The Honorable Dale W. Steager v. Consol Energy, Inc.

IN THE SUPREME COURT OF APPEALS OF WEST VIRGINIA
January 2019 Term FILED
June 5, 2019
released at 3:00 p.m.
No. 18-0121 EDYTHE NASH GAISER, CLERK
SUPREME COURT OF APPEALS
OF WEST VIRGINIA
DALE W. STEAGER, WEST VIRGINIA STATE TAX COMMISSIONER,
Respondent Below/Petitioner
v.
CONSOL ENERGY, INC., d/b/a CNX GAS COMPANY LLC,
Petitioner Below/Respondent
Appeal from the Circuit Court of Lewis County, Business Court Division
The Honorable Christopher C. Wilkes, Judge
Civil Action No. 17-C-11
AFFIRMED IN PART, REVERSED IN PART AND REMANDED
AND
No. 18-0122
DALE W. STEAGER, WEST VIRGINIA STATE TAX COMMISSIONER,
Respondent Below/Petitioner
v.
CONSOL ENERGY, INC., d/b/a CNX GAS COMPANY LLC,
Petitioner Below/Respondent
Appeal from the Circuit Court of McDowell County, Business Court Division
The Honorable Christopher C. Wilkes, Judge
Civil Action No. 16-C-135
AFFIRMED IN PART, REVERSED IN PART AND REMANDED
AND
No. 18-0123
DALE W. STEAGER, WEST VIRGINIA STATE TAX COMMISSIONER
and DAVID E. SPONAUGLE, ASSESSOR OF DODDRIDGE COUNTY,
Respondents Below/Petitioners
v.
CONSOL ENERGY, INC., d/b/a CNX GAS COMPANY LLC,
Petitioner Below/Respondent
Appeal from the Circuit Court of Doddridge County, Business Court Division
The Honorable Christopher C. Wilkes, Judge
Civil Action No. 17-AA-2
AFFIRMED IN PART, REVERSED IN PART AND REMANDED
AND
No. 18-0124
DALE W. STEAGER, WEST VIRGINIA STATE TAX COMMISSIONER and
ARLENE MOSSOR, ASSESSOR OF RITCHIE COUNTY,
Respondents Below/Petitioners
v.
ANTERO RESOURCES CORPORATION,
Petitioner Below/Respondent
Appeal from the Circuit Court of Ritchie County, Business Court Division
The Honorable Christopher C. Wilkes, Judge
Civil Action No. 17-AA-1
AFFIRMED IN PART, REVERSED IN PART AND REMANDED
AND
No. 18-0125
DALE W. STEAGER, WEST VIRGINIA STATE TAX COMMISSIONER and
DAVID E. SPONAUGLE, ASSESSOR OF DODDRIDGE COUNTY,
Respondents Below/Petitioners
v.
ANTERO RESOURCES CORPORATION,
Petitioner Below/Respondent
Appeal from the Circuit Court of Doddridge County, Business Court Division
The Honorable Christopher C. Wilkes, Judge
Civil Action No. 17-AA-1 and 17-AA-3
AFFIRMED IN PART, REVERSED IN PART AND REMANDED
AND
No. 18-0227
THE COUNTY COMMISSION OF DODDRIDGE COUNTY, Sitting as the Board of
Assessment Appeals and Board of Equalization,
Respondent Below/Petitioner
v.
CONSOL ENERGY, INC., d/b/a CNX GAS COMPANY LLC,
Petitioner Below/Respondent
Appeal from the Circuit Court of Doddridge County, Business Court Division
The Honorable Christopher C. Wilkes, Judge
Civil Action No. 17-AA-2
AFFIRMED IN PART, REVERSED IN PART AND REMANDED
AND
No. 18-0228
THE COUNTY COMMISSION OF DODDRIDGE COUNTY, Sitting as the Board of
Assessment Appeals and Board of Equalization,
Respondent Below/Petitioner
v.
ANTERO RESOURCES CORPORATION,
Petitioner Below/Respondent
Appeal from the Circuit Court of Doddridge County, Business Court Division
The Honorable Christopher C. Wilkes, Judge
Civil Action No. 17-AA-1 and 17-AA-3
AFFIRMED IN PART, REVERSED IN PART AND REMANDED
Submitted: March 12, 2019
Filed: June 5, 2019
Patrick Morrisey Ancil G. Ramey, Esq.
Attorney General Steptoe & Johnson PLLC
L. Wayne Williams, Esq. Huntington, WV
Assistant Attorney General Craig A. Griffith, Esq
Charleston, WV John J. Meadows, Esq.
Counsel for Petitioner Dale W. Steager, Steptoe & Johnson PLLC
West Virginia State Tax Commissioner Charleston, WV
Counsel for Respondents
Consol Energy Inc. d/b/a CNX Gas
Jonathan Nicol, Esq. Company LLC and Antero
Brandy D. Bell, Esq. Resources Corporation
Lindsay M. Gainer, Esq.
Kay Casto & Chaney PLLC
Charleston, WV
Counsel for Respondent the County Commission
of Doddridge County
James Brian Shockley, Esq.
Assistant Prosecuting Attorney
Harrison County Prosecutor’s Office
Clarksburg, WV
Counsel for Amicus Curiae the Harrison
County Commission and Joseph R. Romano,
Assessor of Harrison County
Jack C. McClung, Esq.
Charleston, WV
Counsel for Amicus Curiae West Virginia
Association of County Officials, Inc.
Kelli D. Talbott, Esq.
Senior Deputy Attorney General
Charleston, WV
Counsel for Amicus Curiae Steven L. Paine,
West Virginia State Superintendent of Schools
Timothy E. Haught, Esq.
Wetzel County Prosecuting Attorney
New Martinsville, WV
Counsel for Amicus Curiae the County
Commission of Wetzel County, West Virginia
JUSTICE WORKMAN delivered the Opinion of the Court.
SYLLABUS BY THE COURT
1. “As a general rule, there is a presumption that valuations for taxation
purposes fixed by an assessor are correct. Thus, a tax assessment of coal property will be
presumed to be correct when the assessor, in assessing the coal property: (1) relies upon
the legislative rules prescribing the methods by which property is to be assessed; and (2)
uses, as a guide, information furnished by the tax department, such as a list of comparable
sales of similar property. The burden is on the taxpayer challenging the assessment to
demonstrate by clear and convincing evidence that the tax assessment is erroneous.” Syl.
Pt. 2, W. Pocahontas Properties, Ltd. v. Cty. Comm’n of Wetzel Cty., 189 W. Va. 322, 431
S.E.2d 661 (1993).
2. “Interpreting a statute or an administrative rule or regulation presents
a purely legal question subject to de novo review.” Syl. Pt. 1, Appalachian Power Co. v.
State Tax Dep’t of W. Va., 195 W. Va. 573, 466 S.E.2d 424 (1995).
