The West Virginia Senate Finance Committee has advanced a bill to the full Senate that would change the methodology for valuing producing oil and natural gas wells, approving changes that the Judiciary Committee made to the bill allow more latitude for the state Tax Department to reform how it values wells despite objections from the oil and gas industry.
County school boards and commissions across the state would have absorbed most of a projected revenue loss of $9 million stemming from additional expenses allowed by House Bill 2581 if it was enacted as passed by the House of Delegates, according to the Tax Department.
But the Judiciary Committee removed language from the original version of the bill providing for a tax on net profit by defining net proceeds for oil and natural gas as actual gross receipts based on sales volume minus royalties and operating costs and including lease-operating, lifting, compression, processing and transportation expenses as annual operating costs.
An impetus for the bill was a 2019 state Supreme Court of Appeals ruling in which the court held in part that the Tax Department improperly imposed a cap on gas well operating expense deductions.
Leroy Barker, director of the Property Tax Division of the Tax Department, said under questioning from Sen. Eric Nelson, R-Kanawha, that counties could be found liable through litigation if the Legislature doesn’t better define its taxation rules.
The latest version of the bill would still allow taxpayers who disagree with their property tax assessments to bypass county boards of equalization and review and go directly to the Office of Tax Appeals, lower the standard of proof that a taxpayer has to meet to get their property reevaluated from clear and convincing to a preponderance of the evidence and eliminate boards of assessment appeals.
The bill would apply to assessment years starting July 1, 2022 and become effective 90 days after passage.
Acting State Tax Commissioner Matt Irby told the judiciary panel that the department saw the original version of the bill as deeply flawed and as allowing taxpayers to essentially claim double credit for their expenses.
House Delegate Dianna Graves, R-Kanawha, the bill’s lead sponsor, and oil and gas industry representatives criticized the Judiciary Committee’s changes to the bill directing the Tax Department to propose rules for approval by a legislative rule-making review committee. Graves argued that the projected $9 million hit to local governments should be weighed against the tens of millions of dollars that counties will keep pulling in from oil and gas property taxes. Graves contended that now would be a convenient time to enact the bill as originally designed given the extra cushion that counties have from CARES Act coronavirus relief funding.
There are no estimates for what the current version of the bill would cost local governments. That figure would depend on the Tax Department’s own rule-making, although the burden on local governments is expected to be less.