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, Wyoming COMM ITTEE M EM BERS PRESENT Senator R. Ray Peterson, Cochairman Representative Michael Madden, Cochairman Senator James Lee Anderson (SD 28) Senator Cale Case Senator Fred Emerich Representative John Eklund Representative W. Patrick Goggles Representative Dan Kirkbride Representative Bunky Loucks Representative Troy Mader Representative Ruth Ann Petroff Representative Mark Semlek COMM ITTEE M EM BERS NOT PRESENT Senator Michael Von Flatern Representative David Northrup LEGISLATIVE SERVICE OFFICE STAFF Josh Anderson, Staff Attorney Mark Quiner, Assistant Director Matt Sackett, Research Manager OTHER LEGISLATORS PRESENT Senator Eli Bebout 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 Wyoming Legislature’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.