3. “Where the issue on an appeal from the circuit court is clearly a
question of law or involving an interpretation of a statute, we apply a de novo standard of
review.” Syl. Pt. 1, Chrystal R. M. v. Charlie A. L., 194 W. Va. 138, 459 S.E.2d 415 (1995).
4. “A regulation that is proposed by an agency and approved by the
Legislature is a ‘legislative rule’ as defined by the State Administrative Procedures Act, W.
Va. Code, 29A–1–2(d) [1982], and such a legislative rule has the force and effect of law.”
i
Syl. Pt. 5, Smith v. W. Va. Human Rights Comm’n, 216 W. Va. 2, 4, 602 S.E.2d 445, 447
(2004).
5. “A statute, or an administrative rule, may not, under the guise of
‘interpretation,’ be modified, revised, amended or rewritten.” Syl. Pt. 1, Consumer
Advocate Div. of Pub. Serv. Comm’n of W. Va. v. Pub. Serv. Comm’n of W. Va., 182 W.
Va. 152, 154, 386 S.E.2d 650, 652 (1989).
6. “If the language of an enactment is clear and within the constitutional
authority of the law-making body which passed it, courts must read the relevant law
according to its unvarnished meaning, without any judicial embroidery. Even when there
is conflict between the legislative rule and the initial statute, that conflict will be resolved
using ordinary canons of interpretation.” Syl. Pt. 3, in part, W. Va. Health Care Cost
Review Auth. v. Boone Mem’l Hosp., 196 W. Va. 326, 472 S.E.2d 411 (1996).
7. “‘“Where economic rights are concerned, we look to see whether the
classification is a rational one based on social, economic, historic or geographic factors,
whether it bears a reasonable relationship to a proper governmental purpose, and whether
all persons within the class are treated equally. Where such classification is rational and
bears the requisite reasonable relationship, the statute does not violate Section 10 of Article
III of the West Virginia Constitution, which is our equal protection clause.” Syllabus Point
7, [as modified,] Atchinson v. Erwin, [172] W.Va. [8], 302 S.E.2d 78 (1983).’ Syllabus
ii
Point 4, as modified, Hartsock-Flesher Candy Co. v. Wheeling Wholesale Grocery Co.,
174 W.Va. 538, 328 S.E.2d 144 (1984).” Syl. Pt. 4, Gibson v. W. Virginia Dep't of
Highways, 185 W. Va. 214, 406 S.E.2d 440 (1991), holding modified by Neal v. Marion,
222 W. Va. 380, 664 S.E.2d 721 (2008).
8. West Virginia Code of State Rules § 110-1J-4.3 (2005) does not
permit the imposition of a “not to exceed” limitation on the operating expense deduction
authorized thereunder and use of such limitation along with a percentage deduction violates
the “equal and uniform” requirement of West Virginia Constitution Article X, Section 1,
as well as the equal protection provisions of the West Virginia and United States
Constitutions.
9. “Judicial review of an agency’s legislative rule and the construction
of a statute that it administers involves two separate but interrelated questions, only the
second of which furnishes an occasion for deference. In deciding whether an
administrative agency’s position should be sustained, a reviewing court applies the
standards set out by the United States Supreme Court in Chevron U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837, 104 S. Ct. 2778, 81 L. Ed. 2d 694 (1984).
The court first must ask whether the Legislature has directly spoken to the precise question
at issue. If the intention of the Legislature is clear, that is the end of the matter, and the
agency’s position only can be upheld if it conforms to the Legislature’s intent. No
iii
deference is due the agency’s interpretation at this stage.” Syl. Pt. 3, Appalachian Power
Co. v. State Tax Dep’t of W. Virginia, 195 W. Va. 573, 466 S.E.2d 424 (1995).
10. “If legislative intent is not clear, a reviewing court may not simply
impose its own construction of the statute in reviewing a legislative rule. Rather, if the
statute is silent or ambiguous with respect to the specific issue, the question for the court
is whether the agency’s answer is based on a permissible construction of the statute. A
valid legislative rule is entitled to substantial deference by the reviewing court. As a
properly promulgated legislative rule, the rule can be ignored only if the agency has
exceeded its constitutional or statutory authority or is arbitrary or capricious. W. Va. Code,
29A–4–2 (1982).” Syl. Pt. 4, Appalachian Power Co. v. State Tax Dep’t of W. Va., 195
W. Va. 573, 466 S.E.2d 424 (1995).
11. “Generally the words of a statute are to be given their ordinary and
familiar significance and meaning, and regard is to be had for their general and proper use.”
Syl. Pt. 4, State v. Gen. Daniel Morgan Post No. 548, Veterans of Foreign Wars, 144 W.
Va. 137, 107 S.E.2d 353 (1959).
12. The provisions contained in West Virginia Code of State Rules §§
110-1J-4.1 and 110-1J-4.3 (2005) for a deduction of the average annual industry operating
expense requires the use of a singular monetary average deduction.
iv
WORKMAN, Justice:
These are seven consolidated appeals from the business court’s January 17,
2018 and February 7, 2018, orders reversing various Boards of Assessment Appeals and
rejecting the West Virginia State Tax Department’s valuation of respondents’ gas wells for
ad valorem tax purposes. The business court concluded that the Tax Department’s
valuation violated the applicable regulation by improperly imposing a “cap” on the amount
of operating expenses which may be deducted and was likewise in violation of West
Virginia Constitution Article X, Section 1’s “equal and uniform” provision and the equal
protection provisions of the United States and West Virginia Constitutions. The business
court further concluded that a survey utilized to ascertain the average industry operating
expenses for Marcellus shale wells failed to properly permit itemization of “post-
production” expenses for inclusion in the calculation of the operating expense average.
Following entry of these orders, the business court subsequently declined to alter or amend
its judgment upon motion of the Doddridge County Commission.
Upon careful review of the briefs of the parties and amici curiae, 1 the
appendix record, the arguments of the parties, and the applicable legal authority, we agree
1
Amici curiae Harrison County Commission, Joseph R. Romano, Assessor of
Harrison County, The West Virginia Association of County Officials, Inc., Steven L. Paine,
West Virginia State Superintendent of Schools, and the County Commission of Wetzel
County, West Virginia, likewise submitted briefs in support of the Tax Department’s
position. The Court acknowledges and expresses its appreciation for the amici curiae’s
submissions.
1
with the business court’s conclusion that the Tax Department acted in violation of the
applicable regulations by improperly imposing a cap on respondents’ operating expense
deductions and therefore affirm its decision to that extent. However, we find that the
business court erred in rejecting the Tax Department’s interpretation of the applicable
regulations concerning the inclusion of post-production expenses in the calculation of the
annual industry average operating expenses. We likewise find that the business court erred
in crafting relief which permitted an unlimited percentage deduction for operating expenses
in lieu of a monetary average, and therefore reverse that aspect of the business court’s
decision and remand for further proceedings consistent with this opinion.
