Charles O. Lorensen
V. McGraw, Jr.
George & Lorensen P.L.L.C. Attorney General
Charleston, West Virginia Stephen Stockton
Attorney for the Appellant Senior Assistant Attorney General
Charleston, West Virginia
Attorneys for the Respondent
JUSTICE ALBRIGHT delivered the Opinion of the Court.
JUSTICE McGRAW dissents.
1. On appeal of an administrative order from
a circuit court, this Court is bound by the statutory standards contained
in W.Va.Code § 29A-5-4(a) and reviews questions of law presented de
novo; findings of fact by the administrative officer are accorded deference
unless the reviewing court believes the findings to be clearly wrong. Syl.
Pt. 1, Muscatell v. Cline, 196 W.Va. 588, 474 S.E.2d 518 (1996).
2. Under the West Virginia Administrative
Procedures Act, W. Va. Code ch. 29A, appellate review of a circuit court's
affirmance of agency action is de novo, with any factual findings
made by the lower court in connection with alleged procedural defects being
reviewed under a clearly erroneous standard. Syl. Pt. 1, Wheeling-Pittsburgh
Steel Corp. v. Rowing, 205 W.Va. 286, 517 S.E.2d 763 (1999).
3. Freight charges paid by a coal producer to a third party to transport fully processed clean coal from the coal preparation plant to the point at which title passes to the buyer are costs which are deductible from the gross proceeds of coal sales for purposes of assessing the severance tax imposed by West Virginia Code § 11-13A-3(a) (2002) (Repl. Vol. 2003) under existing regulations promulgated by the West Virginia Department of Tax and Revenue.
4. The initial loading of fully processed clean coal at the preparation plant for shipment is one of the specified activities viewed as a taxable event associated with the privilege of mining in this state. However, any reloading of coal that transpires after the initial loading at the preparation plant is part of the delivery process, rather than the mining process, and accordingly falls outside of the statutorily delineated activities that qualify as part of the taxable treatment processes performed upon coal set forth in West Virginia Code § 11-13A-4(a)(1) (1987) (Repl. Vol. 2003).
Kanawha Eagle Coal, LLC, (Kanawha Eagle)
appeals from the January 8, 2004, order of the Circuit Court of Kanawha County
affirming the administrative decision of Appellee Tax Commissioner of the
State of West Virginia (Tax Commissioner) with regard to a severance
tax assessment. The underlying tax ruling involves excess severance taxes
related to freight charges paid by Kanawha Eagle to transport coal from a
coal preparation plant to a river dock in West Virginia at which location
the coal was reloaded into barges for final shipment to the buyer. The Tax
Commissioner disallowed the freight charge deductions Kanawha Eagle took
in submitting its severance tax documentation for amounts paid to CSX Railroad
to transport coal from its preparation plant to the river dock. (See
footnote 1) Upon our review of this matter, we determine
that under regulations promulgated by the West Virginia Department of Tax
and Revenue (Tax Department), costs paid to a third party associated
with transporting coal from a preparation plant to a river dock are deductible
in determining the value of coal in making a severance tax assessment. Having determined that the lower court committed error by affirming the administrative
decision upholding the excess severance tax assessment against Kanawha Eagle,
By notice dated November 9, 2001, the Tax Commissioner
issued an excess severance tax assessment against Kanawha Eagle for the period
of January 1, 1998, through December 31, 2000. The assessment was for $118,979,
an amount which represented $105,838 in severance taxes and $13,141 in interest
for the stated period. In making the assessment, the Tax Commissioner took
the position that Kanawha Eagle erroneously deducted certain transportation
costs associated with moving clean coal from the preparation plant to the
river dock facility as well as certain fees charged by the dock operators. (See
Kanawha Eagle timely filed an objection to the tax assessment
in the form of a petition for reassessment. In its petition, Kanawha Eagle contended
that the Tax Commissioner wrongly denied it a deduction for transportation and
dock charges in arriving at the gross value of clean coal for purposes of assessing
the severance taxes at issue. When the Tax Commissioner failed to schedule a
hearing within ninety days of the petition for reassessment, (See
footnote 3) Kanawha Eagle objected to the lack of a timely
footnote 4) and sought to have the assessment dismissed on
the basis of untimeliness.
On April 10, 2002, an administrative hearing was
held on the reassessment petition filed by Kanawha Eagle. The only evidence
introduced by the Tax Commissioner at the hearing was the notice of assessment.
