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Wyodak Resources Development Corp. v. Wyoming Department of Revenue

Supreme Court of Wyoming

January 23, 2017

WYODAK RESOURCES DEVELOPMENT CORP., Appellant (Petitioner),
v.
WYOMING DEPARTMENT OF REVENUE, Appellee (Respondent).

         W.R.A.P Rule 12.09(b) Certification from the District Court of Campbell County The Honorable Michael N. Deegan, Judge

          Representing Appellant: Lawrence J. Wolfe, P.C. and Jenifer E. Scoggin, P.C. of Holland & Hart, LLP, Cheyenne, Wyoming. Argument by Mr. Wolfe.

          Representing Appellee: Peter K. Michael, Wyoming Attorney General; Ryan Schelhaas, Deputy Attorney General; Karl D. Anderson, Senior Assistant Attorney General. Argument by Mr. Anderson.

          Before BURKE, C.J., and HILL, DAVIS, FOX, and KAUTZ, JJ.

          KAUTZ, Justice.

         [¶1] Appellant Wyodak Resources Development Corp. (Wyodak) is a coal producer in Campbell County, Wyoming and reports the taxable value of its coal to Appellee Department of Revenue (Department) using the proportionate profits valuation method. Wyodak claims the Department improperly applied Wyoming law when it set the point of valuation for its coal for production years 2009 through 2011. It also challenges the Department's categorization of certain government-imposed and environmental expenses in the tax valuation formula. The Board of Equalization (Board) upheld the Department's determinations, and Wyodak petitioned for judicial review. We conclude the Board's decision on the point of valuation was correct and affirm that ruling.

         [¶2] The environmental and government-imposed expenses were under audit at the time of the hearing before the Board. Given the audit will result in a more complete factual record and the results are subject to further administrative and, if necessary, judicial review, the Board's decision on the categorization of the costs was not final and the issue is not ripe for judicial review.

         ISSUES

         [¶3] The issues which must be resolved in this appeal[1] are:

1. Did the Board err by upholding the Department's determination that the mouth of the mine and, consequently, the point of valuation for Wyodak's coal, was located where the coal actually reached the surface of the ground rather than where Wyodak calculated it to be?
2. Was Wyodak's right to equal and uniform taxation under the Wyoming Constitution violated by the Board's decision on the point of valuation?
3. Did the Board issue a final decision on whether the Department's classification of Wyodak's environmental and government-imposed costs was correct and is that issue ripe for review?

         FACTS

         [¶4] Wyodak owns a surface coal mine approximately five miles east of Gillette in Campbell County, Wyoming. During the years in question, Wyodak mined out of the Clovis Pit which is located north of I-90. The Gillette Energy Complex is a group of several power plants located south of I-90 and is the primary customer for Wyodak's coal.

         [¶5] During the mining process, the topsoil and overburden are removed to expose the coal seam. The removed material is used to backfill mined areas. The Clovis Pit coal seam is divided into two benches -- the top bench is approximately fifty feet deep and the bottom bench is approximately thirty feet deep. The bottom bench contains higher quality coal than the top bench. Wyodak severs the coal from the vertical coal face of each bench by blasting explosives. As the coal is extracted, the coal face moves in a northerly direction, away from I-90.

         [¶6] For the Wyodak coal destined for the energy complex, front end loaders take the severed coal to a primary crusher located near the coal face of each bench. The primary crushers break it into uniform pieces about eight inches in diameter and dump it onto mobile conveyors. The mobile conveyors transport the coal to a permanent conveyor, where coal from the two benches is blended to the customer's specifications.

         [¶7] The permanent conveyor is located in a "transportation corridor, " which was formed when the top bench of coal was mined and not backfilled. The transportation corridor is 50 to 250 feet lower than the surrounding topography. The permanent conveyor carries the coal south, crosses under I-90 via a tunnel and delivers the coal to the energy complex.

         [¶8] The coal that is not transported on the permanent conveyor is hauled out of the pit in trucks via a haul road. The road begins in the pit and climbs until it reaches the surface of the surrounding land. The trucks carry the coal along the haul road to a train load-out facility north of the mine, where it is transported by train to the Dave Johnston power plant in Glenrock, Wyoming.

