Anadarko Petroleum Corp. v. Utah State Tax Comm'n

• Decision Date: 30 January 2015
• Docket Number: No. 20130192.,20130192.
• Citation: 2015 UT 25,345 P.3d 648
• Court: Utah Supreme Court
• Parties: ANADARKO PETROLEUM CORPORATION and Kerr–McGee Oil & Gas Onshore, L.P., Petitioners and Appellants, v. UTAH STATE TAX COMMISSION, Respondent and Appellee.

345 P.3d 648

2015 UT 25

ANADARKO PETROLEUM CORPORATION and Kerr–McGee Oil & Gas Onshore, L.P., Petitioners and Appellants

v.UTAH STATE TAX COMMISSION, Respondent and Appellee.

No. 20130192.

Supreme Court of Utah.

Jan. 30, 2015.

Nathan R. Runyan, Steven P. Young, Salt Lake City, for petitioners.

Sean D. Reyes, Att'y Gen., Clark L. Snelson, Asst. Att'y Gen., Salt Lake City, for respondent.

Chief Justice DURRANT authored the opinion of the Court, in which Justice DURHAM, Justice PARRISH, and Justice LEE joined.

Chief Justice DURRANT, opinion of the Court:

Introduction

¶ 1 This is a tax case that comes before us on appeal from a formal decision of the Utah State Tax Commission (Commission). Utah law imposes a severance tax on owners of oil and gas interests. The tax rate an owner must pay depends on the fair market value of the owner's interest. The question presented in this case concerns how the value of such an interest is to be calculated. Petitioners Anadarko Petroleum Corporation and Kerr–McGee Oil & Gas Onshore L.P. (collectively Anadarko) argue that the Commission improperly disallowed deductions they made for tax-exempt federal, state, and Indian tribe royalty interests. Based on the plain meaning and structure of the severance tax statute, we agree and reverse the Commission's determination.

Background

¶ 2 The facts of this case are not in dispute. Anadarko acquired Kerr–McGee in 2006. From January 1, 2008, to December 31, 2011, Anadarko operated oil and gas wells in Carbon and Uintah counties. Anadarko filed severance tax returns during this period. On September 2, 2010, the Auditing Division of the Commission sent Anadarko a preliminary notice of its proposed tax liability. After correspondence between the parties, the Auditing Division issued two notices to Anadarko on November 10, 2010. The first notice informed Anadarko of a deficiency in its 2009 severance tax and assessed $10,118.54 in additional taxes and interest. The second notice informed Kerr–McGee that its claimed 2009 refund of $606,376.65 was being reduced by $111,654.09, resulting in a refund of $494,722.56.¹ Anadarko conceded that $1,509.83 of the $10,118.84 deficiency was properly assessed and that $10,185.42 of the $111,654.09 refund was properly withheld, but it disputed the remaining actions of the Commission.

¶ 3 Anadarko challenged the disputed amounts by filing a petition for redetermination of tax with the Commission. Both Anadarko and the Auditing Division filed motions for summary judgment, and the Commission held a hearing on the cross-motions for summary judgment. The issue before the Commission was whether the Auditing Division had applied the correct tax rate, which involves the application of a somewhat complicated formula outlined in Utah Code sections 59–5–102 and 59–5–103.1.

¶ 4 The formula first requires the taxpayer to calculate the fair market value of the interest in oil or gas according to a sale in an “arm's-length contract” or by “comparison to other sales of oil or gas.”² Second, permissible deductions are subtracted from that amount to yield the net taxable value.³ Third, the Commission divides the taxable value by the amount of oil or gas produced. For natural gas, the unit of measurement is an MCF, or one-thousand cubic feet of natural gas.⁴ So for Anadarko's natural gas interests, the third step yielded the taxable value per MCF (unit price). Finally, to determine the tax rate, the Commission calculates the percentage of the unit price up to $1.50 and then the percentage above $1.50. The percentage of the unit price up to $1.50 is the percentage of the taxable value assessed at a three-percent tax rate. The percentage of the unit price above $1.50 is the percentage of the taxable value assessed at a five-percent tax rate.⁵

¶ 5 We offer a brief example by way of illustration. In one of the calculations in this case, the net taxable value of 24,874 MCFs was $66,478. The net taxable value per MCF was therefore $2.67 (66,478/24,874 = 2.67). Fifty-six percent of the unit price is below $1.50 (1.50/2.67 = 0.56) and the remaining forty-four percent is above $1.50 ((2.67–1.50)/2.67 = 0.44). Therefore, of the $66,478 in taxable value, fifty-six percent is assessed at three percent (66,478*0.56 = 37,227.68), and forty-four percent is assessed at five percent (66,478*0.44 = 29,250.32).

