Bill Summary – FastDemocracy

WEST VIRGINIA LEGISLATURE
       2024 REGULAR SESSION
                  ENROLLED
          Committee Substitute for House Bill 4850
  BY DELEGATES CRISS, ANDERSON, ZATEZALO, HARDY,
          HOUSEHOLDER, AND FEHRENBACHER
 [Passed February 23, 2024; in effect ninety days from passage.]
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 AN ACT to amend and reenact §11-1C-10 of the Code of West Virginia, 1931, as amended,
         relating to the valuation of industrial property and natural resources property by the Tax
         Commissioner; removing a sunset provision concerning valuation of property producing
         oil, natural gas, and natural gas liquids; and making technical corrections.
     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:
         "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.
         "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.
         (c) The State Tax Commissioner shall value all industrial property in the state at its fair
 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
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 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
 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
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 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 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) "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.
        (ii) "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).
        (iii) "Compression costs" are the actual costs in the process of raising the pressure of
 minerals.
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           (iv) "Fractionation costs" means the actual costs incurred by the producer in fractionation.
 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.
           (v) "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.
           (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) "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.
           (ix) "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.
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            (x) "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.
            (xi) "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.
            (xii) "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.
            (xiii) "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 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.
            (xiv) "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.
            (C) (i) For all assessments made on or after July 1, 2022, the valuation of property
 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.
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         (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
 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.
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        (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
 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.
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        (F) 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.
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         (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
 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 s