I. FACTS AND PROCEDURAL HISTORY
Respondents Consol Energy, Inc. d/b/a CNX Gas Company, LLC (“CNX”)
and Antero Resources Corporation (“Antero”) (collectively “respondents”) are owners of
various gas wells in Doddridge, Ritchie, Lewis, and McDowell Counties; CNX owns
conventional, vertical gas wells and Antero owns horizontal, Marcellus shale gas wells
(“Marcellus wells”). These gas well interests are appraised for ad valorem tax purposes
by petitioner Dale W. Steager, West Virginia State Tax Commissioner (“Tax
Department”), and assessed by the respective county commissions. This case involves
valuation of CNX’s conventional gas wells for the 2016 tax year and Antero’s Marcellus
wells for both the 2016 and 2017 tax years.
2
GAS WELL VALUATION AND DEDUCTION OF OPERATING EXPENSES
To determine the value of gas wells for ad valorem taxation purposes, gas
well owners provide gross receipts from their well production, to which the Tax
Department applies a “production decline rate.” From this figure, the “average annual
industry operating expenses” are deducted to establish a “net receipts” value. That value
is then capitalized to determine the taxable value. This formula is described in West
Virginia Code of State Rules § 110-1J-4.1 (2005) as follows:
4.1. General. -- Oil and/or natural gas producing property value
shall be determined through the process of applying a yield
capitalization model to the net receipts (gross receipts less
royalties paid less operating expenses) for the working interest
and a yield capitalization model applied to the gross royalty
payments for the royalty interest.
(emphasis added). With respect to the operating expenses referenced above, West Virginia
Code of State Rules § 110-1J-4.3 provides that the Tax Commissioner shall “every five (5)
years, determine the average annual industry operating expenses per well. The average
annual industry operating expenses shall be deducted from working interest gross receipts
to develop an income stream for application of a yield capitalization procedure.” (emphasis
added).
Each tax year, the Tax Department issues an Administrative Notice which
states what the average annual industry operating expense is for that tax year; it is expressed
by way of a percentage of the well’s gross receipts, with a “not to exceed” amount or, as
3
respondents have characterized it, a “cap.”2 For the tax year 2016, Administrative Notice
2016-08 provided that for conventional gas wells the “[d]irect ordinary operating expenses
will be estimated to be 30% of the gross receipts derived from gas production, not to exceed
$5,000 . . . .” (emphasis added). For Marcellus horizontal wells, the Administrative Notice
provided that “the maximum operating expenses allowed is 20% of the gross receipts
derived from gas production, not to exceed $150,000.” For the tax year 2017, the
Administrative Notice provided for operating expenses of 20% not to exceed $175,000 for
Marcellus wells.3
Respondents appealed their gas well valuations to the respective Boards of
Assessment Appeals (“Board(s)”) for the appropriate county, claiming that their actual
expenses4 were in excess of the stated percentages and that the cap resulted in an artificial
reduction in the operating expense deduction where their expenses exceeded the cap. 5
2
The Tax Department disputes the characterization of the “not to exceed” amount
as being tantamount to a “cap.” As discussed more fully infra, we find the Tax
Department’s resistance to that characterization unfounded.
3
Valuations for the conventional wells for tax year 2017 are not at issue herein;
however, in that instance, the operating expense percentage was increased from 30% to
45%, but the $5,000 limit remained.
4
CNX asserted that its actual expenses were 37% of its gross receipts; Antero
maintained that its actual expenses were 23% for tax year 2016 and 36% for tax year 2017,
respectively.
5
For example, if a well’s gross receipts were $10,000, the 30% operating expense
reduction would equal $3,000.00 and it would get the benefit of the full 30%. However, if
gross receipts were greater—for example $50,000.00—application of the cap would serve
4
Respondents provided expert testimony in support of these figures and analysis of the
inequality occasioned by the cap. 6 These experts also testified that industry-reported
operating expense percentages 7 were closer to respondents’ actual values than the Tax
Department’s average percentage. The experts further noted that in tax years preceding
the 2016 tax year, the Administrative Notice invited taxpayers to submit their actual
expenses and that, despite no change in the law, the 2016 and subsequent Administrative
Notices did not make such an invitation.
In response, the Tax Department offered testimony from its appraiser
Cynthia Hoover who explained that the average operating expense figures were derived
from a survey of gas well producers conducted in 2014. She explained that, based on the
results of that survey for conventional gas wells, on average each well incurred expenses
of $5,000.00. This monetary amount approximated, on average, 30% of the gross receipts
per well. Notably, she agreed that application of the $5,000.00 “not to exceed” amount
served to treat higher-producing wells differently than lower-producing wells and that the
cap resulted in certain wells with higher gross receipts not realizing a full 30% operating
expense deduction. Ms. Hoover agreed that the Tax Department had previously invited
to provide less than a 30% reduction (i.e., the $5,000 cap equates to only a 10% operating
expense deduction on a well with $50,000 in gross receipts).
6
It appears that the majority of wells in each county, except McDowell, were subject
to the cap.
7
The West Virginia Oil and Natural Gas Association provided a letter indicating
that its members’ average operating expense was 41% of gross receipts.
5
production of “actual expenses,” but demurred that the regulation actually does not allow
for any such consideration since it requires use of the “average industry” expenses.
With respect to the Marcellus wells, respondents’ experts further explained
that the survey circulated to ascertain the average industry operating expense did not
provide line items for expenses such as gathering, compressing, processing, and
transporting, which expenses are incurred in getting shale gas and its products to market.
Consequently, these expenses—which are significant for Marcellus wells—are not
factored into the average industry operating expenses. The experts explained that requiring
the taxpayers to report their gross receipts at the “field line point of sale,” 8 where the
Marcellus gas yields a higher price, without including those commensurate expenses in the
average industry expense calculation, was inequitable and resulted in overvaluation of their
gas wells.
The Tax Department countered that West Virginia Code of State Rules §
110-1J-3.16 (2005) provides that “operating expenses” include only “ordinary expenses
which are directly related to the maintenance and production of natural gas and/or oil” and
does not include “extraordinary expenses.” (emphasis added). The Tax Department took
the position that expenses for gathering, processing, and transporting are essentially “post-
8
West Virginia Code of State Rules § 110-1J-3.8 provides that “‘[g]ross receipts’
means total income received from production on any well, at the field line point of sale,
during a calendar year before subtraction of any royalties and/or expenses.” (emphasis
added).
6
production” expenses unrelated to getting the gas out of the ground and therefore not
“directly related” to the “maintenance and production” of gas, as required by the Rule. The
Tax Department agreed that the survey utilized was one designed prior to the advent of
Marcellus drilling in the State, but also that those particular expenses would not be properly
deductible regardless.9
PROCEDURAL HISTORY AND BUSINESS COURT RULING
The various Boards upheld the Tax Department’s valuations and respondents
appealed those decisions to circuit court. The matters were then referred to the business
court. Based on the records created before the various Boards and after briefing by the
parties, the business court concluded that the Tax Department failed to assess the wells at
their true and actual value.
