Antero Res. Corp. v. Steager

• Decision Date: 17 November 2020
• Docket Number: No. 18-1106,18-1106
• Citation: 851 S.E.2d 527
• Court: West Virginia Supreme Court
• Parties: ANTERO RESOURCES CORPORATION, Petitioner v. Dale W. STEAGER, as State Tax Commissioner of West Virginia, Respondent

851 S.E.2d 527

ANTERO RESOURCES CORPORATION, Petitioner

v.Dale W. STEAGER, as State Tax Commissioner of West Virginia, Respondent

No. 18-1106

Supreme Court of Appeals of West Virginia.

Submitted: October 6, 2020

Filed: November 17, 2020

Ancil G. Ramey, Esq., Steptoe & Johnson PLLC, Huntington, WV, Craig A. Griffith, Esq., L. Frederick Williams, Esq., John J. Meadows, Esq., Steptoe & Johnson PLLC, Charleston, WV, Counsel for Petitioner.

Patrick Morrisey, Esq., Attorney General, L. Wayne Williams, Esq., Assistant Attorney General, Charleston, WV, Counsel for Respondent.

ARMSTEAD, Chief Justice:

Petitioner Antero Resources Corporation ("Antero") appeals the November 15, 2018 order issued by the Circuit Court of Kanawha County reversing the decision of the Office of Tax Appeals ("OTA"), which reimposed a sales and use tax assessment against Antero for purchases/rentals of certain tangible personal property and services from January 1, 2011, through December 31, 2013. On appeal, Antero argues that the circuit court erred by determining that certain purchases of tangible personal property and services made by it were not directly used in its natural resource production and, therefore, did not qualify for the direct use exemption under West Virginia Code § 11-15-9(b)(2) and 11-15A-3(a)(2) (the "Direct Use Exemption").

Upon consideration of the parties’ briefs and oral arguments, the submitted record, and the applicable authorities, this Court finds that Antero is entitled to the Direct Use Exemption for the following: (1) crew quarters and related equipment; and (2) portable toilets, sewage systems, related water systems, and septic cleaning charges. However, we find that Antero is not entitled to the Direct Use Exemption for the rentals of trash trailers and waste receptacles. Accordingly, the circuit court's final order is affirmed in part, reversed in part and remanded.

I. FACTUAL AND PROCEDURAL BACKGROUND

Antero is engaged in the exploration, development and acquisition of natural gas and oil from properties located in the Appalachian Basin. Antero has been producing natural gas from wells in the State of West Virginia since 2008. It appears undisputed that Antero purchases or rents various items and services from vendors. Specific to the instant appeal, Antero rents items and purchases services in the following three categories: (1) crew quarters and related equipment; (2) portable toilets, sewage systems, related water systems, and septic cleaning charges; and (3) trash trailers and waste receptacles.

On December 19, 2014, the Auditing Division of the West Virginia State Tax Commissioner's Office ("Tax Department" or "Respondent") issued two Notices of Assessment against Antero for the period of January 1, 2011, through December 31, 2013.¹ The assessments included the purchases/rental of three categories of tangible personal property and services utilized by Antero in its horizontal drilling operations: (1) crew quarters and related equipment; (2) portable toilets, sewage systems, related water systems, and septic cleaning charges; and (3) trash trailers and waste receptacles. The assessment was based on the fact that Antero did not pay sales or use tax on purchases or rentals of the above-referenced items. Within one month of receiving the assessment, Antero paid the assessment in full but did so under protest. These assessments were timely appealed to the OTA.

An evidentiary hearing on Antero's appeal was held before the OTA on May 5, 2016. At the hearing, Alvyn Schopp, Chief Administrative Officer, Regional Senior Vice President and Treasurer of Antero and Evelyn Furbee, Tax Unit Supervisor II of the Tax Department, provided testimony.

The OTA issued its Final Decision on April 3, 2018. In its Final Decision, the OTA modified the two assessments so that the total liability owed by Antero for the period January 1, 2011, through December 13, 2013 was $25,613.82 as opposed to the initial assessment, which was in excess of $1,000,000. The OTA concluded that Antero's rental of the items in the following categories – (1) crew quarters and related equipment and (2) portable toilets, sewage systems, related water systems and septic charges (3) trash trailers and waste receptacles, were all exempt from tax because the rentals were integral and essential to Antero's operations. The Tax Commissioner appealed the decision of the OTA to the Circuit Court of Kanawha County.

