CNG Transmission Corp. v. Craig, 29996.

Decision Date26 April 2002
Docket NumberNo. 29996.,29996.
CourtWest Virginia Supreme Court
PartiesCNG TRANSMISSION CORPORATION, a West Virginia corporation, Petitioner below, Appellant, v. Rebecca Melton CRAIG, as Tax Commissioner of the State of West Virginia Respondent below, Appellee.

David K. Higgins, Esq., Paul G. Papadopoulos, Esq., Robinson & McElwee, PLLC, Charleston, for Appellant.

Darrell V. McGraw, Jr., Attorney General, Joy M. Bolling, Assistant Attorney General, Charleston, for Appellee.

STARCHER, Justice.

In this appeal from the Circuit Court of Harrison County, appellant CNG Transmission Corporation ("CNG") challenges the circuit court's ruling upholding assessments against CNG for consumer sales taxes imposed by the Tax Commissioner of the State of West Virginia ("Tax Commissioner"). The taxes were assessed upon CNG's purchase of goods and services that were used in the transmission of natural gas owned by CNG.

After careful consideration, we reverse the circuit court's ruling, and find that the statutes in effect at the time of CNG's purchases exempted the purchase of goods and services used in the transmission of natural gas from the consumer sales tax, whether or not CNG owned the natural gas that was being transmitted.

I. Facts & Background

The instant case involves the interpretation of several tax statutes1 that exempt companies in the business of the "transmission" of natural gas through a pipeline from paying consumer sales tax on the purchase of goods and services that are used to conduct that business. The Tax Commissioner disputes CNG's claim to have the status of a company in the business of transmission.

Between January 1986 and September 1993, CNG was engaged in the business of transporting natural gas through its pipeline system, both within and without the State of West Virginia. CNG was also in the business of making wholesale sales of "company-owned" natural gas that CNG bought from other suppliers.2 To sell this company-owned natural gas, CNG would transport the natural gas to a subsequent purchaser through its pipeline system.

The Tax Commissioner, in an audit of CNG's records, found that between January 1, 1986 and September 30, 1993, from 5% to 13% of the natural gas flowing through CNG's pipelines was company-owned; the remaining 87% to 95% of the natural gas belonged to other companies.3 The Tax Commissioner took the position that the transportation of company-owned natural gas for sale to others by CNG could not to be included in the statutorily tax-exempt activity of "transmission." The Tax Commissioner concluded that, between 1986 and 1993, CNG should have paid sales tax on 5% to 13% of all goods and services purchased and used to transport natural gas through CNG's pipelines.4 With the addition of interest, on February 25, 1998, CNG was assessed with a total sales tax liability of $266,601.94.

After receiving notification of the tax assessment, CNG paid the tax liability and timely filed a petition for reassessment. By a decision dated February 22, 2000, an Administrative Law Judge ("ALJ") found that CNG was liable to the State of West Virginia for taxes related to the purchase of goods and services used in connection with its transportation of company-owned natural gas between January 1, 1986, and September 30, 1993. CNG subsequently sought judicial review of the decision in the Circuit Court of Harrison County. In an order dated January 22, 2001, the circuit court affirmed the ALJ's ruling.

CNG now appeals the circuit court's order.

II. Standard of Review

The parties agree that this case involves the interpretation of several tax statutes and presents a pure question of law. "Interpreting a statute or an administrative rule or regulation presents a purely legal question subject to de novo review." Syllabus Point 1, Appalachian Power Co. v. State Tax Dept. of West Virginia, 195 W.Va. 573, 466 S.E.2d 424 (1995).

III. Discussion

At issue in the instant case is the Tax Commissioner's interpretation of several statutes, in effect between January 1986 and September 1993, that exempted from the consumer sales tax goods and services that were purchased and directly used or consumed in the business of the "transmission" of natural gas.

The first statute, W.Va.Code, 11-15-9(7) [1985]5, was effective between January 1, 1986, and June 30, 1987, and provided the following exemption from the consumer sales tax:

Sales of property or services to persons engaged in this state in the business of ... transmission ... Provided, That the exemption herein granted shall apply only to services, machinery, supplies and materials directly used or consumed in the businesses or organizations named above, and shall not apply to purchases of gasoline or special fuel[.]

