For BPOL tax, could a gas producer remove value added after gas entered transit at the county wellhead?

Plain-English summary

Virginia required the county to measure the gas producer's BPOL receipts at fair market value when the gas entered transit at the wellhead. The gas was not used or sold for use inside the county; it was placed in shipment for sale elsewhere.

For this severance tax, the special gross-receipts rule measured value either when gas was used or sold locally or when it was placed in transit out of the locality. Later value added in another jurisdiction did not belong in the county's tax base.

Sale proceeds could be used as a starting point, but supported value added at and after shipment—such as processing, transportation, and marketing expense—could be deducted to reach wellhead fair market value. Virginia returned the case to the county and required the taxpayer to provide acceptable documentation.

Common questions

Q: Was the final sale price automatically the county BPOL base?
A: No. The relevant value was fair market value when the gas entered transit at the wellhead.

Q: Did Virginia calculate the final wellhead value?
A: No. It remanded for the county to review the taxpayer's documentation and determine that value.

Citations and references

• Va. Code §§ 58.1-3700.1, 58.1-3703.1, 58.1-3712, 58.1-3713, and 58.1-3713.4.
• 1990 Op. Va. Att'y Gen. 223 and 2011 Op. Va. Att'y Gen. 10-110.
• Virginia Public Document 99-306.

Subject

Taxpayer severs gases from the earth ;Fair market value of the gas at the time it was placed in transit.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-44

Original ruling text

April 18, 2012

Re: Taxpayer: *

Locality Assessing Tax: *

Date of Final Local Determination: June 24, 2011

Business, Professional and Occupational License Tax

Dear *:

This final state determination is issued upon the application for correction filed by * (the "Taxpayer") with the Department of Taxation. The Taxpayer appeals the assessment of Business, Professional and Occupational License (BPOL) tax issued to the Taxpayer by the *** (the "County") for the 2007 tax year.

The BPOL tax is imposed and administered by local officials. Virginia Code § 58.1-3703.1 authorizes the Department to issue determinations on taxpayer appeals of BPOL tax assessments. On appeal, a BPOL tax assessment is deemed prima facie correct, i.e. , the local assessment will stand unless the taxpayer proves that it is incorrect.

The following determination is based on the facts presented to the Department summarized below. The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site.

FACTS

The Taxpayer severs gases from the earth and places it in transit for sale outside of the County. The Taxpayer did not utilize or sell the gas for utilization within the County. Under audit, the County disallowed certain expenses, including depreciation, compression, maintenance, transportation fees and personal property taxes that the Taxpayer deducted to determine its gross receipts.

The Taxpayer appealed, asserting that expenses that add value to the gas between the wellhead and the point of sale are deductible from the gross receipts as provided under Va. Code § 58.1-3712. In its final determination, the County concluded that the deductions were improper, and upheld its assessment. The Taxpayer filed an appeal with the Department, contending that its gross receipts must be adjusted for the value added to the gases after being placed into transit.

The Taxpayer argues that Va. Code § 58.1-3712 provides a special definition of gross receipts and the general meaning of the term does not apply in computing the BPOL tax for the severance of gases from the earth. The County defends its assessment asserting that the BPOL statutes do not provide for deductions from gross receipts for depreciation, compression, maintenance, transportation, and property taxes.

ANALYSIS

For purposes of the BPOL tax, Va. Code § 58.1-3700.1 defines gross receipts as "the whole, entire, total receipts, without deduction." BPOL taxes on gas severance, authorized pursuant to Va. Code §§ 58.1-3712, 58.1-3713 and 58.1-3713.4, are determined at a rate not to exceed 1% of the gross receipts derived from coal or gases severed with such county. Virginia Code § 58.1-3712 defines such gross receipts to be "the fair market value measured at the time such coal or gases are utilized or sold for utilization in such county or city or at the time they are placed in transit for shipment therefrom ...."

In 1990 Op. Att'y Gen. 223, 224, the Attorney General opined that, for purposes of Va. Code § 58.1-3712, gross receipts may be measured at two distinct times. According to the opinion, gross receipts may be measured (1) when the coal [or gas] is used or sold for use within the taxing locality; or (2) when the coal [or gas] is placed in transit for shipment from the taxing locality. When gas or coal is placed in transit for shipment, gross receipts are determined to be the fair market value, measured at the time the coal or gas is placed in shipment. The fair market value should not include value added by the processing of the coal or gas in another jurisdiction.

The Department has previously addressed the issue of determining gross receipts for gas placed in transit at the wellhead. See Public Document (P.D.) 99-306 (11/29/1999). In such cases, gross receipts from sale may be used as a starting point when determining the value of the gases at the time they are placed in transit for shipment. Expenditures that represent value added to the gases at, and subsequent to, the time they are placed in transit for shipment may be deducted. Such expenses may include processing, transportation and marketing expense. See also 2011 Op. Va. Att'y Gen. (10-110).

DETERMINATION

Based on the evidence provided, the Taxpayer placed its gas in transit at a wellhead in the County. As such, its gross receipts for the 2007 tax year would be measured by the fair market value of the gas at the time it was placed in transit. Such value would not include the value added from the time it was placed in transit until the point of sale.

Accordingly, I am returning this matter to the County for a determination of the fair market value of the gases at the wellhead. The Taxpayer should provide documentation acceptable to the County showing the amount of value added to the gas after it was placed in transit.

If you have any questions about this determination, you may contact, * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4892367806.D