Draft Only

Approval Pending

of SUMMARY

P ROCEEDINGS JOINT REVENUE COMMITTEE

COMM ITTEE M EETING I NFORMATION September 22-23, 2014 Starrett Junior High School Library Lander,

COMM ITTEE M EM BERS PRESENT Senator R. Ray Peterson, Cochairman Representative Michael Madden, Cochairman Senator (SD 28) Senator Senator Representative John Eklund Representative W. Representative Representative Representative Troy Mader Representative Ruth Ann Petroff Representative

COMM ITTEE M EM BERS NOT PRESENT Senator Representative

LEGISLATIVE SERVICE OFFICE STAFF Josh Anderson, Staff Attorney Mark Quiner, Assistant Director Matt Sackett, Research Manager

OTHER LEGISLATORS PRESENT Senator Representative Lloyd Larsen

The Committee Meeting Summary of Proceedings (meeting minutes) is prepared by the Legislative Service Office (LSO) and is the official record of the proceedings of a legislative committee meeting. This document does not represent a transcript of the meeting; it is a digest of the meeting and provides a record of official actions taken by the Committee. All meeting materials and handouts provided to the Committee by the Legislative Service Office, public officials, lobbyists, and the public are on file at the Legislative Service Office and are part of the official record of the meeting. An index of these materials is provided at the end of this document and these materials are on file at the Legislative Service Office. For more information or to review meeting materials, please contact the Legislative Service Office at (307) 777-7881 or by e-mail at [email protected] . The Summary of Proceedings for each legislative committee meeting can be found on the ’s website at www.wyoleg.gov. PAGE 2 OF 9

OTHERS PRESENT AT M EETING Please refer to Appendix 1 to review the Subcommittee Sign-in Sheet for a list of other individuals who attended the meeting.

JOINT REVENUE COMMITTEE Summary of Proceedings

WYOMING LEGISLATIVE SERVICE OFFICE • 213 State Capitol • Cheyenne, Wyoming 82002 TELEPHONE (307) 777-7881 • FAX 307-777-5466 • E-MAIL [email protected] • WEB SITE www.wyoleg.gov PAGE 3 OF 9

EXECUTIVE SUMMARY The Committee met for two days in Lander, Wyoming. The Committee heard testimony on the mineral tax code and directed staff to prepare a bill creating a task force to consider the issue. The Committee heard testimony on the definition of “well site”, affiliated businesses, assessment of airline property and the property tax refund program. The Committee will consider all of those topics at the November meeting and directed staff to prepare bills on the definition of well site and the assessment of airline property.

CALL TO ORDER (JUNE 2, 2014) Co-Chairman Peterson called the meeting to order at 8:30 a.m. The following sections summarize the Committee proceedings by topic. Please refer to Appendix 2 to review the Committee Meeting Agenda.

MINERAL TAX CODE Mr. Buck McVeigh of the Wyoming Taxpayers association said that the association had supported 2014 House Bill 22 which was a reduction in the interest rate during the audit period on mineral taxes. He said that the goal is to create a fair and simplified taxation system. He stated that it would be important for education on the constitution and statutes related to mineral taxation and that it would be important to consult with the attorney general to address constitutional concerns.

Mr. Dan Noble of the Department of Revenue said that in determining what fair market value means over the years has created a real puzzle and at this point it is a complex system which can create some problems on all sides. He said that because of how complex the structure is there has been a lot of litigation over the years and audits take a long time.

Mr. Carl Anderson, Senior Assistant Attorney General gave a presentation to the Committee on mineral taxation. See Appendix 3 for a copy of the presentation. He noted that in Wyoming’s tax system the taxes are based on production and not on an estimate of the reserves, though some states do it that way. In Wyoming minerals are only taxed once, when they are severed and removed from the ground. He said that under the Constitution minerals shall be taxed in proportion to the value thereof, as determined by the Legislature. He noted that the value of gross product and fair market value are defined in statute and the department is required to use various methodologies to arrive at market value. He noted that fair market value is determined at the mouth of the mine, after the mining or production process is completed. Each mineral has its own definition of mouth of the mine. He said that the Department looks for a bona fide arms-length sale which does not involve related parties and that if the sale is to a marketing affiliate then it not on the open market.

