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July 19 and 20, 2005
Wyoming Room, Dunbar Inn
Evanston, Wyoming
(July 18 – Tour of Whitney Canyon and LaBarge/Shute Creek Gas Plants)
Senator Robert Peck, Co-Chairman
Representative Rodney “Pete” Anderson, Co-Chairman
Senator Stan Cooper
Senator Bill Hawks
Senator Jayne Mockler
Representative Mary Meyer Gilmore
Representative Steve Harshman
Representative Bryan Pedersen
Representative Tom Walsh
Senator Pat Aullman
Representative Kurt Bucholz
Representative Gerald Gay
Representative John Hastert
Representative David Miller
Mark Quiner, Assistant Director
Joe Rodriguez, Staff Attorney
Dean Temte, Legislative Analyst
Don Richards, Senior Research Analyst
Please refer to
Appendix 1 to review the Committee Sign-in Sheet
for a list of other individuals who attended the meeting.
Committee members, legislative staff, and interested parties toured several natural gas fields, as well as the Whitney Canyon and LaBarge/Shute Creek gas processing plants. A summary packet relating to the Whitney Canyon and LaBarge/Shute Creek gas processing plants were provided by ChevronTexaco and ExxonMobil, respectively. (See Appendices 2 and 3.)
Cochairman Peck called the meeting to order at 8:30 a.m. The following sections summarize the Committee proceedings by topic. Please refer to Appendix 4 to review the Committee meeting agenda.
Cochairman Peck summarized the prior activities of the Joint Revenue Interim Committee and the 2001 Select Committee on Mineral Taxation and Valuation. Both Committees addressed the issue of producer-processed natural gas and suggested clarifying legislation.
Ed Schmidt, Director, Department of Revenue and Craig Grenvik, Mineral Tax Administrator, provided the Committee with an extensive background of valuing producer-processed natural gas. Director Schmidt stated that the proportionate profits methodology, currently provided for in statute, no longer provides an accurate measure of market value. Mr. Schmidt explained that the Department prefers taxpayers file using the comparable value method, when comparables are available. According to Mr. Schmidt, a few companies believe that there are not comparable values for their gas and have filed using the proportionate profits method, which Mr. Schmidt stated does not achieve market value.
Craig Grenvik, Mineral Tax Administrator, suggested that the total disputed taxable value for producer-processed natural gas has been $1.5 billion, which translates into roughly $108 million in disputed ad valorem tax and $93 million in disputed severance tax.
One of the major issues is the point of valuation, according to Mr. Grenvik. In 1990, the Legislature established the point of valuation prior to the initial dehydrator. If an arms length transaction (sale of the natural gas) occurs, the value of the natural gas can be determined directly, with deductions for processing and transportation, as necessary. In the event an arms length transaction does not occur, then the Department can use either the comparable value or proportionate profits method to value the producer-processed natural gas.
Mr. Grenvik stated that another major issue of litigation in the application of the proportionate profits methodology is whether taxes and royalties should be included in the computation. The Department maintains that taxes and royalties should be included in the direct cost ratio.
Mr. Grenvik indicated the State Board of Equalization concurred with the Department’s position on the inclusion of taxes and royalties in the direct cost ratio under the proportionate profits method. However, recently, Mr. Grenvik understands that a district court found otherwise. The Department also received a recent Supreme Court decision indicating the natural gas processed in the Whitney Canyon facility can be valued using the comparable value method. However, there is still on-going dispute over the valuation of gas processed at the Carter Creek facility, which could mean that gas processed at Whitney Canyon could have a substantially higher taxable value than gas processed at the Carter Creek facility, given the recent decision. Finally, Mr. Grenvik stated that the Department desires to apply the comparable value method first, within a hierarchy of methodologies.
The Committee engaged Department of Revenue staff through several questions, discussing definitional issues, choice of methodology, how long a selected method would remain in effect, and the likely difference in values achieved through three methodologies: comparable value, proportionate profits, and modified netback.
Bruce Hinchey, Executive Director, Petroleum Association of Wyoming, and Anthony Fasone, Burlington Resources, provided the Committee a background presentation of producer-processed gas from industry's perspective. (Appendix 5.)
Mr. Hinchey discussed whether specific definitions are needed and stated that adding a definition of coal bed methane or other similar definitions to statute is not necessary. Further, Mr. Hinchey stated that while the term “processing” is defined in statute, the term “processing facility” is not, and industry is working through those definitions.
