Petron Development Company v. Washington County Board of Equalization, Court of Appeals No. 02CA1476.

• Decision Date: 09 October 2003
• Docket Number: Court of Appeals No. 02CA1476.
• Parties: Petron Development Company, Petitioner-Appellant, and Mary E. Huddleston, Property Tax Administrator for the State of Colorado, Intervenor-Appellant, v. Washington County Board of Equalization, Respondent-Appellee, and Colorado State Board of Assessment Appeals, Appellee.
• Court: Colorado Court of Appeals

Page 1

Petron Development Company, Petitioner-Appellant, and Mary E. Huddleston, Property Tax Administrator for the State of Colorado, Intervenor-Appellant, v. Washington County Board of Equalization, Respondent-Appellee, and Colorado State Board of Assessment Appeals, Appellee.

Court of Appeals No. 02CA1476.

Court of Appeals of Colorado.

October 9, 2003.

ORDER REVERSED AND CASE REMANDED WITH DIRECTIONS.

Colorado State Board of Assessment Appeals No. 38106.

Holland & Hart, LLP, Alan Poe, Marcy G. Glenn, Greenwood Village, Colorado, for Petitioner-Appellant

Ken Salazar, Attorney General, Larry A. Williams, Assistant Attorney General, Denver, Colorado, for Intervenor-Appellant

Berg Hill Greenleaf & Ruscitti, LLP, Josh A. Marks, Boulder, Colorado; Hall & Evans LLC, Edmund M. Kennedy, Denver, Colorado, for Respondent-Appellee

Ken Salazar, Attorney General, John Baird, Assistant Attorney General, Denver, Colorado, for Appellee

Holme Roberts & Owen LLP, James D. Butler, Kenneth A. Wonstolen, Denver, Colorado, for Amicus Curiae Colorado Oil & Gas Association

George N. Monsson, County Attorney, Fort Morgan, Colorado, for Amicus Curiae Colorado Counties, Inc.

Roy and Piccone, JJ., concur

Opinion by JUDGE CASEBOLT

In this property tax case involving valuation of oil leaseholds, petitioner, Petron Development Company, and intervenor, Mary E. Huddleston, the Property Tax Administrator (PTA), appeal the order of the Board of Assessment Appeals (BAA) upholding the valuations affirmed by respondent, the Washington County Board of Equalization (CBOE). We reverse and remand.

Petron operates ten oil wells on six leaseholds located in Washington County. Each well consists of equipment that extracts an emulsion of oil, gas, water, and other impurities from an underground reservoir and brings it to the earth's surface. The emulsion is then pumped through various pieces of equipment that inject chemicals to break down the emulsion, remove water, and separate or settle the contents. The material is finally piped to storage tanks or "tank batteries" to await final transportation by truck.

As required by § 39-7-101, C.R.S. 2002, Petron filed statements with the county assessor for tax year 2001, reporting the value of the oil sold from the leaseholds during the preceding calendar year. Because the oil produced from the wells was sold at the tank battery downstream from the point it exited the ground, and because § 39-7-101 requires the operator to report the selling price of the oil at the wellhead, which Petron interpreted to mean the value of the unprocessed material at the point it exited the ground, Petron used a "netback" method of valuation. Thus, it reduced the sale price by the costs it incurred for gathering, transporting, manufacturing, and processing the material downstream from the point the oil exited the ground.

The assessor refused to allow these deductions. Instead, the assessor valued the leaseholds based upon the amount of gross lease revenues; that is, he construed the selling price at the wellhead to mean the selling price at the tank batteries. The assessor took the position that the material was unprocessed at the point of delivery from the tank batteries because it remained crude oil and that there were no gathering, transportation, manufacturing, or processing costs incurred here. The assessor reached that conclusion in part because the claimed deductions did not arise beyond the well site, which he understood was required before a netback valuation method could be employed.

Petron appealed the assessor's valuation to the CBOE, which affirmed. Upon Petron's further appeal to the BAA, the parties stipulated to costs Petron incurred for gathering, transporting, manufacturing, and processing the oil, agreeing that such deductions from the sale price would be appropriate if the BAA allowed them.

The BAA declined to allow the deductions and affirmed the assessor's valuation. In doing so, the BAA interpreted statutory provisions and the PTA's guidelines and concluded that the sale at the tank battery was not a downstream point of sale for purposes of allowable netback deductions, but rather was a sale at the wellhead. This appeal followed.

I.

Petron contends that the BAA erred in upholding the assessor's valuation based on the amount received for the oil at a downstream point of sale, without allowing deductions for the costs of gathering, transporting, manufacturing, and processing the oil. Specifically, it asserts that the BAA's decision violates the constitutional requirement that valuations of oil leaseholds be based on the value of the unprocessed material, violates the statutory requirement that valuations be based on the selling price at the wellhead, and contravenes the PTA's guidelines. We agree.

