Powder River Coal v. Dept. of Revenue

• Decision Date: 31 October 2006
• Docket Number: No. 05-296.,05-296.
• Parties: POWDER RIVER COAL COMPANY, Appellant (Petitioner), v. WYOMING DEPARTMENT OF REVENUE, Appellee (Respondent).
• Court: Wyoming Supreme Court

Page 442

145 P.3d 442

2006 WY 137

POWDER RIVER COAL COMPANY, Appellant (Petitioner), v. WYOMING DEPARTMENT OF REVENUE, Appellee (Respondent).

No. 05-296.

Supreme Court of Wyoming.

October 31, 2006.

COPYRIGHT MATERIAL OMITTED

Representing Appellant: Lawrence J. Wolfe of Holland & Hart, LLP, Cheyenne, Wyoming.

Representing Appellee: Patrick J. Crank, Attorney General; Michael L. Hubbard, Deputy Attorney General; Martin L. Hardsocg, Senior Assistant Attorney General; Karl D. Anderson, Senior Assistant Attorney General; Ryan T. Schelhaas, Senior Assistant Attorney General. Argument by Mr. Schelhaas.

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

KITE, Justice.

[¶ 1] Powder River Coal Company (PRCC) produces coal and sells it away from the mouth of each of its mines. Wyo. Stat. Ann. § 39-14-103(b)(vii) (LexisNexis 2005) requires the coal be valued for severance and ad valorem tax purposes using the proportionate profits method. In applying this method, costs must be categorized as either direct or indirect and PRCC contended employee healthcare costs were indirect costs. The Department of Revenue (DOR) disagreed, determined those costs should be treated as direct mining costs, and assessed PRCC accordingly for production years 1997-2000. Because the DOR treated healthcare costs as direct, rather than indirect, mining costs, PRCC's assessed value was higher because the ratio of direct costs to total costs was higher. PRCC appealed those assessments to the State Board of Equalization (SBOE). After a hearing, the SBOE affirmed the DOR's classification of employee healthcare costs as direct costs, and PRCC appealed that decision to the district court which certified the case to this Court pursuant to W.R.A.P. 12.09(b). We accepted the certification and, finding the SBOE properly interpreted the applicable statutes, we affirm.

ISSUES

[¶ 2] PRCC presents the following issue:

Appellant operates a self-insurance program that pays healthcare costs for employees and dependents. In valuing Appellant's coal production, the Department of Revenue included these costs in direct labor costs which has the effect of assigning the costs by where employees work in the facility. The Appellant treated the healthcare costs as indirect costs. Did the State Board of Equalization err when it affirmed the Department's treatment as direct costs, when the holding is contrary to the State Board's factual finding that the costs do not follow employment?

The DOR re-phrases the issue as follows:

Did the State Board of Equalization properly conclude that Powder River Coal Company's employee healthcare costs were direct costs pursuant to the proportionate profits statute, Wyo. Stat. § 39-14-103(b)(vii)?

FACTS

[¶ 3] PRCC is a subsidiary of Peabody Investments Corporation (Peabody) and owns three coal mines in Campbell County, Wyoming. Peabody offers a healthcare plan to all of its employees funded by the company through a program of self-insurance. Employees pay a monthly fee of $25 for an individual participant, $50 for an employee plus one dependent, and $75 for a family and receive coverage for medical, dental, vision and prescription drug expenses. Employees who choose not to participate in the plan are paid $1,200 annually. While this plan is funded by the company, it is administered through a third party administrator under a service contract. PRCC pays a monthly fee per employee to the administrator and, in return, the administrator processes and adjudicates the claims and pays the providers. The healthcare plan is similar to traditional insurance coverage in that it has enrollment requirements, limitations for pre-existing conditions, employee co-pays, participating provider requirements, coverage exclusions, pre-certification of coverage and provider payment limitations based upon "usual and reasonable customary charges." Healthcare providers submit their bills for reimbursement directly to the administrator rather than to PRCC. The administrator reviews all claims, determines eligibility, pays eligible claims and sends Peabody a weekly summary of the claims paid. Peabody then pays the administrator to cover those payments. No accruals or reserves exist to cover healthcare costs; the claims are simply paid as incurred. Monthly reports are provided to Peabody identifying the claims made by each individual employee by social security number. This information allows Peabody to attribute healthcare costs back to individual employees at a particular mine. However, in the interest of employee confidentiality, this information is not shared with the mine management. Instead, the mines are provided with the total healthcare costs for each facility.

