Blocker Drilling Canada, Ltd. v. Conrad

• Decision Date: 17 August 1984
• Docket Number: No. 10588,10588
• Parties: BLOCKER DRILLING CANADA, LTD., Anderson-Myers Drilling Company, Atco Drilling, Inc., Brinkerhoff-Signal, Inc., Burris Drilling Co., Kenai Drilling Co., Inc., Kenting Drilling Co., Ltd., Shelby Drilling, Inc., and Star Drilling Co., Inc., Appellees, v. Kent CONRAD, Tax Commissioner of the State of North Dakota, Appellant. Civ.
• Court: North Dakota Supreme Court

Page 912

354 N.W.2d 912

BLOCKER DRILLING CANADA, LTD., Anderson-Myers Drilling Company, Atco Drilling, Inc., Brinkerhoff-Signal, Inc. Burris Drilling Co., Kenai Drilling Co., Inc., Kenting Drilling Co., Ltd., Shelby Drilling, Inc., and Star Drilling Co., Inc., Appellees, v. Kent CONRAD, Tax Commissioner of the State of North Dakota, Appellant.

Civ. No. 10588.

Supreme Court of North Dakota.

Aug. 17, 1984.

Fleck, Mather, Strutz & Mayer, Bismarck, and Holme, Roberts & Owen, Denver Colo., for appellees; argued by Warren H. Albrecht, Jr., Bismarck. Appearances by Thomas H. Olson and James D. Butler, Denver, Colo.

Robert W. Wirtz and Carla Smith, Asst. Attys. Gen., Tax Dept., Bismarck, for appellant; argued by Robert W. Wirtz.

PEDERSON, Justice.

We are asked to decide for the first time in this state if the tax commissioner can be estopped from reassessing the use tax liabilities of certain taxpayers. The basic facts of the case are relatively straightforward and undisputed.

The taxpayers are out-of-state corporations who are drilling contractors in the oil and gas business. They engaged the services of Clyde Logan and Rick Logan (hereinafter Logan), tax consultants in Denver, Colorado, to handle their use tax obligations in North Dakota. At all times relevant to this case, Walter Stack (hereinafter Stack) was the Director of Sales and Special Taxes and was the official responsible for use tax assessment. Stack has held that position for a number of years and through several administrations. Logan first met with Stack in 1972 to resolve the use tax liability of one of Logan's clients who had retained the consultant following an audit by the North Dakota Tax Department (hereinafter Department).

Section 57-40.2-02.1, NDCC, provides that, with certain exceptions, a tax be imposed on tangible personal property at the time it is brought into North Dakota if it was not originally purchased for storage, use or consumption in this state. If the property is new, the tax is based on the purchase price; if the property is used, the tax is based on the fair market value of the property at the time it is brought into the state. There is no statutory definition of fair market value for use tax purposes and the Department at the time pertinent to our consideration had no regulations or written guidelines pertaining to fair market value for oil drilling rigs.

At the 1972 meeting with Stack, Logan discussed the method of assessment used for property tax purposes in other oil and gas producing states in the Rocky Mountain region. In 1974, Logan and Stack first used schedules from other states as a base and arrived at a figure for North Dakota use tax purposes, adjusting upward or downward depending on facts supplied by Logan concerning each particular rig.

From 1972 to 1982, Logan met and corresponded with Stack on numerous occasions to report the movement of a drilling rig into North Dakota, to arrive at a figure for determining the use tax due and to arrange for payment of tax due. A similar process was used on the occasions pertinent to this case. Stack himself prepared the use tax returns on at least several occasions and gave them to Logan to be signed and returned by the respective clients. Following the meetings Stack sent Logan letters on the tax commissioner's letterhead confirming the meetings and the values agreed upon. Logan forwarded copies of the letters to the clients and arranged for payment of the tax. At no time did Stack affirmatively represent to Logan that Logan's clients would not be subject to an audit, and Logan makes no assertion to that end. Similarly, Stack does not claim that he felt Logan intentionally misled him. To the contrary, Stack stated that Logan was always cooperative and had not tried to deceive him.

Before 1982 oil activity in North Dakota experienced tremendous growth and drilling rigs were at a premium. The Department turned its attention to the drilling industry as a whole and decided to conduct field audits. By the time the audits were completed, however, the drilling industry had suffered a complete turnaround. The Department, based on the audit results that utilized book value rather than fair market value, reassessed the tax due and imposed penalties and interest.