In particular, the business court found that use of the “not to exceed” amount
or “cap” was not supported by West Virginia Code of State Rules § 110-1J-4.3 and that, in
effect, the Tax Department was using two averages—the percentage and the cap—
depending on the amount of gross receipts for a particular well. That is to say, if a well’s
gross receipts resulted in its expenses meeting or exceeding the cap, the monetary cap was
utilized; if the gross receipts resulted in the expenses being less than the cap, the percentage
9
The Tax Department also suggested (somewhat inconsistently), however, that the
survey participants could have included those expenses under the “other” line item
category.
7
deduction was utilized. The business court therefore found that the cap “singles out” wells
with higher gross receipts, applying a different percentage reduction for operating expenses
by way of the cap. The business court found that this application of the rule was a violation
of the constitutional “equal and uniform” requirement and equal protection.
With respect to the Marcellus wells, the business court also found, in addition
to the impermissible cap, that the Tax Department’s method of calculating the average
industry expense was under-inclusive of operating expenses and therefore overvalued the
wells. The business court found that the survey utilized to determine this figure pertained
“almost solely to typical lease operating expenses . . . for conventional wells.” Given that
the survey did not include line items for gathering, compressing, processing, and
transporting expenses, the business court declared it to be “outdated and misdesigned,” and
concluded that those expenses were “directly related to maintenance and production” of
natural gas. With respect to the conclusion that such expenses were related to
“maintenance and production,” the business court found simply that because the rules
require calculation of gross receipts based on the “point of sale,” the Tax Department must
allow for operating expenses incurred to reach that point of sale and the resultant increased
value.10
10
The business court cited to the Tax Department’s characterization of some of
these expenses as being for the purpose of “processing wet gas to remove natural gas,”
concluding that this process was obviously related to “production” of natural gas. The
8
Based upon the foregoing conclusions, for the conventional wells, the
business court found the record inadequate to set a value and remanded to the Board “to
set the fair value . . . based on application of the Tax Department’s 30% average annual
industry operating expense percentage . . . without the imposition of a cap.” With respect
to the Marcellus wells, however, the business court declared the fair value of the wells
using evidence in the record, and set the taxable value at a sum certain “based on
application of the State’s 20% average annual industry operating expense percentage by
Antero’s gross receipts without the imposition of a cap.”11
Following entry of the business court’s orders, petitioner Doddridge County
Commission (“Doddridge County”) moved to alter or amend the judgment, arguing that its
failure to file a responsive brief before entry of the orders was due to its attorney being
business court further found that the taxpayers’ failure to include those expenses under the
“other” category on its survey responses did not alleviate the infirmity in the survey.
11
For reasons that do not plainly appear from the record, the business court’s relief
utilized the same 20% expense figure derived from the survey which it had found infirm
due to lack of inclusion of post-production costs. The business court’s order makes
reference to an across-the-board unlimited 20% expense reduction as representing a
“compromise” amount requested by Antero. However, it is not clear whether such
compromise amount purported to correct only the alleged discrepancy between Antero’s
actual expense percentages, the imposition of the cap, the lack of inclusion of post-
production expenses, or all of these challenged calculations. Regardless, despite agreeing
with respondent’s contention that the survey numbers were fatally flawed, the business
court used those same figures to render its judgment—it merely removed the cap. See
infra.
9
arrested and indicted shortly after the briefing deadline.12 As such, Doddridge County
argued it was deprived of its opportunity to represent its interests. The business court
denied the motion, finding primarily that most of the county commissions relied upon the
Tax Department to file briefs on the issue and therefore declined to file briefs. It found
that the Tax Department and county commissions’ interests were fully aligned and
therefore adequately protected. These appeals followed and were consolidated before this
Court for consideration.
II. STANDARD OF REVIEW
While “[a]s a general rule, there is a presumption that valuations for taxation
purposes fixed by an assessor are correct,” this case requires the Court to analyze the Tax
Department’s interpretation and application of a legislatively-approved regulation. Syl. Pt.
2, in part, Western Pocahontas Props., Ltd. v. Cty. Comm’n of Wetzel Cty., 189 W.Va. 322,
431 S.E.2d 661 (1993). “Interpreting a statute or an administrative rule or regulation
presents a purely legal question subject to de novo review.” Syl. Pt. 1, Appalachian Power
Co. v. State Tax Dep’t of W. Va., 195 W.Va. 573, 466 S.E.2d 424 (1995). Moreover, this
case presents additional issues of law by way of the constitutional challenges: “Where the
issue on an appeal from the circuit court is clearly a question of law . . . we apply a de
12
The county commission’s brief was due by December 4, 2017. The Tax
Department and Assessor filed its brief on that date, but the county commission filed no
brief. Steven Sluss, the Doddridge County Commission’s lawyer, was arrested four days
after the briefing due date on December 8, 2017 and the Office of Disciplinary Counsel
moved for immediate suspension of his law license on December 13, 2017.
10
novo standard of review.” Syl. Pt. 1, Chrystal R.M. v. Charlie A.L., 194 W.Va. 138, 459
S.E.2d 415 (1995). Accordingly, our review is plenary.
III. DISCUSSION
The Tax Department asserts that the business court erred in 1) finding that
its imposition of the “cap” was a misapplication of the legislative rule; 2) finding that the
survey and resultant calculation of average operating expenses should have included post-
production expenses; and 3) permitting, as its relief, use of an unlimited percentage
operating expense deduction. It urges reversal of the business court and return to the
original valuations. Doddridge County, however, while likewise arguing that the business
court should be reversed with a return to the original valuation, takes the position that if
the business court is upheld, the proper methodology for deduction of operating expenses
is the use of a monetary average rather than a percentage. Our discussion, then, must
necessarily address both the validity of the business court’s legal conclusions, as well as
the propriety of the remedy which it afforded.
At the outset of our discussion, we would be remiss in failing to note that this
is the second instance within this Court term in which we have been called upon to assess
the legal and constitutional implications of the Tax Department’s application of regulations
affecting the valuation of natural resources property. In Murray Energy v. Steager, No.
18-0018, 2019 WL 1982993 (W. Va. Apr. 29, 2019), petitioners challenged the coal
property valuation regulations, arguing that the methodology as delineated therein for
11
calculating the average steam coal price per ton and average seam thickness violated
constitutional equality provisions. We disagreed and held that the legislatively-approved
methodology rationally flowed from its enabling statute and the Tax Department was
therefore entitled to the deference afforded administrative agencies under Chevron, U.S.A.,
Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), in utilizing the
methodology.
Importantly, petitioners in Murray Energy did not accuse the Tax
Department of “misapplying the methodology, not evenly applying the methodology to all
coal property taxpayers, or violating the regulations in any way.” Id. at *7. In contrast,
respondents herein argue that the Tax Department misinterpreted and/or misapplied the
plain language of the regulations, creating a method of operating expense calculation which
unconstitutionally differentiates between taxpayers and otherwise overvalues their gas
interests. The respondents herein take no issue with the regulation as crafted, but rather
the manner in which the Tax Department has chosen to interpret and implement it.
