Recently, the Supreme Court of Appeals of West Virginia (SCAWV) awarded a total victory for natural gas producer Equinor USA Onshore Properties, LLC, regarding the calculation of severance tax and the timeliness of its appeals of those taxes. The decision not only affects how natural gas producers report and pay severance taxes, but also the manner in which appeals of those taxes (and others) are timely filed.

THE FACTS

Equinor, formerly Statoil, sells the impure mix of natural gas it severs in the state to a midstream natural gas company, which processes and fractionates the natural gas into NGLs within its own facilities. Afterwards, the midstream company sells the NGLs to third parties. The midstream company then sends a settlement statement to Equinor, outlining its payment to Equinor of the “net proceeds” of the NGLs, which are calculated as the “product value,” or the proceeds of the sale from the midstream company to a third party, minus contractually determined fees.

Equinor sought refunds of overpaid severance taxes in several tax years, but the State Tax Commissioner of West Virginia and the State Tax Division denied parts of those refunds. This denial sparked a multi-million-dollar dispute over (a) the proper calculation of the value of the gas at the wellhead upon which severance tax is based, (b) the proper calculation of a natural gas producer’s “gross proceeds” subject to severance tax, (c) the determination of transportation and transmission allowance for producers, and (d) the time during which a producer may appeal a decision of the Tax Division.

EQUINOR SECURES LESSER GROSS PROCEEDS VALUE, WHICH MEANS LESS TAX

Severance taxes are imposed on a percentage of the producer’s “gross proceeds”; however, natural gas must be valued at the wellhead. The difficulty is that gas is rarely sold at the wellhead, despite the statutory requirement that gas be valued at the wellhead. The Tax Commissioner argued that the higher “product value” on Equinor’s settlement statements should be reported as its “gross proceeds” for the sale of NGLs, while Equinor argued for the lesser “net proceeds” because it was the only money it actually received for the sale of its unprocessed natural gas. After briefing and oral argument saying that the severance tax statute and regulations are clear and unambiguous, the SCAWV held that: gross proceeds mean only the proceeds from the sale of natural gas by the producer which was, in this case, the “net proceeds” on the settlement statement that Equinor received in its sale to the midstream company; and, “gross proceeds” could not include any of the (a) proceeds from a subsequent, downstream sale of NGLs to a third party or (b) contractually agreed fees between the producer and midstream company. The SCAWV therefore ruled in favor of Equinor.

EQUINOR NOT LIABLE FOR MIDSTREAM COMPANIES’ FEES AND SECURES SAFE HARBOR T&T ALLOWANCE

As natural gas is no longer sold at the wellhead, the regulations permit a producer to take a “transportation and transmission allowance” that is subtracted from the “gross proceeds” in order to determine the value of the natural gas at the wellhead. The Tax Commissioner argued that Equinor “double dipped” as to its allowance, taking both actual costs and the 15 percent safe harbor. Equinor argued that the “actual costs” were attributed to the midstream company and were not applicable. The SCAWV agreed, finding that under the applicable regulation, the “actual costs” alleged by the Tax Commissioner were solely attributable to the midstream company and not Equinor. As such, SCAWV found Equinor had not taken the allowance in the form of “actual costs” and was free to take the 15 percent safe harbor.

EQUINOR TIMELY FILED APPEAL AFTER RECEIVING REFUND CHECK

An appeal of a decision of the Tax Division must be filed within 60 days of the Tax Division providing written notice of its decision. In one particular tax year, there were multiple refund denial letters and refund checks issued to Equinor. The Tax Commissioner argued that Equinor’s appeal for this tax year was untimely as it was filed more than 60 days after the issuance of a “formal” refund denial letter. Equinor argued that its appeal was timely, as it was filed within 60 days after receiving a final refund check from the Tax Division. The SCAWV found the statute required only a written notice of decision, which need not be a “formal” notice or form letter from the Tax Division. Instead, the final refund check that the Tax Division cut and sent to Equinor constituted a written notice under the statute sufficient to spark the 60-day appeal period. As Equinor filed within 60 days of receiving that final refund check, the SCAWV found its appeal timely. This permitted that tax year’s refund to proceed on remand, alongside all others, for refunds calculated according to the opinion.

IMPACT ACROSS THE INDUSTRY EXPECTED

This decision will significantly impact producers across the state in numerous ways. Immediately, numerous decisions and appeals had been stayed awaiting this decision. Looking forward, this will also shape how producers:

• contract with midstream companies;
• structure their invoices or settlement statements;
• calculate “gross value” for severance tax purposes;
• review past tax years to ensure correct calculation of severance taxes;
• select their transportation and transmission allowance for severance tax purposes; and,
• file appeals of State Tax Division determinations.

[Equinor was represented by Alexander Macia, Paul G. Papadopoulos, and Chelsea E. Thompson of Spilman Thomas & Battle PLLC throughout the life of this litigation.].