WASH. COUNTY BD. OF EQUAL. v. PETRON DEVEL. CO., No. 03SC787.

• Decision Date: 28 March 2005
• Docket Number: No. 03SC787.
• Citation: 109 P.3d 146
• Parties: Petitioners: WASHINGTON COUNTY BOARD OF EQUALIZATION; Ronald L. Shook, in his official capacity as the Washington County Assessor; and The Colorado State Board of Assessment Appeals, v. Respondents: PETRON DEVELOPMENT COMPANY and Mary E. Huddleston, Property Tax Administrator for the State of Colorado.
• Court: Colorado Supreme Court

109 P.3d 146

Petitioners: WASHINGTON COUNTY BOARD OF EQUALIZATION; Ronald L. Shook, in his official capacity as the Washington County Assessor; and The Colorado State Board of Assessment Appeals, v. Respondents: PETRON DEVELOPMENT COMPANY and Mary E. Huddleston, Property Tax Administrator for the State of Colorado.

No. 03SC787.

Supreme Court of Colorado.

March 28, 2005.

Berg Hill Greenleaf & Ruscitti LLP, Josh A. Marks, Heidi C. Potter, Boulder, Duncan, Ostrander & Dingess, P.C., James Birch (Special Counsel), Denver, for Petitioners Washington County Board of Equalization and Ronald L. Shook, in his official capacity as the Washington County Assessor.

John W. Suthers, Attorney General, John D. Baird, First Assistant Attorney General, State Services Section, Denver, for Petitioner Colorado State Board of Assessment Appeals.

Holland & Hart, LLP, Alan Poe, Greenwood Village, Marcy G. Glenn, Denver, for Respondent Petron Development Company.

John W. Suthers, Attorney General, Larry A. Williams, First Assistant Attorney General, Department of Revenue, Business and Licensing Section, Denver, for Respondent Mary E. Huddleston, Property Tax Administrator for the State of Colorado.

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

Colorado Oil & Gas Association, Kenneth A. Wonstolen, General Counsel, Denver, for Amicus Curiae Colorado Oil & Gas Association.

HOBBS, Justice.

This property tax case involves the valuation of oil leaseholds for real property taxation purposes pursuant to Colorado law.¹ We granted certiorari to review the court of appeals' decision in Petron Development Co. v. Washington County Board of Equalization, 91 P.3d 408 (Colo.App.2003), allowing the deduction of certain processing costs on the leasehold site.² The Colorado Constitution delegates the task of prescribing procedures for valuing oil to the General Assembly. Article X, section 3(1)(b) expressly requires that taxation be based on the value of the "unprocessed material." Colo. Const. art. X, § 3(1)(b)(1982). The General Assembly has required that "[e]very operator of, or if there is no operator, every person owning any oil or gas leasehold or lands within this state ... [which] are producing or capable of producing oil or gas" shall file with the county assessor a statement showing "[t]he selling price at the wellhead." § 39-7-101(1)(d), C.R.S. (2004). We affirm the court of appeals' holding that processing costs occurring on the leasehold site are properly deducted from the sale price of the oil in valuing the unprocessed material at the wellhead, as provided by Colorado Constitution article X, section 3(1)(b) and section 39-7-101(1)(d), C.R.S. (2004).

I.

Petron operates ten oil wells on six leaseholds located in Washington County. Each well consists of equipment that brings to the earth's surface unprocessed material consisting of fluids and gas. This equipment includes "downhole" equipment such as piping, casing, rods and underground pumps, and may include above-ground pumping equipment.

Once the unprocessed material reaches the surface at the casinghead,³ it is transported to the heater-treater⁴ and settling tanks that separate water and gas from the oil. Then the oil is transported to the tank battery for metering and storage until a hauler picks up the oil and transports it to a location specified by the purchaser. These activities that Petron conducts on the leasehold add value to the unmarketable product extracted at the wellhead by rendering it saleable; other operators conduct the same processing activities off their leasehold sites and deduct the processing costs to arrive at the value of the unprocessed material at the wellhead.

This case arose after Petron filed tax declaration schedules with Washington County pursuant to section 39-7-101, C.R.S. (2004). Petron used the "netback" method to report the wellhead selling price of its oil production for the year 2000. Petron did not seek to deduct the vertical costs associated with bringing the product to the earth's surface, but did seek to deduct horizontal costs associated with making the product marketable. In accordance with the "netback" method, Petron reduced the value of the oil at the downstream point of sale (the tank battery) by the costs incurred for gathering and processing activities that took place between the wellhead and the tank battery. Pursuant to the Washington County Assessor's written request, Petron provided the assessor with extensive documentation supporting the deductions claimed.

