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West Virginia House of Delegates Committee Agrees To Compromise on Natural Gas Property Tax Assessments

photo by: Photo Courtesy of WV Legislative Photography

House Finance Committee Vice Chairman Vernon Criss said a bill dealing with natural gas property tax assessments is a fairer bill than the current process in place.

CHARLESTON — Members of a West Virginia House of Delegates committee approved a compromise bill to address the issues over the last year regarding county natural gas property tax assessments, though one Northern Panhandle lawmaker remained unconvinced.

The House Finance Committee recommended House Bill 4336, providing for the valuation of natural resources property, for passage Friday afternoon by voice vote. The only no vote heard came from Del. Dave Pethtel, D-Wetzel.

HB 4336 would provide a revised and more specific methodology to the State Tax Department for valuing property producing oil, natural gas, and natural gas liquids for property tax assessments.

The bill keeps much of the original language from House Bill 2581, passed during the 2021 legislative session, requiring the State Tax Commissioner to develop a revised methodology to value oil and natural gas properties based on the fair market value based on a yield capitalization model. Net proceeds would come from the actual gross receipts on a sales volume basis and the actual price received as reported on the taxpayer’s return once royalties and annual operating costs are subtracted from gross receipts.

Controversy erupted over the last year since HB 2581 was passed when the emergency rule and the draft rule developed by the State Tax Department lowered the capitalization rate, eliminated the use of a three-year weighting, and left it up to the State Tax Department to use its own reasonable standard, which is undefined in the rule, itself instead of the actual revenues and expenses of the producer.

Members of the West Virginia Legislature’s Rule-Making Review Committee moved to not approve the State Tax Department’s natural gas property tax rule, but the emergency rule remains in place. HB 4336 would phase out the rule over a three-year period starting July 1 and ending July 1, 2024.

The State Tax Department would also have to submit a new emergency rule and legislative rule by July 1.

Starting in July, the State Tax Commissioner is required to annualize gross receipts and actual annual operating costs before calculating the working interest model and royalty interest model for wells that produce less than 12 months during a calendar year. Companies would be allowed to provide actual gross receipts and actual operating expense information that can supplement or be used in place of annualization calculations. The bill also provides a safe harbor provision for wells marginally producing wells.

The bill includes a sunset provision of July 1, 2025, requiring the Legislature to either renew to bill’s provisions during the 2025 legislative session or develop a new formula based on the accumulated data between 2022 and 2025.

Del. Diana Graves, R-Kanawha, was the lead sponsor of HB 4336 and last year’s HB 2581. She said the bill is a compromise working with state Senators Ryan Weld, R-Brooke, and Charles Clements, R-Wetzel, as well as the State Tax Department.

“There was a lot of work that went into crafting (HB 4336). We had to make a lot of compromises,” Graves said. “Unlike 2581, we’re taking into account the impact on counties. This is a compromise that everyone kind of had to agree to. It takes some of the policy decisions that were in the rule that softened the blow of 2581 to the counties. It takes those policy decisions by tax and actually puts them in the statute so that when gas prices are going up, revenues to counties go up.”

Pethtel, who voted against 2581 last year, said he was still concerned about the cost to counties for the emergency natural gas property tax rule currently in place. The original version of last year’s HB 2581 would have resulted in a $9.1 million property tax revenue loss to county governments and county school systems, with $7 million of that cost hitting eight counties in the Northern Panhandle and North Central West Virginia.

“I feel like I’m in the same position that I was in last year with 2581,” Pethtel said. “I think there’s about six counties that’s going to take the brunt of this. Especially not knowing; that’s what is even worse. I cannot go back home and whenever somebody says, ‘what’s this going to cost,’ I’m going to have to say, ‘well, I don’t know what it’s going to cost.'”

House Finance Committee Vice Chairman Vernon Criss, R-Wood, called the previous State Tax Department “lazy” for the way it used to calculate natural gas property tax rates, resulting in a decision by the West Virginia Supreme Court of Appeals in 2019 that ruled the method unconstitutional. Criss said this new method would be fairer to natural gas producers who were over-taxed under the previous method.

“The Supreme Court is the one that started this,” Criss said. “They looked at the evaluations that the Tax Department was doing and rendered them unfair because we were not taking each individual property and each individual’s income and expenses to that, because our tax department was lazy in the way that they did this. That’s what is not fair, and this bill is trying to rectify that.”

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