Oxy USA, Inc. v. MISS. STATE TAX COM'N, 1998-SA-01293-SCT.

• Decision Date: 13 April 2000
• Docket Number: No. 1998-SA-01293-SCT.,1998-SA-01293-SCT.
• Citation: 757 So.2d 271
• Parties: OXY USA, INC. v. MISSISSIPPI STATE TAX COMMISSION.
• Court: Mississippi Supreme Court

757 So.2d 271

OXY USA, INC. v. MISSISSIPPI STATE TAX COMMISSION.

No. 1998-SA-01293-SCT.

Supreme Court of Mississippi.

April 13, 2000.

Jefferson D. Stewart, Victoria W. Thomas, Jackson, Attorneys for Appellant. Brad D. Wilkinson, Bobby Long, Jackson, Attorneys for Appellee.

BEFORE PITTMAN AND BANKS, P.JJ., AND COBB, J.

PITTMAN, Presiding Justice, for the Court:

STATEMENT OF THE CASE

¶ 1. This case arises on appeal, pursuant to Miss.Code Ann. § 27-25-23 (Supp.1999) and §§ 27-65-47 & -49 (1990), from a suit filed by OXY USA Inc. (OXY) against the Mississippi State Tax Commission (Commission) to recover improper severance taxes in the amount of $431,254.47, including interest and penalties. The assessment of severance taxes was appealed by OXY to the Commission Board of Review on April 15, 1994, which upheld the severance tax assessment. OXY paid the amount in full on October 17, 1994, and filed suit on January 24, 1997, in the Chancery Court of the First Judicial District of Hinds County. Trial was held before the Chancellor Patricia D. Wise on May 27, 1998. On June 30, 1998, the Chancellor issued her Memorandum Opinion and Order affirming the assessment and dismissing OXY's complaint. Final judgment was entered on August 3, 1998, and OXY perfected this appeal on August 25, 1998.

STATEMENT OF THE FACTS

¶ 2. In the mid-1980's, the drastic reduction in the prices of oil and natural gas discouraged producers from large scale prospecting and exploration. Mississippi reacted to this "crisis" by giving potential producers a tax break from the oil and gas severance tax. This concession, commonly referred to as the "production exemption" is found at Miss.Code Ann. § 27-25-703, allowing, in part, that:

(3) Natural gas and condensate produced from any wells for which drilling is commenced after March 15, 1987, and before July 1, 1990, shall be exempt from the tax levied under this section for a period of two (2) years beginning on the date of first sale of production from such well.

¶ 3. OXY has been in the business of oil and natural gas exploration and production in Mississippi for the past thirty years. In 1987, OXY struck oil in Wilkinson County. The find is named Thanksgiving Field. Between October 1987 and May 1989, OXY drilled fourteen wells which produced oil and gas from the Thanksgiving Field. All of these wells were first drilled during the qualifying period for the Production Exemption. All but seven wells produced and sold their oil and gas production for two full years prior to December 1989.

¶ 4. Over the one-year period from July 1988 to November 1989, oil and gas were produced and sold from these seven wells in what is generally referred to as primary recovery. In November 1989, however, the Lower Tuscaloosa A Sand Fieldwide Unit was established in the Thanksgiving Field by the Mississippi State Oil and Gas Board (the Board) in order to institute a secondary recovery project within the field. The Board found that a secondary recovery project was feasible and would result in the recovery of more oil and/or gas.

¶ 5. In December 1989, as part of the secondary recovery project, OXY began injecting gas produced from Lower Tuscaloosa pool, as well as gas purchased from the nearby "Frio wells" and pipeline OXY operated, into the Lower Tuscaloosa reservoir. Between December 1989, and May 1991, 2.3 billion cubic feet (bcf) of gas produced from the seven wells of the Thanksgiving Field were re-injected into the Thanksgiving Field Secondary Recovery Project. All of this gas was produced during a period that qualified it for the production exemption. During that period, OXY purchased 2.4 bcf of gas from the Frio Wells and pipeline and injected that gas into the Thanksgiving Field Secondary Recovery Project. Much of this gas was also qualified for the production exemption. ¶ 6. The gas produced from the Lower Tuscaloosa reservoir between December 1989 and May 1991 was sent to two central facilities in the field where it was separated, compressed, heated and dehydrated. As a result, the nature and the composition of the gas were significantly changed into "pipeline quality" gas. This refined gas was then commingled with the pipeline quality gas purchased from the Frio Wells and pipeline and injected through three injection wells into the "gas leg" of the Lower Tuscaloosa reservoir. This injected gas was used to maintain reservoir pressure sufficiently high enough to continue producing oil from that pool.

¶ 7. By January 1993, OXY had determined that the maximum benefits of the secondary recovery project had been achieved and the injection of gas ceased. OXY began recovering and selling the previously injected gas, so that by November 1993, quantities of gas equivalent to the amount of pipeline gas purchased and injected (2.4 bcf) and quantities of gas produced from the seven wells and refined into pipeline gas (2.3 bcf) had been recovered and sold.

