CHARLESTON – For the second year in a row, issues with property tax valuations for natural gas and oil-producing personal property continue to plague taxpayers.
One county assessor and several property owners vented their frustrations Wednesday at a public hearing before the West Virginia House of Delegates regarding a separate bill to eliminate a sunset provision that would require lawmakers to go back to the drawing board for a new valuation formula.
House Bill 4850 would eliminate a sunset provision that states that the assessment formula for valuing the worth of first-year wells producing oil, natural gas, and natural gas liquids would expire after July 1, 2025, unless re-enacted by the Legislature. A similar bill, Senate Bill 395, was recommended for passage by the Senate Finance Committee Tuesday night and will be up for passage next week.
A public hearing was requested with the House Finance Committee for HB 4850, which was passed by the full House of Delegates Friday. Committee members heard Wednesday from business and industry leaders, royalty owners, and Wetzel County Assessor Scott Lemley.
In his remarks, Lemley once again raised concerns about the sheer number of notices sent directly to taxpayers by the state Tax Division alerting them to changes in their natural gas property valuations. 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.
According to Lemley, Wetzel County taxpayers received 7,000 notices, and 30,000 notices were sent out mostly to taxpayers with natural gas-producing properties. However, while these notices informed the taxpayers that the appraised values on their property increased, it did not say what the dollar amount appraisal was. Taxpayers have until Tuesday, Feb. 20, to appeal their appraised values to the Tax Division.
“They received a notice of increase in their appraised value without an actual value listed on the notice of increase,” Lemley said. “They were given a short time frame for appeal, but they don’t even know what they are appealing.”
“The Tax Division sent notices to affected property owners indicating that their appraisal had increased by at least 10% or $1,000 pursuant to state law,” said Alicia Elam Clark, an executive assistant to State Tax Commissioner Matthew Irby, in a statement Thursday. “Those notices contained contact information with the WV State Tax Division to get the actual appraised value.”
Lemley also said that other natural gas producers have not even had their properties appraised and valued by the Tax Division.
“We are six days away from the appeal deadline and thousands of Wetzel County taxpayers do not know what their values are,” Lemley said. “They were supposed to receive notice in December, but at this point they will not receive notice of their values until after the deadline to appeal. This means that thousands of Wetzel County taxpayers, and tens and thousands of West Virginia taxpayers are not receiving due process required by our Constitution and statutory law.”
The Tax Division has been plagued with numerous issues since the West Virginia Legislature passed two bills in 2021 and 2022 creating a new natural gas property tax formula after the state Supreme Court of Appeals ruled in 2019 against the previous way the Tax Division (formerly the State Tax Department) was valuing natural gas-producing property.
House Bill 4336, the most recent bill passed in 2022, 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.
While the Tax Division once could lump in multiple wells together to determine an assessed value, tax officials must appraise individual wells. Constant staffing issues combined with the requirement to appraise more than 1.3 million oil and natural gas properties has created delays and backlogs.
One of the biggest changes affecting assessments is 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. The new formula looks back over the previous tax year, when natural gas prices were higher, resulting in increased production and higher payments to royalty owners in the previous year versus the current year when prices and production are down.
At the end of 2022 and the beginning of 2023, the Tax Division and county assessors – who have no control over the assessed values the state provides – were flooded with phone calls due to royalty owners seeing their appraisals go up by hundreds of percentage points.
The Tax Division has been accused of being slow to communicate with county assessors and commissioners and providing incorrect assessment numbers to property owners. Over the summer, the West Virginia Office of Tax Appeals was flooded with hundreds of tax appeals, most of which involved owners of natural gas-producing property.
It was revealed last month that eight natural gas-producing counties in West Virginia are receiving a combined $30 million less in property tax revenue after an alleged “clerical error” caused the Tax Division to submit property tax valuations for first-year producing wells that were undervalued.
The Tax Division was made aware of the mistake in March 2023, with the Legislature’s Division of Regulatory and Fiscal Affairs also finding the mistake during a review of the Tax Division’s implementation of the formula. A request for comment from the Division of Regulatory and Fiscal Affairs was not returned, and a Freedom of Information Act request for emails between the Tax Division and the Legislative Auditor’s Office was rejected.
