Anadarko v. Tax Commn , 345 P.3d 648 ( 2015 )

This opinion is subject to revision before final
publication in the Pacific Reporter
2015 UT 25
IN THE
SUPREME COURT OF THE STATE OF UTAH
ANADARKO PETROLEUM CORPORATION and
KERR-MCGEE OIL & GAS ONSHORE, L.P.,
Petitioners and Appellants,
v.
UTAH STATE TAX COMMISSION,
Respondent and Appellee.
No. 20130192
Filed January 30, 2015
Original Proceeding in this Court
Attorneys:
Nathan R. Runyan, Steven P. Young, Salt Lake City, for petitioners
Sean D. Reyes, Att‟y Gen., Clark L. Snelson, Asst. Att‟y Gen.,
Salt Lake City, for respondent
CHIEF JUSTICE DURRANT authored the opinion of the Court, in which
JUSTICE DURHAM, JUSTICE PARRISH, and JUSTICE LEE joined.
ASSOCIATE CHIEF JUSTICE NEHRING authored a dissenting opinion.
CHIEF JUSTICE DURRANT, opinion of the Court:
Introduction
¶1 This is a tax case that comes before us on appeal from a
formal decision of the Utah State Tax Commission (Commission).
Utah law imposes a severance tax on owners of oil and gas interests.
The tax rate an owner must pay depends on the fair market value of
the owner‟s interest. The question presented in this case concerns
how the value of such an interest is to be calculated. Petitioners
Anadarko Petroleum Corporation and Kerr-McGee Oil & Gas
ANADARKO v. TAX COMM‟N
Opinion of the Court
Onshore L.P. (collectively Anadarko) argue that the Commission
improperly disallowed deductions they made for tax-exempt federal,
state, and Indian tribe royalty interests. Based on the plain meaning
and structure of the severance tax statute, we agree and reverse the
Commission‟s determination.
Background
¶2 The facts of this case are not in dispute. Anadarko acquired
Kerr-McGee in 2006. From January 1, 2008, to December 31, 2011,
Anadarko operated oil and gas wells in Carbon and Uintah counties.
Anadarko filed severance tax returns during this period. On
September 2, 2010, the Auditing Division of the Commission sent
Anadarko a preliminary notice of its proposed tax liability. After
correspondence between the parties, the Auditing Division issued
two notices to Anadarko on November 10, 2010. The first notice
informed Anadarko of a deficiency in its 2009 severance tax and
assessed $10,118.54 in additional taxes and interest. The second
notice informed Kerr-McGee that its claimed 2009 refund of
$606,376.65 was being reduced by $111,654.09, resulting in a refund
of $494,722.56.1 Anadarko conceded that $1,509.83 of the $10,118.84
deficiency was properly assessed and that $10,185.42 of the
$111,654.09 refund was properly withheld, but it disputed the
remaining actions of the Commission.
¶3 Anadarko challenged the disputed amounts by filing a
petition for redetermination of tax with the Commission. Both
Anadarko and the Auditing Division filed motions for summary
judgment, and the Commission held a hearing on the cross-motions
for summary judgment. The issue before the Commission was
whether the Auditing Division had applied the correct tax rate,
which involves the application of a somewhat complicated formula
outlined in Utah Code sections 59-5-102 and 59-5-103.1.
¶4 The formula first requires the taxpayer to calculate the fair
market value of the interest in oil or gas according to a sale in an
“arm‟s-length contract” or by “comparison to other sales of oil or
gas.”2 Second, permissible deductions are subtracted from that
1 A small portion of these discrepancies in tax liability was due to
the calculation of a stripper well exception. The Commission granted
summary judgment in favor of Anadarko on this issue, and it is not
before us on appeal.