By order entered November 15, 2018, the circuit court reversed the decision of the OTA and affirmed the original tax assessments, which held that the purchases and rentals at issue were not subject to the Direct Use Exemption. The circuit court concluded that oral argument was not necessary to decide the issues on appeal and relied upon the pleadings, the administrative decision, statutory language, and the prevailing case law in making its ruling. The circuit court found that the Tax Department correctly applied the Consumers Sales Tax and the applicable legislative rules. With respect to the crew quarters and related equipment, the circuit court found that "nothing in the statutory language or the legislative rule ... indicates the WV Legislature has classified restrooms, bedrooms, kitchenettes, TV Lounges, as (sic) breakrooms, as being directly used on (sic) the production of natural resources." With respect to portable toilets, sewage systems, related water systems, and septic cleaning charges, the circuit court found that Respondent had correctly assessed the Consumer Sales Tax on those items because the "direct use exemption and the legislative rule do not include any language authorizing or even suggesting such an exemption." With respect to the rentals of trash trailers and waste receptacles, the circuit court found that the "only waste put into the receptacles was from the living areas, kitchenettes, and bedrooms of the Crew Quarters which were not directly used in the production of natural resources." Finally, the circuit court concluded that the OTA's decision essentially "re-wrote" the statutory exemption at issue in this case. For these reasons, the circuit court reversed the administrative decision issued by the OTA.

This appeal by Antero followed.

II. STANDARD OF REVIEW

The standard of review applicable to Antero's appeal can be found in Syllabus Point 1 of Griffith v. ConAgra Brands, Inc. , 229 W. Va. 190, 728 S.E.2d 74 (2012) :

In an administrative appeal from the decision of the West Virginia Office of Tax Appeals, this Court will review the final order of the circuit court pursuant to the standards of review in the State Administrative Procedures Act set forth in W. Va. Code § 29A-5-4(g) [1988]. Findings of fact of the administrative law judge will not be set aside or vacated unless clearly wrong, and, although administrative interpretation of State tax provisions will be afforded sound discretion, this Court will review questions of law de novo.

West Virginia Code § 29A-5-4(g) provides, in relation to the circuit court's review:

The court may affirm the order or decision of the agency or remand the case for further proceedings. It shall reverse, vacate or modify the order or decision of the agency if the substantial rights of the petitioner or petitioners have been prejudiced because the administrative findings, inferences, conclusions decision or order are:

(1) In violation of constitutional or statutory provisions; or

(2) In excess of the statutory authority or jurisdiction of the agency; or

(3) Made upon unlawful procedures; or

(4) Affected by other error of law; or

(5) Clearly wrong in view of the reliable, probative and substantial evidence on the whole record; or

(6) Arbitrary or capricious or characterized by abuse of discretion or clearly unwarranted exercise of discretion.

Further, "[t]he ‘clearly wrong’ and the ‘arbitrary and capricious’ standards of review are deferential ones which presume an agency's actions are valid as long as the decision is supported by substantial evidence or by a rational basis." Syl. Pt. 3, In re Queen , 196 W. Va. 442, 473 S.E.2d 483 (1996).

With these standards in mind, we turn to the parties’ arguments.

III. DISCUSSION

This matter involves what is commonly referred to as the Direct Use Exemption to the Consumers Sales and Service Tax. Simply put, Antero argues that it is entitled to the Direct Use Exemption for purchases and rentals of certain tangible property and services, and the Tax Department disagrees.

We begin our analysis with a discussion of the applicable law regarding the taxes and exemption at issue. The State of West Virginia imposes a general consumers sales and service tax. See W. Va. Code § 11-15-1 et seq. "To prevent evasion [of this tax], it is presumed that all sales and services are subject to the tax until the contrary is clearly established." W. Va. Code § 11-15-6(b). The Direct Use Exemption for the Consumer Sales and Service Tax article provides,

[t]he following sales of tangible personal property and services are exempt from tax as provided in this subsection:

...

(2) Sales of services, machinery, supplies and materials directly used or consumed in the activities of manufacturing, transportation, transmission, communication, production of natural resources , gas storage, generation or production or selling electric power, provision of a public utility service or the operation of a utility service or the operation of a utility business, in the businesses or organizations named in this subdivision and does not apply to purchases of gasoline or special fuel;

W. Va. Code § 11-15-9(b)(2) (emphasis added). The phrase "directly used or consumed" is defined as:

"Directly used or consumed" in the activities of manufacturing, transportation, transmission, communication or the production of natural resources means used or consumed in those activities or operations which constitute an integral and essential part of the activities, as contrasted with and distinguished from those activities or operations

...