Mr. Anderson said that it is a bifurcated system between the state severance tax and the ad valorem tax which is administered by the counties. He noted that the Department of Revenue makes the determination of what fair market value is and that is certified to the counties. He said that there are some constitutional issues to consider but the valuation is largely done through statute.

Mr. Craig Grenvik of the Department Revenue provided a presentation to the Committee on mineral taxation. See Appendix 4 for a copy of the presentation. He said that the main issue is how to value the mineral when there is no arms-length sale. He noted that every industry is constantly changing and it is hard to figure out what the value is in a changing environment. That results is NOVC’s or notice of valuation changes which is a change to the notice of value that the county had received from the

JOINT REVENUE COMMITTEE Summary of Proceedings

WYOMING LEGISLATIVE SERVICE OFFICE • 213 State Capitol • Cheyenne, Wyoming 82002 TELEPHONE (307) 777-7881 • FAX 307-777-5466 • E-MAIL [email protected] • WEB SITE www.wyoleg.gov PAGE 4 OF 9

department. He noted that changes could come from audits or other methods and could result in the county needing to refund some money.

Mr. Grenvik described the various valuation methods used today. He said that under the modified netback method where there is not an arms-length sale they do two calculations, the proportionate profits method and the netback method and, assess the higher of the two. That is because in some circumstances the netback method can result in a negative assessed value and the proportionate profits method is used to establish a floor value. He noted that proportionate profits results in a lower value for gas and oil compared to coal because they are easier to get to the surface than coal is. He noted that the modified netback includes a rate of return on the gross investment to simulate a profit taken by a third party. He noted that the cost buildup method is used in bentonite. There is no statutory reference but it is a recognized appraisal technique.

Mr. Grenvik said that Wyoming is a self-reporting system both for severance and ad valorem tax. He said that the information provided by the taxpayer is loaded into the computer system and a number of checks are performed to verify the taxpayer, verify whether the numbers are within a tolerance range and verify deductions and exemptions. He said that the Department receives around 40,000 original returns, plus an additional 10,000 to 20,000 amended returns. He noted that extensions are routinely granted until April 25th which gives the Department very little time to analyze the returns by the deadline of June 1st. He said that because it is a self-reporting system with very little up-front verification they have to rely on formal audits by the Department of Audit to provide much more in depth information than the reconciliations that the Department of Revenue can perform.

Mr. Grenvik noted that the severance tax was enacted in 1969 on the privilege of severance. He noted that through the 80s the primary direction was to use recognized appraisal techniques. In 1986 the mineral tax division was created. In 1988 the Department of Audit including a minerals division was created which provided for much more oversight of the minerals industry and led to much more litigation. From 1991 to present the valuation has been done under the methods set out in statute. He noted that anything not defined in statute has been litigated, and some of the definitions such as “dehydrator” were also litigated. He said that the Department won some cases and lost others over roughly10 years of litigation. He said that in 1997 there were 71 mineral valuation appeals, this year the State Board of Equalization has heard 3 appeals with 3 pending.

Mr. Grenvik noted that complexities of mineral taxation have been exposed and sometimes created by litigation. He noted that these cases involve complex valuation scenarios and that some of the information is not known until an audit is performed. He noted that it does not get simpler after it is valued the first time because there can be new contracts, new or changed facilities, turnover at the company and use of tax agents which may not have access to all necessary information. He also noted that these properties are routinely sold which can also provide difficulties in valuation.

Mr. Grenvik said that only Wyoming uses the proportionate profits method to value coal and new producers can have difficulty adjusting. He noted that changes in the accounting systems can impact the allocations but none of the accounting systems are created with the proportionate profits method in mind. He said that it is becoming increasingly rare that audits can be completed in the 2 year time frame. He said that for bentonite the calculation is unbelievably complex and the statutes have fallen behind the market.

Mr. Noble provided a presentation on the work of the select committee that looked at this topic in 2000. Seep appendix 5 for a copy of the presentation. He noted that it was 18 months of work through 8

JOINT REVENUE COMMITTEE Summary of Proceedings

WYOMING LEGISLATIVE SERVICE OFFICE • 213 State Capitol • Cheyenne, Wyoming 82002 TELEPHONE (307) 777-7881 • FAX 307-777-5466 • E-MAIL [email protected] • WEB SITE www.wyoleg.gov PAGE 5 OF 9

meetings of the committee. He said they produced a three volume set of documents and if the Committee wants to move forward it may be valuable to look at that the work done by that select committee. He noted that in the late 80’s and 90’s mineral prices were very low and there were concerns over the netback method which could produce a zero value. A stopgap was included to ensure that there was no zero value.