2 See UTAH CODE § 59-5-103.1(1)(a).
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Opinion of the Court
amount to yield the net taxable value.3 Third, the Commission
divides the taxable value by the amount of oil or gas produced. For
natural gas, the unit of measurement is an MCF, or one-thousand
cubic feet of natural gas.4 So for Anadarko‟s natural gas interests, the
third step yielded the taxable value per MCF (unit price). Finally, to
determine the tax rate, the Commission calculates the percentage of
the unit price up to $1.50 and then the percentage above $1.50. The
percentage of the unit price up to $1.50 is the percentage of the
taxable value assessed at a three-percent tax rate. The percentage of
the unit price above $1.50 is the percentage of the taxable value
assessed at a five-percent tax rate.5
¶5 We offer a brief example by way of illustration. In one of the
calculations in this case, the net taxable value of 24,874 MCFs was
$66,478. The net taxable value per MCF was therefore $2.67
(66,478/24,874 = 2.67). Fifty-six percent of the unit price is below
$1.50 (1.50/2.67 = 0.56) and the remaining forty-four percent is above
$1.50 ((2.67-1.50)/2.67 = 0.44). Therefore, of the $66,478 in taxable
value, fifty-six percent is assessed at three percent (66,478*0.56 =
37,227.68), and forty-four percent is assessed at five percent
(66,478*0.44 = 29,250.32).
¶6 The dispute before the Commission concerned step two of
this formula—what deductions are permitted under the severance
tax statute in the unit price calculation. Anadarko argued that
because the statute exempts federal, state, and Indian tribe royalty
interests from the severance tax, it also permits taxpayers to deduct
such interests from the net taxable value in calculating the per unit
price. The Auditing Division maintained that the unit price should
be calculated “based on the prices at which the gas was sold, prior to
the point when the producer paid the exempt royalties.”
¶7 On December 13, 2011, the Commission determined there
was no genuine issue of material fact and granted summary
judgment in favor of the Auditing Division. The Commission agreed
with the Auditing Division‟s calculation of price per MCF, relying on
the plain language of Utah Code section 59-5-103.1. The Commission
3 Id. § 59-5-103.1(1)(b)
4 See id. § 59-5-102(2)(b); What Is Natural Gas?, AM. GAS ASS‟N,
http://www.aga.org/what-natural-gas (last visited January 26,
2015).
5 UTAH CODE § 59-5-102(2)(b).
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ANADARKO v. TAX COMM‟N
Opinion of the Court
also acknowledged that the exempt entities‟ interests—the interests
of federal and state governments, and Indian tribes—are not subject
to the severance tax but must be included in the calculation of value
under Utah Code sections 59-5-102 and -103.1. The Commission
concluded that “[t]axable value is established prior to being allocated
between the two tax rates” and that the Auditing Division‟s
methodology did not increase Anadarko‟s taxable value. Anadarko
filed a request for reconsideration on January 2, 2013, which the
Commission denied. Anadarko timely appealed. We have
jurisdiction to review final orders of the Utah State Tax Commission
under Utah Code section 78A-3-102(3)(e)(ii).
Standard of Review
¶8 When reviewing formal adjudicative proceedings of the
Utah State Tax Commission, we “grant the commission deference
concerning its written findings of fact, applying a substantial
evidence standard,” and we review the Commission‟s conclusions of
law for correctness, granting the Commission‟s legal analysis no
deference.6
Analysis
¶9 Anadarko first argues that the Commission‟s decision is
inconsistent with the terms of the Utah Severance Tax Act. It
contends that the Act‟s plain language requires the exclusion of any
federal, state, or Indian tribe interests from the calculation of value
used to determine severance tax liability. And Anadarko maintains
that reading the statute any other way creates two inconsistent
meanings of “value” within sections 59-5-102 and 59-5-103.1.
Anadarko also argues that reading the statute to include exempt
federal interests in the unit price calculation violates the United
States Constitution by imposing a tax on the federal government.
¶10 We agree with Anadarko that the plain meaning and
structure of the severance tax statute categorically excludes federal,
state, and Indian tribe interests from the unit price calculation.
Accordingly, we do not reach the constitutional questions raised in
Anadarko‟s brief.7
6 UTAH CODE § 59-1-610(1).
7 See Bailey v. Bayles, 2002 UT 58, ¶ 26, 52 P.3d 1158 (“[I]t is
fundamental that constitutional issues should be avoided if the case
can be properly decided on non-constitutional grounds.” (internal
quotation marks omitted)).
