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Lawmakers receive update on new oil, gas tax formulation

Photo Courtesy/WV Legislative Photography GO-WV lobbyist Phil Reale testifies about industry concerns about a new formulation for oil and natural gas property taxation.

CHARLESTON — The natural gas industry remains unhappy with the way property tax valuations are calculated even after the West Virginia Legislature passed a law to address the issue.

Members of the Joint Committee on Natural Gas Development received an update Monday from representatives of the State Tax Department, county assessors, and interest groups on the new formulation for determining the value of oil and natural gas-producing property.

Members heard testimony regarding the implementation of House Bill 2581, providing for the valuation of natural resources property and an alternate method of appeal of proposed valuation of natural resources property.

HB 2581 requires the State Tax Commissioner to develop a revised methodology to value oil and natural gas properties after the West Virginia Supreme Court of Appeals struck down part of the previous methodology the department uses to value active oil and natural gas well sites in 2019. The bill directed the State Tax Department to promulgate regulations the Legislature can review and approve, with emergency rules due by July 1.

According to the emergency rule, the value of oil and natural gas-producing property will be determined by applying a yield capitalization model based on a weighted average cost of capital to the net receipts (once royalties and annual operating costs are subtracted from gross receipts) for working interest, with a yield capitalization model applied to gross royalty payments for royalty interest. The official rule is before the Legislature’s Rule-Making Review Committee.

“We believe this is a more accurate representation of the actual cost of employing capital in the investment and more like captures the risk,” said Erin Winter, acting deputy commissioner for the State Tax Department.

The tax department also eliminated the provision that called for the 18-months of decline from the first discounted cash flow analysis, and natural gas liquids along with the value reduction costs to make it marketable are included as a value item.

“Going forward, we’ll continue to review tax returns to the extent we have the resources to do so,” Winter said. “We think reasonableness is the starting point of any inquiry into the actual costs is the most workable solution for us. The tax department will continue to work with industry moving forward to ensure the completeness and accuracy and the actual value is determined. And we’ll work with the counties to ensure compliance by the industry.”

Mark Monteleone, co-chairman of tax committee for the Gas and Oil Association of West Virginia (GO-WV), said the tax department’s rules go beyond the scope of HB 2581. Despite clear language in the bill, Monteleone said the proposed rules give too much latitude to the State Tax Commissioner.

“(House Bill) 2581 was a simple bill … if you look at the emergency rule that was passed, it’s not very simple at all,” Monteleone said. “It’s a very complex rule that goes beyond, we believe, the scope of the statute. For that reason, we believe they have exceeded statutory authority of 2581.”

According to a report by West Virginia University’s Bureau of Business and Economic Research on behalf of GO-WV, West Virginia has the third largest proven reserves of natural gas behind Texas and Pennsylvania, but growth of natural gas in the state has lagged behind Pennsylvania and fellow natural gas producer Ohio. GO-WV lobbyist Phil Reale said this was due, in part, because of the unfair way natural gas property is taxed.

“I think this industry has a lot of potential … to reinvent our state,” Reale said. “The key to this … is for the counties to have more money and the state to have more money, there’s got to be more production. If the risk capital runs out or if we’re not looked upon favorably, production is simply going to deplete … all things being equal, I think we ought to strive to get to a balanced, comparative status with neighboring states so we can attract a little more of the risk capital than we currently do.”

The bill was controversial for lawmakers from the Northern Panhandle and North Central West Virginia where most of the state’s oil and natural gas is produced. The original version of the bill would have resulted in a $9.1 million property tax revenue loss to county governments and county school systems. Eight counties in the Northern Panhandle and North Central West Virginia would have taken a $7 million hit under the previous plan.

Harrison County Assessor Joseph R. “Rocky” Romano said no county assessor in the state was reached out to by the State Tax Department regarding their proposed rules before being submitted.

“This is the first time that the Assessor’s Association has had a say in this,” Romano said. “When the assessors don’t have a say, our county commissioners haven’t heard anything either because they get their information from the assessors in each county.”

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