CHARLESTON – Legislation passed near the end of the 2021 regular session was supposed to address constitutional issues with how West Virginia values property values with natural gas production.
Instead, no one is happy with the new rules.
Lawmakers passed Bill 2581 in April over objections from several elected leaders in the northern Panhandle and west-central West Virginia. The bill required the state tax commissioner to develop a revised methodology for valuing oil and gas properties.
The state’s tax department submitted an emergency rule over the summer on how it planned to implement HB 2581, although the legislature’s rule-making review committee has not yet adopted the final rule. But Marshall County assessor Eric Buzzard is hoping lawmakers can scrap the rule and start over in the 2022 legislative session.
“I think people are just going to pay way too much money and at the end of the day are going to give big business a break and that’s not the company I’m in. I am taking care of our county inhabitants ”, said Buzzard. “I hope once the session kicks off they will evaluate it and it will be more beneficial to residents of the county than to out-of-state oil and gas companies.” “
Under the emergency rule, the value of oil and gas assets is determined by applying a yield capitalization model based on a weighted average cost of capital to net revenues (after annual royalties and operating costs are subtracted from revenues. gross) for direct participation, with a yield capitalization model applied to gross royalty payments for royalty interest.
“The main methodological changes consisted of a statutory transition to real revenues less costs … more likely to capture the risk”, Acting Assistant Tax Commissioner Erin Winter said at an interim legislative meeting in September.
The State Department of Taxation also removed the provision which called for an 18-month cut in discounted cash flow analysis, and natural gas liquids – as well as write-down costs to make them marketable – are included as an item of value.
What does it all mean? This is a question that large natural gas producers, accountants and county valuers would like to know.
“I don’t understand their opinion on this” said Buzzard. “I think nobody knows that and nobody knows what’s going on.”
Buzzard said the rule is far too complicated, and the state’s tax department received little notice from county assessors or even the general public until the next fiscal year.
“The residents have not been sufficiently informed about this system and neither have the evaluators until now” said Buzzard. “Previously it was based on a three-year production average. Now they are based on actual costs. It looks like it will benefit the big oil and gas companies rather than the residents of our county. A three-year average is a more realistic value when it comes to paying your taxes than the actual amount of your production.
One of HB 2581’s biggest supporters, the Gas and Oil Association of West Virginia, believed the bill would help simplify valuations of natural gas properties. Instead, they say the state’s tax department’s emergency rule gives the state more power than the bill intended. As a result, state tax officials made a simple change more complicated.
“(House Bill) 2581 was just a simple bill… if you look at the emergency rule that was passed, it’s not very simple at all. “ Gas and Oil Association of West Virginia tax committee co-chair Mark Monteleone told lawmakers in September. “It is a very complex rule that we believe is beyond the scope of the law. For this reason, we believe they exceeded the legal authority of 2581. “
According to GOWV, natural gas production in West Virginia increased 14% between 2019 and 2020, with property tax contributions increasing by more than 24% from 2019 figures. Natural gas production in the state has increased. from 1.4 trillion cubic feet in 2016 to 2.5 trillion cubic feet in 2020. During the same period, property tax contributions increased from $ 134.8 million to $ 162.7 million.
The version of HB 2581 passed by the House of Delegates created a formula for valuing oil and gas goods using a weighted average regional market price, less actual expenses reported by the taxpayer. It was the State Senate that removed this formula and left it to the State Tax Department to develop wording that the legislature could approve through its drafting review authority. rules.
The previous methodology used to determine the value of natural gas producing properties was rejected by the West Virginia Supreme Court of Appeal in 2019 in Steager v. Consol Energy Inc, forcing lawmakers to adopt HB 2581.
“… The Court noted that the legislative rule for the valuation of producing natural gas wells did not relate to the costs of collection, compression, treatment and transport, and that the determination of the tax service that these expenses are not “directly related” to the “maintenance and production” of natural gas was not arbitrary, capricious or manifestly contrary to the enabling tax law “, according to an analysis by Craig Griffith, an attorney at the law firm Frost Todd Brown in Charleston.
Speaking to lawmakers in September, Winter said the state’s tax department was willing to work with county taxpayers and assessors to implement the new rule.
“In the future, we will continue to review tax returns to the extent that we have the resources to do so,” says winter. “We believe that reasonableness as a starting point for any true cost investigation is the most viable solution for us. And the tax department will continue to work with industry to ensure completeness and accuracy and ensure true value is determined, and we will work with counties to ensure industry compliance. “
However, county tax officials have felt left out of the entire process, from the drafting of HB 2581 to the release of the state’s tax department’s state of emergency last summer. While the state’s tax department makes the rules, it’s up to county assessors to determine the actual values using the new rule.
The original version of the bill would have resulted in a loss of property tax revenue of $ 9.1 million for county governments and county school systems. Eight counties in the Northern Panhandle and north-central West Virginia are believed to have suffered a $ 7 million blow under the previous plan. It is not known how many hits the state and natural gas-producing counties would suffer under the new rule.
“We have not received anything” said Buzzard. “We’ve been asking for it for months and we haven’t received any totals. Of course, we always hear that it will be minimal, but minimal for a gas producing county is substantial.
Steven Allen Adams can be contacted at [email protected]