The Committee then discussed whether the Department’s position on comparable value as the primary method and a modified netback method as a fallback method for valuing producer-processed natural gas would result in too much uncertainty for industry. Mr. Hinchey stressed the need for predictability and certainty in the taxation law. He added that industry's position has been, and still is, to select one method, be it netback or proportionate profits. Mr. Fasone suggested that the entity selecting the valuation methodology could ultimately play games with the selection, depending upon price expectations.
Cochairman Peck asked about the status of the negotiations between industry and the Department of Revenue. Mr. Hinchey outlined three areas of difference including:
1) Calculation of return on investment;
2) Methods of valuation; and
3) Point of valuation, although the progress has been made in the first four meetings.
Senator Hawks asked what the position of the Governor is on these negotiations, and Mr. Hinchey indicated that the Office of the Attorney General had expressed a concern over the definition of "processing facility."
Cochairman Peck directed the parties to continue to negotiate and report back to the Committee at its next meeting.
Sarah Gorin, Equality State Policy Center, addressed the Committee and discussed the need to reduce the amount of litigation that involves issues related to producer-processed gas and provided a handout. (Appendix 6.) She stated that the State is not investing enough in enforcement of tax valuation and tax collection. Ms. Gorin indicated the lack of enforcement invites further litigation. Ms. Gorin indicated that the Department of Revenue's annual budget for litigation expenses is $20,000 per year or $40,000 per biennium. She added that another aspect contributing to litigation is unclear statutory language.
Randy Bolles, Wyoming Taxpayer’s Association, clarified that the Department of Revenue’s budget of $40,000 per biennium was correct, but the Attorney General’s Office has a multi-million budget to address litigation issues. Mr. Bolles stressed recognition of the high cost of the natural gas production facilities and the investments in people and infrastructure. He indicated that the involved companies want to do the right thing; including paying what is right and fair. Mr. Bolles stated that companies should be able to make a profit and recover their costs. He added that it is necessary to provide a certain, predictable environment where investments can be made.
Scott Harnsberger, Fremont County Treasurer, addressed the Committee. He asked the Committee to give the Department of Revenue the tools to determine value. He urged the Legislature consider the previous netback bill.
Bill Cramer, Sublette County Commissioner, asked the Committee to include counties when moving forward. He indicated that the County Commissioners did support 2003 HB 87. He added that any impressions that Sublette County had initiated litigation were not accurate.
Dan Noble, Excise Tax Division Administrator, Department of Revenue, reported to the Committee that Wyoming, along with 17 other states, is now a governing state for the Streamlined Sales Tax Agreement, effective October 1, 2005. Mr. Noble provided the Committee two sheets showing the current status of the Streamlined Sales Tax effort. (Appendix 7 and 8) Mr. Noble reported that in the conforming legislation passed by the Legislature, the due dates related to bad debt are consistent with Wyoming law, but inconsistent with the Streamlined Sales Tax Agreement (SSTA). He also suggested a small number of definitions also need to be updated for full compliance. Mr. Noble told the Committee that there is also a $20,000 fee (initially) for Wyoming's participation in the Streamlined Sales Tax Agreement and governance, although that initial amount may not be the same for all years.
Mr. Noble also indicated that the sourcing rules promulgated by the Department of Revenue are currently under challenge by Woodworkers Supply. Woodworkers Supply alleges that the rules promulgated are inconsistent with Wyoming law. Mr. Noble provided the Committee two additional handouts: Section 5 currently in place regarding sourcing (Appendix 9) and Chapter 11, Sales Tax from the 1985 rules regarding sourcing (Appendix 10). Mr. Noble explained the need to transition from origin-based sourcing to destination-based sourcing regarding the application of sales tax under the SSTA. However, he indicated that Wyoming has always been a destination-based sourcing state for in-state taxation. Mr. Noble suggested the Legislature may wish to address the concern raised by Woodworkers Supply by including a direct reference to the Streamlined Sales Tax Agreement, as amended, in statute.
Next, Mr. Noble discussed membership on various boards of the SSTA. Mr. Noble indicated that this effort was beginning to take a fair amount of his time. Currently, the two Chairmen of the Joint Revenue Committee, and Mr. Noble, as a designee of Director Schmidt, comprise Wyoming’s representation for the SSTA. Mr. Noble asked what the Revenue Committee desired in terms of representation and service on one or more governing committees. After discussing how membership is determined, Mr. Noble added that some expense and time would be associated with serving on these committees.
The Committee, Director Schmidt, Mr. Noble, and Mr. Mike Geesey, Director, Department of Audit, discussed possible designees and whether the work would likely be administrative or policy making. Representative Walsh nominated Representative Pedersen as the state’s fourth delegate. Representative Gilmore seconded the motion. Senator Hawks nominated Senator Mockler and Senator Cooper seconded the motion.