¶ 8. As a result of the injection of this purchased and produced and refined pipeline gas, significant barrels of oil were produced and sold from the Thanksgiving Field between December 1989 through January 1993. Over 730,000 barrels of oil were produced from this Thanksgiving Field, over and above what would have been produced without this gas injection. Over $630,000 in severance taxes was paid on these additional barrels of oil.

¶ 9. OXY reported the production of this purchased gas and the gas produced from the seven wells and re-injected as exempt from severance taxes on its severance tax returns. The Commission audited those returns and agreed that it could not assess a tax for the 2.4 bcf of purchased gas which OXY recovered in 1993, but the Commission refused OXY's claimed production exemption for the 2.3 bcf of gas produced from the seven wells which was refined then re-injected and recovered in 1993. The Commission claimed that the production exemption did not apply to gas produced for the second time outside the exemption period. This position was upheld by the Board of Review and the Chancery Court.

STATEMENT OF THE ISSUES

I. WHETHER THE OXY GAS, ONCE EXEMPT FROM SEVERANCE TAX UNDER MISS. CODE ANN. § 27-25-703(3), COULD LATER LOSE THAT EXEMPTION BY VIRTUE OF OXY'S USE OF THE GAS—INJECTING IT BACK INTO THE GROUND TO MAXIMIZE RECOVERY FROM THE OIL FIELD AND LATER RECOVERING AND SELLING IT.

II. IF SO, WHETHER THE RECOVERED OXY GAS, AFTER BEING REFINED, INJECTED BACK INTO THE EARTH, AND THEN, RECOVERED, WAS GAS THAT WAS "PRODUCED OR SEVERED FROM THE SOIL OR WATER ... IN ITS NATURAL, UNREFINED OR UNMANUFACTURED STATE," AS REQUIRED BY MISS. CODE ANN. § 27-25-703 FOR A LEVY OF SEVERANCE TAX.

III. WHETHER THE ASSESSMENT WAS ARBITRARY AND CAPRICIOUS BECAUSE IT WAS INCONSISTENT WITH THE COMMISSION'S PRIOR ADVISORIES ON THE ISSUE AND, AS WELL, WITH THE COMMISSION'S TREATMENT OF SIMILAR GAS.

DISCUSSION OF THE LAW

¶ 10. This Court has stated:

Our Constitution does not permit the judiciary of this state to retry de novo matters on appeal from administrative agencies. Our courts are not permitted to make administrative decisions and perform the functions of an administrative agency. Administrative agencies must perform the functions required of them by law. When an administrative agency has performed its function, and has made the determination and entered the order required of it, the parties may then appeal to the judicial tribunal designated to hear the appeal. The appeal is a limited one, however, since the courts cannot enter the field of the administrative agency. The court will entertain the appeal to determine whether or not the order of the administrative agency (1) was supported by substantial evidence, (2) was arbitrary or capricious, (3) was beyond the power of the administrative agency to make, or (4) violated some statutory or constitutional right of the complaining party.

Mississippi State Tax Comm'n v. Mississippi-Ala. State Fair, 222 So.2d 664, 665 (Miss.1969). The decision of an administrative agency or board is afforded great deference upon judicial review by this Court even though we review the decision of the chancellor de novo. St. Dominic-Jackson Mem. Hosp. v. Mississippi State Dep't of Health, 728 So.2d 81, 83 (Miss. 1998); Mississippi State Dep't of Health v. Southwest Miss. Reg'l Med. Ctr., 580 So.2d 1238, 1240 (Miss.1991).

¶ 11. With regard to the interpretation of statutes by state agencies, unless the agency's interpretation is repugnant to the plain meaning of the statute, this Court will defer to the agency's interpretation. Mississippi State Tax Comm'n v. Lady Forest Farms, Inc., 701 So.2d 294, 296 (Miss.1997); see also Kerr-McGee Chem. Corp. v. Buelow, 670 So.2d 12, 16 (Miss.1995); Tower Loan of Miss., Inc. v. Mississippi State Tax Comm'n, 662 So.2d 1077 (Miss.1995); Mississippi State Tax Comm'n v. Dyer Inv. Co., 507 So.2d 1287, 1289 (Miss.1987).

I. WHETHER THE OXY GAS, ONCE EXEMPT FROM SEVERANCE TAX UNDER MISS. CODE ANN. § 27-25-703(3), COULD LATER LOSE THAT EXEMPTION BY VIRTUE OF OXY'S USE OF THE GAS—INJECTING IT BACK INTO THE GROUND TO MAXIMIZE RECOVERY FROM THE OIL FIELD AND LATER RECOVERING AND SELLING IT.

¶ 12. Here the Court is called upon, as a matter of first impression, to interpret the meaning and application of the following production exemption statute:

(3) Natural gas and condensate produced from any wells for which drilling is commenced after March 15, 1987, and before July 1, 1989 shall be exempt from the tax levied under this section for a period of two (2) years beginning on the date of first sale of production from such wells.

Miss.Code Ann. § 27-25-703(3) (amended 1988). Where a statute is unambiguous, the Court must apply the statute according to its plain meaning, refraining from principles of statutory construction. City of Natchez v. Sullivan, 612 So.2d 1087, 1089 (Miss.1992).

¶ 13. The Chancellor determined that this production exemption statute is clear on its face. She further found...