Current through Register Vol. XLI, No. 38, September 20, 2024
4.1. Treatment Processes Constituting Mining.
-- The following treatment processes listed in Subsections 4.1.1 through 4.1.4
(and the treatment processes necessary or incidental thereto) when applied by
the mine owner or operator to natural resources mined in this State shall be
considered as mining and part of the privilege taxed:
4.1.1. Coal. -- In the case of coal, the term
"production of coal" shall include all activities and values arising from the
severance or extraction of coal and/or the ordinary processing activities
including crushing, working, cleaning, drying, sorting, sizing, dust allaying,
loading for shipment and freeze treatment. When any of the activities are
performed, the value added to the coal shall be considered gross value
attributable to the owner of the coal taxable under the severance tax.
4.1.1.1. Example -- Company A, a coal
producer, contracts with Company B to have B extract the coal and deliver it to
Company C who crushes, cleans and loads the coal for shipment. In this
instance, Company A would report the total gross value, without any deductions
for payments made to B and C, under the severance tax.
4.1.1.2. Example -- Company A, a coal
producer extracts the coal and sells the coal to Company B for $20.00 a ton who
crushes, cleans and sells coal to Company C for $30.00 a ton. C, a coal broker,
blends the coal with other purchased coal, loads and freeze treats the coal.
The coal is ultimately sold for $35.00 a ton. Company A should report $20.00 a
ton under the severance tax. Company B is required to report $10.00 a ton under
the severance tax and C would be required to report $5.00 a ton for severance
tax purposes.
4.1.1.3. Production
of coal will also include the severance, extraction and processing of coal
fines, gob piles, sludge ponds or other coal wastes or rejects which, when
processed are sold as coal, as if such activities constituted the initial
production activity.
4.1.2. Minerals Customarily Sold in Crude
Form. -- In the case of other minerals which are customarily sold in crude
form, sorting, concentrating, sintering and essentially equivalent processes to
bring them to shipping grade and form, and loading for shipment shall be part
of the privilege taxed.
4.1.3.
Minerals Not Customarily Sold in Crude Form. -- In the case of other minerals
which are not customarily sold in the form of the crude mineral products,
crushing, grinding and beneficiation by concentration (gravity, flotation,
amalgamation or electrostatic or magnetic), cyanidation, leaching,
crystallization, precipitation (but not including electrolytic deposition,
roasting, thermal or electric smelting or refining), or substantially
equivalent processes or combinations of processes used in the separation or
extraction of the product or products from the ore or the mineral or minerals
from other material from the mine or other natural deposit shall be part of the
privilege taxed.
4.1.4. Oil Shale.
-- In the case of oil shale, extraction from the ground, crushing, loading into
the retort and retorting, but not hydrogenation, refining or any other process
subsequent to retorting shall be part of the privilege taxed.
4.2. Treatment Processes Not Part
of Mining. -- Except as provided in Subsection 4.1 the following treatment
processes listed in Subsections 4.2.1 through 4.2.11 shall not be considered as
"mining" and, thus, not part of the privilege taxed under [W. Va. Code
'11-13A]:
4.2.1. Electrolytic
deposition
4.2.2.
Roasting
4.2.3. Calcining
4.2.4. Thermal or electric smelting
4.2.5. Refining
4.2.6. Polishing
4.2.7. Fine Pulverization
4.2.8. Blending with other
materials
4.2.9. Treatment
effecting a chemical change
4.2.10.
Thermal action
4.2.11. Molding or
shaping
4.3. Treatment
Processes Considered Part of Production of Oil, Natural Gas and Natural Gas
Liquids. -- The privileges of severing and producing oil and natural gas shall
not include any conversion or refining process. Oil and natural gas will be
valued at the well-mouth in conformance with Subsection 4.8.
4.4. Timber Production Privilege. -- The
measure of tax under this classification is the gross value of the timber at
the point where the production privilege ends. This is an amount equal to the
fair market value of the timber production at that point where the tree is
severed and delimbed. When a sale occurs at that point, taxable value is gross
proceeds of sale. In the absence of such a sale, taxable value is that amount
which corresponds as nearly as possible to the gross proceeds from the sale of
similar products of like quality or character determined under the following
uniform and equitable rules.
4.4.1. In the
absence of sales at the point where the timber production privilege ends, gross
value must be determined in light of the most reliable and accurate information
available. Such factors as the following are to be given due consideration.
4.4.1.1. Character and quality of the timber
as determined by species, age, size, condition, etc.;
4.4.1.2. The quantity of timber per acre, the
total quantity under consideration, and the location of the timber in question
with reference to other timber;
4.4.1.3. Accessibility of the timber
(location with reference to distance from a common carrier, the topography and
other features of the ground upon which the timber stands and over which it
must be transported in the process of exploitation), the probable cost of
exploitation and the climate and state of industrial development of the
locality; and
4.4.1.4. The freight
rates charged by common carriers to important markets.