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Opinion of the Court
¶11 When interpreting a statute, we look first to the plain and
ordinary meaning of its terms.8 But we do not interpret statutory
provisions in isolation. We also construe terms “in each part or
section” of a statute “in connection with every other part or section
so as to produce a harmonious whole.”9 The meaning of seemingly
unclear or ambiguous provisions is often clear when read in context
of the entire statute.10
¶12 Here, we acknowledge that the Commission‟s reading of the
severance tax statute is plausible if section 59-5-103.1 is read in
isolation. But when read in harmony with section 59-5-102(1)(b), we
conclude that the plain language and structure of the statute
categorically excludes federal and Indian tribe interests from the
value calculation set forth in section 59-5-103.1.
¶13 Section 59-5-102(1)(a) imposes a severance tax on any
“person owning an interest in oil or gas produced from a well in the
state.” The tax rate depends on the fair market value of a producer‟s
oil or gas interest, as “determined under Section 59-5-103.1.” That
section allows anyone subject to the severance tax to deduct
processing and transportation costs before “determining the fair
market value of oil or gas,” but it makes no mention of exempt
royalty interests.
¶14 The Commission concluded that because section 103.1 does
not include a deduction for federal, state, or Indian tribe royalty
interests, the statute unambiguously dictates that the calculation of
value does not permit the deduction of such interests. But this
conclusion overlooks the fact that subsection 102(1)(a)—the
provision that imposes the severance tax and sets forth how the rate
is to be calculated under section 103.1—is, by its own terms,
“[s]ubject to Subsection [102](1)(b).” And that subsection specifically
excludes exempt interests from consideration under the entire
section:
This section [59-5-102] applies to an interest in oil or gas
produced from a well in the state or in proceeds of the
production of oil or gas produced from a well in the
state except for: (i) an interest of the United States . . . ;
8 Olsen v. Eagle Mountain City, 2011 UT 10, ¶ 9, 248 P.3d 465.
9 State v. Watkins, 2013 UT 28, ¶ 29, 309 P.3d 209 (internal
quotation marks omitted).
10 See Olsen, 2011 UT 10, ¶ 9.
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Opinion of the Court
(ii) an interest of the state or a political subdivision . . . ;
or (iii) an interest of an Indian or Indian Tribe . . . .11
In other words, no provision in section 59-5-102 applies to “an
interest in oil or gas” owned by any of the listed entities. This
excludes the interests of these entities not just from the imposition of
a severance tax, but from any consideration in calculating the
“value” of an interest under section 59-5-102(1)(a) as determined by
section 59-5-103.1. Accordingly, we conclude that Anadarko should
be permitted to deduct these interests in calculating the unit price
used to determine its tax rate.
¶15 The dissent argues that section 59-5-102 “says nothing of
deducting [exempt] interests for purposes of calculating fair market
value.”12 And it focuses on the fact that section 59-5-103.1
“specifically enumerates the deductions that are permitted at that
stage—deductions for processing and transportation costs”—
without including “royalty interest deductions.”13 Because exempt
royalty interests are not listed as permissible deductions, the dissent
would hold that the plain text of section 59-5-103.1 unambiguously
prohibits the deduction of such interests in calculating the unit
price.
¶16 As a general proposition, the dissent is correct that we
“„give effect to omissions in the statutory language by presuming all
omissions to be purposeful.‟”14 But in this case, the dissent‟s
application of that canon begs the question of whether in fact the
omission it identifies is purposeful. If, as we hold today, section 59-
5-102(1)(b) excludes exempted royalty interests altogether from both
the imposition of the severance tax and the value calculation it
references in section 59-5-103.1, including an additional deduction
for such interests in section 59-5-103.1 would have been entirely
superfluous.
¶17 And moreover, the subsection 102(1)(b) exclusion is not a
“deduction” in the sense of a cost or expense to be subtracted from
the fair market value of an oil or gas interest. Rather, it specifies
what types of interests are subject to taxation and section 103.1‟s
11 UTAH CODE § 59-5-102(1)(b) (emphasis added).
12 Infra ¶ 26.
13 Infra ¶ 26.
14 Infra ¶ 26 (quoting Marion Energy, Inc. v. KFJ Ranch P’ship, 2011
50, ¶ 14, 267 P.3d 863).
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A.C.J. NEHRING, dissenting
valuation formula in the first place. So it makes perfect sense for the
Legislature to have provided that exclusion separately. For these
reasons, the Legislature‟s failure to include a specific deduction for
exempt royalty interests in section 103.1 does not tell us anything
about whether it intended to allow taxpayers to deduct them in the
severance-tax-rate-calculation.