This statute did not specifically define the term "transmission," nor did the regulations enacted by the Tax Commissioner define or limit the term "transmission." Furthermore, no language was contained in either the statute or the Tax Commissioner's regulations regarding the transportation of company-owned natural gas by the owner of the transmission business.

Effective July 1, 1987, the Legislature substantially altered the relevant tax statutes, and enacted changes that remained in effect through 1993. The statute above was changed to W.Va.Code, 11-15-9(g) [1987],6 and was amended to read as follows:

The following sales and services shall be exempt [from the consumer sales tax]: ...
(g) Sales of property or services to persons engaged in this state in the business of ... transmission ... Provided ... the exemption provided in this subsection shall apply only to services, machinery, supplies and materials directly used or consumed in the activities of ... transmission ... in the businesses or organizations named above and shall not apply to purchases of gasoline or special fuel[.]

Additionally, the Legislature, in W.Va.Code, 11-15-2(r) [1987],7 defined the term "transmission" as follows:

"Transmission" shall mean the act or process of causing ... natural gas ... to pass or be conveyed from one place or geographical location to another place or geographical location through a pipeline or other medium for commercial purposes.

The language contained in these two statutes was in effect through the remainder of the relevant time period in this case.

Pursuant to these statutes, the Tax Commissioner enacted various regulations that were in effect between July 1, 1987 and April 30, 1992. Those regulations essentially restated the statutory definition of "transmission" as the "act or process of causing ... natural gas ... to pass or be conveyed from one place ... to another place ... through a pipeline[.]"8 The regulations, like the statute, were again silent concerning the transportation of company-owned natural gas by the owner of the transmission business.

Regulations that were legislatively approved and which became effective on May 1, 1992, addressed this issue for the first time, and specifically provided that the tax-exempt business of "transmission" did not include the transport of company-owned natural gas. Specifically, 110 C.S.R. 15, § 123.4.4 [1992] was amended to read as follows, in part and with emphasis on the amendments:

Transmission.—The activity of transmission means the act or process of causing... natural gas ... to pass or be conveyed for others for consideration from one place or geographical location through a pipeline or other medium for commercial purposes but does not include the passage or conveyance of ... natural gas ... by the owner thereof.

The Tax Commissioner contends that the statutory and regulatory definitions of "transmission" have remained materially the same over the January 1986 to September 1993 assessment period, and contends that in none of the definitions is there any indication that CNG is entitled to an exemption for conveying company-owned natural gas.

The Tax Commissioner argues that the tax exemption contained in W.Va.Code, 11-15-9(7) [1985] and W.Va.Code, 11-15-9(g) [1987] applies only to companies in the "business" of transmission, with the "transmission" done for "commercial purposes." When a company transports natural gas owned by another, and charges a fee for the transportation service, the company is engaged in the business of transmission for a commercial purpose. However, the Tax Commissioner argues that when a company transports company-owned natural gas through a pipeline, the transportation service is merely incidental to the subsequent sale of the gas to a purchaser—the commercial purpose of the transaction is to sell natural gas for a profit, not to transport natural gas. Accordingly, the Tax Commissioner argues that the "transmission" of company-owned natural gas is not done for a commercial purpose, and is therefore not a tax-exempt activity.

Appellant CNG, however, argues that the Tax Commissioner has—particularly through the regulations adopted in 1992—ignored the statutory definition of "transmission." CNG takes the position that "transmission" means any act of conveying natural gas through a pipeline for a commercial purpose, and argues that when CNG conveys natural gas along its pipeline to a customer—whether the gas is company-owned or owned by another person—CNG charges the customer for the transportation costs incurred. Accordingly, CNG posits that its purchases of pipe, valves, gauges and other goods and services directly used or consumed in the operation of its interstate pipeline are used in its "transmission" business, and that those purchases are exempt from sales taxes. We agree with CNG's position.

The essence of CNG's argument is that the meaning of the word "transmission" in the statutes is clear and unambiguous, but that the Tax Commissioner has altered that definition through regulations and interpretation. "Where the language of a statute is clear and without ambiguity the plain...

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