Kennedy Oil v. Department of Revenue

• Decision Date: 31 December 2008
• Docket Number: No. S-07-0287.,S-07-0287.
• Citation: 2008 WY 154,205 P.3d 999
• Parties: KENNEDY OIL, a Wyoming corporation, Appellant (Petitioner), v. DEPARTMENT OF REVENUE, Appellee (Respondent).
• Court: Wyoming Supreme Court

205 P.3d 999

2008 WY 154

KENNEDY OIL, a Wyoming corporation, Appellant (Petitioner), v. DEPARTMENT OF REVENUE, Appellee (Respondent).

No. S-07-0287.

Supreme Court of Wyoming.

December 31, 2008.

Representing Appellant: Morris R. Massey of Brown, Drew & Massey, LLP, Casper, Wyoming.

Representing Appellee: Bruce A. Salzburg, Attorney General; Michael L. Hubbard, Deputy Attorney General; Martin L. Hardsocg, Senior Assistant Attorney General; Karl D. Anderson, Senior Assistant Attorney General. Argument by Mr. Hardsocg.

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

KITE, Justice.

[¶ 1] After the Wyoming State Board of Equalization (Board) affirmed the Department of Revenue's (DOR) valuations of Kennedy Oil's (Kennedy) coal bed methane (CBM) production for production years 2000-2002, Kennedy sought review in district court. The DOR moved for, the district court ordered and this Court accepted certification pursuant to W.R.A.P. 12.09(b).¹ We are asked to decide whether the DOR properly valued Kennedy's 2000-2002 CBM production at the outlet of the initial dehydrator pursuant to Wyo. Stat. Ann. § 39-14-203(b)(iv) (LexisNexis 2007).

ISSUES

[¶ 2] The primary issue for our determination concerns the point at which CBM is valued for taxation purposes. Specifically, we must decide, when a producer such as Kennedy sells its CBM production to a third party at or near the wellhead, whether the production is valued at the point of sale or at the outlet of the initial dehydrator.

FACTS

[¶ 3] In 2000, 2001 and 2002, Kennedy produced CBM from the North, South and Central Kitty fields located in Campbell County, Wyoming. In 1999, prior to the start of production, Kennedy entered into contracts with two affiliates of Enron—a gas purchase agreement with Enron Capital & Trade Resources Corporation and a field services agreement with Enron Midstream Services, LLC. Under the gas purchase agreement, Enron purchased and received CBM from Kennedy at or very near the wellhead and was responsible for gathering and transporting it from there to available markets at the end of the pipeline. Kennedy discounted the purchase price by the costs Enron incurred in gathering and transporting the gas from the wellhead to the outlet of the initial dehydrator. The field services agreement provided for Enron to perform the gathering and transporting services for Kennedy even if the marketing aspect of the gas purchase agreement failed. After Enron filed for bankruptcy during the term of the agreements, Kennedy sold or transferred the CBM to other purchasers or field service providers under terms substantially similar to those in its contracts with Enron.

[¶ 4] For production years 2000-2002, Kennedy reported and paid taxes on its CBM production from the Kitty fields in accordance with its view that the point of valuation was the point of sale at or near the wellheads. In 2006, the Wyoming Department of Audit (DOA) completed an audit of Kennedy's 2000-2002 CBM production. The DOA determined the point of valuation to be the outlet of the initial dehydrator downstream from the wellheads. On that basis, the DOA disallowed the gathering and transportation expenses incurred between the wellheads and the outlet of the initial dehydrator. As a consequence, the DOA placed a significantly higher value on the production than Kennedy, subjecting Kennedy to additional severance and ad valorem taxes on the difference.

[¶ 5] Kennedy appealed the DOA decision to the Board, which convened a contested case hearing in January of 2007. At the hearing, Kennedy maintained that it sold the CBM at the wellhead; therefore, § 39-14-203(b)(v) applied and the fair market value of the CBM produced should be the bona fide arms length sales price. The DOR asserted that the point of valuation was the outlet of the initial dehydrator; therefore, § 39-14-203(b)(iv) applied and Kennedy should not receive deductions for expenses incurred between the wellhead and the initial dehydrator. The Board affirmed the DOR's valuation. Kennedy filed a petition for review in the district court. The DOR filed a motion for certification to this Court, which the district court granted.