Conclusion
¶18 We hold that Utah Code sections 59-5-102 and -103.1
categorically exclude any federal, state, and Indian tribe interests
from the net taxable value of an oil or gas interest for purposes of
calculating the applicable tax rate. The Commission erred in
concluding otherwise. Accordingly, we reverse and remand for
further proceedings consistent with this opinion.
ASSOCIATE CHIEF JUSTICE NEHRING, dissenting:
¶19 I respectfully dissent. At bottom this case presents an issue
of statutory interpretation. I find Anadarko‟s statutory and
constitutional arguments unpersuasive, and I disagree with the
majority‟s interpretations of the relevant Severance Tax Act
provisions. I would therefore uphold the decision of the Utah State
Tax Commission (Commission).
I. THE UTAH SEVERANCE TAX ACT DOES NOT
PERMIT A DEDUCTION FOR ROYALTY
INTERESTS IN THE CALCULATION OF
MARKET VALUE OF OIL AND GAS
¶20 Utah Code section 59-5-102 governs the severance tax for oil
and natural gas interests within the state. The statute employs a
two-tiered rate scheme whereby part of the tax is assessed at
3 percent and the remainder at 5 percent.15 The operation of these
tax rates lies at the heart of the parties‟ dispute.
¶21 Utah Code section 59-5-102 requires that “a person owning
an interest in oil or gas produced from a well in the state” pay a
severance tax on the oil or gas “on the basis of the value determined
under Section 59-5-103.1.”16 This tax must be paid on all oil or gas
15 UTAH CODE § 59-5-102(2).
16 Id. § 59-5-102 (1)(a).
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A.C.J. NEHRING, dissenting
produced and saved, sold, or transported from the field.17
Subsection (1)(b) dictates that the severance tax applies to “an
interest in oil or gas . . . or in the proceeds of the production of oil or
gas produced from a well in the state,” but it specifically exempts
interests owned by the United States, the state or political
subdivisions of the state, or Indian tribes.18 The statute provides that
the severance tax rate for natural gas is “3% of the value of the
natural gas up to and including the first $1.50 per MCF for gas” and
“5% of the value of natural gas from $1.51 and above per MCF for
gas.”19 The statute mandates that “value” is “determined under
Section 59-5-103.1.”20
¶22 Utah Code section 59-5-103.1 provides the calculation for
how “the value of oil or gas shall be determined” for the purposes of
imposing tax “under Section 59-5-102.”21 Importantly, the
computation of fair market value under section 59-5-103.1 makes no
mention of a deduction for exempt royalty interests. Instead, to
determine fair market value, an owner may deduct “processing
costs” and “transportation costs.”22
¶23 Notwithstanding the absence of an express deduction,
Anadarko contends that the plain language of the statutes
nonetheless requires that the exempt interests be deducted from the
calculation of value under section 59-5-103.1. The Commission
responds, quite simply, that section 59-5-103.1 on its face does not
allow such a deduction.
17 Id.
18 Id. § 59-5-102 (1)(b). Section 59-5-102 was amended in 2011,
during the audit period for the present case. See Severance Tax
Amendments, ch. 54, sec. 1, § 59-5-102, 2011 Utah Laws 407, 407. The
amendment added, as relevant for our purposes, subsection (1)(b).
See id. However, both parties agree that this amendment was simply
a clarification of the previous law and that our analysis should
remain the same under both versions of the statute.
19 UTAH CODE § 59-5-102(2)(b).
20 Id. § 59-5-102(1)(a).
21 Id. § 59-5-103.1(1)(a).
22 Id. § 59-5-103.1(1)(b).
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A.C.J. NEHRING, dissenting
¶24 It is axiomatic that “[w]hen interpreting statutory language,
our primary objective is to ascertain the intent of the legislature.”23
And “[t]he best evidence of the legislature‟s intent is the plain
language of the statute itself.”24 Thus, “[w]hen statutory language is
clear, there is no need for us to look further to determine legislative
intent.”25
¶25 Neither party disputes that the exempt royalty interests
must be deducted from Anadarko‟s ultimate tax liability. Both
Anadarko and the Commission agree that the Auditing Division
correctly subtracted the federal, state, and Indian interests from
Anadarko‟s taxable amount.26 But Anadarko claims that it must also
be allowed to deduct the exempt interests from the value
computation, which in turn will direct how the two tax rates are to
be calculated. Anadarko argues that it would have been superfluous
to explicitly include this deduction in section 59-5-103.1, which
provides the value calculation, because under section 59-5-102(1)(b)
the severance tax does not apply to the exempted interests. I
disagree. In looking to the plain language of Utah Code sections 59-
5-102 and -103.1, I would conclude that the text unambiguously
dictates that the calculation of value does not permit the deduction
of federal, state, or Indian royalty interests.