Mr. Noble stated that it would be important to make sure that all interested parties are involved in looking at this issue. He noted that another issue to consider is whether to look strictly at oil and gas or all minerals. In response to a question he noted that the most significant litigation has taken place in oil and gas because the way that oil and gas does business creates a lot of complexity and there are not many arms-length transactions. The Department knows how much of the mineral was produced, but the valuation of it is difficult. He said that it is unclear if the Department would be trading one set of litigation for another, but if the new system were simple enough it would likely limit any additional litigation.

Mr. Mark Haggerty of Headwaters Economics made a presentation to the Committee on severance tax policies from states all over the country. See Appendix 6 for a copy of the handouts provided by Mr. Haggerty. He noted that rural areas are losing revenue except for those areas with energy development. He said that gas well produce on a decline curve where wells produce more at beginning, then taper off rapidly. The company has to drill more wells to keep the same level of production.

Mr. Haggerty said that when they started looking at taxable value they had assumed that it would be similar but they had found that no two states do it similarly. He said that the key variables are price and deductions. He noted that North Dakota and Louisiana base their tax on a fixed price per mcf which is adjusted monthly or annually and that appeared to be the simplest way to tax minerals. He said that Pennsylvania had a per-well fee on an annual basis which was not tied to production. In response to a question he noted that taxation rates did not appear to drive industry decisions. He said that for example North Dakota had the highest tax and also had lots of production and companies had not relocated to Montana. The oil is in North Dakota so that is where production was occurring.

Mr. Bob Rolston, Sheridan County Commissioner and WCCA president, said that it was important to have consistent and predictable budgets and a fair, predictable and simple tax code. He said that if any changes resulted in more accurate and timely reporting it would be a win-win for everyone. He said it was important that any decisions that are made be revenue neutral. Mineral extraction is a needed source of income for the counties and it may be necessary to look at the constitution to achieve a simpler taxation system.

Mr. Pete Obermueller of the WCCA said that it would be simplest to move to something related to production though that may raise constitutional questions. He said it would be important to consider whether it is possible to change to a volume structure and not fundamentally change county valuation or the counties’ ability to bond. He noted that their organization would not reject anything out of hand but would want to consider those issues.

Mr. Pat Meyer, Park County Assessor, said that it was important to keep any changes revenue neutral. He said the NOVC’s can cause a lot of issues and it is a lot of work even if it is only a small monetary impact. He said getting those only once a year might solve some of their issues, although there is an issue with calculating interest.

Ms. Dixie Huxtable, Converse County Assessor, stated that keeping the valuation whole is very important especially to special districts. She said that while counties may have enough money to pay back money owed due to a NOVC, the special districts may not have that money on hand.

JOINT REVENUE COMMITTEE Summary of Proceedings

WYOMING LEGISLATIVE SERVICE OFFICE • 213 State Capitol • Cheyenne, Wyoming 82002 TELEPHONE (307) 777-7881 • FAX 307-777-5466 • E-MAIL [email protected] • WEB SITE www.wyoleg.gov PAGE 6 OF 9

Ms. Carla Faircloth said that the impacts that can be caused by NOVC’s need to be addressed and it is important to have everyone involved.

Mr. Bruce Hinchey of the Petroleum Association of Wyoming said that this is a complex issue and represents a lot of money. Mr. Hinchey provided a handout to the Committee (see Appendix 7 for a copy of the handout). He said that simplification is an important issue for the industry and for the state. He noted that the current system costs a lot of money. He said that it was important to have all stakeholders included in the discussion.

Ms. Amy Folsom of Devon Energy made a presentation to the Committee on the Wyoming production tax. See Appendix 8 for a copy of the presentation. She said that changes after that initial valuation creates an NOVC. She said that there are many reasons for prior period adjustments including volume allocations, measurement, downtime, change in allocation methods and audits. She said that pricing and deduction changes can also cause prior period adjustment and some examples are complex pricing formulas, new contracts, operated vs. take-in-kind sales and internal audits which can find incorrect pricing invoiced by the purchaser. She noted that these are complex sales agreements involving a number of parties including the well operator, the pipeline/plant operator and the purchaser. She said that when reporting they do not have control of information from outside parties. In response to a question she said that Wyoming is one of the most complex reporting jurisdictions and they would like consideration of the possibility to simplify that process.