A. INTERPRETATION AND APPLICATION OF THE LEGISLATIVE RULE
West Virginia Constitution Article X, Section 1 provides that “taxation shall
be equal and uniform throughout the state, and all property, both real and personal, shall
be taxed in proportion to its value to be ascertained as directed by law.” West Virginia
Code § 11-6K-1 (2010) provides that “[a]ll industrial property and natural resources
property shall be assessed annually as of the assessment date at sixty percent of its true and
12
actual value[]”; moreover, West Virginia Code § 11-1C-10(e) (1994) directs the Tax
Commissioner to “develop a plan for the . . . valuation of natural resources property.” See
also W. Va. Code § 11-6K-8 (2010) (“The Tax Commissioner is hereby authorized to
promulgate . . . rules . . . as necessary or convenient for administration and interpretation
of this article.”). Accordingly, the Tax Commissioner promulgated regulations for the
valuation of oil and natural gas properties, which have the force and effect of law due to
their legislative approval. See Syl. Pt. 5, Smith v. W. Va. Human Rights Comm’n, 216 W.
Va. 2, 602 S.E.2d 445 (2004) (“A regulation that is proposed by an agency and approved
by the Legislature is a ‘legislative rule’ . . . [and] has the force and effect of law.”).
As explained above, West Virginia Code of State Rules § 110-1J-4.1
provides that the value of natural gas producing property is determined, in part, by applying
a yield capitalization model to the “net receipts” which are parenthetically defined as “gross
receipts less royalties paid less operating expenses[.]” West Virginia Code of State Rules
§ 110-1J-4.3, approved in 2005, provides further instruction regarding the deduction of
operating expenses to calculate net receipts:
4.3. Average industry operating expenses. -- The Tax
Commissioner shall every five (5) years, determine the average
annual industry operating expenses per well. The average
annual industry operating expenses shall be deducted from
working interest gross receipts to develop an income stream
for application of a yield capitalization procedure.
13
(emphasis added). 13 In that regard, Administrative Notice 2016-08 entitled “State Tax
Commissioner’s Statement for the Determination of Oil and Gas Operating Expenses for
Property Tax Purposes for Tax Year 2016, Pursuant to § 110 CSR 1J-4.3” states:
Direct ordinary operating expense will be estimated to be 30%
of the gross receipts derived from gas production, not to exceed
$5,000 . . . . [and] [f]or Marcellus horizontal wells the
maximum operating expenses allowed is 20% of the gross
receipts derived from gas production, not to exceed
$150,000.”14
(footnote added). The business court found that the Tax Department’s method of utilizing
a percentage deduction with a “not to exceed” amount (or “cap”) is in clear violation of the
West Virginia Code of State Rules § 110-1J-4.3, which makes no provision for such
limitation. The business court concluded that by applying a percentage deduction to lower-
producing gas wells, but enforcing a cap on higher-producing gas wells, the Tax
13
The Tax Department dedicates much of its briefing arguing that respondents are
not permitted to deduct their actual expenses. This is correct, but also fairly irrelevant for
our purposes. CNX introduced evidence below of what their actual expenses were for
purposes of demonstrating the disparity between their actual expenses and the permitted
deductions; it may well maintain, in some measure, that actual expenses are required.
However, the business court did not permit deduction of actual expenses, nor do
respondents before this Court argue they are entitled to their actual expenses. In its brief,
CNX concedes that the business court’s relief “reflects the ‘mass appraisal’ system of
valuation contemplated by [the Rules] and will agree with the fair market value that results
from application of the average annual industry operating expense percentage to
Respondent’s gross receipts without the imposition of a cap[.]”
14
For ease of discussion, only the conventional gas well percentage and “cap”
figures are used in our analysis. The factual and legal analysis of the percentages and cap
applicable to the Marcellus wells, for each tax year appealed, is the same.
14
Department is creating two categories of gas wells and permitting unequal operating
expense deductions.
The Tax Department relies on the testimony of Ms. Hoover to explain that
its use of both a percentage figure and monetary “not to exceed” amount is a permissible
construction and implementation of the regulation. The Tax Department cites Ms.
Hoover’s explanation that the Notice provides for a deduction of 30%, which is the
percentage average amount of expenses, in an amount not to exceed $5,000, which is the
monetary average. In this way, the Tax Department insists that the “not to exceed” amount
is simply the monetary representation of the percentage average operating expense and
therefore ensures that no taxpayer deducts greater than the average expense. As to the
characterization of the “not to exceed” amount as a “cap,” the Tax Department ardently
rejects this description, insisting that the percentage deduction and the “not to exceed”
amount are simply two different ways of expressing the same thing. The Tax Department
repeatedly correlates the relationship between these figures to that of equivalent
measurements, stating that “12 inches equals one foot.” Accordingly, the Tax Department
argues it is not acting in contravention of the Rule, nor is it imposing an impermissible
“cap.”
It is well-established that “[a] statute, or an administrative rule, may not,
under the guise of ‘interpretation,’ be modified, revised, amended or rewritten.” Syl. Pt.
1, Consumer Advocate Div. of Pub. Serv. Comm’n of W. Va. v. Pub. Serv. Comm’n of W.
15
Va., 182 W. Va. 152, 386 S.E.2d 650 (1989). Rather, [i]f the language of an enactment is
clear and within the constitutional authority of the law-making body which passed it, courts
must read the relevant law according to its unvarnished meaning, without any judicial
embroidery.” Syl. Pt. 3, in part, W. Va. Health Care Cost Review Auth. v. Boone Mem’l
Hosp., 196 W. Va. 326, 472 S.E.2d 411 (1996).
There is little question that West Virginia Code of State Rules § 110-1J-4.1
and § 110-1J-4.3 make no provision for an upper limit on the amount of the annual
operating expense deduction which may be taken. Its language plainly and unambiguously
requires and permits only a simple deduction of the “average annual industry operating
expenses . . . from working interest gross receipts[.]”15 Moreover, the Rule provides no
discretion for the Tax Department to employ its own methodology for expression and
application of the annual industry average expense deduction. It is therefore clear that the
Tax Department’s use of a percentage deduction limited by the use of a “not to exceed”
amount or “cap” is neither authorized by nor consistent with the regulation.
Further, we wholly reject the Tax Department’s insistence that the “cap” and
percentage are merely two expressions of “the same” average figure. This aspect of the
15
Moreover, the fact that the Tax Department has long-utilized the “not to exceed”
amount in its Administrative Notices is of no moment for our purposes: “‘While long
standing interpretation of its own rules by an administrative body is ordinarily afforded
much weight, such interpretation is impermissible where the language is clear and
unambiguous.’ Syl. pt. 3, Crockett v. Andrews, 153 W.Va. 714, 172 S.E.2d 384 (1970).”
Syl. Pt. 1, Ooten v. Faerber, 181 W. Va. 592, 383 S.E.2d 774 (1989).
