Chevron U.S.A. v. Department of Revenue

• Decision Date: 11 May 2007
• Docket Number: No. 06-56.,06-56.
• Citation: 158 P.3d 131,2007 WY 79
• Parties: CHEVRON U.S.A., INC., Appellant (Petitioner), v. DEPARTMENT OF REVENUE, State of Wyoming, Appellee (Respondent).
• Court: Wyoming Supreme Court

158 P.3d 131

2007 WY 79

CHEVRON U.S.A., INC., Appellant (Petitioner), v. DEPARTMENT OF REVENUE, State of Wyoming, Appellee (Respondent).

No. 06-56.

Supreme Court of Wyoming.

May 11, 2007.

Representing Appellant: William J. Thomson II, Randall B. Reed, and Brian J. Hanify of Dray, Thomson & Dyekman, P.C., Cheyenne, Wyoming. Argument by Mr. Thomson.

Representing Appellee: Patrick J. Crank, Wyoming Attorney General; Michael L. Hubbard, Deputy Attorney General; Martin L. Hardsocg, Senior Assistant Attorney General; and Cathleen D. Parker, Senior Assistant Attorney General. Argument by Ms. Parker.

Before VOIGT, C.J., and GOLDEN, HILL, KITE, and BURKE, JJ.

HILL, Justice.

[¶ 1] The Department of Revenue used the comparable value method set forth in Wyo. Stat. Ann. § 39-14-203(b)(vi)(B) to establish the value of natural gas produced by Chevron and processed at its Carter Creek processing plant in 2000 and 2001. Chevron claims that there were no comparable agreements for use in determining an appropriate processing fee and, consequently, the DOR's choice and application of the comparable value method was flawed. We conclude that the State Board of Equalization properly ruled: (1) The Department of Revenue (DOR) had a reasonable basis for choosing the comparable value method to appraise Chevron's Carter Creek production; and (2) the DOR appropriately applied the comparable value method to determine the fair market value of Chevron's production in 2000 and 2001. Consequently, we affirm.

ISSUES

[¶ 2] Chevron phrases the issues as:

1. Do comparable processing agreements exist for Chevron's Carter Creek plant that satisfy the statutory elements of Wyo. Stat. Ann. § 39-14-203(b)(vi)(B)?

2. Does the selection of the comparable value method, Wyo. Stat. Ann. § 39-14-203(b)(vi)(B) fail to determine the fair market value for Chevron's Carter Creek production at the "point of valuation?"

3. Was Chevron denied its right to equal and uniform tax treatment in violation [of the] Wyoming Constitution because the Department allowed other similarly-situated taxpayers to use the proportionate profits methodology which yielded a far lower taxable value for those other taxpayers?

[¶ 3] The DOR's statement of the issues is more detailed:

I. Did the State Board of Equalization correctly affirm the Department of Revenue's selection of the comparable value method as the method which most accurately reflected the taxable fair market value of [Chevron's] 2000-02 Carter Creek production?

II. Did the State Board of Equalization correctly affirm the Department of Revenue's application of a comparable value processing fee of 25% of the product paid in-kind, the maximum fee paid by any producer regardless of any circumstances to value [Chevron's] 2000 and 2001 Carter Creek production?

III. Did the State Board correctly determine that [Chevron] failed to carry its burden of proof when it failed to offer any evidence that its application of proportionate profits reflected the most accurate fair market value for taxation purposes, as required by Wyo. Stat. § 39-14-203(b)(viii)?

IV. Did the State Board of Equalization correctly affirm the Department's rejection of [Chevron's] application of proportionate profits which resulted in processing deductions far in excess of the actual costs to process and which bore no relationship to actual processing costs?

V. Did the State Board of Equalization correctly determine that [Chevron's] due process rights were not violated?

FACTS

[¶ 4] Chevron owns natural gas production rights in the Carter Creek field which is located in Uinta and Lincoln counties. The field produces "sour gas," which has high levels of hydrogen sulfide. In order to process the sour gas from the Carter Creek field, Chevron constructed the Carter Creek Gas Processing Plant. Chevron is the sole owner of the Carter Creek plant. Consequently, there is no Construction and Operating Agreement for the Carter Creek plant, and Chevron does not charge itself a fee to process its Carter Creek field gas.

[¶ 5] In 1999, the DOR sent a letter to all Wyoming oil and gas producers directing them to use the comparable value method set out in § 39-14-203(b)(vi)(B), to value their production for 2000, 2001, and 2002, when it was sold beyond the point of valuation. Chevron sent an "exception letter" to the DOR, claiming that there were no comparable agreements for use in appraising its Carter Creek production under the comparable value method and requesting to utilize the proportionate profits valuation method instead. The DOR identified agreements it considered comparable and refused to allow Chevron to use its chosen appraisal method.

