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By Elizabeth Burg, CPA, Senior Manager | September 17, 2020

On Friday, August 21st, the West Virginia State Tax Department published proposed draft amendments to Legislative Rule (110 CSR 1J) relating to the valuation of oil and gas properties for property tax purposes.  The Tax Department acknowledges the Rule, in its current form, is outdated.  The Rule promulgated in 1992, had an amendment in 2005 adding a provision for horizontal wells.  Absent the 2005 amendment, the Rule has been largely untouched since its enactment in 1992.  The purpose of the Rule is to outline the methods in which producing and reserve oil and gas properties will be valued according to 11-1C-10(d) which states in part, the state tax commissioner shall determine the fair market value of all natural resources property in the state.  Natural resources are defined in § 11-1C-10 to include natural gas, oil and other minerals.

With the proposed Rule changes the Tax Department has demonstrated their desire to modernize the Rule according to industry standards.  In general, the changes are looking to include certain post-production cost allowances, namely gathering, firm transportation and processing, that companies incur to transport the gas to their respective points of sale.  These post-production costs have been excluded from the Tax Department’s fair market value appraisals as the Tax Department maintained they were not included in the definition of operating expense which interpretation was validated in Steager v. Consol Energy, Inc., 832 S.E.2d 135(W. Va. 2019).  The Rule changes are also seeking to include gross proceeds from natural gas liquids products processed and sold.

In West Virginia proposed legislative rules changes go to a Legislative Rule-Making Review Committee for review. From there all fiscal year proposed Rule changes are bundled for review for the next legislative session.  Therefore, the likelihood of proposed West Virginia Rule changes being enacted are much greater than new proposed tax legislation.  Given that the Rule has not been updated for several decades, oil and gas producers affected by the proposed Rule changes are strongly advised to review and provide comments within the 30-day comment period which expires at 10:00 AM on 9/21/20.  Companies looking to learn more about the proposed Rule amendments are encouraged to consult with their tax advisors or the WVONGA tax committee accordingly.

Once enacted there will be more work to come for the West Virginia Property Tax Department as valuation models and property tax reports will need to be updated to comply with the Rule changes.  The industry intends on working with the Tax Department on the implementation of the Rule so stay tuned to this post for further updates.

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