3300 Corp. v. Marx

• Decision Date: 10 March 1994
• Docket Number: No. 91-CC-01254,91-CC-01254
• Citation: 633 So.2d 1028
• Parties: 128 Oil & Gas Rep. 455 3300 CORP. v. C.A. MARX, in his Capacity as Chairman of the Mississippi State Tax Commission.
• Court: Mississippi Supreme Court

Page 1028

633 So.2d 1028

128 Oil & Gas Rep. 455

3300 CORP. v. C.A. MARX, in his Capacity as Chairman of the Mississippi

State Tax Commission.

No. 91-CC-01254.

Supreme Court of Mississippi.

March 10, 1994.

Thomas L. Kirkland, Jr., William T. Wilkins, Kirkland Barfield & Moore, Jackson, for appellant.

Bobby R. Long, MS State Tax Com'n, Leslie R. Brown, Jackson, for appellee.

Before DAN M. LEE, P.J., and McRAE and SMITH, JJ.

McRAE, Justice, for the Court:

This appeal arises from a November 26, 1991, order of the Chancery Court for the First Judicial District of Hinds County granting the Tax Commission's motion for summary judgment against 3300 Corp., a taxpayer. In a case of first impression, we are asked to consider whether, pursuant to Miss.Code Ann. § 27-25-701 (1972) and Miss.Code Ann. § 27-25-703 (1972), a reimbursement for severance tax by the purchaser pursuant to a natural gas purchase agreement is considered part of the "sales price" of the gas and, therefore, is itself taxable. Finding that the Tax Commission properly considered the severance tax reimbursement as part of the taxable price of the natural gas, we affirm the chancellor's judgment.

I.

3300 Corp. is an interest owner in certain natural gas wells located in Rankin County's Thomasville Field and the successor-in-interest to the rights and interests of Mississippi Mining & Mineral Company under a gas purchase contract with Southern Natural Gas Company. The chancellor found, as a matter of law, that the Commission had properly assessed severance taxes against 3300 Corp. and the operator of the well, Pursue Energy Corporation, on a portion of a March, 1985 settlement from Southern Natural. ¹ The disputed tax, which 3300 Corp. has paid, was levied on that part of the settlement which was designated as a reimbursement of severance tax pursuant to the gas purchase contract.

As the result of an audit made after the settlement, the Mississippi State Tax Commission notified Pursue on June 6, 1988, that a gas severance assessment of $665,681.50 was due for the period beginning February 1, 1985, and ending December 31, 1987. 3300 Corp.'s share of the assessment amounted to $386,830.86. Pursue petitioned the Board of Review, which affirmed the assessment on September 28, 1988, and reassessed the obligation at $668,538.35. Pursue and 3300 Corp. appealed the Board of Review's decision to the full Commission, which affirmed the Board's assessment on June 21, 1989. In so ruling, the Commission found that "the monies received from Southern Natural Gas Company by the producers in settlement of their contractual litigation constitute a part of the sale price of the gas produced during the audit period and thereby would be properly subject to severance taxes."

Its administrative remedies exhausted, 3300 Corp. filed suit against C.A. Marx, Chairman of the Mississippi Tax Commission, in the Hinds County Chancery Court on October 25, 1989. The corporation sought a refund of severance taxes which it had paid, but alleged had been improperly charged to it.

On June 18, 1991, 3300 Corp. filed a motion for summary judgment, asserting that $317,998.98 of the assessment was based on an erroneous interpretation and application of Miss.Code Ann. § 27-25-701(d). 3300 Corp. argued that the reimbursement of severance taxes pursuant to its contract with Southern Natural did not constitute part of the "sale price" of the natural gas as contemplated by § 27-5-701.

Marx, in his capacity as Chairman of the Tax Commission, filed a cross-motion for summary judgment on October 1, 1991. The Commission argued that under the terms of the contract between 3300 Corp. and Southern Natural, the reimbursement of severance taxes which had been paid by the seller was part of the "sale price" of the gas as defined by § 27-25-701 and thus taxable pursuant to § 27-25-703(2).

After hearing arguments on the motion and considering the pleadings and exhibits, the chancellor found, as a matter of law, that the Tax Commission was entitled to summary judgment in its favor. The court further found that the intent of the parties, as expressed in the language of the contract, was controlling, and held that Southern Natural's reimbursement for the severance taxes paid by the seller constituted part of the sales price and was taxable pursuant to Miss.Code Ann. § 27-25-703.

II.

