap. However, the District Court did not reach the merits of what it termed this “piecemeal approach,” because § 11501 offers no authority for CSX to attempt to extract benefits from one tax scheme while holding on to benefits, i.e., the equalization factor, from an entirely different tax scheme.

CSX Transportation, Inc. v. South Carolina Department of Revenue, (D. S.C., Columbia Div., June 6, 2016) 2016 WL 3162178

NORTH DAKOTA – County auditor may not use omitted property statutes to revalue oil and liquid petroleum gas terminals following reduction in prior year due to failure to notify taxpayer of Board of Equalization meeting.

Plains Marketing, LP and an affiliate own three parcels of land in Mountrail County. The Van Hook Crude Terminal is located on one of the parcels and the Manitou LPG Rail Terminal is located on the other two parcels. The terminals are loading facilities used to transfer oil and liquid petroleum gas resources into rail cars. Each parcel was substantially improved between the 2012 and 2013 assessments, and the County revalued the improvements for the 2013 tax year and issued notices of increase in the real estate assessment for each parcel in May 2013. The 2013 assessments increased the assessed valuation for each parcel by $3,000 or more and ten percent or more from the 2012 assessed valuation, and so the County was required to notify Plains Marketing of a local Board of Equalization meeting before issuing the May 2013 notices of increases, which it failed to do. Plains Marketing appealed the increased valuations to the Mountrail County Board, but the County Board denied its appeal and adopted the assessed valuations in the assessor’s notices of increases. Plains Marketing then appealed to the State Board of Equalization, claiming the assessments included exempt personal property and that it did not receive timely notice of the increases in the assessments as required under N.D.C.C. § 57–12–09. The State Board ordered a reduction of the 2013 valuations of the three parcels to the 2012 true and full values of the improvements.

In January 2014, the Mountrail County Auditor issued assessment notices for the three parcels for property escaping assessment for the 2013 tax year, increasing the assessed valuation for each of the three parcels by the same amount the State Board of Equalization had reduced the assessed valuation for each parcel the prior year. Plains Marketing objected and appealed to the Mountrail County Board, claiming the omitted property statutes were misapplied. The County Board approved the omitted property assessments, which resulted in increasing the valuation for each parcel by the same amount the State Board had reduced the 2013 assessments for each parcel. Plains Marketing paid $260,752.17 in additional taxes for the omitted property assessments under protest and applied for an abatement, claiming that the Auditor was not authorized to use the omitted property statutes for the 2013 assessments, and that the assessments included personal property. The County Board denied the application and held the omitted property tax assessments were a valid exercise of the Auditor’s duty. The County Board’s written decision explained that the State Board of Equalization’s decision to reduce the true and full value of all parcels to the 2012 valuations was “due to the failure of the County to timely send out the statutory notices, and not due to other considerations.”

Plains Marketing appealed and the district court affirmed the County Board’s decision. Plains Marketing then appealed to the Supreme Court, arguing that the County Board incorrectly applied the statutory provisions in N.D.C.C. Ch. 57–14 for correcting omitted property assessments because no property was omitted from the 2013 assessments. Plains Marketing claimed the omitted property statutes were not applicable because the State Board of Equalization reduced the assessed valuations of the three parcels for the 2013 assessment and did not remove taxable property from the assessments. They assert the County Board’s decision revalued the parcels in violation of state law and circumvented the State Board of Equalization’s authority.
The North Dakota Supreme Court reversed, explaining that it has consistently held that a county auditor may not use the omitted property statutes to reassess and revalue property that has been listed and assessed.

Under N.D.C.C. § 57–02–53, when any assessor has increased the true and full valuation of any lot or tract of land and improvements by $3,000 or more and ten percent or more from the previous year’s assessment, the assessor must deliver a notice of the increase to the property owner at least fifteen days before the meeting of a local board of equalization. The notice requirement is jurisdictional and any increase exceeding the specified percentage is invalid. Mountrail County conceded it failed to timely notify Plains Marketing of the local Board of Equalization meeting before increasing the 2013 assessments. The property owners appealed the 2013 assessments, which included the improvements, to the State Board of Equalization, and the effect of the State Board’s decision for the 2013 assessments ostensibly valued the parcels, including the improvements, at the 2012 true and full values. All the property, including the improvements, was listed in the 2013 notices of assessment, and the State Board had the authority to make a substantive decision regarding the 2013 valuations. The State Board did not limit the assessments to a ten percent increase. Rather, the State Board established a valuation for the 2013 assessments, including the listed improvements, at the 2012 true and full values. The Supreme Court held the Mountrail County Auditor was not authorized to use the omitted property statutes in N.D.C.C. Ch. 57–14 to revalue or circumvent the State Board’s 2013 valuations.