In reviewing an agency's action, a court must determine all questions of law, interpret constitutional and statutory provisions, and apply its interpretation to the facts as found or established. Interpretation of constitutional, statutory, and regulatory provisions presents a question of law; hence our review is de novo. See United Parcel Serv., Inc. v. Huddleston, 981 P.2d 223 (Colo. App. 1999).

A decision of the BAA may be set aside if it reflects a failure to abide by the statutory scheme for calculating property tax assessments. City & County of Denver v. Bd. of Assessment Appeals, 848 P.2d 355 (Colo. 1993).

When interpreting a constitutional, statutory, or regulatory provision, we look to the ordinary and common meaning of its language, giving effect to every word and term whenever possible. See Welby Gardens v. Adams County Bd. of Equalization, 71 P.3d 992 (Colo. 2003); Bd. of County Comm'rs v. Vail Assocs., Inc., 19 P.3d 1263 (Colo. 2001); Regular Route Common Carrier Conference v. Pub. Utils. Comm'n, 761 P.2d 737 (Colo. 1988); Bd. of County Comm'rs v. City & County of Broomfield, 62 P.3d 1086 (Colo. App. 2002). If the language is clear and unambiguous, examination of legislative history is unnecessary. See Town of Telluride v. Lot Thirty-Four Venture, L.L.C., 3 P.3d 30 (Colo. 2000).

When interpreting a tax statute, a court may not extend its operation by analogy or beyond the clear import of the language used, and all doubts are resolved in favor of the taxpayer. Transponder Corp. v. Prop. Tax Adm'r, 681 P.2d 499 (Colo. 1984).

The tax at issue here is imposed upon lands or leaseholds and is considered a real property tax. See § 39-1-102(14)(b), C.R.S. 2002. Accordingly, the county tax assessor must value for assessment the oil-producing leaseholds and lands that are located within county boundaries. See § 39-1-103(2), C.R.S. 2002; Bd. of County Comm'rs v. City & County of Broomfield supra. The statutory formula for valuing the oil and gas leasehold is intended to gauge the value of the oil in the ground and is not a tax on the amount of oil actually produced. See Fed. Land Bank v. Bd. of County Comm'rs, 788 F.2d 1440 (10th Cir. 1986).

Colo. Const. art. X, § 3(1)(b) provides, in pertinent part:

[T]he valuation for assessment for . . . lands or leaseholds producing oil or gas, as defined by law, shall be a portion of the actual annual or actual average annual production therefrom, based upon the value of the unprocessed material, according to procedures prescribed by law for different types of minerals.

Thus, the constitution delegates to the General Assembly the task of specifying the valuation procedure, but expressly requires that valuation be based on the worth of the "unprocessed material." Accordingly, we must determine the meaning of "unprocessed."

The plain meaning of "processing" is "subject[ing] to a particular method, system, or technique of preparation, handling, or other treatment designed to effect a particular result . . . to prepare for market, manufacture, or other commercial use by subjecting to some process." Webster's Third New International Dictionary 1808 (1976); see Bd. of County Comm'rs v. City & County of Broomfield, supra (applying dictionary definition to constitutional provision to determine meaning); see also State v. Four States Drilling Co., 278 Ala. 273, 177 So. 2d 828 (1965)(for purposes of tax statute, processing began when power oil and demulsifier were added to make production oil flow more easily and to start the process of making production oil into a marketable product).

The constitutional provision requiring valuation to be based on the value of the unprocessed material is implemented by § 39-7-101, et seq., C.R.S. 2002. Review of that statute reinforces this plain meaning.

Section 39-7-101(1), C.R.S. 2002, requires the leasehold operator or owner to file an annual statement including the "selling price at the wellhead" of the oil or gas sold from the land during the preceding calendar year. "Selling price at the wellhead" is defined in § 39-7-101(1)(d), C.R.S. 2002:

As used in this article, "selling price at the wellhead" means the net taxable revenues realized by the taxpayer for sale of the oil or gas, whether such sale occurs at the wellhead or after gathering, transportation, manufacturing, and processing of the product. The net taxable revenues shall be equal to the gross lease revenues, minus deductions for gathering, transportation, manufacturing, and processing costs borne by the taxpayer pursuant to guidelines established by the administrator.

Thus, the statute indicates two locations where the sale may occur: at the wellhead itself or at some other point after gathering, transporting, manufacturing, and processing. "Selling price at the wellhead" requires computation of the "net taxable revenues" realized by the taxpayer. That term is defined to allow deductions for, inter alia, "processing" costs to reach a "net" price.

The term "at the wellhead" generally refers to the point at the top or "head" of the actual well where the mineral product is severed or removed from the ground. See Schroeder v. Terra Energy, Ltd., ...