         [¶9] Wyodak annually reports its coal production, expenses and resulting taxable value to the Department. Wyoming statutes establish that the point of valuation for coal, when reporting its value for tax purposes, is the mouth of the mine. Wyo. Stat. Ann. § 39-14-103(b)(ii) (LexisNexis 2015); DOR Rules, ch. 6, § 4(b)(i) (2006). The Department and Wyodak historically recognized the mouth of the mine for coal sent to the energy complex at the point where the permanent conveyor entered the I-90 tunnel.[2]

         [¶10] Wyodak initially reported its 2009, 2010 and 2011 taxable values for the coal sent to the energy complex using the entry to the I-90 tunnel as the mouth of the mine. We will explain the tax structure in more detail later, but in general, costs incurred before the mouth of the mine are considered direct mining costs and increase the taxable value of the mineral. Because the I-90 tunnel was the mouth of the mine, most of the permanent conveyor costs were considered direct mining costs. Wyodak subsequently reevaluated the location of the mouth of its mine because each year the coal face had moved farther north, away from I-90, increasing the direct mining costs associated with the conveyor system, and thereby increasing the taxable value of the coal. By 2011, the transportation corridor was 8, 080 feet, or approximately one and one-half miles, long.

         [¶11] Wyodak used a 1999 Wyoming Mining Association memorandum prepared by Donald Coovert to "relocate" its mine mouth for tax purposes by assuming that the conveyor system did not exist. Mr. Coovert is a coal tax consultant who testified for Wyodak at the hearing before the Board. The memo provided a method to calculate where the mouth of the mine would be if Wyodak used a truck haul road, instead of the permanent conveyor, to transport its coal to the energy complex. Wyodak's calculations artificially moved the mouth of the mine significantly closer to the coal face, thereby reducing its direct mining costs and, accordingly, the taxable value of its coal.

         [¶12] In 2013, Wyodak filed amended returns for production years 2009, 2010 and 2011. The amended returns reflected the calculated locations of hypothetical mouths of the mine for each year assuming no permanent conveyor system existed and re-categorized various environmental and government-imposed expenses as indirect instead of direct costs, resulting in a reduction of Wyodak's taxes. The Department did not agree with Wyodak's new calculated mouth of the mine locations or its re-categorization of expenses and rejected the amended returns.

         [¶13] Wyodak appealed the Department's decision to the Board, and the Board held a contested case hearing on November 12 through 14, 2013. It issued its findings of fact, conclusions of law and order on December 18, 2015, ruling that the Department's determinations on Wyodak's mouth of the mine and categorization of mining expenses were correct. Wyodak filed a petition with the district court for review of the Board's decision. The parties and the district court agreed that the case should be certified to this Court pursuant to W.R.A.P. 12.09, and we accepted the certification.[3]

         STANDARD OF REVIEW

         [¶14] When an administrative agency case is certified to this Court under W.R.A.P. 12.09(b), we apply the standards for judicial review set forth in Wyo. Stat. Ann. § 16-3-114(c) (LexisNexis 2015). Wyodak Resources Dev. Corp. v. Dep't of Revenue, 2002 WY 181 ¶ 9, 60 P.3d 129, 134 (Wyo. 2002). The Board's findings of fact are reviewed under the substantial evidence standard. Dale v. S & S Builders, LLC, 2008 WY 84, ¶ 22, 188 P.3d 554, 561 (Wyo. 2008); Section 16-3-114(c). Substantial evidence means "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Bush v. State ex rel. Wyo. Workers' Comp. Div., 2005 WY 120, ¶ 5, 120 P.3d 176, 179 (Wyo. 2005) (citation omitted). Findings of fact are supported by substantial evidence when we can discern a rational premise for those findings from the evidence preserved in the record. Id.

         [¶15] We review an agency's conclusions of law de novo and affirm when they are in accordance with the law. However, when the agency has failed to properly invoke and apply the correct rule of law, we correct the agency's error. Dale, ¶ 26, 188 P.3d at 561-62. This case requires interpretation of the relevant statutes, which is a matter of law subject to de novo review. DB v. State (In re CRA), 2016 WY 24, ¶ 15, 368 P.3d 294, 298 (Wyo. 2016).