[¶ 6] Chevron disregarded the DOR's directive and reported the value of its production pursuant to the proportionate profits method. The DOR issued a notice of valuation for Chevron's Carter Creek natural gas production for 2000 using the comparable value method. The DOR used a 25% processing fee deduction and assigned a much larger taxable value to Chevron's production than Chevron had reported. Chevron appealed both the DOR's choice of valuation method and its notice of valuation for 2000 to the State Board of Equalization (SBOE), and the SBOE consolidated the appeals. After a contested case hearing, the SBOE upheld the DOR's choice of the comparable value method to appraise Chevron's Carter Creek natural gas production and its valuation of the gas for production year 2000.¹

[¶ 7] The DOR also used the comparable value method and the 25% processing fee deduction to value Chevron's production for the Carter Creek field in 2001. Chevron objected to DOR's notice of valuation and appealed to the SBOE. The SBOE held another contested case hearing and upheld the DOR's valuation of Chevron's 2001 Carter Creek production. Chevron filed petitions for review of the SBOE decisions in the district court. The district court consolidated the appeals and certified them to this Court.

STANDARD OF REVIEW

[¶ 8] The district court certified this case to us pursuant to W.R.A.P. 12.09(b); consequently, we apply the appellate standards applicable to the court of the first instance. State ex rel. Wyo. Dep't of Revenue v. Buggy Bath Unlimited, Inc., 2001 WY 27, ¶ 5, 18 P.3d 1182, 1185 (Wyo.2001); see also Union Tel. Co. v. Wyo. Pub. Serv. Comm'n, 907 P.2d 340, 341-42 (Wyo.1995). Wyo. Stat. Ann. § 16-3-114(c) (LexisNexis 2005) governs judicial review of administrative decisions.

[¶ 9] When an appellant challenges an agency's findings of fact and both parties submitted evidence at the contested case hearing, we examine the entire record to determine if the agency's findings are supported by substantial evidence. Colorado Interstate Gas Co. v. Wyoming Department of Revenue, 2001 WY 34, ¶ 8, 20 P.3d 528, 530 (Wyo.2001); RT Commc'ns, Inc. v. State Bd. of Equalization, 11 P.3d 915, 920 (Wyo.2000). If the agency's findings of fact are supported by substantial evidence, we will not substitute our judgment for that of the agency and will uphold the factual findings on appeal. "Substantial evidence is more than a scintilla of evidence; it is evidence that a reasonable mind might accept in support of the conclusions of the agency." Id.

[¶ 10] This Court reviews an agency's conclusions of law de novo. Wyo. Dep't of Revenue v. Guthrie, 2005 WY 79, ¶ 13, 115 P.3d 1086, 1091 (Wyo.2005). If a conclusion of law is in accord with the law, it is affirmed. Airtouch Commc'ns, Inc. v. Dep't of Revenue, 2003 WY 114, ¶ 10, 76 P.3d 342, 347. "However, when the agency has failed to properly invoke and apply the correct rule of law, we correct the agency's error." Id. See also, Powder River Coal Co. v. Wyo. State Bd. of Equalization, 2002 WY 5, ¶ 6, 38 P.3d 423, 426 (Wyo.2002); Chevron U.S.A., Inc. v. State, 918 P.2d 980, 983 (Wyo. 1996).

When an agency's determinations contain elements of law and fact, we do not treat them with the deference we reserve for findings of basic fact. When reviewing an "ultimate fact," we separate the factual and legal aspects of the finding to determine whether the correct rule of law has been properly applied to the facts. We do not defer to the agency's ultimate factual finding if there is an error in either stating or applying the law.

Basin Elec. Power Co-op., Inc. v. Dep't of Revenue, State of Wyo., 970 P.2d 841, 850-51 (Wyo.1998) (citations omitted). See also Colorado Interstate Gas, ¶ 8, 20 P.3d at 530-31.

DISCUSSION

1. Comparable Value

[¶ 11] This case originated with the DOR's choice of the comparable value method, pursuant to § 39-14-203(b)(vi)(B), to determine the value of Chevron's natural gas production for severance tax purposes. The severance tax for natural gas is calculated from the "value of the gross product," which is defined as the fair market value of the product less any deductions and exemptions allowed by Wyoming law. Wyo. Stat. Ann. §§ 39-14-201(a)(xxix) and 39-14-203(a)(i) (LexisNexis 2005). Wyo. Stat. Ann. § 39-14-203(b)(ii) (LexisNexis 2005) states: "The fair market value for . . . natural gas shall be determined after the production process is completed.... [Thus,] expenses incurred by the producer prior to the point of valuation are not deductible in determining the fair market value of the mineral." Wyo. Stat. Ann. § 39-14-203(b)(iv) (LexisNexis 2005) defines when production of natural gas is considered complete: "The production process for natural gas is completed after extracting from the well, gathering, separating, injecting and any other activity which occurs before the outlet of the initial dehydrator."

[¶ 12] Chevron's Carter Creek gas is sold after processing. Consequently, use of a valuation formula is necessary because Chevron's gas is not sold at the point of valuation. Section 39-14-203(b)(vi) describes the options for valuing natural gas sold after it has undergone processing.

§ 39-14-203. Imposition.

. . . .

(vi) In the event the crude oil, lease condensate or...