BEFORE THE UTAH STATE TAX
COMMISSION
_____________________________________
XXXXX
Petitioner, : FINDINGS OF FACT,
v. : CONCLUSIONS OF LAW,
: AND FINAL
DECISION
AUDITING
DIVISION OF THE :
UTAH STATE TAX COMMISSION : Appeal
No. 88-0157
Respondent. :
_____________________________________
STATEMENT OF CASE
This
matter came before the Utah State Tax Commission pursuant to the Petitioner's
Petition for Redetermination arising from a statutory notice of deficiency
assessed by the Auditing Division for unpaid occupation and conservation taxes
for the audit period XXXXX through XXXXX.
Oral
arguments on the matter were heard on XXXXX, before Paul F. Iwasaki, Presiding
Officer. XXXXX, Attorney at Law,
appeared on behalf of the Petitioner.
XXXXX, Assistant Attorney General, appeared on behalf of the Respondent.
Based
upon oral arguments presented by counsel for the parties and the briefs and
memoranda submitted by the parties, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. The tax in question is occupation tax.
2. The period in question is XXXXX through
XXXXX.
3. The Petitioner and its successor, XXXXX
("XXXXX"), have owned and produced natural gas from the XXXXX and the
XXXXX unit area in XXXXX County, Utah.
XXXXX paid ad valorem taxes on its natural gas production from the XXXXX
unit and XXXXX unit area.
4. Pursuant to a gas purchase agreement dated
XXXXX, as amended, XXXXX sold its natural gas produced from the XXXXX unit area
to XXXXX and to XXXXX during the years in question. The natural gas produced from the XXXXX Wells unit area was also
sold pursuant to a gas purchase agreement between the Petitioner and XXXXX
dated XXXXX.
5. Pursuant to a gas purchase agreement dated
XXXXX, the Petitioner sells its natural gas produced in the XXXXX unit area to
XXXXX.
6. Each of the natural gas purchase agreements
mentioned above requires the gas purchaser to reimburse the Petitioner all, or
a portion of all, of ad valorem taxes assessed against the Petitioner's natural
gas production.
7. The Petitioner received such reimbursements
of its ad valorem taxes and did not pay occupation or conservation tax on those
ad valorem tax reimbursements.
CONCLUSIONS OF LAW
In
the case of oil, gas, and other hydrocarbon substances (except solid
hydrocarbons), the value at the well shall be the value established under a
bona fide contract for the purchase of the same or in the absence of a contract
by the value of the well established by the United States for royalty purposes in
the field from which they are produced.
(Utah Code Ann. §59-5-67(2)(b)(i), 1953 as amended 1983.)
DECISION AND ORDER
In
the present case, the singular issue to be decided by the Commission is whether
ad valorem tax reimbursements received by the Petitioner for the years XXXXX
through XXXXX should be included in the calculation used to determine the
appropriate occupation and conservation tax for that period.
The
Petitioner argues that, at best, the statute is ambiguous with regard to this
issue. The Petitioner maintains that
under the terms of the statute the taxable value is the price received for the
oil or gas as set forth in a bona fide contract. Because, the Petitioner argues, no mention is made of tax reimbursements
nor of other elements of consideration often exchanged under a gas purchase
agreement as being subject to tax, such absence indicates a legislative intent
not to include those in the determination of value. The Petitioner goes on to argue that taxing statutes must be
construed strictly and that any ambiguities must be resolved in favor of the
taxpayer.
The
Petitioner goes on to argue that the tax reimbursement provision of the
contracts entered into by the Petitioner is not an element of consideration for
the gas sold by the Petitioner. The
Petitioner argues that tax reimbursements do not represent a payment for the
gas purchase but rather are there as an incentive to producers to commit the
sale of their gas for the extended terms of the agreements. The agreements, as in this case, can run as
long as 20 years.
The
Commission does not accept the Petitioner's argument and finds that the ad
valorem tax reimbursements received by the Petitioner are properly included in
the calculation used in determining the appropriate occupation and conservation
tax.
Although
it is true the term "value" is not defined by the statute, such a
fact does not render the term ambiguous.
Absent a statutory definition, the term "value" is given its ordinary
and usual meaning per well accepted rules of statutory construction.
Under
its ordinary and usual meaning, the term "value" as used in §59-5-67
includes all forms of compensation received by the Petitioner in exchange for
the sale of its gas. In this case, in
addition to the specified price to be paid for specific volumes of gas sold,
the Petitioner also received reimbursements for ad valorem taxes paid by
it. That reimbursement feature was as
much as a consideration received for the contract by the Petitioner as the
price for the gas itself. Therefore,
clearly, that reimbursement feature had value to the Petitioner. It is also very likely that had such a
condition been included in the purchase contract, the Petitioner merely would
have adjusted the sales price of the gas sold to cover those expenses.
If
the Commission were to find that the value of the gas did not include such tax
reimbursements, parties to the contract could simply restructure the gas
purchase agreements to lower the purchase price of the gas and then add in
other reimbursement features for various other items including occupation tax,
which would thereby reduce the basis upon which the occupation tax is
determined. This clearly is not what
was intended by the legislature when it enacted the statute in question.
The
Petitioner next argues that to include the amounts received as reimbursement
for ad valorem taxes into the amount used to determine the occupation tax is
tantamount to double taxation. In
support of that argument, the Petitioner claimed that to do so would be to tax
again the amount already paid as ad valorem tax. The Petitioner then uses the illustration that if the tax
deficiency is affirmed, the Petitioner would seek reimbursement from its gas
purchasers under the tax reimbursement provisions, which in turn could
presumably be assessed again. This, the
Petitioner argues, would go on ad infinitum.
The
Commission finds that inclusion of the tax reimbursements in determining the
occupation tax to be paid by the Petitioner does not constitute double
taxation. This is not a situation where
two taxes have been imposed for the same taxing period and for the same
purpose. There has been but one tax
assessed, that being an occupation tax, and it has been done once for each of
the taxable years in question.
The
Petitioner's argument that allowing the tax reimbursements to be included in
the amount upon which occupation tax is calculated would lead to an infinite
number of deficiency assessments is purely conjectural and theoretical. Indeed,
counsel for the Auditing-- Division represented that such a situation would not
occur. Obviously, if such actions did
occur, they would form the basis of an appeal by the Petitioner and a review by
this Commission. Until such time,
however, the Tax Commission finds that the double taxation argument of the
Petitioner is without merit.
Based
upon the foregoing, the Tax Commission finds that the tax reimbursements
received by the Petitioner are subject to occupation and conservation taxes for
the years XXXXX through XXXXX, and affirms the determination of the Auditing
Division. It is so ordered.
DATED
this 31 day of May, 1991.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco G.
Blaine Davis
Commissioner Commissioner