State Tax Developments for Energy and Resources for June 2012

State tax laws are constantly in flux, particularly for taxpayers in the energy and resources industries. From the taxable value of mineral interests to exemptions for nuclear power plants, these changes have wide-reaching implications for businesses located within the state's borders, as well as those outside. This legal update outlines some of the developments in state tax that occurred during June 2012, affecting taxpayers in the energy and resources sectors.

Nebraska assessor's method of valuing mineral interests ruled invalid

The assessor of Cass County, Nebraska, hired an appraiser to determine the value of mineral interests in the county. The appraiser was instructed to speak only with mine operators, not individual land owners, and to look for the presence of a conditional use permits to determine if the property had mineral value. All properties owned by individuals and without permits were given mineral interest values of $0. A limestone mining operation had its mineral interests valued substantially, while a neighboring parcel owned by an individual was given a $0 value. The operator appealed the valuation on the grounds that the interests were not valued or classified in a uniform or proportionate manner with other parcels in the county, as required by the Nebraska Constitution.

In Martin Marietta Materials, Inc. v. Cass County Bd. of Equalization, the court found that the assessments were not uniform and proportionate with other parcels. There were properties which contained valuable minerals that were assessed a mineral interest value of $0, solely because the properties were owned by individual landowners. The court found that the assessor's system of valuing mineral reserves arbitrarily favored one group of taxpayers (those without conditional use permits) over another (those holding permits) and resulted in an unjustified de facto ownership classification. The assessments were therefore void.

Montana DOR's method of valuing natural gas ruled improper

The Montana State Tax Appeal Board ruled that the Montana Department of Revenue (DOR) exceeded its authority when it valued natural gas using an alternative method. In MCR, LLC v. Dept. of Revenue, the DOR adjusted the natural gas production tax return of a well developer to more accurately reflect the value of the gas. Because the taxpayer sold the gas to a related transmission company, the DOR argued that the contract price was not at arm's-length. The DOR instead calculated the average monthly price using the taxpayer's net proceeds, a method which had been repealed by the legislature, but which the DOR argued was still valid because governing law allowed the value to be "determined by the department."

The board found that the DOR exceeded its authority by using a method which the legislature chose to repeal "expressly and with criticism." The average monthly price could be determined by reference to other contracts or by reference to a generally accepted price index, the method by which the taxpayer did set its contract prices. The DOR did not determine the average market price at the mouth of the well, however, but instead used the net proceeds tax calculations to determine a reasonable price. The board ruled that using such a method "utterly fails to give notice to taxpayers" and was improper.

New Hampshire court denies pollution treatment exemption to nuclear containment system

The New Hampshire Supreme Court ruled that various containment facilities at a nuclear power station were not entitled to a property tax exemption as pollution treatment facilities. In Appeal of Town of Seabrook, a nuclear power station sought an exemption for facilities that collect, contain and process airborne contaminants that would otherwise be released into the atmosphere during abnormal operating conditions, such as a loss-of-coolant accident. The town appealed, arguing that the plain language of the exemption required that the facility actively treat or control pollution. Under the town's reasoning, the facilities would only be entitled to exemption in the years they were actively used, i.e., during and after a nuclear catastrophe.

The Court agreed with the town. The term "treatment facility" presumes that the facility will routinely treat pollution or will subject something to some action or process, which these facilities did not. It was merely speculation whether the containment systems would ever operate to treat anything, and presumably the taxpayer seeks to avoid the events that would actually trigger their operation. Accordingly, the containment systems were not entitled to the pollution treatment exemption.

Louisiana allows single sales factor apportionment for renewable energy businesses

Louisiana has enacted legislation that expands single sales factor apportionment for purposes of the corporate income and franchise taxes to qualified businesses that participate in a new Corporate Tax Apportionment Program. A business is eligible to participate in the program if two requirements are met: (1) at least 50 percent of the total annual sales from a Louisiana site must be to out-of-state customers, in-state customers who resell out-of-state, or to the federal government; and (2) the activities at the site must involve certain targeted sectors, including clean technology and renewable energy. However, a business primarily engaged in natural resource extraction or exploration is not eligible unless it provides 25 new headquarter jobs or shared service center jobs.

Kansas repeals 24-month severance tax exemption

Kansas has enacted legislation that repeals the 24-month severance tax exemption, effective July 1, 2012. The exemption previously applied to the severance and production of gas or oil for the 24 months immediately after the pool of gas or oil had first been tapped. The 24-month exemption now applies only to oil pools tapped on or after July 1, 2012, which do not produce more than 50 barrels per day.

Ohio imposes fee on owners of injection wells

Ohio has enacted legislation that imposes on owners of injection wells a per-barrel fee on substances delivered to each well to be injected into the well. Effective September 10, 2012, the fee is paid to the Division of Oil and Gas Resources Management. The per-barrel fee is five cents if the substance is produced within the same or adjoining regulatory district as the well. The per-barrel fee is 20 cents if the substance is not produced in the same or adjoining regulatory district. The fee is imposed only on the first 500,000 barrels per well, though the fee is calculated first on all barrels not produced within the same or adjoining regulatory district.