BEFORE THE UTAH STATE TAX COMMISSION
Petitioner, : FINDINGS OF FACT,
v. : CONCLUSIONS OF LAW,
: AND FINAL DECISION
AUDITING DIVISION OF THE :
UTAH STATE TAX COMMISSION : Appeal No. 88-0157
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
Joe B. Pacheco G. Blaine Davis