Plains Marketing, LP v. Mountrail County Bd. of County Com’rs, 879 N.W.2d 75 (N.D., May 26, 2016)

COLORADO – Court of Appeals holds that counties may retroactively assess oil and gas leaseholds under the omitted property statutes where value has been underreported, even without evidence of omitted property or willfully false and misleading annual statements.

The McElmo Dome in Colorado’s Montezuma and Dolores Counties is a large deposit of pure carbon dioxide owned by many mineral interest owners. Kinder Morgan, the largest interest owner, was selected as the operator. Kinder Morgan extracts and processes the carbon dioxide, and then transports it through the Cortez Pipeline to the Permian Basin in West Texas, where it is used by Kinder Morgan in enhanced oil recovery.

Oil and gas leasehold land is valued based on the oil and gas produced throughout the year. For property tax purposes, the value is determined by the owner or operator under the “netback” method of valuation, which permits the operator to deduct the cost of transporting unprocessed carbon dioxide downstream to the selling point to determine the net value of the leasehold. If the taxpayer pays a third party to transport the carbon dioxide, the taxpayer is allowed to deduct the amount paid (the tariff rate) for transportation under the “unrelated-third-party” method of calculating the transportation deduction. If the taxpayer or an affiliate transports the carbon dioxide itself, the taxpayer must use the “related-party” method of calculating the transportation deduction, under which it is only allowed to deduct the direct cost of transportation along with other allowances that account for capital investments and depreciation.

In April 2008, Kinder Morgan submitted six operator statements, one for each tax district, detailing its production in Montezuma County for 2007. The operator statements for 2007 showed a decrease in valuation of carbon dioxide from the previous tax year. A Montezuma County Assessor audited the statements and determined that Kinder Morgan had underreported the selling price of oil and gas produced because it erroneously applied the unrelated-third-party method of calculating the transportation deduction rather than the related-parties method, and had accordingly underpaid its 2007 property taxes. Specifically, the audit resulted in an increased assessed valuation of $56,745,120, which increased Kinder Morgan’s property taxes by $2,028,865.80. The Assessor’s increase in taxes was based on a difference in the determination of the allowable transportation deduction.

Kinder Morgan paid the tax bill, and filed a petition with the Board of County Commissioners for Montezuma County for abatement or refund, which was denied. Kinder Morgan then appealed to the Board of Assessment Appeals. The Board upheld the County Commissioners’ denial of the petition, reasoning that the Assessor had the statutory authority to retroactively assess taxes under the auditing guidelines established pursuant to § 39–2–109(1)(k), C.R.S.2014, which provides that the property tax administrator is authorized to “prepare and publish guidelines . . . concerning the audit and compliance review of oil and gas leasehold properties for property tax purposes.” The Board ruled that because the property tax administrator exercised his authority to develop guidelines for auditing oil and gas leaseholds for property tax purposes, which include changing the valuation of the oil and gas leasehold, issuing special notices of valuation, and issuing a tax bill, the Assessor had the statutory authority to retroactively assess taxes on omitted value. Kinder Morgan appealed.

The Court of Appeals affirmed, holding that the Board correctly determined that the Assessor had the authority to retroactively assess property taxes and that the related-parties transportation deduction was the correct method employed. The Court rejected Kinder Morgan’s argument that §§ 39–5–125 and 39–10–101(2)(a)(I), C.R.S.2014 (the omitted property statutes), only authorize assessors to issue retroactive property tax assessments against taxable property omitted from tax rolls, not omitted value. Relying on § 39–10–107(1)(b), which was recently amended to define “omitted” oil and gas leaseholds and lands as “the underreporting of the selling price or quantity of oil and gas sold therefrom,” the Court held that retroactive assessments of oil and gas leaseholds can occur where value has been underreported, even without evidence of omitted property or willfully false and misleading annual statements. The Court of Appeals also held that the Board’s finding that Kinder Morgan and the pipeline company transporting the C02 were related parties for the purpose of calculating the allowable transportation deduction was supported by competent evidence and affirmed the Board’s ruling regarding the transportation deduction.

Kinder Morgan CO2 Company, L.P. v. Montezuma County Board, — P.3d —- (Co. Ct. App., June 4, 2015) 2015 WL 3504537

ALASKA – Department of Revenue regulation directing appeals of oil and gas property tax valuation to be heard by State Assessment Review Board while appeals of oil and gas property taxability were to be heard by Department violates statute granting Review Board exclusive jurisdiction over all appeals from Department’s assessments of oil and gas property.

