CHARLESTON — Tax officials in West Virginia are wading through more than 300 appeals of natural gas property tax valuations while legislative staff are investigating how those valuations came to be and if they are consistent with state law.
Multiple changes to the law by the West Virginia Legislature over the last several years in the wake of rulings by the state Supreme Court of Appeals, different interpretations of how to apply the law by the Tax Division and the increase of natural gas prices last year led to multiple appeals of natural gas property valuations, leaving taxpayers and county assessors frustrated.
According to the West Virginia Office of Tax Appeals, the office has received 422 property tax cases that have been appealed to date, with 104 appellants having withdrawn their appeals and 12 dismissed because appellants missed a statutory deadline.
Out of the remaining 306 pending property tax cases, 303, or 99%, are appeals of natural gas property tax evaluations. So far, none of the cases have been adjudicated. In fiscal year 2022, covering July 1, 2021, to July 30, 2022, the Office of Tax Appeals only had 226 docketed cases total.
The Office of Tax Appeals, which is independent of the Tax Division of the Department of Revenue, hears and rules on tax disputes between taxpayers and the state. It was created by the Legislature in 2003 to review decisions made by the Tax Commissioner.
The office consists of one governor-appointed chief administrative law judge (A.M. “Fenway” Pollack), a second administrative law judge, an executive director and two support staff. The Tax Division itself also is having high employee turnover in its property tax subdivision, which only had four staff members in February.
Tax Commissioner Matt Irby declined to comment on this story.
A spokesperson for the governor’s office cited concerns Irby had on commenting on a story while natural gas property tax valuation appeals are pending. The governor’s office also cited a pending investigation by the Legislative Auditor’s Office into how the Tax Division developed its formula for natural gas property tax valuations.
Aaron Allred, the legislative auditor and legislative manager for the Joint Committee on Government and Finance, confirmed an investigation was ongoing, but declined to comment further.
”THE TAX MAN’S KNOCKIN’”
The multi-year drama over natural gas property tax valuations goes back to a 2019 legal case. In Steager v. Consol Energy, the state Supreme Court found that the Tax Division (formerly called the State Tax Department) was using a methodology for calculating natural gas property tax valuations inconsistent with the state Constitution.
The high court found that the way tax officials were calculating operating expense reductions was causing oil and natural gas wells to be differently treated, violating the equal and uniform assessment requirement of the state Constitution. Prior to the ruling, the Tax Division based operating expenses on the gross receipts of a well’s production and an arbitrary cap set by state tax officials.
House Bill 2581, passed in 2021, was the Legislature’s first attempt to develop a new natural gas property tax valuation formula. It required the state tax commissioner to develop a revised methodology to value oil and natural gas properties using the fair market value based on a yield capitalization model.
However, the Legislature’s Rule-Making Review Committee rejected the rule developed by the Tax Division at the beginning of 2022, which lowered the capitalization rate, eliminated the use of three-year weighting and left it up to the Tax Division to use its own reasonable standard, which is undefined in the rule itself, instead of the actual revenues and expenses of the producer.
During 2022’s legislative session, lawmakers passed HB 4336, providing little wiggle room for the Tax Division to go rogue. Now, the Tax Division calculates oil and natural gas property valuations using an income-based approach based on what the value of the interest would be if sold at market value.
The formulation takes into account several factors, including whether a well is horizontal or vertical, the geographic location of the well, whether the well is located in certain shale regions and the age of the well.
“These factors are supplied by the producer along with the actual royalty paid in 2021 to a royalty owner,” according to the Tax Division’s website. “Some royalty interests are expected to produce more income over the life of the well than others, and these factors help determine what that income is expected to be (based upon current price of gas). For a typical royalty interest, the income approach will produce a value of the interest that is anywhere between 1.5 and 7 times the actual income received by a royalty owner as reported by the producer.”
GASLIGHTING
While the previous formula looked back using a three-year average, the new formula looks back over only the previous tax year when natural gas prices were at record highs, resulting in increased production and higher payments to royalty owners. As a result, royalty owners received sticker shock once the Tax Division began sending automated letters triggered any time appraisals rose 10%, or $1,000, over the previous tax year.
With some royalty owners seeing appraisals go up by hundreds of percentage points, the Tax Division and county assessors were flooded with phone calls. The Tax Division has been accused of being slow to communicate with county assessors and commissioners and providing incorrect assessment numbers to property owners.
Multiple pending lawsuits are challenging how the valuations were done, including lawsuits in Ohio and Brooke counties led by Scott Sonda and Mark Sonda of Bethany. The Tax Division has been added as a party to those lawsuits.
“Both Ohio and Brooke County commissioners ask for the (Tax Division) to be included in the lawsuit,” Sonda said by phone Friday morning. “Not only did we not object, we actually encouraged it. The (Tax Division) said if they were joined in the lawsuit, then they want the lawsuit dismissed because they said we picked the wrong venue. We should have picked the tax court.”
“Pursuant to its legislative authority, the (Tax Division) has promulgated rules governing the valuation of (Sonda’s) oil and gas interests, not the Brooke County Board of Equalization and Review. Appellant has complained about how the State Tax Department applied those rules,” wrote Brooke County Assistant Prosecuting Attorney David F. Cross in a motion to join the Tax Division to the Sonda case on May 5.
“The (Tax Division) has an interest in ensuring that legislatively authorized rules are followed (just as the legislature has an interest in ensuring that duly enacted legislation is followed),” Cross continued.
Sonda said the courts gave the Tax Division 30 days to answer the response from Sonda and the other plaintiffs, with the Brooke County answer due next week.
“They can follow the law. They can use an income-based approach, they can use a yield capitalization model, but there are 10 different ways or more they can apply a yield capitalization model to get a fair market value,” Sonda said. “They picked a way that yields a very high value, which is not fair market value …I think we have a very compelling case.”
It is likely that once again, the state Supreme Court will have to step in and determine whether the formulations used for natural gas property tax valuations are consistent with state code and the Constitution.
In the meantime, royalty owners will be stuck with higher assessments this year and next before the assessments begin to reflect lower natural gas prices and help bring those assessments back down. The effects of the up-and-down valuations, upon which county assessors base their property tax liabilities, could provide uncertainty for the budgets of counties and school systems over the next several years.
