Steager v. Consol Energy, Inc.
| Decision Date | 05 June 2019 |
| Docket Number | No. 18-0227, No. 18-0122, No. 18-0123, No. 18-0125, No. 18-0228, No. 18-0124,No. 18-0121,18-0121 |
| Citation | 832 S.E.2d 135,242 W.Va. 209 |
| Court | West Virginia Supreme Court |
| Parties | Dale W. STEAGER, West Virginia State Tax Commissioner, Respondent Below/Petitioner v. CONSOL ENERGY, INC., d/b/a CNX Gas Company LLC, Petitioner Below/Respondent and Dale W. Steager, West Virginia State Tax Commissioner, Respondent Below/Petitioner v. Consol Energy, Inc., d/b/a CNX Gas Company LLC, Petitioner Below/Respondent and Dale W. Steager, West Virginia State Tax Commissioner and David E. Sponaugle, Assessor of Doddridge County, Respondents Below/Petitioners v. Consol Energy, Inc., d/b/a CNX Gas Company LLC, Petitioner Below/Respondent and Dale W. Steager, West Virginia State Tax Commissioner and Arlene Mossor, Assessor of Ritchie County, Respondents Below/Petitioners v. Antero Resources Corporation, Petitioner Below/Respondent and Dale W. Steager, West Virginia State Tax Commissioner and David E. Sponaugle, Assessor of Doddridge County, Respondents Below/Petitioners v. Antero Resources Corporation, Petitioner Below/Respondent and The County Commission of Doddridge County, Sitting as the Board of Assessment Appeals and Board of Equalization, Respondent Below/Petitioner v. Consol Energy, Inc., d/b/a CNX Gas Company LLC, Petitioner Below/Respondent and The County Commission of Doddridge County, Sitting as the Board of Assessment Appeals and Board of Equalization, Respondent Below/Petitioner v. Antero Resources Corporation, Petitioner Below/Respondent |
Patrick Morrisey, Attorney General, L. Wayne Williams, Esq., Assistant Attorney General, Charleston, WV, Counsel for Petitioner Dale W. Steager, West Virginia State Tax Commissioner
Jonathan Nicol, Esq., Brandy D. Bell, Esq., Lindsay M. Gainer, Esq., Kay Casto & Chaney PLLC, Charleston, WV, Counsel for Respondent the County Commission of Doddridge County
James Brian Shockley, Esq., Assistant Prosecuting Attorney, Harrison County Prosecutor’s Office, Clarksburg, WV, Counsel for Amicus Curiae the Harrison County Commission and Joseph R. Romano, Assessor of Harrison County
Jack C. McClung, Esq., Charleston, WV, Counsel for Amicus Curiae West Virginia Association of County Officials, Inc.
Kelli D. Talbott, Esq., Senior Deputy Attorney General, Charleston, WV, Counsel for Amicus Curiae Steven L. Paine, West Virginia State Superintendent of Schools
Timothy E. Haught, Esq., Wetzel County Prosecuting Attorney, New Martinsville, WV, Counsel for Amicus Curiae the County, Commission of Wetzel County, West Virginia
Ancil G. Ramey, Esq., Steptoe & Johnson PLLC, Huntington, WV, Craig A. Griffith, Esq, John J. Meadows, Esq., Steptoe & Johnson PLLC, Charleston, WV, Counsel for Respondents, Consol Energy Inc. d/b/a CNX Gas, Company LLC and Antero, Resources Corporation
These are seven consolidated appeals from the business court’s January 17, 2018 and February 7, 2018, orders reversing various Boards of Assessment Appeals and rejecting the West Virginia State Tax Department’s valuation of respondents’ gas wells for ad valorem tax purposes. The business court concluded that the Tax Department’s valuation violated the applicable regulation by improperly imposing a "cap" on the amount of operating expenses which may be deducted and was likewise in violation of West Virginia Constitution Article X, Section 1 ’s "equal and uniform" provision and the equal protection provisions of the United States and West Virginia Constitutions. The business court further concluded that a survey utilized to ascertain the average industry operating expenses for Marcellus shale wells failed to properly permit itemization of "post-production" expenses for inclusion in the calculation of the operating expense average. Following entry of these orders, the business court subsequently declined to alter or amend its judgment upon motion of the Doddridge County Commission.