Mr. Noble clarified that he is Director Schmidt’s designee and the agreement allows four delegates. Mark Quiner, Assistant Director, LSO clarified that current statute specifies three delegates and two positions were clearly authorized under the Legislature’s budget. The Committee discussed whether state law or the agreement is controlling and whether the Committee should table all nominations until it is clear as to whether three or four delegates can be sent from Wyoming. Senator Hawks withdrew his nomination as did Representative Walsh.
Chairman Peck asked whether members of the SSTA committees needed to be delegates and how to advance nominees for the various boards. Mr. Noble indicated that states simply indicate what committees they would entertain nominations. Mr. Noble stated that the Nominating Committee merely screens nominations for other committees. Senator Mockler moved that the Revenue Committee allow the current three Wyoming SSTA delegates determine how to proceed with nominations. Representative Gilmore seconded the motion, and the motion carried.
Mr. Noble explained that the Department of Revenue is proceeding to accept electronic file downloads and the excise tax system was initially programmed to solve issues. Further, he suggested that there is probably not a reasonable expectation of federal legislation related to this topic this year. He stated that a centralized registry has not been exhaustively tested to determine if vendors can return an accurate tax return.
Mr. Noble concluded this discussion by indicating that he would be presenting proposed legislation needed to address the issues described earlier at the next meeting of the Joint Revenue Committee.
Bruce Hinchey, Petroleum Association of Wyoming, addressed the Committee regarding the sales tax exemption when drilling a well through the point a casing is set. He explained that in the event re-drilling is conducted, the activities could be taxable.
Mr. Noble, Excise Tax Administrator, indicated that the current statutory provision does create a substantial amount of confusion. Mr. Noble believed that there needed to be a bright line test for the purpose of encouraging drilling and taxing everything afterwards, including production. Mr. Noble stated that he was unsure whether re-drilling a well deeper was originally contemplated. Mr. Noble indicated that the Department of Revenue adopted the definition of "recompletion" from the Oil and Gas Commission.
Senator Hawks asked if defining that re-entry and deepening is not considered recompletion, or simply putting an exception in the statute could resolve this issue. Mr. Noble agreed but indicated the term “deepening” should be inserted.
Representative Walsh moved that LSO staff draft a bill to address the issue, working with industry to address it. Senator Cooper seconded. Senator Hawks asked whether the issue was within the scope of approved topics for the Joint Revenue Interim Committee. Mr. Quiner read interim topic #4 assigned to the Committee for this interim. The motion passed with Senator Hawks opposed. Senator Hawks clarified his "no" vote was against a Committee sponsored bill, not against the subject of the bill.
First, Mr. Noble raised an issue of “time and materials” contracts, whereby retailers sell tangible personal property and also provide installation. Mr. Noble suggested that there are significant issues for the vendors in terms of audit findings, and the Department would like to address these issues at some point in the future.
Second, Mr. Noble stated that the term “farm implement” must be better defined or better clarified. Mr. Noble described instances of a D-9 cat or a golf cart with a bed being claimed as farm implements. He added that the issue requires better definitions to insure proper administration.
Senator Mockler moved to direct the Department to present legislation to remedy both of the above issues. Representative Walsh seconded the motion. The motion passed with Representative Anderson voting no.
Senator Peck inquired as to whether individual vendors with minimal sales are required to report monthly. Mr. Noble indicated that charitable and religious organizations with occasional sales are currently not required to collect the tax. He indicated that noncommercial or de minimus sales are not exempted. However, Mr. Noble indicated that the issue is complicated by wholesalers and other issues. Representative Pedersen informed the Committee that he had already initiated a bill draft on this issue.
George Parks, Wyoming Association of Municipalities (WAM), offered the Committee four pieces of advisory information:
1. WAM is working on legislation to bring forward tax increment financing.
2. WAM is quite concerned about proposals to eliminate the sales tax on food and stressed the need for a replacement stream in a similar amount to municipalities.
3. WAM has approached the Department of Revenue regarding DOR's computer system, and WAM supports reviewing the computer system to insure it is not an obstacle to policy proposals.
4. While WAM is interested in a long-term revenue source, it appears that the policy environment has transitioned to an appropriations process with enhanced grants and different distribution mechanisms rather than a revenue distribution process. WAM would like to a have a conversation as to whether the distribution systems are designed to work as well as possible for the 98 municipalities (and the 23 counties).