Pursuant to Miss.Code Ann. § 27-25-703 (1972 and Supp.1992), an annual privilege tax, the so-called severance tax, is levied upon those persons in the business of producing or severing natural gas. The amount of the tax is measured by "the value of the gas produced" and assessed at a rate of six percent "of the value thereof at the point of production." Miss.Code Ann. § 27-25-703. The term "value" as used in § 27-25-703 is defined by § 27-25-701(d) as:

the sale price, or market value, at the mouth of the well. If the gas is exchanged for something other than cash, or if there is no sale at the time of severance, or if the relation between the buyer and seller is such that the consideration paid, if any, is not indicative of the true value or market price, then the commissioner shall determine the value of the gas subject to tax, considering the sale price for gas of gas of like quality in the same or nearest gas-producing field.

The parties agree that 3300 Corp.'s sale of gas to Southern Natural was made pursuant to a competitive contract, negotiated at arm's length. Therefore, the value of the taxable gas is its sale price or market value "at the mouth of the well."

The Tax Commission's pleadings infer a long-standing policy of imposing severance taxes on "the total receipts by a producer of natural gas." Further, the Commission stated in its Responses to Interrogatories that its expert witnesses were expected to testify that it has "always interpreted the severance tax law as requiring that severance tax be paid on the full value or sales price without any deductions for severance taxes or other like items."

At issue is whether any severance taxes reimbursed by the buyer to the seller, pursuant to a gas purchase contract, constitute part of the "sale price" or "market value" of the gas. This court has not previously construed "sale price" or "market value" in the context of § 25-27-701(d). 3300 Corp., which asserts that the severance tax reimbursement is not part of the sale price or market value of the gas, approaches the question as an issue of statutory construction. The Tax Commission, on the other hand, bases its contention that the reimbursement is part of the sales price solely on its interpretation of the gas purchase contract. The few other jurisdictions which have considered whether a tax reimbursement is part of the sales price or market value of a natural resource have looked primarily at the controlling statutes, but have also considered the language of the purchase contract.

A. 3300 Corp.'s Statutory Construction Argument

3300 Corp. asserts that taxing the reimbursement of severance taxes is illogical and creates an unworkable standard for measuring the value of gas sold in Mississippi. It argues that the interpretation espoused by the Commission and affirmed by the chancellor "results in a never ending cycle in which the taxpayer must first attempt to determine its sales price, then calculate the severance tax owing, then add back the reimbursement, then recalculate the severance the severance taxes owing, then add back more reimbursement...."

3300 Corp. further contends that the Commission and the chancellor misconstrued and incorrectly applied the definition of "value" as set forth in Miss.Code Ann. § 27-25-701(d). 3300 Corp. suggests that the chancellor and the Commission have confused the "sale price" subject to severance tax with the "gross proceeds of sales" subject to sales tax pursuant to Miss.Code Ann. § 27-65-15. "Gross proceeds of sales" is defined in § 27-65-3(h) as follows:

[t]he value proceeding or accruing from the full sale price of tangible personal property including installation charges, carrying charges, or any other addition to the selling price on account of deferred payments by the purchaser, without any deduction for delivery charges, cost of property sold, other expenses or losses, or taxes of any kind except those expressly exempt by this chapter.

The corporation asserts that had the legislature intended to impose a severance tax on gross proceeds, it would have used same language it employed when levying a sales tax on the gross proceeds of natural resource sales. 3300 Corp. mistakenly bases its theory of legislative intent on an analysis of the legislative history of House Bill No. 23, which, it states, is the predecessor to § 27-25-701. However, House Bill No. 23 was the predecessor to § 27-25-501, which imposes a severance tax on oil, not on natural gas. The correct legislation is House Bill No. 485, adopted by the legislature in 1948. While the language is similar to that used in House Bill No. 23, especially in its definition of "value," there is one difference. House Bill No. 23, indeed, drew a distinction between "gross proceeds" and "sales price," as 3300 Corp. argues, by providing an amendment to the sales tax statute. In 1948, however, when House Bill No. 485 was adopted, the same § 2-a of Chapter 119, Laws of 1934, was amended by House Bill No. 573 "to remove the imposition of a sales tax on the production of natural gas." That the 1948 law exempted natural gas from the sales tax takes the wind from the sails of 3300 Corp.'s argument that the legislature really intended to distinguish between the bases for calculating natural gas severance and sales taxes.

Finally, 3300 Corp. argues that the chancellor erred in finding that the intent of the parties as evidenced by the language of the contract was the key to determining whether the severance tax reimbursement constituted part of the sale price. It suggests that such an approach would lead to inconsistent...