Kanawha Eagle offered the testimony of a witness and introduced various exhibits
through this witness for the purpose of establishing that the only action
taken with regard to the clean coal upon its arrival at the river dock is
a change in the mode of transportation. (See
In its ruling dated October 8, 2002, the administrative
law judge denied the motion to dismiss on untimeliness grounds, finding that
Kanawha Eagle had failed to demonstrate prejudice resulting from the six-day delay and also finding
good cause for the delay due to the unavailability of a hearing examiner. (See
footnote 6) As to the substantive grounds for review, the
administrative law judge upheld the Tax Commissioner's disallowance of the
freight deductions in arriving at the gross value of the coal. The amount
of the assessment was reduced, however, due to the Tax Commissioner's wrongful
inclusion of severance taxes owed by a separate entity. (See
footnote 7) After reducing the assessment by the amounts
wrongfully included, the revised severance tax assessment was determined
to be $59,186.93, with $51,876 representing the amount of the actual excess
assessment and $7,310.93 the interest charges owing on that amount through
September 15, 2002. (See
Kanawha Eagle appealed the decision of the administrative
law judge to the circuit court. As grounds for the appeal, Kanawha Eagle
argued that the decision to uphold the assessment was erroneous because
'gross value' of coal in the immediate vicinity where it is severed determined
after application of post production processing does not include costs of transportation incurred with respect to clean coal transferred
from a preparation plant via an independent trucker or railroad to a remote
coal dock facility. . . . After reviewing the parties' briefs and the
record but without holding a hearing, the circuit court ruled in its January
8, 2004, order, that the Tax Department was not clearly erroneous in disallowing
deduction of Petitioner's freight and dock expenses from its preparation
plant to the Winifrede Dock. (See
footnote 9) It is from this order that Kanawha Eagle seeks
On appeal of an administrative
order from a circuit court, this Court is bound by the statutory standards contained
in W.Va. Code § 29A-5-4(a) and reviews questions of law presented de
novo; findings of fact by the administrative officer are accorded deference
unless the reviewing court believes the findings to be clearly wrong.
Applying this standard to a lower court's decision to affirm an administrative decision, we held in syllabus point one of Wheeling-Pittsburgh Steel Corp. v. Rowing, 205 W.Va. 286, 517 S.E.2d 763 (1999): Under the West Virginia Administrative Procedures Act, W. Va.Code ch. 29A, appellate review of a circuit court's affirmance of agency action is de novo, with any factual findings made by the lower court in connection with alleged procedural defects being reviewed under a clearly erroneous standard.
With these standards in mind, we proceed to determine
whether the lower court committed error in affirming the Tax Commissioner's
assessment of excess severance taxes against Kanawha Eagle.
By statute, gross value for coal or
other taxable natural resources is defined to mean the market value
of the natural resource product, in the immediate vicinity, where severed,
determined after application of post production processing generally applied
by the industry to obtain commercially marketable or usable natural resource
products. W.Va. Code § 11-13A-2(c)(6) (1995) (Repl. Vol. 2003).
The statute further provides that for reporting purposes, gross value with
regard to natural resources is the gross proceeds received or receivable
by the taxpayer. W.Va. Code § 11-13A-2(c)(6)(A). For purposes
of assessing the severance tax, the treatment processes pertinent to coal
which include [c]leaning, breaking, sizing, dust allaying, treating
to prevent freezing and loading for shipment are all considered
as mining and part of the privilege taxed under this article [article 13A]. W.Va.
Code § 11-13A-4(a), -4(a)(1) (1987) (Repl. Vol. 2003) (emphasis supplied).
In 1992, the Tax Department promulgated rules to aid taxpayers in identifying how the gross value of natural resources would be assessed for severance tax purposes. By regulation, gross value
in the case of natural resources means the market value
of the natural resource product, in the immediate vicinity, where severed, determined
after application of post production processing generally applied by the industry
to obtain commercially marketable or usable natural resource products. The value
of natural resource products produced shall be determined by the gross proceeds
of sales in every instance in which a bona fide sale of such products
is made at the point where production ends, and whether sold at wholesale or
retail. In determining the value of natural resource products delivered to
purchasers there may be deducted from the gross proceeds of sales so much thereof
as the taxpayer can prove to be actual outgoing freight charges (paid by him)
from the point at which shipment originates in this State to the point of delivery. However,
no deduction is permitted for expenses incurred by him through the use of his
own equipment in transporting items produced. No deduction is permitted for expenses
incurred to transport items from the point of severance to the processing plant
(or loading facilities), when treatment processes are considered part of the
production or mining taxable as such pursuant to W.Va. Code § 11-13A-4.
Further, no deduction will be allowed for sales commissions, royalties, or other
costs, expenses or fees incurred by a producer and ultimately paid to third parties.