16
case presents less of an issue of law than logic. Obviously, using a percentage operating
expense deduction creates a variable number—variable depending on the amount of the
gross receipts to which it is applied. The static “cap” is not variable and therefore does not
maintain a pro rata relationship to the gross receipts as the percentage does. They are,
mathematically, not “the same.” In addition to being logically inscrutable, the Tax
Department’s position that the percentage and monetary cap are the same is undermined
by the fact that in 2017, it increased the percentage deduction allowable for conventional
wells from 30% to 45% based on a drop in gas prices, but kept the same cap. For Marcellus
wells, it increased the cap from $150,000 to $175,000, but kept the same percentage
deduction. Clearly then, the percentage and monetary average are not “the same,” nor do
they even move in lockstep.
Moreover, given the regulation’s clarity, our analysis of this aspect of the
case is unaffected by generalized claims of agency deference. As explained in Cookman
Realty Group, Inc. v. Taylor, 211 W. Va. 407, 411, 566 S.E.2d 294, 298 (2002):
We need not go so far in this case as to define what deference,
if any, must be afforded an administrative agency’s
interpretation of its own legislative rule, since the regulations
at issue here [are] unambiguous[] . . . . A reviewing court would
only be required to afford deference to an agency’s
interpretation if the regulation contained an ambiguity.
Rather, “[t]he rule[s] of construction . . . [apply] only when the Legislature has blown an
uncertain trumpet. If ambiguity or silence does not loom, the occasion for preferential
17
interpretation never arises.” W. Va. Health Care Cost Review Auth., 196 W. Va. at 337,
472 S.E.2d at 422.
The business court correctly found that where the cap is imposed, that gas
well’s effective percentage operating expense is reduced to less than 30%. The Tax
Department’s position fails to recognize that by using a percentage deduction on smaller
producing wells, thereby resulting in a deduction less than $5,000, it is in the same measure
disallowing the same average it claims to be enforcing as to the larger-producing wells. It
seems clear that the percentage is utilized to allow the Tax Department to eke out taxes on
low-producing wells, whereas if the monetary average were used, low-producing wells
may have zero taxable value, i.e. a well whose gross receipts are $5,000 or less. Use of
an “average” by definition results in an evening out of the losses and gains realized at the
far ends of the spectrum, which in this case are occupied by lower- and higher-producing
wells. The Tax Department’s use of a percentage and cap serves to alter its operating
expense formula depending on which end of the spectrum a well is on, thereby treating like
wells in a dissimilar fashion.
It is therefore fairly inarguable that this errant interpretation and application
of the regulations necessarily creates an inequality under both the “equal and uniform”
18
language of Article X, Section 1,16 and the equal protection provisions of the West Virginia
and United States Constitutions.17 This is not due to an over-valuation of the gas wells per
se, but rather the use of two differing formulas to calculate operating expenses, which
results in some wells receiving the full benefit of the deduction and others being denied it.
Indeed, the Tax Department’s use of an unauthorized operating expense deduction method
which creates inconsistent deductions between like properties, is precisely the type of
agency action which this Court cautioned against in Murray Energy. See 2019 WL
1982993, at *13 (distinguishing “alleged valuation inequalities which necessarily result
from carefully crafted, stakeholder-involved, and legislatively-approved systems” from
those which make “facially arbitrary classifications” or “allow for use of indiscriminate
applications”); cf. Appalachian Power Co., 195 W. Va. at 596, 466 S.E.2d at 447 (finding
16
“Our equal and uniform provision governing taxes is sub-species of the equal
protection clause.” Kline v. McCloud, 174 W. Va. 369, 380, 326 S.E.2d 715, 726 (1984)
(Neely, J., dissenting).
17
As explained in Murray Energy,
“The right to equal protection of the laws is, of course, found
in the Fourteenth Amendment to the Constitution of the United
States.” Payne v. Gundy, 196 W. Va. 82, 87, 468 S.E.2d 335,
340 (1996). Commensurately, “West Virginia’s constitutional
equal protection principle is a part of the Due Process Clause
found in Article III, Section 10 of the West Virginia
Constitution.” Syl. Pt. 4, Israel by Israel v. W. Va. Secondary
Sch. Activities Comm’n, 182 W. Va. 454, 388 S.E.2d 480
(1989).
2019 WL 1982993, at *12.
19
no equal protection violation where regulation “treats all businesses within each class the
same”).
Finally, in contrast to Murray Energy, the inequality occasioned by the
economic classifications created by the Tax Department’s interpretation and application of
West Virginia Code of State Rules § 110-1J-4.3 fails to pass the “rational relationship” test.
As this Court has held, “[w]here economic rights are concerned, we look to see whether
the classification is a rational one based on social, economic, historic or geographic factors,
whether it bears a reasonable relationship to a proper governmental purpose, and whether
all persons within the class are treated equally.” Syl. Pt. 4, in part, Gibson v. W. Va. Dep’t
of Highways, 185 W. Va. 214, 406 S.E.2d 440 (1991), holding modified by Neal v. Marion,
222 W. Va. 380, 664 S.E.2d 721 (2008); see also Appalachian Power, 195 W. Va. at 594,
466 S.E.2d at 445 (using rational relationship test to assess constitutionality of tax
regulations). In this instance, the Tax Department offers no governmental purpose for its
use of a methodology which provides differing operating expense percentage deductions
depending on the amount of gross receipts, nor can this Court discern one.18 In fact, the
Tax Department adamantly refuses to admit that any such classifications are created by its
methodology, much less that they are rational ones.
18
As respondents note, the Tax Department cursorily mentions that the “not to
exceed” amount serves as a “safeguard,” but fails to indicate against what occurrence it
safeguards.
20
We therefore hold that West Virginia Code of State Rules § 110-1J-4.3 does
not permit the imposition of a “not to exceed” limitation on the operating expense
deduction authorized thereunder and use of such limitation along with a percentage
deduction violates the “equal and uniform” requirement of West Virginia Constitution
Article X, Section 1, as well as the equal protection provisions of the West Virginia and
United States Constitutions. We therefore affirm the business court’s orders to that extent.
B. LACK OF INCLUSION OF GATHERING, PROCESSING, AND TRANSPORTING
EXPENSES
As previously indicated, with regard to the Marcellus wells, the business
court made an additional finding that the operating expense average calculated by the Tax
Department was flawed because it did not include expenses for gathering, compressing,
processing, and transporting the gas to market, which the Tax Department characterizes as
“post-production” expenses. In that regard, West Virginia Code of State Rules § 110-1J-
3.16, defines “operating expenses” as
only those ordinary expenses which are directly related to the
maintenance and production of natural gas and/or oil. These
expenses do not include extraordinary expenses, depreciation,
ad valorem taxes, capital expenditures or expenditures relating
to vehicles or other tangible personal property not permanently
used in the production of natural gas or oil.