¶26 Section 59-5-102 very clearly does not tax the exempted
interests, but it says nothing of deducting those interests for the
purposes of calculating fair market value. In fact, section 59-5-103.1
specifically enumerates the deductions that are permitted at that
stage—deductions for processing and transportation costs—but does
not allow royalty interest deductions. When interpreting statutory
language, we must “give effect to omissions in the statutory
language by presuming all omissions to be purposeful.” 27 Therefore,
I would not ignore the plain language of the statute and read in an
23 Ivory Homes, Ltd. v. Utah State Tax Comm’n, 2011 UT 54, ¶ 21,
266 P.3d 751.
24Reynolds v. Bickel, 2013 UT 32, ¶ 10, 307 P.3d 570 (internal
quotation marks omitted).
25 Morra v. Grand Cnty., 2010 UT 21, ¶ 32, 230 P.3d 1022.
26 It is for this reason that Anadarko‟s constitutional and federal
statutory arguments fail. See infra Part II.
27 Marion Energy, Inc. v. KFJ Ranch P’ship, 2011 UT 50, ¶ 14, 267
P.3d 863.
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ANADARKO v. TAX COMM‟N
A.C.J. NEHRING, dissenting
additional deduction that the legislature did not provide. It is clear
that the legislature contemplated possible deductions for the value
calculation and yet omitted the deduction for the royalty interests. I
would not alter this legislative determination by judicial fiat.
¶27 Moreover, I do not believe, as Anadarko next contends, that
this interpretation creates inconsistent definitions of “value” within
the Act. Anadarko argues that the Commission interprets “value”
under section 59-5-102(1) to exclude the exempt interests but then
interprets “value” in section 59-5-102(2) to include such interests. I
disagree. Subsection (1) directs the taxpayer to pay a severance tax
“on the basis of the value determined under Section 59-5-103.1.”
Subsection (2) then subjects the taxpayer to a tax of either 3 percent
or 5 percent of that value. Thus, subsection (1) supplies the
determination of value that is used in subsection (2). In this way,
subsection (2) simply incorporates the computation of value found in
subsection (1). I find this understanding of the statutes to be wholly
consistent.28
¶28 In sum, by evaluating the plain language of the statute, I
would conclude that the text of section 59-5-103.1 is unambiguous.
When calculating the value of the oil or gas, Anadarko may deduct
the transportation and processing costs but not the exempt royalty
interests.
II. THE CALCULATION OF VALUE UNDER
UTAH CODE SECTION 59-5-103.1 DOES
NOT VIOLATE CONSTITUTIONAL OR
STATUTORY PROVISIONS
¶29 Anadarko also argues that including the royalty interests in
the calculation of value imposes a tax on the federal government and
Indian tribes in violation of the Supremacy Clause of the United
28 Anadarko‟s argument also appears premised on the
Commission‟s Form TC-684A (Schedule A), used for calculating the
severance tax liability. Anadarko argues that the term “value” in
lines 12 and 18 of Schedule A are inconsistent. Even if that is the
case, when interpreting statutes, we do not look to such forms as
controlling interpretations of law. See Am. W. Bank Members, L.C. v.
State, 2014 UT 49, ¶ 17, __ P.3d __ (explaining that forms can be
helpful “exemplars”); McKnight v. State Land Bd., 381 P.2d 726, 731
(Utah 1963) (holding that an individual must “comply with the law
regardless of any form that may be used,” even if furnished with a
deficient form by the State).