110 W.Va.R. Taxation § 13A-2.7 (emphasis supplied).
The regulations specifically address how freight charges are to be treated in the assessment process:
In certain instances, producers and processors of natural
resource products are permitted to deduct freight charges from the gross proceeds
of sale or value to arrive at taxable value under the severance tax.
In order to determine the value within the State and at the place where production or processing ends, there may be deducted from gross proceeds of sales certain outgoing freight charges actually incurred by the producer or processor, but no deduction will be allowed for expenses incurred by him through the use of his own equipment in transporting items produced except as provided in Sections 4.7.4, 4.7.6 and 4.7.7 of these regulations. (See footnote 11)
110 W.Va.R. Taxation §§ 13A-4.7; -4.7.1 (footnote added).
The freight charges at issue in this case (See
footnote 12) represent transportation charges that
Kanawha Eagle paid to CSX, a common carrier, to transport its fully processed
clean coal over a six-mile route from its preparation plant to a river
dock location for reloading onto a barge for final delivery to the buyer. (See
footnote 13) Because the river dock is owned and operated
by a wholly-owned subsidiary of Kanawha Eagle, the Tax Commissioner has
taken the position that the taxpayer in this case is not entitled to
the freight deduction ordinarily allowed for such transportation costs on the theory that it is merely shipping the
coal to itself. To reach this result under the applicable statutory and regulatory
provisions, however, requires the Tax Commissioner to encompass this subsequent
stage of transportation within those specified activities that are set forth
by statute as part of the treatment processes that are considered as
mining and, therefore, subject to the severance tax. W.Va. Code §11-13A-
4(a)(1) (identifying [c]leaning, breaking, sizing, dust allaying, treating
to prevent freezing and loading for shipment as taxable activities
viewed as part of the mining process). In its attempt to fall within the
statutorily specified processing activities that are subject to the severance
tax, the Tax Commissioner argues that when the coal is reloaded at the river
dock onto the barges for delivery this subsequent loading qualifies as a loading
for shipment. Id. Essentially, it is the position of the Tax
Commissioner that each and every mode of transport of the clean coal after
it leaves the preparation plant comes within the loading for shipment concept
and is therefore subject to taxation as part of the original mining activity. Id.
The position advocated by the Tax Commissioner is that freight charges are not deductible when any form of reloading occurs because the coal is still being processed within the meaning of West Virginia Code § 11-13A-4(a)(1). Kanawha Eagle maintains that coal is loaded for delivery within the meaning of the severance tax statutory scheme only when it is initially loaded from the clean coal stockpile at the preparation plant onto rail cars.
Emphasizing that nothing which affects the value of the coal occurs after
the fully treated natural resource leaves the preparation plant, Kanawha
Eagle suggests that the point when the coal first leaves the preparation
plant is the only location which can qualify as the loading for shipment situs
under the facts of this case. Kanawha Eagle posits that any subsequent loading
of coal that occurs at the river dock is merely transloading or reloading
and further that these subsequent transportation related activities fall
outside the scope of the treatment processes specifically taxed by statute
as part of the mining process. See id.
In arguing that the transfer of coal from a railcar to a barge qualifies as loading for shipment under the tax scheme at issue, Kanawha Eagle contends that the Tax Department is taking a position markedly at odds with both its previous stance on this issue and with the historical view of the point at which severance taxes are determined. As evidence of this divergence in positions, Kanawha Eagle cites to Publication TSD-210, through which the following is provided:
Severance tax is imposed on the gross value of the coal. Gross value is determined by the sale price of the coal less freight expenses incurred in transporting the coal to a customer, if the transportation is performed by a common carrier. Freight expenses are also deductible when performed by the taxpayer, if the charges are separately stated on the invoice. Freight expenses related to the transporting of coal from a mine to a processing area are not deductible. Only outgoing freight charges incurred in shipping coal to a customer are exempt.
In that same publication, the following clarification is included: The
activities of loading for shipment or freezeproofing when performed by themselves
are not sufficient to subject a person to the severance tax.
Applying this policy in its recent administrative ruling in 91-500SV, (See footnote 14) the Tax Department determined that charges paid by a coal producer to an independent hauler were deductible:
Based upon the case file it is clear that the Petitioner
is correct in stating that transportation costs are deductible if paid by the
Petitioner to an unrelated third party for delivery to the customer. It is also
clear, that because the gross value of the severed coal (production) could end
no later than the crusher, Petitioner is justified in claiming the full amount
of the freight deduction.