Upon careful review of the briefs of the parties and amici curiae,1 the appendix record, the arguments of the parties, and the applicable legal authority, we agree with the business court’s conclusion that the Tax Department acted in violation of the applicable regulations by improperly imposing a cap on respondents’ operating expense deductions and therefore affirm its decision to that extent. However, we find that the business court erred in rejecting the Tax Department’s interpretation of the applicable regulations concerning the inclusion of post-production expenses in the calculation of the annual industry average operating expenses. We likewise find that the business court erred in crafting relief which permitted an unlimited percentage deduction for operating expenses in lieu of a monetary average, and therefore reverse that aspect of the business court’s decision and remand for further proceedings consistent with this opinion.
Respondents Consol Energy, Inc. d/b/a CNX Gas Company, LLC ("CNX") and Antero Resources Corporation ("Antero") (collectively "respondents") are owners of various gas wells in Doddridge, Ritchie, Lewis, and McDowell Counties; CNX owns conventional, vertical gas wells and Antero owns horizontal, Marcellus shale gas wells ("Marcellus wells"). These gas well interests are appraised for ad valorem tax purposes by petitioner Dale W. Steager, West Virginia State Tax Commissioner ("Tax Department"), and assessed by the respective county commissions. This case involves valuation of CNX’s conventional gas wells for the 2016 tax year and Antero’s Marcellus wells for both the 2016 and 2017 tax years.
To determine the value of gas wells for ad valorem taxation purposes, gas well owners provide gross receipts from their well production, to which the Tax Department applies a "production decline rate." From this figure, the "average annual industry operating expenses" are deducted to establish a "net receipts" value. That value is then capitalized to determine the taxable value. This formula is described in West Virginia Code of State Rules § 110-1J-4.1 (2005) as follows:
4.1. General. -- Oil and/or natural gas producing property value shall be determined through the process of applying a yield capitalization model to the net receipts (gross receipts less royalties paid less operating expenses ) for the working interest and a yield capitalization model applied to the gross royalty payments for the royalty interest.
(emphasis added). With respect to the operating expenses referenced above, West Virginia Code of State Rules § 110-1J-4.3 provides that the Tax Commissioner shall (emphasis added).
Each tax year, the Tax Department issues an Administrative Notice which states what the average annual industry operating expense is for that tax year; it is expressed by way of a percentage of the well’s gross receipts, with a "not to exceed" amount or, as respondents have characterized it, a "cap."2 For the tax year 2016, Administrative Notice 2016-08 provided that for conventional gas wells the "[d]irect ordinary operating expenses will be estimated to be 30% of the gross receipts derived from gas production, not to exceed $ 5,000 ...." (emphasis added). For Marcellus horizontal wells, the Administrative Notice provided that "the maximum operating expenses allowed is 20% of the gross receipts derived from gas production, not to exceed $ 150,000." For the tax year 2017, the Administrative Notice provided for operating expenses of 20% not to exceed $ 175,000 for Marcellus wells.3
Respondents appealed their gas well valuations to the respective Boards of Assessment Appeals ("Board(s)") for the appropriate county, claiming that their actual expenses4 were in excess of the stated percentages and that the cap resulted in an artificial reduction in the operating expense deduction where their expenses exceeded the cap.5 Respondents provided expert testimony in support of these figures and analysis of the inequality occasioned by the cap.6 These experts also testified that industry-reported operating expense percentages7 were closer to respondents’ actual values than the Tax Department’s average percentage. The experts further noted that in tax years preceding the 2016 tax year, the Administrative Notice invited taxpayers to submit their actual expenses and that, despite no change in the law, the 2016 and subsequent Administrative Notices did not make such an invitation.
In response, the Tax Department offered testimony from its appraiser Cynthia Hoover who explained that the average operating expense figures were derived from a survey of gas well producers conducted in 2014. She explained that, based on the results of that survey for conventional gas wells, on average each well incurred expenses of $ 5,000.00. This monetary amount approximated, on average, 30% of the gross receipts per well. Notably, she agreed that application of the $ 5,000.00 "not to exceed" amount served to treat higher-producing wells differently than lower-producing wells and that the cap resulted in certain wells with higher gross receipts not realizing a full 30% operating expense deduction. Ms. Hoover agreed that the Tax Department had previously invited production of "actual expenses," but demurred that the regulation actually does not allow for any such consideration since it requires use of the "average industry" expenses.
With respect to the Marcellus wells, respondents’ experts further explained that the survey circulated to ascertain the average industry operating expense did not provide line items for expenses such as gathering, compressing, processing, and transporting, which expenses are incurred in getting shale gas and...
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