Coal, State Dispute Taxes on Exports

Office of Tax Appeals Ordering Refunds in Newer Cases

By JULIET A. TERRY
jterry@statejournal.com

The coal industry, like many taxpayers, would like a tax refund from the state of West Virginia.

But the refund coal companies seek isn't on income taxes. They want a refund on the severance taxes paid on coal exported to other countries, and they want the West Virginia Supreme Court of Appeals to give it to them.

Coal vs. State

U.S. Steel Mining Co., Consolidated Coal Co., Arch Coal Co. and several other coal companies have been seeking a refund on severance taxes paid on exported coal for four years, according to Herschel Rose III, the Charleston lawyer representing the companies.

"The Constitution does not permit states to tax goods that are exported, and the structure of West Virginia's severance tax is that it accrues even when coal is exported," Rose said.

In 2001, the companies asked for a refund on taxes paid on exports for the four previous years, going back to 1997. Four years is the maximum for a refund request, Rose said. About one-third of all U.S. coal that is exported is mined in West Virginia, which produced nearly 15 million tons last year for export.

The state Tax Commission refused the refund, a decision that was upheld by the Office of Hearings and Appeals in March 2003. The Kanawha County Circuit Court affirmed the administrative decision in May 2004, and now the case is headed to West Virginia's highest court. Arguments are scheduled for June 15.

According to Carte Goodwin, general counsel for Gov. Joe Manchin, the case carries potential liability of up to $500 million for the state.

"In addition to the hit the state would take, this case could hit on the local level," Goodwin said, referring to disbursements of severance tax revenues.

"Last year, 18 counties received over $200,000, and a handful received more than $1 million. If the Supreme Court rules against the Tax Commission, the counties will take a substantial hit."

Rose said the economics of the case cannot be ignored, and state government has not yet tried to resolve the case outside the courtroom. When the first refund request was filed, he met with tax officials in the administration of Gov. Bob Wise.

"I met with them just for the purpose that this was going to be a big-ticket legal issue, and I suggested that we could work it out," Rose said. "I've received no overture since then from the state to try and come up with a compromise."

Indiscriminate Taxation

Rose cited the Import-Export Clause of the U.S. Constitution, which says no state can "lay imposts or duties on imports or exports."

Stephen Stockton, senior assistant attorney general who is representing the Tax Commission, said severance taxes are not "imposts or duties" but a tax, and that places them outside the Import-Export Clause.

Companies pay 5 percent on the gross value of their product, which means the market value determined after the coal has been processed or "cleaned." In practical terms, the severance tax is assessed after the coal has been weighed, which in the case of exported coal often does not occur until it reaches the ship, Stockton said.

Rose said the state Supreme Court has held "the character of a tax is determined not by its label but by analyzing its operation and effect," he said, quoting a 1996 decision.

In a 1995 case, the Supreme Court said it "is a well-nigh universal principle that courts will determine and classify taxation on the basis of realities, rather than what the tax is called in the taxing statute or ordinance."

In short, state code may state that severance taxes go to the privilege of mining coal, but Rose said the practical application of the tax is that coal is taxed when it is sold.

"Coal is valued not when it is stockpiled, but after it has been cleaned and loaded. Only at that point is the tax levied," he said.

Stockton disagreed.

"Even though the tax is imposed on the severance of coal, you don't know the value of the coal until it is sold," he said. "There are any number of points when you could weigh the coal but the system we have right now is to take the numbers generated for sale."

Severance taxes are indiscriminate, he continued. They are levied against all coal mined in West Virginia, regardless of whether it is sold stateside or exported.

"There is a disjunction there," Stockton admitted. "A tax is imposed at one point but not measured until a later point. But it's not being imposed at the later point, just measured."

Coal sold to other counties enters the export stream as soon as it is loaded into rail cars and starts its journey to the coast, Rose said, highlighting another point of contention between the state and coal companies.

A 1946 U.S. Supreme Court case called Richland Oil Corp. vs. State Board of Equalization states goods that are within the stream of export are immune from taxation according to the federal Import-Export Clause.

Stockton said Rose's arguments don't hold up because state code includes a provision for taxing coal that has not been sold. He also said the Richland case is superceded by a 1976 federal decision in Michelin Tire Corp. vs. Wages. The Michelin case sets out a three-part test to determine whether the Import-Export Clause should apply, and, according to that case, West Virginia's tax system for coal is just fine, Stockton said.

Office of Tax Appeals

The Tax Commission's Office of Hearings and Appeals was replaced April 1, 2003, with the Office of Tax Appeals, which is independent of the commission.

Since the Office of Tax Appeals took over, it has found in favor of coal companies in three subsequent severance tax refund requests on exports.

"It's not like we're crazy," Rose said. "You now have what is the only specialized tax court in the state, and it has found consistently for the taxpayers in these cases."

In a September 2003 case, the Office of Tax Appeals said a coal company should get the refund it requested for severance taxes paid on exports in 1999. The appeals court found "the commencement of the export occurs no later than the loading of the coal into the rail car at the mines in West Virginia." It also said the taxes in question constitute "in operation and effect, direct imposts on sales of coal in foreign-export transit, which imposts are per se prohibited by the federal Import-Export Clause as analyzed by Richland oil."