West Virginia natural gas property tax issues cause more headaches

Mike Ferro, president of the Marshall County Commission and a former Democratic lawmaker, blames both the Tax Division and the Republican-led Legislature.

“It’s been a nightmare ... it’s been a major debacle with this,” Ferro said. “First of all, the majority party Legislature is the one that was hell bent on doing this the last three years. Then the Tax Division screwed it up. We’re not going to be punished for doing something that they have screwed up. If they fix it, we’ll take a look at it again.”

House Bill 4336, passed by the Legislature last year, was itself a fix to House Bill 2581 passed in 2021. Both bills were attempts to fix natural gas property tax assessments after the West Virginia Supreme Court of Appeals ruled in 2019 that the way the state was valuing natural gas property previously was unconstitutional.

Ferro, speaking by phone Wednesday, said he and other officials from natural gas-producing counties were active in trying to warn lawmakers about the consequences of HB 4336, including hosting a meeting in Wheeling last year.

“After it was all over with, I asked a question of one of the representatives of the Tax Division and asked who would be the biggest winners and losers in this.” Ferro said. “The representative said major oil and gas companies would be the big winners and that royalty owners would be the biggest losers.”

THE TAX MAN COMETH

The most recent bill, House Bill 4336, required the State Tax Commissioner to develop a revised methodology to value oil and natural gas properties based on the fair market value based on a yield capitalization model. Net proceeds would come from the actual gross receipts on a sales volume basis and the actual price received as reported on the taxpayer’s return once royalties and annual operating costs are subtracted from gross receipts.

Matt Irby, the state tax commissioner, said their hands are tied by the Legislature and the requirements of HB 4336. The Tax Division has four people who are required to appraise more than 1.3 million oil and gas property tax interests in West Virginia.

The division could previously lump in multiple wells together to determine an assessed value, but each well must be appraised, causing delays in the assessments sent to county assessors. The Tax Division was also in the middle of implementing a new statewide assessment system this year.

Irby said the biggest changes affecting the assessments this year are the change from using a weighted average of income approach that looked at multiple years and allowing natural gas producers to take their expenses off.

“Expenses don’t really impact the royalty owner, so that is where we’re getting the most anxiety right now,” Irby said. “The two things coming together took us about six months or so to fully implement what the Legislature had done in (HB 2581 and HB 4336), so that put us a little bit further behind than we wanted to be. Then it was a process of getting the information from the producers, getting all the information from the royalty owners, and walking it through the formula.”

The Tax Division’s issues implementing the new natural gas property tax assessments couldn’t have happened at a more inconvenient time. The formula looks back over the previous tax year, when natural gas prices were at record highs, resulting in increased production and higher payments to royalty owners.

Those prices are beginning to come down, but royalty owners will be stuck with higher assessments this year and next year before the assessments begin to reflect the lower natural gas prices and help bring those assessments back down.

“We have at this exact same time a sort of ... perfect storm,” Irby said. “The very first year we went to the one-year average, we had historic low gas prices. Then the second year this new methodology was implemented we have extremely high prices. That’s really the big lag in property taxes. For tax year 2023, we’re looking back to calendar year 2021 with regard to the gross receipts, so it is a long lookback period. You’ll see that again next year if we maintain that same kind of formula.”

The increases in assessed values of natural gas property triggered letters going out to royalty owners. State Code requires the Tax Division to send notices out anytime an appraisal goes up by 10% or $1,000. These notices only include the increase in appraisal, not the actual property tax liability, but with some royalty owners seeing appraisals go up by hundreds of percentage points, it resulted in panicked royalty owners flooding the Tax Division and county assessors with phone calls.

“A dollar amount on an appraisal looks like a lot of money on its face, and we get a lot of folks who are very, very concerned about this sort of significant increase on their property taxes from their point of view,” Irby said. “We take a lot of time to walk a taxpayer through how the formula operates and get them comfortable with the appraisal that they got.”

Adding to the confusion, the Tax Division was using older appraisal data for the “Notice of Increase in Appraisal” letters it sent to royalty owners in December and early January, resulting in incorrect numbers being sent out to royalty owners.