¶ 6 The dispute before the Commission concerned step two of this formula—what deductions are permitted under the severance tax statute in the unit price calculation. Anadarko argued that because the statute exempts federal, state, and Indian tribe royalty interests from the severance tax, it also permits taxpayers to deduct such interests from the net taxable value in calculating the per unit price. The Auditing Division maintained that the unit price should be calculated “based on the prices at which the gas was sold, prior to the point when the producer paid the exempt royalties.”

¶ 7 On December 13, 2011, the Commission determined there was no genuine issue of material fact and granted summary judgment in favor of the Auditing Division. The Commission agreed with the Auditing Division's calculation of price per MCF, relying on the plain language of Utah Code section 59–5–103.1. The Commission also acknowledged that the exempt entities' interests—the interests of federal and state governments, and Indian tribes—are not subject to the severance tax but must be included in the calculation of value under Utah Code sections 59–5–102 and –103.1. The Commission concluded that “[t]axable value is established prior to being allocated between the two tax rates” and that the Auditing Division's methodology did not increase Anadarko's taxable value. Anadarko filed a request for reconsideration on January 2, 2013, which the Commission denied. Anadarko timely appealed. We have jurisdiction to review final orders of the Utah State Tax Commission under Utah Code section 78A–3–102(3)(e)(ii).

Standard of Review

¶ 8 When reviewing formal adjudicative proceedings of the Utah State Tax Commission, we “grant the commission deference concerning its written findings of fact, applying a substantial evidence standard,” and we review the Commission's conclusions of law for correctness, granting the Commission's legal analysis no deference.⁶

Analysis

¶ 9 Anadarko first argues that the Commission's decision is inconsistent with the terms of the Utah Severance Tax Act. It contends that the Act's plain language requires the exclusion of any federal, state, or Indian tribe interests from the calculation of value used to determine severance tax liability. And Anadarko maintains that reading the statute any other way creates two inconsistent meanings of “value” within sections 59–5–102 and 59–5–103.1. Anadarko also argues that reading the statute to include exempt federal interests in the unit price calculation violates the United States Constitution by imposing a tax on the federal government.

¶ 10 We agree with Anadarko that the plain meaning and structure of the severance tax statute categorically excludes federal, state, and Indian tribe interests from the unit price calculation. Accordingly, we do not reach the constitutional questions raised in Anadarko's brief.⁷

¶ 11 When interpreting a statute, we look first to the plain and ordinary meaning of its terms.⁸ But we do not interpret statutory provisions in isolation. We also construe terms “in each part or section” of a statute “in connection with every other part or section so as to produce a harmonious whole.”⁹ The meaning of seemingly unclear or ambiguous provisions is often clear when read in context of the entire statute.¹⁰

¶ 12 Here, we acknowledge that the Commission's reading of the severance tax statute is plausible if section 59–5–103.1 is read in isolation. But when read in harmony with section 59–5–102(1)(b), we conclude that the plain language and structure of the statute categorically excludes federal and Indian tribe interests from the value calculation set forth in section 59–5–103.1.

¶ 13 Section 59–5–102(1)(a) imposes a severance tax on any “person owning an interest in oil or gas produced from a well in the state.” The tax rate depends on the fair market value of a producer's oil or gas interest, as “determined under Section 59–5–103.1.” That section allows anyone subject to the severance tax to deduct processing and transportation costs before “determining the fair market value of oil or gas,” but it makes no mention of exempt royalty interests.

¶ 14 The Commission concluded that because section 103.1 does not include a deduction for federal, state, or Indian tribe royalty interests, the statute unambiguously dictates that the calculation of value does not permit the deduction of such interests. But this conclusion overlooks the fact that subsection 102(1)(a)—the provision that imposes the severance tax and sets forth how the rate is to be calculated under section 103.1—is, by its own terms, “[s]ubject to Subsection [102](1)(b).” And that subsection specifically excludes exempt interests from consideration under the entire section:

This section [59–5–102] applies to an interest in oil or gas produced from a well in the state or in proceeds of the production of oil or gas produced from a well in the state except for: (i) an interest of the United States ...; (ii) an interest of the state or a political subdivision ...; or (iii) an interest of an Indian or Indian Tribe....¹¹

In other words, no provision in section 59–5–102 applies to “an interest in oil or gas” owned by any of the listed entities. This excludes the interests of these entities not just from the imposition of a severance tax, but from any consideration in calculating the “value” of an interest under section 59–5–102(1)(a) as determined by section 59–5–103.1. Accordingly, we conclude that Anadarko should be permitted to deduct these interests in calculating the unit price used to determine its tax rate.

¶ 15 The dissent argues that section 59–5–102...