Exxon Corp. v. Oklahoma Tax Com'n

Decision Date02 November 1993
Docket NumberNo. 79130,No. 1,79130,1
Parties1993 OK CIV APP 178, Util. L. Rep. P 26,380 EXXON CORPORATION and El Paso Natural Gas Company, Appellants, v. OKLAHOMA TAX COMMISSION, Appellee. Court of Appeals of Oklahoma, Division
CourtUnited States State Court of Criminal Appeals of Oklahoma. Court of Civil Appeals of Oklahoma

Appeal from the Oklahoma Tax Commission.


William J. Legg, Richard B. Kells, and Timothy M. Larason, Oklahoma City, for appellants.

David Hudson and Kathryn Bass, Oklahoma City, for appellee.


HANSEN, Chief Judge:

Appellant, Exxon Corporation, is an Oklahoma gas producer. Appellant, El Paso Natural Gas Company, purchases gas from Exxon for transport into interstate commerce. Exxon and El Paso entered into approximately 124 gas purchase contracts whereby Exxon agreed to sell gas to El Paso. Twenty eight of these contracts were Oklahoma contracts. The contracts contained take-or-pay provisions which required El Paso to take certain quantities of gas or pay for it even if not taken. These take-or-pay payments were recoupable and, except for two contracts, refundable if not recouped.

In 1988, Exxon initiated two lawsuits against El Paso, one in federal court and one in a Texas district court. These lawsuits, among other things, alleged El Paso had breached the gas purchase contracts by failing to comply with the take-or-pay deficiency provisions. The claims included prayers for prejudgment interest. In January of 1989 El Paso paid Exxon $42 million, $18,072,964.00 of which was attributable to Oklahoma contracts, in settlement of the lawsuits and in consideration for Exxon's dismissal of the lawsuits. The payment represented a one time nonrecoupable nonrefundable cash payment. It was not a payment for future gas purchases. None of the Oklahoma contracts was terminated as a result of the agreement. The settlement agreement provided that Exxon was responsible for any production taxes that might be due on the payment. However, no taxes were paid on the settlement monies.

The Business Tax Division of the Oklahoma Tax Commission conducted an audit of Exxon. As a result, Commission issued an assessment of gross production and petroleum excise taxes against El Paso on the $18 million settlement. Commission based the assessment on 68 O.S.1991 § 1009(g). Exxon and El Paso timely protested the assessment and requested a hearing pursuant to 68 O.S.1991 § 221(d), claiming the entire settlement payment was interest on the deficiencies that Exxon would have earned had El Paso paid pursuant to the contract.

At the hearing, Exxon's witness testified the settlement payment represented interest even though in its accounts it was not booked to an interest account. The representative of Commission's Business Tax Division testified that the audit section did not make a distinction between recoupable and non-recoupable take-or-pay settlement payments and that both are subject to gross production taxes. He further testified, however, that if a take-or-pay settlement agreement allocates amounts to principal and interest, the interest portion is not subject to gross production tax. He did not know that Exxon claimed the settlement payment to be interest until Appellants filed their protest.

After the hearing, the Administrative Law Judge (ALJ) made specific findings of fact and conclusions of law and recommended denial of the protest. Commission adopted the ALJ's recommendations. Additionally, Commission, upon recommendation of the ALJ, refused to waive the assessed penalty for failure to pay. Both El Paso and Exxon appeal Commission's order.

68 O.S.1991 § 1009(g) provides:

Pursuant to the provisions of a gas purchase contract or agreement, if the first purchaser makes payments to the producer as a result of the failure or refusal of said purchaser to take gas, said payments, for purposes of this article, are hereby deemed to be part of the gross value of gas taken according to said contract or agreement. The gross production tax shall be calculated upon the gross value, including said payments, in accordance with the provisions of this article. Gas on which the gross production tax has been paid in this manner when taken by said purchaser shall be reported as gas on which said tax has been paid. If said gas, which corresponds to such payments, is not taken but payments therefor are retained by the producer, then said payments are hereby deemed to be a premium on gas which was taken under said contract or agreement.

Interest portions of a take-or-pay settlement are not subject to gross production tax. 1 Therefore, if the settlement payment was interest, it was non-taxable. Commission found the payment was not interest in that Exxon's lawsuits were for money judgments for take-or-pay deficiencies. In addition, the settlement agreement stated the payment was in lieu of making payment for all of El Paso's obligations under the contracts. The settlement agreement did not specifically identify any part of the payment as interest. Accordingly, under § 1009(g) Commission found the settlement payment taxable.

The Gross Production Tax Code, 68 O.S.1991 § 1001 et. seq. levies a tax on the gross value of production of oil and gas. The tax is not added to the price of the gas, as is a sales tax, but rather, it is deducted from the first sales proceeds of the gas. Under § 1009(g), added to the Code in 1983, take-or-pay payments are deemed part of the gross value of the gas taken under the contract.

The original gas purchase contracts provided the take-or-pay payments were recoupable, and except for two of the contracts, were refundable if not recouped. Exxon had the option at the end of the primary term to either terminate the contract and refund any unrecouped deficiency payments or to extend the term until El Paso recouped the gas. Appellants point out, however, that El Paso never made the take-or-pay payments and the settlement agreement provided that the payments were not recoupable or refundable. Thus, they argue, § 1009(g) does not impose a tax on take-or-pay settlement payments. A plain reading of this statute does not support Appellants' argument.

If production taxes are paid on a recoupable refundable take-or-pay payment made by a purchaser to a producer, which payment is not recouped in gas and is later refunded to the purchaser, the purchaser would be entitled to a refund of the taxes on the refunded amount if a timely claim is filed.

A take-or-pay payment is taxable at the time of payment. If the producer later refunds the money, a tax refund may be granted, but this does not make the original payment nontaxable. Neither is there an exception in § 1009(g) for payments that may not be refunded.

Under § 1009(g), take-or-pay payments made by the purchaser are deemed part of the gross value of the gas taken. The gross production tax is calculated on the gross value of the gas which includes take-or-pay payments. If the payment is recouped, the gas is reported to Commission as gas upon which taxes have been paid, thus preventing double taxation. If the payments are not recouped, they are considered a premium on gas taken. See, 68 O.S.1991 § 1010(b)(5). The Legislature made no...

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