“Those initial numbers were based on the information in the system at the time,” Irby said. “We’ve updated information as we’ve received more information. That caused some of those numbers to change a little bit and some of them to a significant degree.

“The county can’t actually assess it if it isn’t right. That’s a big key in that,” Irby said. “We might have an appraisal on our side, if the numbers don’t come all together appropriately, the county can’t actually assess it in the system. There is sort of a safeguard there for the taxpayer.”

UNDER THE GUN

Another problem has arisen due to these compounding issues: counties in natural gas-producing areas are running up against deadlines to have their budgets for the next fiscal year approved by the State Auditor’s Office.

State Code requires county commissions to submit a document called “levy estimate – budget document’ to the State Auditor by a certain date. This year, that date falls on Friday, March 3. Speaking by phone Wednesday, State Auditor J.B. McCuskey said the delays have put a crunch on counties to finalize their budget documents for his office to review.

“We have to approve the county budgets. In order to do that, they have to be able to estimate their revenue as it comes in from their oil and natural gas royalty assessments,” McCuskey said. “The Tax Division has been unable to provide them with the data they need to make that happen in a timely manner.”

McCuskey has been actively working with county officials to help them meet the deadline. Irby also said they are helping counties and making sure they have the numbers they need to finalize their budgets.

“What we’re doing is working with the assessors to come up with a short-term plan to enable them and us to complete what is our statutory and, essentially, constitutional duty vis-a-vis the approval of their budgets for the upcoming year,” McCuskey said.

“The work we’re doing with counties right now to make sure they can close their books is to make sure everything is appropriately balanced and that they can actually issue the assessments of the appraisals we issued. We’ve got a list of when counties close and we’re looking county-by-county as they close to make sure they get those in.”

ASSESSING THE SITUATION

Both House bills 4336 and 2581 were opposed by several members of Legislature from gas-producing counties, particularly in the House of Delegates.

Delegate Erikka Storch, R-Ohio, was among the lawmakers from oil- and natural gas-producing counties that opposed both bills. She is a lead sponsor this year of House Bill 3334, which would limit the appraised value of royalty interests to not exceed the sales values of similar royalty interests that are sold.

“This bill generally says that you can’t assess more than the average actual sale price, because we have had some sales now,” Storch said. “Fifteen years ago, people were holding onto their minerals; they weren’t selling them. Now, we’ve seen some sales of minerals. We should have a basis to calculate that.”

Storch said that royalty owners are essentially being taxed at least twice and maybe more simply for having mineral rights.

“The greatest frustration I have is one of the factors in the current formula includes the income that has been generated ... it shouldn’t be a derivative of what royalty you’re receiving,” Storch said. “They’re paying income taxes on their royalties, so we are double-taxing them if we’re including that value in this factor for this equation.

“That’s my frustration talking to colleagues down here and telling them I’ve been contacted by constituents who have had their property assessments go from $38,000 to $220,000 or $217,000 to $951,000,” Storch continued. “The first thing that is commented on if you’re talking to someone from a non-gas-producing county is ‘man, how much royalties have they received?’ Why is that relevant?”

The bill is co-sponsored by House Finance Committee Chairman Vernon Criss, R-Wood, and Vice Chairman John Hardy, R-Berkeley. But before the bill can go to the House Finance Committee, it must be taken up by the House Energy and Manufacturing Committee. And it must move out of both committees by Sunday to pass the House by Crossover Day on Wednesday.

According to HB 4336, the new appraisal formulation is only in effect until July 1, 2025, and will have to be revisited by the Legislature by next year. But Storch said the issue should be addressed more urgently.

“My fear is if we don’t do something to fix this now, these assessments are going to go up next year because this is based on the value of gas being a little higher at the time of July 1, 2021,” Storch said. “Some of these people may lose their minerals, lose their rights, because they are unable to pay for them. How fair is that?”

Steven Allen Adams can be reached at sadams@newsandsentinel.com.