WEST VIRGINIA LEGISLATURE House Bill 4850

WEST VIRGINIA LEGISLATURE

2024 REGULAR SESSION

Introduced

House Bill 4850

By Delegates Criss, Anderson, Zatezalo, Hardy,

Householder and Fehrenbacher

[Introduced January 17, 2024; Referred to the

Committee on Finance]

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A BILL to amend and reenact §11-1C-10 of the Code of West Virginia, 1931, as amended, relating

to removing the sunset clause from the oil and gas personal property tax.

Be it enacted by the Legislature of West Virginia:

ARTICLE 1C. FAIR AND EQUITABLE PROPERTY VALUATION.

§11-1C-10. Valuation of industrial property and natural resources property by Tax

Commissioner; penalties; methods; values sent to assessors.

(a) As used in this section:

(1) "Industrial property" means real and personal property integrated as a functioning unit

intended for the assembling, processing and manufacturing of finished or partially finished

products.

(2) "Natural resources property" means coal, oil, natural gas, limestone, fireclay, dolomite,

sandstone, shale, sand and gravel, salt, lead, zinc, manganese, iron ore, radioactive minerals, oil

shale, managed timberland as defined in section two of this article, and other minerals.

(b) All owners of industrial property and natural resources property each year shall make a

return to the State Tax Commissioner and, if requested in writing by the assessor of the county

where situated, to such county assessor at a time and in the form specified by the commissioner of

all industrial or natural resources property owned by them. The commissioner may require any

information to be filed which would be useful in valuing the property covered in the return. Any

penalties provided for in this chapter or elsewhere in this code relating to failure to list any property

or to file any return or report may be applied to any owner of property required to make a return

pursuant to this section.

market value within three years of the approval date of the plan for industrial property required in

subsection (e) of this section. The commissioner shall thereafter maintain accurate values for all

such property. The Tax Commissioner shall forward each industrial property appraisal to the

county assessor of the county in which that property is located and the assessor shall multiply

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each such appraisal by sixty percent and include the resulting assessed value in the land book or

the personal property book, as appropriate for each tax year. The commissioner shall supply

support data that the assessor might need to evaluate the appraisal.

(d) Within three years of the approval date of the plan required for natural resources

property required pursuant to subsection (e) of this section, the State Tax Commissioner shall

determine the fair market value of all natural resources property in the state and thereafter

maintain accurate values for all such property.

(1) In order to qualify for identification as managed timberland for property tax purposes the

owner must annually certify, in writing to the Division of Forestry, that the property meets the

definition of managed timberland as set forth in this article and contracts to manage property

according to a plan that will maintain the property as managed timberland. In addition, each

owner’s certification must state that forest management practices will be conducted in accordance

with approved practices from the publication "Best Management Practices for Forestry". Property

certified as managed timberland shall be valued according to its use and productive potential. The

Tax Commissioner shall promulgate rules for certification as managed timberland.

(2) In the case of all other natural resources property, the commissioner shall develop an

inventory on a county by county basis of all such property and may use any resources, including,

but not limited to, geological survey information; exploratory, drilling, mining and other information

supplied by natural resources property owners; and maps and other information on file with the

state Division of Environmental Protection and office of miners’ health, safety and training. Any

information supplied by natural resources owners or any proprietary or otherwise privileged

information supplied by the state Division of Environmental Protection and office of miner’s health,

safety and training shall be kept confidential unless needed to defend an appraisal challenged by a

natural resources owner. Formulas for natural resources valuation may contain differing variables

based upon known geological or other common factors. The Tax Commissioner shall forward each

natural resources property appraisal to the county assessor of the county in which that property is

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located and the assessor shall multiply each such appraisal by sixty percent and include the

resulting assessed value in the land book or the personal property book, as appropriate, for each

tax year. The commissioner shall supply support data that the assessor might need to explain or

defend the appraisal. The commissioner shall directly defend any challenged appraisal when the

assessed value of the property in question exceeds $2 million or an owner challenging an

appraisal holds or controls property situated in the same county with an assessed value exceeding

$2 million. At least every five years, the commissioner shall review current technology for the

recovery of natural resources property to determine if valuation methodologies need to be

adjusted to reflect changes in value which result from development of new recovery technologies.

(3) Property producing oil, natural gas, natural gas liquids-

(A) The Tax Commissioner shall value property producing oil, natural gas, natural gas

liquids, or any combination thereof in the state at its fair market value determined through the

process of applying a yield capitalization model to the net proceeds.

