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State tax officials still are not properly valuing oil and gas wells under a rule proposed to comply with a new law using what industry representatives said would be a fairer formula.

Industry representatives registered their complaints about the emergency rule, while tax officials defended it at a recent West Virginia Joint Natural Gas Development Committee meeting.

“[W]e think it’s exceeded its statutory authority under [HB] 2581,” Marc Monteleone, co-chairman of the Gas & Oil Association of West Virginia tax committee, told the committee.

The Legislature approved House Bill 2581 in response to a 2019 ruling in which the state Supreme Court held that the Tax Department improperly capped deductions for gas well operating expenses.

Monteleone argued the rule has allowed the tax commissioner too much leeway to determine property tax valuation rather than going by actual income and expenses reported on tax returns. He also expressed concern the capitalization rate had been lowered significantly, which he said made no sense given uncertainty in the oil and gas market. He said the move was aimed at keeping oil and gas companies paying roughly the same amount of property tax as before.

A capitalization rate is used to find the rate of return expected for a real estate investment property, calculated by dividing a property’s net operating income by its current market value. A lower capitalization rate means valuation goes up, reflecting a lower level of risk.

“[W]e’re just trying to create a tax scheme that gets us back to the same number we were paying last year,” Monteleone said.

The new capitalization rate more accurately reflects the risk of capital investment, said acting state Tax Department Deputy Commissioner Erin Winter.

“We think reasonableness is the starting point of any inquiry into the actual cost is the most workable solution for us,” Winter said. “The Tax Department will continue to work with industry moving forward to ensure completeness, accuracy and make sure the actual value is determined and that we will work with the counties to ensure compliance by the industry.”

Harrison County Assessor Joseph R. “Rocky” Romano testified he had not spoken with Tax Department officials during the rule proposal process.

“This is the first time that the [state] Assessors 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.”

HB 2581 was initially reworked in the Senate Judiciary Committee to allow more latitude for the Tax Department to reform how it values wells after members of both parties expressed concern about the bill’s impact on local government revenues.

County school boards and commissions would have absorbed most of a projected revenue loss of $9.1 million stemming from additional expenses allowed by HB 2581 if it was enacted as initially passed by the House, according to the Tax Department.

Delegate Lisa Zukoff, D-Marshall, asked for an updated Tax Department analysis of revenue impacts from the emergency rule.

The Legislature approved HB 2581 on the last day of the legislative session after Delegate Dianna Graves, R-Kanawha, contended a compromise version of the bill would not hit counties nearly as hard financially as the original version, partially due to a new tax on natural gas liquids, including propane, ethane and butanes.

The state defines emergency rules as conditions of a legislative rule that allow needed changes to be in effect while going through the rulemaking process. They can be valid for up to 15 months or until a legislative rule becomes effective.

Mike Tony covers energy and the environment. He can be reached at 304-348-1236 or mtony@hdmediallc.com. Follow @Mike__Tony on Twitter.

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