[¶ 4] PRCC has a sophisticated accounting system allowing it to attribute its salary costs to the separate functions of mining, transportation and processing. Employees use time cards to record where they worked in the mine. PRCC then enters that information into its accounting system and tracks its labor costs by functional category. From 1990, when the proportionate profits method was adopted by the legislature, to 1997, PRCC treated healthcare costs as direct costs and attributed those costs to the three operational functions, mining, transportation and processing. Although its accounting system did not capture healthcare costs by operational category, PRCC used the salary percentages for each function to determine the percentage of healthcare costs for that particular function. The DOR agreed with and accepted PRCC's method of attributing its healthcare costs to the various mine functions.

[¶ 5] In the course of the audit of PRCC's tax returns for the years 1997-2000, the company took the position that healthcare costs should no longer be treated as direct costs. The explanation given by Jeff Maher, Assistant Controller of Operations for Peabody, who was responsible for the tax returns, was that healthcare costs were indirect because they did not track directly with employee wages, and PRCC could not attribute healthcare costs to a particular function where the employee worked. Don Coovert, a PRCC consultant who assisted with preparation of the tax returns, provided a further reason for treatment of healthcare costs as indirect. He explained his understanding of the legislative history of the statutes establishing the proportionate profit method and concluded that healthcare costs fit the statutory definition of indirect costs because they are not specifically listed as a direct cost in the statute and could not be attributed to an operation function without allocation.

[¶ 6] PRCC agrees its healthcare benefits are part of its compensation package and are a substantial inducement to potential employees. It also recognizes that good healthcare benefits are one of the things the company offers to discourage unionization.

STANDARD OF REVIEW

[¶ 7] When we review cases certified to this Court pursuant to W.R.A.P. 12.09(b), 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 (LexisNexis 2005) governs judicial review of administrative decisions. Buggy Bath Unlimited, Inc., ¶ 5, 18 P.3d at 1185; Everheart v. S & L Indust., 957 P.2d 847, 851 (Wyo.1998).

[¶ 8] When an appealing party contests an agency's findings of fact, we examine the entire record to determine if the agency's findings are supported by substantial evidence. 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. Id. at 921. "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.

[¶ 9] We review 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. This case requires interpretation of the relevant tax statutes. Statutory interpretation is a question of law. 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).

DISCUSSION

[¶ 10] We discussed the proportionate profits method and its statutory and constitutional underpinnings in Powder River, as follows:

The genesis of this dispute lies in the constitutional and statutory construct for the taxation of minerals in Wyoming. The Wyoming Constitution provides that all mines "shall be taxed . . . in lieu of taxes on the lands[ ] on the gross product thereof . . .; provided, that the product of all mines shall be taxed in proportion to the value thereof." Wyo. Const. art. 15, § 3. The statutes then impose ad valorem and severance taxes upon the value of the gross product mined. Wyo. Stat. Ann. §§ 39-13-103, 39-14-103 (LexisNexis 2001). "The value of the gross product shall be the fair market value of the product at the mouth of the mine where produced, after the mining or production process is completed." Section 39-14-103(b)(ii).

For coal sold away from the mouth of the mine pursuant to a bona fide arms-length sale, the statute mandates applying a formula to determine what portion of the sales value is attributable to the value of the gross product at the mouth of the mine, the point at which the product is valued for tax purposes under this constitutional and ...