(B) For the purposes of this subdivision:

(i) "Natural gas liquids" means propane, ethane, butanes, and pentanes (also referred to

as condensate), or a combination of them that are subject to recovery from raw gas liquids by

processing in field separators, scrubbers, gas processing and reprocessing plants, or cycling

plants.

(ii) "Actual annual operating costs" shall include, without limitation, all lease operating

expenses, lifting costs, gathering, compression, processing, separation, fractionation, and

transportation costs; as further defined herein.

(iii) "Net proceeds" means actual gross receipts on a sales volume basis determined from

the actual price received by the taxpayers as reported on the taxpayer’s returns, less royalty

interest receipts, and less actual annual operating costs as reported on the taxpayer’s returns.

(iv) "Royalty interest receipts" means the fractional interest in production of oil, natural gas,

natural gas liquids, or any combination thereof, that may or may not be subject to development

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costs or operating expenses and extends undiminished over the life of the property. Typically, it is

retained by the mineral owner, mineral lessor, or both.

(v) "Capitalization rate" means a single state-wide capitalization rate for oil, natural gas,

and natural gas liquids producing property, which shall be determined annually by the Tax

Department based on a "Build-up-Model" of the Weighted Average Cost of Capital (WACC).

(vi) "Lease operating expenses" means the actual costs incurred to bring the subsurface

minerals (oil, natural gas, and natural gas liquids) up to the surface and convert them to

marketable products. Lease operating expenses refers to the costs of operating the wells and

equipment. "Lease operating expenses" includes actual costs of labor, fuel, utilities, materials, rent

or supplies, which are directly related to the production, processing, or transportation of oil, natural

gas, natural gas liquids, or any combination thereof and that can be documented by the producer.

For the purposes of this calculation, depreciation, depletion, extraordinary expenses, ad valorem

taxes, capital expenditures, intangible drilling costs, expenditures relating to vehicles or other

tangible personal property not permanently used in the production of oil, natural gas, natural gas

liquids, or any combination thereof shall not be included as lease operating expenses.

(vii) "Lifting costs" means the actual costs incurred to operate a well during production.

(viii) "Gathering costs" means the actual costs of transportation of oil, natural gas, natural

gas liquids, condensate, or any combination thereof from multiple wells by separate and individual

pipelines to a central point of accumulation, dehydration, compression, separation, heating and

treating or storage.

(ix) "Compression costs" are the actual costs in the process of raising the pressure of

minerals.

(x) "Processing, Separation and Fractionation costs" means de-ethnization fees,

processing or fractionation fees, pipeline or transportation fees, fuel fees, and electric fees

charged by a processing or fractionation plant to the producer.

(xi) "Fractionation costs" means the actual costs incurred by the producer in fractionation.

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Fractionation is the separating of components of a mixture through differences in physical or

chemical properties. Fractionation is the process by which raw hydrocarbons are separated into

products.

(xii) "Processing costs" means the actual costs incurred by the producer for activities

occurring beyond the inlet to an oil, natural gas, or natural gas liquids processing facility that

changes the physical or chemical characteristics, enhances the marketability, or enhances the

value of the separate components. Processing costs are limited to the costs for the following

activities: fractionation, adsorption, flashing, refrigeration, cryogenics. sweetening, dehydration

within a processing facility, beneficiation. stabilizing, compression, and separation which occurs

within a processing facility.

(xiii) "Transportation costs" means the actual costs of moving oil, natural gas, natural gas

liquids, unprocessed gas, residue gas, or gas plant products or any combination thereof to a point

of sale.

(xiv) "Marginal well" means in the calendar year immediately preceding the July 1

assessment date a well with an average daily production of 2 barrels of oil or less and an average

daily production of 10 MCF or less of natural gas.

producing oil, natural gas, natural gas liquids, or any combination thereof shall be calculated using

a yield capitalization model. The yield capitalization model shall be composed of a working interest

model and a royalty interest model. The summation of the working interest model and the royalty

interest model shall represent the fair market value of the property.

(I) The working interest model shall be calculated as the sum of the working interest net

proceeds income series for natural gas, oil, and natural gas liquids. The net proceeds income

series shall be calculated as a terminating series of net proceeds discounted by applying a

capitalization rate multiplier and a decline rate multiplier. The initial term of the terminating series

of net proceeds shall be the net proceeds for that product multiplied by a six month capitalization

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rate multiplier and an eighteen month decline rate multiplier.

In each subsequent term of the net proceeds income series, the calculation shall use the

value from the previous term and multiply that term by a capitalization rate multiplier and an

applicable twelve-month decline rate multiplier.