The taxpayers protested the assessment and filed a declaratory judgment action in district court. The taxpayers asked the court to declare the original determinations of tax due "final and irrevocable" under Sec. 57-39.2-15, NDCC, ¹ thus precluding the tax commissioner from redetermining the tax, to declare the tax commissioner estopped from redetermining or reassessing the tax, and to declare that the tax commissioner was precluded by law and equity from assessing penalties and interest under the facts of the case. The taxpayers also petitioned the court for a Writ of Prohibition to keep the tax commissioner from redetermining and reassessing their use tax liability and from holding an administrative hearing on the validity of the tax assessments. The district court decided in favor of the taxpayers on all counts and the tax commissioner has appealed from the court's final judgment of November 18, 1983.

The Department contends that, as a matter of law, estoppel against the government is not available in North Dakota as a remedy in tax matters and that the tax commissioner, in fact, has an affirmative duty to verify the accuracy of use tax returns and to assess tax deficiencies when necessary. The Department further argues that Stack's meetings with Logan only constituted taxpayer assistance and were not "final determinations" under Sec. 57-39.2-15, NDCC, because the statute charges the tax commissioner himself with the duty of giving the "notice of determination" to the taxpayer. Stack's letters were not on the forms regularly used by the Department and, therefore, according to the Department, they could not possibly be construed as a determination of tax due. Finally, the Department contends that applying estoppel in this case would violate Article X, Section 2 of the North Dakota Constitution (which provides that the power of taxation cannot be suspended or surrendered by grant or contract) and Article X, Section 18 of the North Dakota Constitution (which prohibits the state or its political subdivisions from giving its credit or making gifts or donations to or on behalf of any individual, association or corporation except for reasonable support of the poor).

We will dispose of the constitutional argument at the outset. It is self-evident that the tax commissioner has not in any way given up his power to tax, even if estoppel is held to apply to this case. The taxpayers have already paid a use tax; the issue here is the tax commissioner's authority to redetermine and reassess that tax under these particular facts. The argument that estoppel would effectively constitute a gift is premised on the assumption that the taxpayers are liable for the additional taxes imposed by the tax commissioner. That assumption is invalid, however, since estoppel would mean the tax commissioner was without authority to assess additional taxes in the first place. We find the Department's constitutional arguments meritless.

The issue of whether or not the tax commissioner has the statutory authority to redetermine the use tax and assess additional tax (and consequently, whether or not the Writ of Prohibition was properly granted) is inextricably intertwined with the estoppel issue and we will discuss them together. If Stack's dealings and communications with Logan are found to be a "determination of tax due," then the tax was finally and irrevocably fixed (absent fraud or willful evasion) pursuant to Sec. 57-39.2-15, NDCC since the taxpayers did not protest or apply for a hearing within the fifteen-day limit. It follows that the tax commissioner would then lack the statutory authority to redetermine the use tax or to proceed with any further administrative action concerning the specific drilling rigs that are the subject of this case. If estoppel does not apply, the tax commissioner did have statutory authority to proceed and the Writ of Prohibition should be vacated.

We direct our initial inquiry to whether or not equitable estoppel against the government is available as a remedy in North Dakota. Along with the recent trend of restricting the doctrine of sovereign immunity there has been an increasing trend to whittle away at the inapplicability of estoppel against the government. See generally, K. Davis, Administrative Law of the Seventies Secs. 17.01-17.08 (1976); Note, Equitable Estoppel of the Government, 79 Colum.L.Rev. 551 (1979). Both parties cited and attempted to distinguish numerous cases on this point. Many of the cases concerned zoning situations. See, e.g., Fields v. Kodiak City Council, 628 P.2d 927 (Alaska 1981); DuPuis v. Submarine Base Credit Union, Inc., 170 Conn. 344, 365 A.2d 1093 (1976); Saah v. District of Columbia Board of Zoning Adjustment, 433 A.2d 1114 (D.C.1981); My Sister's Place v. City of Burlington, 139 Vt. 602, 433 A.2d 275 (1981); Board of County Commissioners of Clark County v. C.A.G., Inc., Nev., 654 P.2d 531 (1982). Others concerned tort actions or a variety of non-taxation issues. See, e.g., Waugh v. University of Hawaii, 63 Hawaii 117, 621 P.2d 957 (1980); Chennault v. Sager, Mont., 610 P.2d 173 (1980); Manning v. Nevada State Board of Accountancy, Nev., 673 P.2d 494 (1983); Bender v. New York City Health & Hospitals Corp., 38 N.Y.2d 662, 345 N.E.2d 561, 382 N.Y.S.2d 18 (1976); Wiggins v. Barrett & Associates, 295 Or. 679, 669 P.2d 1132 (1983); City of Shamrock v. Hrnciar, 453 S.W.2d 898 (Tex.Civ.App.1970); Shafer v. State, 83 Wash.2d 618, 521 P.2d 736 (1974); Beane v. City of Sturgeon Bay, 112 Wis.2d 609, 334 N.W.2d 235 (1983). Others specifically concerned tax situations and will be discussed in greater detail later in this opinion. The facts in the cases cited above are so...