STANDARD OF REVIEW

[¶ 6] Our review of administrative agency action is governed by Wyo. Stat. Ann. § 16-3-114 (LexisNexis 2007), which provides in pertinent part:

(c) To the extent necessary to make a decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action. In making the following determinations, the court shall review the whole record or those parts of it cited by a party and due account shall be taken of the rule of prejudicial error. The reviewing court shall:

(i) Compel agency action unlawfully withheld or unreasonably delayed; and

(ii) Hold unlawful and set aside agency action, findings and conclusions found to be:

(A) Arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law;

(B) Contrary to constitutional right, power, privilege or immunity;

(C) In excess of statutory jurisdiction, authority or limitations or lacking statutory right;

(D) Without observance of procedure required by law; or

(E) Unsupported by substantial evidence in a case reviewed on the record of an agency hearing provided by statute.

[¶ 7] When reviewing a case certified to us from district court pursuant to W.R.A.P. 12.09(b), we apply the appellate standards applicable to a reviewing court of the first instance. Williams Prod. RMT Co. v. State Dep't of Revenue, 2005 WY 28, ¶ 7, 107 P.3d 179, 182-183 (Wyo.2005). We review factual determinations for substantial evidence, meaning we consider whether there is relevant evidence in the entire record which a reasonable mind might accept in support of the agency's conclusions. Dale v. S & S Builders, LLC, 2008 WY 84, ¶ 21, 188 P.3d 554, 561 (Wyo.2008). Importantly, our review of any particular decision turns not on whether we agree with the outcome, but on whether the agency could reasonably conclude as it did based upon all of the evidence presented. Id., ¶ 23, 188 P.3d at 561. The burden of proof with respect to tax valuation is on the party asserting an improper valuation. Williams Prod., ¶ 7, 107 P.3d at 183. We review an agency's conclusions of law de novo, and will affirm an agency's legal conclusion only if it is in accordance with the law. Dale, ¶ 27, 188 P.3d at 562. Statutory interpretation is a question of law and is reviewed de novo. Williams Prod., ¶ 8, 107 P.3d at 183.

DISCUSSION

1. Point of Valuation

[¶ 8] Kennedy asserts that the Board incorrectly ruled that the CBM covered by the audit was to be valued at the outlet of the initial dehydrator. Kennedy contends the uncontested evidence established that it sold the CBM at or near the wellhead. Citing § 39-14-203(b)(v), Kennedy maintains that the point of sale is the point of valuation for tax purposes. The DOR responds that the Board correctly found that the point of valuation was the outlet of the initial dehydrator downstream from the wellhead, not the point of sale upstream as Kennedy claimed.

[¶ 9] The relevant statutory provisions are as follows:

§ 39-14-203. Imposition.

(a) Taxable event. The following shall apply:

(i) There is levied a severance tax on the value of the gross product extracted for the privilege of severing or extracting crude oil, lease condensate or natural gas in the state. The tax imposed by this subsection shall be in addition to all other taxes imposed by law including, but not limited to, ad valorem taxes imposed by W.S. 39-13-101 through 39-13-111.

(b) Basis of tax. The following shall apply:

(i) Crude oil, lease condensate and natural gas shall be valued for taxation as provided in this subsection;

(ii) The fair market value for crude oil, lease condensate and natural gas shall be determined after the production process is completed. Notwithstanding paragraph (x) of this subsection, expenses incurred by the producer prior to the point of valuation are not deductible in determining the fair market value of the mineral;

(iii) The production process for crude oil or lease condensate is completed after extracting from the well, gathering, heating and treating, separating, injecting for enhanced recovery, and any other activity which occurs before the outlet of the initial storage facility or lease automatic custody transfer (LACT) unit;

(iv) 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. When no dehydration is performed, other than within a processing facility, the production process is completed at the inlet to the initial transportation related compressor, custody transfer meter or processing facility, whichever occurs first;

(v) If the crude oil, lease condensate or natural gas production as provided by paragraphs (iii) and (iv) of this subsection are sold to a third party, or processed or transported by a third party at or prior to the point of valuation provided in paragraphs (iii) and (iv) of this subsection, the fair market value shall be the value established by bona fide arms-length transaction.

[¶ 10] Our review of statutory provisions is governed by the following standards:

The paramount consideration is to determine the legislature's intent, which must be ascertained initially and primarily from the words used in the statute. We look first to the plain and ordinary meaning of the words to determine if the statute is ambiguous. A statute is clear and unambiguous if its wording is such that reasonable persons are able to agree on its meaning with consistency and predictability. Conversely, a statute is ambiguous if it is found to be vague or uncertain and subject to varying interpretations. If we determine that a...