         DISCUSSION

         [¶16] Resolution of this case requires interpretation and application of Wyoming mineral taxation statutes. In order to provide proper context for the specific issues presented by Wyodak, we will begin by describing the statutory framework used to value its coal.

         1. General Law on Coal Taxation/Direct Cost Ratio

         [¶17] Wyo. Const. art. 15, § 3 provides that all coal mines "shall be taxed ... in lieu of taxes on the lands[ ] on the gross product thereof ...; provided, that the product of all mines shall be taxed in proportion to the value thereof." "The legislature is directed to define full value for the classes of property and to enact laws securing "'a just valuation for taxation of all property ....'" RME Petroleum Co. v. Dep't of Revenue, 2007 WY 16, ¶ 14, 150 P.3d 673, 679 (Wyo. 2007), quoting Wyo. Const. art. 15, § 11. Exercising that power, the legislature has imposed ad valorem and severance taxes on the value of gross mineral production. Wyo. Stat. Ann. § 39-13-103 (LexisNexis 2015) (ad valorem tax), § 39-14-103 (severance tax). Coal is valued for purposes of taxation at "the fair market value of the product at the mouth of the mine where produced, after the mining or production process is completed." Section 39-14-103(b)(ii).[4]

         [¶18] Pursuant to Wyo. Stat. Ann. § 39-14-101(a)(vi), the mouth of the mine is defined as:

[t]he point at which a mineral is brought to the surface of the ground and is taken out of the pit, shaft or portal. For a surface mine, this point shall be the top of the ramp where the road or conveying system leaves the pit. For an in situ mine, the point shall be the wellhead.

Section 37-14-101(a)(v) defines mining or production as:

drilling, blasting, loading, roadwork, overburden removal, pre-mouth of the mine reclamation, transportation from the point of severance to the mouth of the mine, and maintenance of facilities and equipment directly relating to any of the functions stated in this paragraph.

         [¶19] Like most Wyoming producers, Wyodak sells its coal away from the mouth of the mine. For coal sold away from the mouth of the mine pursuant to a bona fide arms-length sale, § 39-14-103(b)(vii) establishes a formula, commonly known as the proportionate profits valuation method, to determine what portion of the sales value is attributable to the value of the gross product at the mouth of the mine. Powder River Coal Co. v. Wyo. State Bd. of Equalization, 2002 WY 5, ¶ 8, 38 P.3d 423, 427 (Wyo. 2002). Section 39-14-103(b)(vii) states in part:

(vii) For coal sold away from the mouth of the mine pursuant to a bona fide arms-length sale, the department shall calculate the fair market value of coal by multiplying the sales value of extracted coal, less transportation to market provided by a third party to the extent included in sales value, all royalties, ad valorem production taxes, severance taxes, black lung excise taxes and abandoned mine lands fees, by the ratio of direct mining costs to total direct costs. Nonexempt royalties, ad valorem production taxes, severance taxes, black lung excise taxes and abandoned mine lands fees shall then be added to determine fair market value.

         [¶20] This Court expressed the proportionate profits method as a mathematical formula in RME, ¶17, 150P.3d at 681:

         (IMAGE OMITTED)

         [¶21] Wyoming's proportionate profits formula uses a ratio of direct mining costs to total direct costs (the direct cost ratio). Section 39-14-103(b)(vii). More direct mining costs result in a higher direct cost ratio. The taxable value of the mineral increases or decreases as the direct cost ratio does, so the higher the direct cost ratio, the higher the taxable value. To determine the correct direct cost ratio and, thereby, the proper taxable value, costs have to be correctly categorized as direct mining costs, total direct costs or indirect costs. Direct mining costs are defined as:

mining labor including mine foremen and supervisory personnel whose primary responsibility is extraction of coal, supplies used for mining, mining equipment depreciation, fuel, power and other utilities used for mining, maintenance of mining equipment, coal transportation from the point of severance to the mouth of the mine, and any other direct costs incurred ...

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