(II) The royalty interest model shall be calculated as the sum of the royalty interest receipts

income series for natural gas, oil, and natural gas liquids. The royalty interest receipts income

series shall be calculated as a terminating series of royalty interest receipts discounted by

applying a capitalization rate multiplier and a decline rate multiplier. The initial term of the

terminating series of royalty interest receipts shall be the royalty interest receipts for that product

multiplied by a six month capitalization rate multiplier and an eighteen month decline rate

multiplier.

In each subsequent term of the royalty interest receipts income series, the calculation shall

use the value from the previous term and multiply that term by a capitalization rate multiplier and

an applicable twelve-month decline rate multiplier.

(ii) For all assessments made on or after July 1, 2022, the Tax Commissioner shall

annualize gross receipts and actual annual operating expenses before calculation of the working

interest model and the royalty interest model for wells that produced for less than 12 months

during the first calendar year of production or during the first calendar year of production after

being shut-in during the previous calendar year. Companies may provide additional actual gross

receipts and actual operating expense information that will be supplemented or used in lieu of the

Tax Commissioner annualization calculations.

(iii) For all assessments made on or after July 1, 2024, but not before, the Tax

Commissioner may not include a minimum valuation for any calculation related to determining the

value of any well. For all assessments made prior to July 1, 2024, no minimum valuation shall

exceed the values of $0.30 per MCF of natural gas, $10.00 per barrel of oil, or $0.30 per unit of

natural gas liquids, as established in a Notice to taxpayers from the State Tax Department dated

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on or about December 22, 2021.

(D) Safe harbor. – The Tax Commissioner shall annually determine a safe harbor amount

for actual annual operating costs to be published in the State Register for all marginal wells

producing oil, natural gas, natural gas liquids, or any combination thereof. For operators of

marginal wells choosing to use the safe harbor amount rather than calculate their actual annual

operating costs, that safe harbor amount will be considered the costs associated with the

production of the oil, natural gas, natural gas liquids, or any combination thereof, typical of the

producing geographical area and geological strata.

(E) The Tax Commissioner shall collect, retain, and report to the Speaker of the House of

Delegates and the President of the Senate on or before April 1, 2023, and each April 1 thereafter,

all information requested by the Division of Regulatory and Fiscal Affairs regarding the valuation of

property producing oil, natural gas, natural gas liquids, or any combination thereof.

(F) This subdivision shall be effective for all assessments made on or after July 1, 2022.

and shall have no further force or effect for any assessments made on or after July 1, 2025, unless

reenacted by the legislature

(G) The Tax Commissioner shall propose rules required to administer this subdivision,

including emergency rules, in accordance with §29A-3-1 et seq. of this code, regarding valuation

of property producing oil, natural gas, natural gas liquids, or any combination thereof.

(e) The Tax Commissioner shall develop a plan for the valuation of industrial property and a

plan for the valuation of natural resources property. The plans shall include expected costs and

reimbursements, and shall be submitted to the property valuation training and procedures

commission on or before January 1, 1991, for its approval on or before July 1, of such year. Such

plan shall be revised, resubmitted to the commission and approved every three years thereafter.

(f) To perform the valuation duties under this section, the State Tax Commissioner has the

authority to contract with a competent property appraisal firm or firms to assist with or to conduct

the valuation process as to any discernible species of property statewide if the contract and the

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entity performing such contract is specifically included in a plan required by subsection (e) of this

section or otherwise approved by the commission. If the Tax Commissioner desires to contract for

valuation services only in one county or a group of counties, the contract must be approved by the

commission.

(g) The county assessor may accept the appraisal provided, pursuant to this section, by

the State Tax Commissioner: Provided, That if the county assessor fails to accept the appraisal

provided by the State Tax Commissioner, the county assessor shall show just cause to the

valuation commission for the failure to accept such appraisal and shall further provide to the

valuation commission a plan by which a different appraisal will be conducted.

(h) The costs of appraising the industrial and natural resources property within each

county, and any costs of defending same shall be paid by the state: Provided, That the office of the

state Attorney General shall provide legal representation on behalf of the Tax Commissioner or

assessor, at no cost, in the event the industrial and natural resources appraisal is challenged in

court.

(i) For purposes of revaluing managed timberland as defined in section two of this article,

any increase or decrease in valuation by the commissioner does not become effective prior to July

1, 1991. The property owner may request a hearing by the director of the Division of Forestry, who

may thereafter rescind the disqualification or allow the property owner a reasonable period of time

in which to qualify the property. A property owner may appeal a disqualification to the circuit court

of the county in which the property is located.

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NOTE: The purpose of this bill is to remove the sunset clause from the oil and gas personal

property tax.

Strike-throughs indicate language that would be stricken from a heading or the present law

and underscoring indicates new language that would be added.