Laurie Kadrich, City of Cody, addressed the Committee regarding funds available through grant programs and the strength of the sales tax collections as a predictable stream of revenue.
Don Richards, Senior Research Analyst, and Dean Temte, Legislative Analyst, explained the fiscal impacts of excluding sales tax on food and the likely adjustments needed to improve the estimate for any potential proposals in the 2006 session.
Senator Mockler, moved that LSO inform legislators requesting research on the topic of exempting sales tax on food that the Joint Revenue Committee is interested in all requests related to food tax and that the results of any research be made public to reduce duplication. Representative Gilmore seconded the motion. The Committee discussed whether this motion removes or reduces confidentiality between LSO and legislators. The motion passed with Senators Cooper, Hawks, and Representative Walsh voting no. (Appendix 11.)
The Committee adjourned at 4:25 p.m., concluding its first day of business.
Cochairman Anderson initiated the second day of business at 8:30 a.m.
Mr. Anderson addressed the Committee, providing it with a handout on private equity funding. (Appendix 11) Mr. Anderson initiated his presentation with a question as to what the state's objectives are: economic development, economic returns, or establishing an investment community. Mr. Anderson explained that the state was currently not invested in venture capital but does invest permanent funds in private equities. Mr. Anderson discussed buy-out investing and venture capital investing, comparing and contrasting the two models. Next, Mr. Anderson discussed economic development and economic returns as two different potential objectives of a manager. Mr. Anderson summarized his presentation with a series of assumptions related to private equity investment. In conclusion, Mr. Anderson outlined a number of recommendations for the state, including goals for outside investment, consistent with the state's objectives.
Treasurer Lummis addressed the Committee via conference call. Ms. Lummis indicated that a goal of economic returns is the best starting point for a venture capital fund in Wyoming. In turn, this would generate an investment community in private equity in Wyoming, according to Ms. Lummis. Treasurer Lummis suggested that the Legislature commit General Funds to a sub account within the Permanent Mineral Trust Fund. The rationale for this mechanism is based in part upon a January 10th opinion of the Attorney General. (Appendix 12.) Ms. Lummis stated that economic development should not be a primary purpose of the fund, rather economic return should be.
In terms of expected returns, Mr. Anderson suggested that his company's experience has had returns around 30 percent. With respect to the Cheyenne Capital Fund, a private equity fund that invests Wyoming permanent funds, Treasurer Lummis stated that she expects roughly a 14 percent net return.
Representative Pedersen asked if adding private equities might actually reduce the total risk of the state's portfolio, given the differences in correlation with other investments. Treasurer Lummis responded that these investments are often negatively correlated with other state equity investments. Ms. Lummis indicated that five percent of the PMTF is invested in private equity funds through the Cheyenne Capital Fund, including buyouts of profitable companies. One of the benefits of a sub fund within the PMTF would be the development of an investment community in Wyoming, made up of Wyoming residents. Such professionals would include patent attorneys, accountings, and managers.
Senator Mockler suggested that all of this activity could currently be completed with current funds deposited into the PMTF and asked whether Treasurer Lummis had approached the State Loan and Investment Board. Treasurer Lummis indicated that she has not brought this concept to the State Loan and Investment Fund and that the full five percent dedicated to private equity has already been placed with the Cheyenne Capital Fund.
Senator Peck asked what Mr. Anderson’s experience had been with replacement of the managers in the bought out companies in the event they leave with the change of ownership. Mr. Anderson suggested that approximately half of his company buyouts required management replacement, and he has experienced a very good record.
Representative Pedersen moved that the Committee incorporate the structure allowed by the Attorney General to pursue this option. Representative Walsh seconded the motion.
Senator Hawks expressed a concern with the philosophy or the investment of public funds for this purpose. Specifically, Mr. Hawks indicated that this mechanism appears to move toward, rather than away from, legislatively designated investments. Representative Pedersen stated he supported his motion based on increased diversity for state investments as well as the benefits of developing investment community expertise.
Cochairman Anderson clarified that the motion would result in draft legislation allowing this type of investment. Senator Mockler asked if the structure would be similar to Cheyenne Capital and whether the state would own these businesses, contrary to the Constitution. Ms. Lummis responded that the technical arrangement would be a limited partnership, which is allowed. Senator Hawks asked if Tucker Fagan had expressed a position on this. Treasurer Lummis responded that she did not know and noted the fund would not have an economic development objective.
The motion passed with Senators Hawks and Mockler and Representative Gilmore voting no. (Vote form attached as Appendix 13.)
Mr. Quiner clarified that the motion included a suggestion that Treasurer Lummis, Representative Pedersen, and Mr. Anderson provide the necessary background to LSO for the development of the draft.