Thereafter, the assessor denied all Petron's deductions for gathering and processing costs, and issued assessments based on the gross lease revenues that Petron received at the outlet of the tank batteries located on Petron's various leases. Petron protested the assessor's valuations in accordance with section 39-5-122(2), C.R.S. (2004). The assessor denied the protest and Petron appealed to the Washington County Board of Equalization ("Board") pursuant to sections 39-5-122(3) and 39-8-106, C.R.S. (2004). After the Board affirmed the assessor's valuation, Petron appealed to the Board of Assessment Appeals ("BAA") pursuant to section 39-8-108(1), C.R.S. (2004). The BAA affirmed the Board's order.

In accordance with sections 24-4-106(11) and 39-8-108(2), C.R.S. (2004), Petron appealed to the Colorado Court of Appeals, which reversed the BAA decision. The court of appeals ruled that Petron's deductions should have been allowed. It concluded that "wellhead," as used in section 39-7-101(1)(d), means "the point where the mineral product is severed or removed from the ground;" that the BAA's proposed construction of "well site" violates the uniformity provision of the Colorado Constitution; that the emulsion produced at the wellhead constituted "unprocessed" material; and that Petron's costs of breaking down the emulsion, removing water, and transporting the product to the tank battery were deductible "gathering" and "processing" costs. Petron v. Washington County Bd. of Equalization, 91 P.3d 408 (Colo.App.2003).

The Board and the BAA petitioned this Court for certiorari to review the court of appeals' decision.

II.

We affirm the court of appeals' holding that processing costs occurring on the leasehold site to make the oil marketable are properly deducted from the sale price of the oil in valuing the unprocessed material at the wellhead, as provided by Colorado Constitution article X, section 3(1)(b) and section 39-7-101(1)(d), C.R.S. (2004).

A. Standard of Review

The application of a constitutional standard to a particular case is a question of law that we review de novo. Greenwood Vill. v. Petitioners for Proposed City of Centennial, 3 P.3d 427, 440 (Colo.2000). We accord a presumption of constitutionality to statutes that implement provisions of the Colorado Constitution. Id. at 440. This presumption reflects the premise that legislative and executive branches of government validly observe and effectuate constitutional provisions in exercising their powers. Id. The party challenging the constitutionality of a statute carries a heavy burden to demonstrate a statute's unconstitutionality. Id.

Only the judicial branch holds the ultimate authority to construe the constitution's meaning. Bd. of County Comm'rs v. Vail Assocs., 19 P.3d 1263, 1272 (Colo.2001). In discharging our judicial function, we afford the language of constitutions and statutes their ordinary and common meaning; we ascertain and give effect to their intent. Id. at 1273. We construe their provisions as a whole, giving effect to every word and term contained therein, whenever possible. Id.

When construing Colorado constitutional and statutory taxation provisions, we apply fundamental principles contained in the Colorado Constitution's revenue provisions, statutes, and case law: (1) all private and real and personal property is subject to payment of its fair proportion of taxation necessary for governmental purposes; (2) the General Assembly's plenary taxation role includes providing definitions of taxable property and prescribing such regulations as will secure a just and equalized valuation for taxation of all property, real and personal, that is not exempt from taxation under the Colorado Constitution; (3) the General Assembly cannot refuse to exercise its taxation authority and must enact tax statutes so that governmental operations may be funded; (4) taxation across a class of property must be uniform, though not necessarily exact or mathematically precise; (5) classifications of property types must be reasonable; and (6) the General Assembly has authority to address methods of valuation and differences in uses to be employed in assessing value for taxation purposes within a class of property. Id. at 1273, 1276, 1279; Dist. 50 Metro. Recreation Dist. v. Burnside, 167 Colo. 425, 448 P.2d 788, 790 (1968); see also Dale A. Oesterle & Richard B. Collins, The Colorado State Constitution: A Reference Guide 232-35 (2002). If the General Assembly's taxation implementing statute is clear and unambiguous, examination of the statute's legislative history is unnecessary. Vigil v. Franklin, 103 P.3d 322, 327 (Colo.2004). We give substantial deference to valuation and assessment methods and procedures the General Assembly establishes. Bd. of Assessment Appeals v. Sonnenberg, 797 P.2d 27, 29 (Colo.1990).

The Colorado Division of Property Taxation and the Property Tax Administrator have significant roles in defining and implementing valuation, assessment, and levy procedures. Vail Assocs., 19 P.3d at 1279 n. 22. While they do not bind our construction of the applicable law, we consult and ordinarily defer to the implementing agency's guidance, rules, and determinations, if they accord with the constitutional and statutory provisions they implement. Lobato v. Indus. Claim Appeals Office, 105 P.3d 220, 223-24 (Colo.2005).

In construing tax...