Mr. Jonathan Downing of the Wyoming Mining Association said that they would be interested to see where the Committee stands on bentonite. He said that the trona producers are satisfied with the current trona factor. He said that with rare earth mineral production it is important to first get that industry off the ground, then it would be appropriate to look at taxing it and it may be possible to phase it in similar to how trona was handled in the past to ensure that it is competitive on a world and national market. He said that with coal simplification is desired and it may be possible to have discussions of a coal factor and possibly different factors within the state.

Ms. Sara Gorin of the Equality State Policy Center said that while the mineral taxes started out not doing so well, things have gotten better. She said that as the Committee is considering changes it would be good to keep in mind that the state may still be better off with the system that is currently in place. She said that it is important to ensure accurate comparisons with and changes in revenue and to have appropriate data. She said that minerals are a valuable, non-renewable resource that needs to be protected. She stated that the permanent mineral trust fund is important and if minerals were to stop producing tomorrow, the permanent mineral trust fund would look tiny.

Mr. Dan Sullivan said that it was important to not let the revenue guide the process and if the Committee does the right thing they can then adjust it to arrive at the right amount of revenue. He said that the Committee could look at one tax and could look at changing the constitution if necessary. He noted that one consideration is the valuation of counties for bonding if the state went to a single tax system.

Mr. Richard Garret of the Wyoming Outdoor Council said that with wind energy the legislation put a placeholder on a generation tax and that amount could be included in this discussion.

Mr. Noble provided a handout to the Committee of the report from the previous select committee on the topic of mineral valuation and taxation. See Appendix 9 for a copy of the handout.

JOINT REVENUE COMMITTEE Summary of Proceedings

WYOMING LEGISLATIVE SERVICE OFFICE • 213 State Capitol • Cheyenne, Wyoming 82002 TELEPHONE (307) 777-7881 • FAX 307-777-5466 • E-MAIL [email protected] • WEB SITE www.wyoleg.gov PAGE 7 OF 9

After additional discussion, Representative Madden made a motion for staff to draft a bill creating a task force with legislative and non-legislative members to meet over the next two years on this topic and to communicate regularly with the full Revenue Committee. The motion was seconded and passed by voice vote.

MEETING RECESS The Committee recessed at 4:45 p.m.

CALL TO ORDER (SEPTEMBER 23, 2014) Co-Chairman Madden called the meeting to order at 8:30 a.m.

DEFINITION OF “WELL SITE” Mr. Dan Noble provided a handout to the Committee regarding the definition of “well site”. See appendix 10 for a copy of the handout. He noted that the previous definition set up a bright line test, but with the increase in horizontal drilling wells are set up differently and the equipment is farther away so the existing definition no longer functions the way that it was intended. In response to a question Mr. Noble noted that the definition does not impose a tax and there is an exemption for drilling activities.

Mr. Hinchey stated that industry recognizes that things have changed and that this issue needs to be worked on and solved.

After additional discussions, Senator Case moved that staff draft a bill based on the language provided. The motion was seconded and passed by voice vote.

AFFILIATED BUSINESSES The LSO provided a handout of the 2013 bill on the topic of a sales tax exemption for related business entities. See Appendix 11 for a copy of the bill.

Senator Bebout stated that when this bill was previously considered there were questions asked which were valid so he withdrew the bill for future consideration by the Committee. He stated that the issue is when businesses purchase personal property and pay the sales tax at the time of purchase they are then required to pay the tax again if they lease it to a related party.

Mr. Dean McKee of McKee, Marburger and Fagnant provided a handout to the Committee related to affiliated businesses. See Appendix 12 for a copy of the handout. He noted that if a corporation organizes into separate entities for legal liability reasons, they have to pay the sales tax when they rent the assets from the related corporation. He said that self-rentals are not subject to the net investment income tax, and the same thing could be done here for sales tax. In response to a question Mr. McKee said that while the calculation was a bit more complicated in the internal revenue code, 80% common ownership is the general number for businesses to be considered related or affiliated.