Based on both the regulations and the position previously taken by the Tax Department, Kanawha Eagle argues that transportation costs which are incurred after the completion of the treatment processes (i.e. washing, crushing, screening, etc.) and which are paid to a third party are deductible. These transportation costs are distinct from the costs associated with transporting coal from the extraction site to the preparation plant. (See footnote 15) Moreover, the act of dumping coal from a railcar to a barge by itself does not qualify as processing of the coal for purposes of assessing the severance tax under the position taken by the Tax Department in Publication TSD-210.
Kanawha Eagle argues that the position taken by
the Tax Commissioner in this case is inconsistent with the manner in which
severance taxes, or privilege taxes, are generally assessed. Longstanding
principles of constitutional law require that to be upheld severance taxes
must be assessed prior to the time when the natural resource enters the stream
of commerce or stream of export. See Coe v. Erroll, 116 U.S. 517 (1886)
(holding that goods are not subject to taxation until they have been shipped
or placed with common carrier for ultimate transportation to another state).
In applying a precursor to the severance tax, the business and organization
tax, as it related to natural gas produced within this state, we held in Hope
Natural Gas Co. v. Hall, 102 W.Va. 272, 135 S.E. 582 (1926), that the
tax was valid provided that the gas was valued before transportation commences. Id. at
276-77, 135 S.E. at 583. In affirming this Court's decision, the United States
Supreme Court stated: The plain result of the opinion and final decree
is to require that the tax be computed upon the value of the gas at the well,
and not otherwise. Hope, 274 U.S. 284, 288 (1927).
The Tax Commissioner views its subject tax assessment
as conforming with Commerce Clause precedent, arguing that the coal at issue
is not being placed in the stream of commerce until placed on the barge for
final shipment to the customer. Presented in this fashion, the Commerce Clause cases do not aid us in resolving the issue
of whether loadings of coal subsequent to the initial loading at the preparation
plant fall within the taxable mining related activities set forth in West
Virginia Code § 11-13A-4(a)(1). We think that the answer to the issue
presented can be found in the language of the statutory provision defining gross
value. By definition, gross value is determined in reference
to the market value of the natural resource product, in the immediate
vicinity, where severed, determined after application of post production
processing. . . . W.Va. Code § 11-13A- 2(c)(6) (emphasis supplied).
In making its argument, the Tax Commissioner focuses singularly on the term loading for shipment, without proper consideration of the remaining language contained in the statute. If we were to accept the logic suggested by the Tax Commissioner that each and every change in transportation of coal following its departure from the preparation plant qualifies as a separate loading for shipment and a distinct taxable event, we would have to omit the statutory language that defines gross value in terms of valuing such resource in the immediate vicinity of the location from which the resource was severed. Id. While the transportation costs associated with moving the coal from the extraction situs to the preparation plant logically fall within the statutory scheme of taxing the processing and treatment of natural resources, there is no similar basis for viewing additional acts of transportation subsequent to the initial loading for delivery as part of the taxable mining process. Moreover, once the coal is transported following the initial loading for delivery it no longer can be said to be in the immediate vicinity of the severance or extraction situs. The severance tax statutory scheme has at its core the concept of assessing the value of the subject natural resource in close proximity to the point of extraction and processing. By limiting its focus on loading for delivery as a taxable event without considering whether subsequent loadings that occur after the initial loading at the preparation plant fall outside the legislative definition of taxable treatment processes, the Tax Commissioner has taken a position that fails to comport with the clearly stated provisions of the severance tax statutes.
Having rejected the Tax Commissioner's modified
view of what constitutes loading for shipment in terms of the
taxable mining process, we determine that freight charges paid by a coal
producer to a third party to transport fully processed clean coal from the
coal preparation plant to the point at which title passes to the buyer are
costs which are deductible from the gross proceeds of coal sales for purposes
of assessing the severance tax imposed by West Virginia Code § 11-13A-3(a)
under existing regulations promulgated by the Tax Department. (See
footnote 16) The initial loading of fully processed clean
coal at the preparation plant for shipment is one of the specified activities
viewed as a taxable event associated with the privilege of mining in this state. However, any reloading of coal that
transpires after the initial loading at the preparation plant is part of
the delivery process, rather than the mining process, and accordingly falls
outside of the statutorily delineated activities that qualify as part of
the taxable treatment processes performed upon coal set forth in West Virginia
Code § 11-13A-4(a)(1). In disallowing the freight charges that Kanawha
Eagle paid to CSX for transportation of the subject coal from the preparation
plant to the river dock, the circuit court committed error.
Based on the foregoing, the decision of the Circuit
Court of Kanawha County is hereby reversed.