(emphasis added). The Tax Department maintains the business court erred because
gathering, compressing, processing, and transporting expenses are not related to getting the
gas out of the ground, but are related solely to getting the gas to the buyer; therefore, they
21
do not “directly relate” to “maintenance and production” of gas as required by Rule 4.1
and are not properly included in their average industry expense calculation.
Antero responds that since its gross receipts must be calculated at the “field
line point of sale” by regulation, a commensurate inclusion of the expenses incurred to
reach the field line point of sale is necessary. Antero further argues that the definition of
“gross receipts” supports their argument. “[G]ross receipts” are defined as “total income
received from production on any well, at the field line point of sale, during a calendar year
before subtraction of any royalties and/or expenses.” W. Va. C.S.R. § 110-1J-3.8
(emphasis added). Accordingly, Antero argues that if the gross receipts are the result of
“production,” any expenses incurred to that point are necessarily also part of “production”
and properly included in the average expense calculation.
The Tax Department counters that deductions are a matter of “legislative
grace” as recognized by the Court in Shawnee Bank v. Paige, 200 W. Va. 20, 27, 488
S.E.2d 20, 27 (1997). Therefore, such expense deductions need not necessarily fairly
correlate to gross receipts inasmuch as the deduction is not required in the first instance.
Critically, in terms of the definition of “maintenance and production,” Antero
concedes that the Rule is silent. Therefore, unlike the Tax Department’s errant
interpretation and application of an unambiguous regulation as indicated above, the
ambiguity surrounding what expenses qualify as being “directly related to the maintenance
22
and production” of natural gas necessitates the Chevron analysis utilized in Murray Energy.
“In deciding whether an administrative agency’s position should be sustained, a reviewing
court applies the standards set out by the United States Supreme Court in Chevron U.S.A.,
Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S. Ct. 2778, 81 L. Ed. 2d
694 (1984).” Syl. Pt. 3, in part, Appalachian Power, 195 W. Va. 573, 466 S.E.2d 424.
As the Appalachian Power Court explained, “[j]udicial review of an
agency’s legislative rule and the construction of a statute that it administers involves two
separate but interrelated questions, only the second of which furnishes an occasion for
deference.” Syl. Pt. 3, in part. First, if
the Legislature has directly spoken to the precise question at
issue [and] . . . the intention of the Legislature is clear, that is
the end of the matter, and the agency’s position only can be
upheld if it conforms to the Legislature's intent. No deference
is due the agency’s interpretation at this stage.
Id. In other words, “[i]f the legislative rule is valid, clear as to its intent and not contrary
to the legislative enactment that triggered its promulgation, the need for further review does
not arise.” Id. at 586, 466 S.E.2d at 437.
There seems to be little question that the Legislature has not, in its enabling
statute, spoken to the issue of whether a Marcellus well average operating expense
calculation must necessarily include gathering, compressing, processing, and transporting
or “post-production” expenses. West Virginia Code § 11-6K-1 requires only that natural
resources properties be assessed at their “true and actual” value. As we concluded in
23
Murray Energy, the statute provides no methodology for making that determination and
expressly delegates that authority to the Tax Commissioner. 2019 WL 1982993, at *10.
Moreover, the legislative rules likewise do not specify whether expenses
“directly related to the maintenance and production of natural gas” include expenses which
are incurred from the time the gas is extracted from the ground but before the gas reaches
the buyer. West Virginia Code of State Rules § 110-1J-3.16 provides that such expenses
expressly do not include “extraordinary expenses, depreciation, ad valorem taxes, capital
expenditures or expenditures relating to vehicles or other tangible personal property not
permanently used in the production of natural gas or oil.” However, there is no indication
that gathering, compression, processing, or transporting expenses fall within any of these
excluded categories.
This “gap” or ambiguity therefore implicates the second stage of the Chevron
analysis: “[I]f the statute is silent or ambiguous with respect to the specific issue, the
question for the court is whether the agency’s answer is based on a permissible construction
of the statute. A valid legislative rule is entitled to substantial deference by the reviewing
court.” Syl. Pt. 4, in part, Appalachian Power, 195 W. Va. 573, 466 S.E.2d 424. The Tax
Department and Antero each make compelling arguments for whether such expenses
24
should be included in the operating expense calculation. 19 Unfortunately, despite the
prevalence of such operations in the State, the Legislature has not seen fit to address these
expenses in the taxation scheme. This uncertainty alone constrains our ability to resolve
the issue on the relative merits of the parties’ positions. As the Appalachian Power Court
aptly stated:
Our power to review the Tax Commissioner’s decisions on
policy grounds is extremely limited. We are not at liberty to
affirm or overturn the Commissioner’s regulation or decision
merely on the basis of our agreement or disagreement with his
policy implications, even when important issues of taxation are
at stake.
195 W. Va. at 588, 466 S.E.2d at 439. Rather, “an agency’s interpretation will stand unless
it is ‘arbitrary, capricious, or manifestly contrary to the statute.’” Id. at 589, 466 S.E.2d at
440 (quoting Chevron, 467 U.S. at 844).
With these limitations, we cannot say that the Tax Department’s position that
gathering, compressing, processing, and transporting expenses are not “directly related” to
the “maintenance and production” of natural gas is arbitrary, capricious, or manifestly
contrary to the enabling taxation statute. In accordance with our precedent, its position
“must be sustained if it falls within the range of permissible construction.” W. Va. Health
Care Cost Review Auth., 196 W. Va. at 339, 472 S.E.2d at 424. More importantly, the
19
Cf. Appalachian Power, 195 W. Va. at 591, 466 S.E.2d at 442 (“Both
constructions are consistent with the statute’s language. It is here that the Chevron analysis
strikes its most telling blow to the plaintiffs. Under Chevron, we may not impose our own
construction of the statute.”).
25
equity of such an interpretation is well beyond the reach of this Court under these
circumstances.20 It is sufficient to conclude that the Tax Department’s exclusion of these
expenses from its average expense calculation is a reasonable construction of the regulation
and not facially inconsistent with the enabling statute. Whether this Court would construe
the regulation similarly is frankly beside the point:
Our job is not to weigh the wisdom of, nor to resolve any
struggle between, competing views of the public interest, but
rather to respect legitimate policy choices made by an agency
in interpreting and applying a statute. Moreover, it is not
necessary for us to find that the regulation is the only
reasonable one or even that it is the result we would have
reached had the question arisen in the first instance in this
Court.
Id. at 339, 472 S.E.2d at 424. We therefore find that the business court’s conclusion that
such expenses must necessarily be included in the Tax Department’s average operating
expense calculation to be erroneous.