Mr. Patterson addressed the Committee on behalf of the Wyoming Capital Fund. (Appendix 14) Mr. Patterson also provided information on a $16 million rural development fund in Minnesota. (Appendix 15) Mr. Patterson stated that Wyoming needs additional business financing activities. Mr. Patterson presented three alternatives for Wyoming's consideration, based upon his experience including: (1) tax credits for individuals and corporations who invest equity capital, (2) contingent tax credits, and (3) state financial capital offered to private entities. The last option might be the best option through a $10 million fund with 50/50 matching of private funds. Mr. Patterson recommended that the Wyoming Legislature consider fostering a cadre of venture capital funds that would bring a wealth of investment-making talent and outside financial capital to Wyoming. Further, Mr. Patterson suggested options for various equity pools.
Cochairman Anderson asked if the Joint Minerals Committee would be interested in this option.
Senator Hawks indicated that he was only interested if the Director of the Business Council and the State Treasurer supported it and had identified that the Business Council and the State Treasurer did not support the idea. Senator Hawks indicated that the Board of the Business Council is opposed to this type of investment. (See Appendix 16 for e-mail discussions from the Business Council on this issue.)
Representative Walsh proposed the Committee take no further action on this topic.
John Cox, Director, Wyoming Transportation Department, and Earl DeGroot, Western Management Services, addressed the Committee, providing a survey of Wyoming residents and their views on multi-lane highways, as requested by the Transportation Commission. (Appendix 17) Mr. DeGroot summarized a phone survey of 1,500 adults with a Wyoming driver's license, regarding the need for multilane highways. He outlined the results of the eight question survey as provided for in Appendix 17.
Del McOmie, DOT, provided an update of the $11 million appropriation in the previous session for multi-lane highways, and a packet on multi-lane highways. (Appendix 18) Mr. McOmie provided background information on proposed routes for widening and crash statistics as well as the criteria and considerations for what areas should qualify for construction. Mr. McOmie indicated that DOT estimates that to construct 490 miles of multi-lane roadway would cost $1.471 billion, or about $3 million per mile. He indicated that the timeline would be approximately 20 year period at a cost of $75 million per year.
The Committee discussed the maximum number of dollars per year that could be addressed within the Department and if the timetable could be decreased to address these issues. Mr. McOmie indicated that DOT could use consultant to whatever level is necessary; however, the state construction capacity is probably $60 to $75 million per year, with anything in excess likely going to out-of-state contractors.
The Committee discussed availability of funds to construct three-lanes across the state on Interstate 80 or for multi-lane expansions for roads that are part of the national highway system. With respect to Interstate 80, Mr. McOmie indicated that the cost would be $1.7 billion, which is not feasible within the current budget. However, as a priority route, Mr. McOmie indicated that special federal funds might become available. With respect to the national highway system, Mr. McOmie indicated that any additional federal funding would require a special earmark.
The Committee asked how the per mile construction costs increased from $1 million per mile to $3 million per mile, and if the increase is related to increased school construction. Mr. McOmie suggested the correlation is to the cost construction products, most likely, e.g., fuel, cement, and steel prices. Therefore, in terms of pricing, Mr. McOmie indicated there may be an advantage for constructing sooner rather than later. In response to additional inquiries, Mr. McOmie indicated at one penny of fuel taxes raised $6.3 million (with exemptions) and $10 million without exemptions.
Senator Hawks moved that LSO staff prepare draft legislation that would increase the fuel tax by five cents without exemptions and include $50 million annual appropriation from the General Fund for the purposes of multilane highways. The motion was seconded.
Senator Cooper suggested that increasing the gas tax penalizes workers, especially with high gasoline prices and the state taking in high surplus funds. Mr. McOmie indicated that 50 percent of the revenue from non-exempt fuel tax is paid by residents and 50 percent by non-residents, responding to an inquiry by Senator Hawks. After further Committee discussion, the motion passed.
Brent Taylor, Wyoming Truckers Association indicated that in the past his association has supported an increase in the fuel tax. However, in light of high gasoline prices, they would be reserving their support until further information is gathered.
Senator Mockler requested an analysis from LSO staff regarding the relationship in the region to gas tax and the percentage of regional cost of fuel.
The Committee tentatively scheduled its next meeting in Casper on August 30 and 31st.
There being no further business, Co-Chairman Anderson adjourned the meeting at noon.
Respectfully submitted,
Senator Bob Peck, Cochairman Representative Rodney "Pete" Anderson, Cochairman