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A.C.J. NEHRING, dissenting
States Constitution as well as state and federal statutes.29 Anadarko
cites the seminal case M’Culloch v. Maryland30 for the proposition that
states cannot levy taxes on the federal government. I unquestionably
agree. However, the State of Utah has imposed no tax whatsoever
on federal or Indian property, nor on the State itself. As Anadarko
concedes, the Commission correctly deducted the exempt royalties
attributable to the federal, state, and Indian interests from
Anadarko‟s taxable value. Apparently recognizing this, Anadarko
asserts that “any severance tax which incorporates federal royalties in
calculating value . . . is a tax on the government in violation of the
Supremacy Clause.” (Emphasis added.) This is not so. That the tax
rates applied to Anadarko are determined by reference to the exempt
interests does not render the State‟s action a tax on those exempt
entities. Neither the federal government nor an Indian tribe has
alleged that it has been improperly assessed a tax. The only entity
being taxed is Anadarko, and I find any argument to the contrary
perplexing. Accordingly, Anadarko‟s claims based on the
Supremacy Clause, as well as related federal and state statutes, fail.
¶30 Finally, Anadarko argues that the Commission‟s calculation
violates due process because it imposes a tax on Anadarko that is
“based upon the property of other entities.” However, as discussed
above, there can be no contention that Anadarko is required to pay a
tax on the royalty interests of federal, state, or Indian entities.
Anadarko agrees that the royalty interests were properly deducted
from its taxable value. For this reason, Hoeper v. Tax Commission
provides no support for Anadarko.31 In Hoeper, the United States
Supreme Court was called upon to determine whether the property
of a married woman could be taxed as belonging to her husband, as
at common law, or whether the wife‟s income was her own separate
29 Anadarko brings its state statutory claim under Utah‟s
Enabling Act, which provides that “no taxes shall be imposed by the
State on lands or property therein belonging to or which may
hereafter be purchased by the United States or reserved for its use.”
Utah Enabling Act of 1894, ch. 138, § 3, 28 Stat. 107, 108. Anadarko‟s
federal statutory argument is based on the Indian Reorganization
Act, which states that title to land or any rights taken by the federal
government in trust for an Indian tribe “shall be exempt from State
and local taxation.” 25 U.S.C. § 465 (2012).
30 17 U.S. (4 Wheat) 316 (1819).
31 284 U.S. 206 (1931).
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ANADARKO v. TAX COMM‟N
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property.32 The Court determined that “the wife‟s income is in the
fullest degree her separate property and in no sense that of her
husband,” and thus taxing the husband on his wife‟s property
violated due process.33 In contrast, Anadarko is not taxed at all on
the royalty interests of the exempted entities.34 Moreover,
deductions in the tax code “are allowed as a matter of grace.”35
Therefore, where the legislature has chosen to define value as the
total value of the gas that Anadarko removed from the Utah soil, the
legislature is under no obligation to provide additional deductions to
taxpayers. Thus, I would hold that the Commission‟s decision does
not violate the United States Constitution or other state and federal
statutory provisions.
CONCLUSION
¶31 Utah Code section 59-5-103.1 provides the calculation for the
value of oil or gas that is used to determine the tax rate allocation
under section 59-5-102. Under the plain language of the statute,
taxpayers are permitted to deduct both processing costs and
transportation costs for the purposes of calculating that value, but
the statute does not allow a taxpayer to deduct royalty interests from
the calculation. This interpretation does not implicate constitutional
or statutory concerns because no exempt interests are subject to
taxation. I would therefore affirm the Commission‟s ruling.
32 Id. at 215.
Id. (“That which is not in fact the taxpayer‟s income cannot be
33
made such by calling it income.”).
34 The additional cases cited by Anadarko are likewise inapposite.
Both cases addressed due process concerns related to states that
taxed business activities conducted outside their borders; they have
no application in the present context. See Container Corp. of Am. v.
Franchise Tax Bd., 463 U.S. 159, 164 (1983) (“Under both the Due
Process and the Commerce Clauses . . . , a state may not, when
imposing an income-based tax, tax value earned outside its borders.”
(internal quotation marks omitted)); ASARCO Inc. v. Idaho State Tax
Comm’n, 458 U.S. 307, 315 (1982) (“As a general principle, a State
may not tax value earned outside its borders.”).
35 Cont’l Tel. Co. of Utah v. State Tax Comm’n, 539 P.2d 447, 450
(Utah 1975); see also INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 (1992)
(“[D]eductions are strictly construed and allowed only as there is a
clear provision therefor.” (internal quotation marks omitted)).
12