Under a Department of Revenue regulation, all appeals of oil and gas property tax valuation must be heard by the State Assessment Review Board, while appeals of oil and gas property taxability must be heard by the Department of Revenue. Three municipalities challenged this regulation, arguing that it contradicts a statute that grants the Review Board exclusive jurisdiction over all appeals from Revenue’s “assessments” of oil and gas property. The Superior Court upheld the regulation as valid, concluding that it was a reasonable interpretation of the statute. The Supreme Court reversed, holding that the regulation is inconsistent with the plain text, legislative history, and purpose of the statute.

Under the statewide scheme for assessment of oil and gas property in order to levy ad valorem taxes, codified at AS 43.56, the State of Alaska taxes oil and gas property at 20 mills, and municipalities are permitted to tax oil and gas property located within their boundaries at the same rate as they do local property. But the State, through Revenue, manages this assessment process, by determining whether property is taxable under AS 43.56 and, if so, its taxable value.

The assessment process begins each year in January, when oil and gas property owners file returns listing and describing their taxable oil and gas properties. Revenue may then choose to investigate any information included or omitted on the return. It must also make an initial taxability determination whether an asset is properly deemed taxable oil and gas property under the statute. Revenue then ascribes a valuation to the property, which becomes prima facie evidence of the property’s full value, and prepares an annual assessment roll listing all taxable oil and gas property and its assessed value. On March 1 of each year, Revenue sends an assessment notice to each owner whose property is included on the assessment roll, and a copy of the notice to the corresponding municipality. The statutory scheme provides both taxpayers and affected municipalities with a series of appeals of this preliminary assessment, first to Revenue, then to State Assessment Review Board, and then to the Superior Court for a trial de novo. Revenue must then issue a final assessment roll by June 1 of each year.

Initially, all appeals of Revenue’s oil and gas property tax assessments were heard by the State Assessment Review Board. In 1986, Revenue promulgated a regulation under which valuation appeals are treated differently from appeals of Revenue’s determination that a property is taxable. A property owner or municipality appealing Revenue’s valuation of oil and gas property must appeal first to Revenue; Revenue issues an informal conference decision, which can be appealed to the State Assessment Review Board. The Board’s decision can then be appealed to the Superior Court for a trial de novo. In contrast, a property owner or municipality appealing Revenue’s determination whether property is taxable must also appeal to Revenue, which issues an informal conference decision; however, an appeal from this informal conference decision is heard by a hearing officer appointed by the Commissioner of Revenue, not by the State Assessment Review Board. The hearing officer’s decision can then be appealed to the Superior Court, but the decision to grant a trial de novo is left to the discretion of the Superior Court judge.

This regulation also modified to whom party status is granted in such appeals. Previously, both property owners and affected municipalities were afforded party status in all appeals, while the new regulation affords affected municipalities different rights depending on what the appeal concerns: in valuation appeals before the Review Board both property owners and the relevant municipality have party status, but in taxability appeals before Revenue only the property owner is afforded party status.

Alaska Statutes 43.56.110–130 provides that the State Assessment Review Board shall hear administrative appeals of all “assessment[s]” of oil and gas property. In the regulation challenged on appeal, Revenue interpreted the term “assessment” in AS 43.56 to include only the valuation of taxable oil and gas property, and not Revenue’s initial determination of taxability. On appeal, the municipalities argued that the term “assessment” also encompasses the determination of whether property is taxable under AS 43.56, because that determination is made by Revenue in the initial stages of the assessment process. They claimed that appeals of taxability determinations are therefore committed to the Board’s jurisdiction by statute, and that the regulation impermissibly removes those appeals from the Board’s jurisdiction.

The Supreme Court first examined the meaning of the term “assessment” as used in other statutory sections relating to the taxation of oil and gas property, and concluded that assessment necessarily includes a determination of the taxability. The Court then reviewed the common usage of the term “assessment,” and determined that the term denotes not just the assigning of value to a piece of property but also the initial identification of that property as eligible for taxation. The Court also observed that if Revenue’s interpretation were accepted, a property owner or municipality appealing a taxability decision by Revenue to the Superior Court would have no statutory right to a trial de novo but would be limited to an administrative appeal in which the decision to grant a trial de novo was left to the discretion of the Superior Court judge, a significant consequence probably not intended by the legislature. Finally, the Court found no support for Revenue’s interpretation of AS 43.56 in its legislative history or purpose. The Court concluded that “this renders the challenged regulation invalid because it has no reasonable basis in the statute and thus falls outside of Revenue’s statutory authority,” and reversed the Superior Court decision.

City of Valdez v. State, 372 P.3d 240 (Alaska, April 29, 2016)