The foregoing notwithstanding, however, we find that our disagreement with
the business court’s conclusion is of little practical consequence to the case at bar. While
the business court concluded that the survey improperly excluded gathering, compressing,
20
In contrast, the Court was under no such constraints when analyzing whether
royalty payments pursuant to an oil or gas lease governed by West Virginia Code § 22-6-
8(e) may be subject to pro-rata deduction or allocation of reasonable post-production
expenses in Leggett v. EQT Prod. Co., 239 W. Va. 264, 800 S.E.2d 850, cert. denied, 138
S. Ct. 472, 199 L. Ed. 2d 358 (2017). In that case, the Court was tasked with interpreting
the “at the wellhead” language contained within that statute in conjunction with our canons
of statutory construction to resolve private parties’ dispute over royalties owed. The
analysis employed in that case, despite the general similarity of the issue, is therefore
inapplicable.
26
processing, and transporting expenses, thereby causing the average operating expense
calculation to be under-inclusive, it failed to grant any relief in that regard. As previously
indicated, in overturning the Tax Department’s valuations, the business court imposed an
unlimited operating expense of 30% for conventional wells and 20% for horizontal
Marcellus wells, despite the fact that these figures were derived from the survey it found
inadequate. Antero did not cross-assign this failure as error and does not squarely address
this incongruity in its briefs;21 furthermore, it requests this Court to affirm the business
court’s valuation. The Tax Department makes note of it, but simply argues this underscores
the fallacious logic of the business court. In any event, this leads us to an examination of
the relief crafted by the business court to resolve the gas well valuations.
C. THE BUSINESS COURT’S RELIEF
The Tax Department’s final assignment of error contends that the business
court failed to grant appropriate relief by removal of the cap and allowing an “unlimited”
percentage expense deduction. 22 Relying on the principles articulated above from
21
Antero’s lone oblique reference to the application of the allegedly erroneous 20%
figure states that it “eliminates some Constitutional infirmities, and is a reasonable
approximation of ‘true and actual value’ until the Tax Department reevaluate its application
of the Rule.” (emphasis added).
22
The Tax Department supplements its attack on the business court’s remedy by
arguing in a separate assignment of error that it erred by creating a “hybrid rule” for
taxation in violation of this Court’s opinion in Lee Trace, LLC v. Raynes, 232 W. Va. 183,
751 S.E.2d 703 (2013). Respondent counters that there is nothing “hybrid” about removal
of the cap, and therefore Lee Trace adds nothing to the analysis. We agree.
27
Appalachian Power, the Tax Department argues that it has discretion in the manner in
which it expresses the average operating expense and that the business court has usurped
that discretion by fashioning its own methodology. In response, respondents insist that the
business court merely removed the offending and inequality-creating aspect of the Tax
Department’s methodology, i.e. the cap, leaving the residual percentage operating expense
deduction.
More specifically, the Tax Department—seemingly in contradiction to its
argument that it properly utilized both a percentage and cap—insists that the business court
erred by utilizing and/or permitting the use of a percentage to deduct operating expenses
because the Rule requires an “average,” stating: “The average of a bunch of numbers is a
number.”23 Doddridge County, whose interests are unquestionably aligned with the Tax
Department, expressly concedes in its brief that the language of the regulation contemplates
the use of a monetary average across the board: “The Average Annual Industry Operating
Lee Trace involved the assessor’s use of both the cost and income approaches to
valuation, i.e. a “hybrid” valuation. The Court found that using the income approach in
the particular circumstances in that case did not allow the assessor to comply with other
provisions of the regulations regarding application of a capitalization rate. The business
court employed no “hybrid” valuation method in its relief; therefore, Lee Trace is wholly
inapposite. In fact, as set forth in our discussion supra, if there is a “hybrid” valuation
method implicated at all, it is the one utilized by the Tax Department by using both a
percentage and a monetary average cap to calculate the operating expense deduction.
23
If so, this merely begs the question as to why the Tax Department utilized a
percentage in the first instance.
28
Expenses is a fixed dollar amount, in this case, $5,000. Expenses are expressed as numbers.
The average of a set of numbers is a number and not a percentage.”
The question presented, then, is whether the business court erred in ordering
the percentage average to be used, rather than the monetary average as a uniform deduction,
or whether it should have deferred the issue of which formulation to use to the Tax
Department altogether. In ordering the use of a percentage, unimpeded by the cap, the
business court determined that a percentage average creates greater proportionality and
avoids the issue of some wells having zero value, i.e., a well where the gross receipts less
the monetary average deduction nets zero value. It therefore ordered that the percentage
average be utilized without any cap or maximum deduction.
We find that neither West Virginia Code of State Rules § 110-1J-4.1 nor §
110-1J-4.3 provide for a “sliding scale” or pro rata operating expense deduction. In that
regard, there is as little authority for the Tax Department’s use of a percentage expression
of the operating expense deduction as there is for a “cap” of those expenses. The language
of the Rule provides that “[t]he average annual industry operating expenses shall be
deducted from working interest gross receipts . . . .” W. Va. C.S.R. § 110-1J-4.3. Our
most well-worn canon of construction mandates that the Court is to give words “their
ordinary and familiar significance and meaning, and regard is to be had for their general
and proper use.” Syl. Pt. 4, in part, State v. Gen. Daniel Morgan Post No. 548, Veterans
of Foreign Wars, 144 W. Va. 137, 107 S.E.2d 353 (1959). With respect to the Tax
29
Department’s purported discretion to express the average expense in the manner it deems
fit, we are reminded yet again that “we are obligated to defer to an agency’s view only
when there is a statutory gap or ambiguity.” W. Va. Health Care Cost Review Auth., 196
W. Va. at 337, 472 S.E.2d at 422. Accordingly, we find that this clear, simply-stated
regulation under any common-sense reading plainly contemplates use of a monetary
average, which must be applied evenly across the board to avoid an unconstitutionally
impermissible application. We therefore hold that the provisions contained in West
Virginia Code of State Rules §§ 110-1J-4.1 and 110-1J-4.3 for a deduction of the average
annual industry operating expense requires the use of a singular monetary average
deduction.
As such, we conclude that the business court’s relief erroneously required
use of a percentage, rather than a monetary average operating expense deduction and
reverse to that extent. However, “this Court does not have the authority to fix the
assessment of appellant’s property . . . [rather,] the trial court is invested by statute with
such authority and the case [should] be remanded for that purpose.” In re Tax Assessments
Against Pocahontas Land Corp., 158 W. Va. 229, 240, 210 S.E.2d 641, 649 (1974); see
also Matter of U. S. Steel Corp., 165 W. Va. 373, 379, 268 S.E.2d 128, 132 (1980) (“This
Court does not have the authority to fix assessments because such authority is vested by
30
statute in the circuit courts.”). Consequently, we remand to the business court for entry of
an order consistent with this opinion.24
IV. CONCLUSION
For the reasons stated above, the January 17, 2018 and February 7, 2018,
orders of the business court in the above-styled matters are therefore affirmed, in part,
reversed, in part, and remanded for further proceedings consistent with this opinion.
Affirmed in part, and reversed in part,
and remanded.
24
In view of the Court’s resolution of this matter, we find that Doddridge County’s
lone separate appellate issue—whether it was unfairly denied an opportunity to fully brief
the issues below—has been rendered moot.
31