Mr. Noble said that there is a tax on retail sales of tangible personal property and there is also a list of exclusions. He noted that there are no tax implications if the property is moved back and forth between related businesses, the concern is when they start selling property back and forth. He said that he does not know what the fiscal impact would be if this went into effect as this information is not reported to the Department. In response to a question he noted that the 80% ownership may be harder to define than it

JOINT REVENUE COMMITTEE Summary of Proceedings

WYOMING LEGISLATIVE SERVICE OFFICE • 213 State Capitol • Cheyenne, Wyoming 82002 TELEPHONE (307) 777-7881 • FAX 307-777-5466 • E-MAIL [email protected] • WEB SITE www.wyoleg.gov PAGE 8 OF 9

appears. He noted that if the first corporation were licensed as a vendor then they would be exempt when buying property for resale. He noted that he could look into how other states handle this issue.

After additional discussion, the Committee determined to include this topic on the agenda for the November meeting.

AIRLINE PROPERTY Ms. Brenda Arnold of the Department of Revenue stated that the statutes list the types of properties that the Department is required to value. One of the types of property is property of a public utility. She stated that the Department has always valued airline property under that provision because in title 37 airlines were included in the definition of “public utility.” She noted that in 2012 that portion of the definition was repealed and airlines are no longer a public utility under title 37. She said that the Department was asking for clarification on whether the state or the counties should value this property. She noted that if counties do the valuation it would be a lower amount because they could not value airlines in the same manner that the state can value them.

Mr. Pat Meyer said that it should be valued by the department of revenue rather than locally.

After additional discussion, the Committee directed staff to draft a bill requiring the Department of Revenue to value airline property.

PROPERTY TAX REFUND PROGRAM SUNSET Co-chair Madden stated that the property tax refund program has existed for a long time and is going to sunset as of January 1, 2015. He noted that the purpose of the bill is to extend the program. LSO provided a copy of the bill to the Committee. See Appendix 13 for a copy of the bill.

After additional discussion, the Committee voted to sponsor the bill by roll call vote with 11 ayes, 1 no and 2 excused. The Committee determined to take additional public comment on the bill at the November meeting.

MEETING ADJOURNMENT There being no further business, Co-Chairman Madden adjourned the meeting at 12:00 p.m.

Respectfully submitted,

Senator Peterson, Co-Chairman Representative Madden, Co-Chairman

JOINT REVENUE COMMITTEE Summary of Proceedings

WYOMING LEGISLATIVE SERVICE OFFICE • 213 State Capitol • Cheyenne, Wyoming 82002 TELEPHONE (307) 777-7881 • FAX 307-777-5466 • E-MAIL [email protected] • WEB SITE www.wyoleg.gov PAGE 9 OF 9

Committee Meeting

Materials Index

Appendix Agenda Item Appendix Description Appendix Provider

1 Committee Sign-In Sheet Lists meeting attendees Legislative Service Office

2 Committee Meeting Provides an outline of the topics the Legislative Service Office Agenda Committee planned to address at meeting

3 Mineral Taxation Mineral tax presentation Attorney General’s Office

4 Mineral Taxation Mineral tax presentation Department of Revenue

5 Review of Select Presentation - Review of the select Department of Revenue Committee committee

6 Mineral tax study Mineral tax study Headwaters Economics

7 Oil and gas figures Oil and gas pamphlet Petroleum Association

8 Mineral taxation Mineral tax presentation Devon Energy

9 Mineral valuation report Report from the mineral taxation select Department of Revenue committee

10 Definition Definition of “well site” Department of Revenue

11 Tax Exemptions 13LSO-0115 Tax exemption related entities Legislative Service Office

12 Tax Exemptions Affiliated businesses Mr. Dean McKee, CPA

13 Property tax refund 15LSO-0123 –Property tax refund Legislative Service Office program program-extension

JOINT REVENUE COMMITTEE Summary of Proceedings

WYOMING LEGISLATIVE SERVICE OFFICE • 213 State Capitol • Cheyenne, Wyoming 82002 TELEPHONE (307) 777-7881 • FAX 307-777-5466 • E-MAIL [email protected] • WEB SITE www.wyoleg.gov