The Tax Division didn’t inform counties of the valuation mistake until September 2023, and it’s only just now beginning to meet with county commissions in the eight affected counties with the one-year deadline one month away for being able to correct mistakes in the property tax books in order for county assessors to send corrected assessments to affected taxpayers.
“To ensure transparency and communication, all affected taxpayers are being sent a notice stating their original assessed value and the corrected value,” according to a statement on a webpage set up by the Tax Division to answer questions about the “clerical error.” “The West Virginia Tax Division is committed to upholding accuracy and fairness in the assessment process, and is constantly reviewing processes and procedures to ensure the correct values are assessed and applied across the state in an equal and uniform manner.”
According to the webpage, the Tax Division scheduled hearings with all eight affected counties. Hearings for Brooke and Tyler counties took place Tuesday and hearings for Harrison and Monongalia counties took place Wednesday.
“To correct this clerical error … the West Virginia Tax Division is filing Applications for Relief from Erroneous Assessment in the affected counties,” according to the webpage. “Pending approval by the respective County Commissions, these counties would be authorized to collect on the corrected 2023 assessment.”
According to the webpage, the application for Monongalia County was accepted, while the applications for Brooke and Harrison counties are pending. The application for Tyler County was rejected. Doddridge and Marshall hearings are scheduled for Tuesday, Feb. 20. Pleasants County’s hearing is Wednesday, Feb. 21, and Wetzel County’s hearing is Tuesday, Feb. 27.
Tyler County’s sum total tax impact from the undervalue mistake by the Tax Division was $15.8 million, followed by Marshall County with $5.3 million, Brooke County with $4.4 million, Monongalia and Wetzel Counties with $1.6 million each, Doddridge County’s with more than $1 million, Harrison County with $275,879, and Pleasants County with $110,277.
Multiple pending lawsuits are challenging how the valuations were done, including lawsuits in Ohio and Brooke counties led by Scott Sonda and Mark Sonda of Bethany. Speaking Wednesday during the public hearing, Scott Sonda and fellow Brooke County property owner John Leonetti argued that HB 4850 needed to be amended to require royalty interests be appraised at fair market value or not to exceed the sales value of similar royalty interests that are sold.
“When they are assessing a tax on a value that’s far in excess of fair market value, that’s a problem,” Sonda said. “In these hearings, there were representatives from the Tax Division there, and they argued that fair market value was whatever the yield capitalization model produced, not what we could sell our minerals for, which is in direct opposition to what the definition of fair market value is.”
Leonetti also called for more transparency for what the owners of oil and natural gas-producing wells were submitted to state and local tax officials that are then being turned around and used to determine the appraised value of the royalty interests.
“We just have no means to compare what they’re taxing us versus how they basically create it in the first place,” Leonetti said. “So, those would probably be my two things I’d like to see in this bill: the provision for fair market value and for the mineral owners to have the ability to see exactly what the formula is based on. Because as it is, there’s no transparency.”
Representatives of the business community and the natural gas industry acknowledged the issues the Tax Division has had with implementing the valuation formula. But they do want to see the sunset provision removed in order to provide certainty for the industry and predictability regarding taxation.
“Our members in the natural gas industry, as well as every other industry, they need to make sure that they have predictability so they can plan their tax liabilities for the year after year going forward,” said Brian Dayton, vice president of policy and advocacy for the West Virginia Chamber of Commerce. “Removing the sunset provision that is currently in place gives a more certain environment to those members as they look to expand development in the Mountain State.”
“While there’s been a great deal of press coverage over the error the Tax Division made with regard to first-year well production, this was in no way due to the passage of legislation in ’22,” said Charlie Burd, executive director of the Gas and Oil Association of West Virginia. “Even with the first-year well problem, property tax collections provided by the industry have gone way up.”
Whether a sunset provision for the natural gas valuation formula remains in place or not, it is becoming increasingly likely that the state Supreme Court will once again have to step in and require the Legislature to start from scratch on a new formula. Speaking after the public hearing, Burd said he believes what the Legislature did was simple and fair, but he could not predict what might happen in the future.
“It seems like the West Virginia Supreme Court has made its ruling: actual revenues versus actual expenses for the valuation,” Burd said. “What the Legislature may do in the future would be anybody’s guess as to how they might want to proceed if they believe there’s inherent unfairness in what they’ve passed.”