4.4.1.5. The timber in each particular case
will be valued on its own merits. The Tax Commissioner will give weight and
consideration to any and all facts and evidence having a bearing on the market
value such as cost, actual sales and transfers of similar timber products, the
margin between cost of production and the price realized for timber products,
and royalties and rentals paid to the owner of the standing timber. The
taxpayer bears the burden of keeping such records as may be necessary to prove
the fair market value of his timber at the point where production ends. In the
absence of such substantiation, fair market value shall be determined under
Subsection 5.4.2.
4.4.2.
At the election of the taxpayer, or in the absence of books and records to
substantiate fair market value determined under Subsection 4.4.1, above, the
following rule shall be used to determine the gross value of timber at the
point where production ends.
4.4.2.1. A
person who produces timber and sells his logs, and by-products of timber
production and bucking operations, on the ground, either where the trees were
felled in the forest or at a central collection point, shall report
seventy-five percent (75%) of the gross proceeds of sale under the severance
tax.
4.4.2.2. A person who produces
timber, and sells and delivers his timber products, in the same condition as
when those products leave the forest, to a saw mill, other manufacturer or
consumer, shall report fifty percent (50%) of his gross proceeds of sale under
the severance tax.
4.4.2.3. A
person who produces timber and further saws, mills or otherwise manufactures
the same into lumber, cross ties, timbers, veneer and other products for sale,
profit of commercial use shall report twenty-five percent (25%) of his gross
proceeds of sale under the severance tax. Where no sale is made, the fair
market value of lumber, cross ties, timbers, veneer or other products must
nevertheless be determined as provided in Section 2a of these regulations and
twenty-five percent (25%) of that amount shall be reported under the severance
tax.
4.5.
Limestone and Sandstone Quarried or Mined Production Privilege. -- The
privilege of severing and producing limestone and sandstone by quarrying or
mining shall end once the limestone or sandstone is severed from the earth. In
the case of limestone or sandstone mined, the measure shall be the value at the
point the product is reduced to possession at the portal of an underground
mine. In the case of limestone or sandstone quarried, the measure shall be the
value at the point the product is severed from the wall of the open quarry .
4.5.1. All activities from the point the
product is first reduced to possession up to the point where it is readied and
placed into its mode of transportation to the processing plant, or the first
(primary) crusher, are not to be included in the value of the privilege taxed.
Related cost or expenses are not to be included in the production
value.
4.6.
Transportation Allowance. -- A person who produces natural resource products or
applies treatment processes deemed to be mining pursuant to W. Va. Code
'11-13A-4
(processor) and does not make sale of said natural resource products, but uses
or consumes the natural resource products in its business, shall report the
value of such resources on the severance tax return. In determining the value
of the natural resource products, the taxpayer must adhere to the requirements
of Section 2a of these regulations and apply such requirements to make
appropriate determinations of value at the point where production or processing
ends. When the natural resource product is transported to a distant place for
use, consumption or further processing, the cost of transporting the natural
resource product to the place of use, consumption or further processing shall
not be included in the value of product taxed. However, no adjustment to value
will be permitted for the cost of transporting such natural resource from the
point of severance to the processing facilities of the producer in the case of
natural resources, the processing of which, is included in the privilege
subject to the tax imposed by W. Va. Code '11-13A-1
et seq.
4.6.1. Where the relationship between
the producer of the natural resource products and the purchaser thereof is such
that the gross proceeds derived from the sale are not indicative of the true
value of the natural resources, the taxpayer shall determine value by
application of Section 2a of these regulations.
4.7. Treatment of Freight Charges Incurred by
Producers. -- In certain instances, producers and processors of natural
resource products are permitted to deduct freight charges from the gross
proceeds of sale or value to arrive at taxable value under the severance tax.
4.7.1. In order to determine the value within
the State and at the place where production or processing ends, there may be
deducted from gross proceeds of sales certain outgoing freight charges actually
incurred by the producer or processor, but no deduction will be allowed for
expenses incurred by him through the use of his own equipment in transporting
items produced except as provided in Sections 4.7.4, 4.7.6 and 4.7.7 of these
regulations.
4.7.2. In all
instances where products are used or consumed by the producer at a point
distant from the place of production, outgoing freight charges paid by the
producer or costs incurred by it will not be allowed as a deduction, unless due
consideration has been given to such charges or costs in the method by which
the production values were determined. Accordingly, when a natural resource
product is consumed (except in a further processing or preparing for sale
activity treated as production by an integrated producer/processor),
transportation costs incurred by the producer to deliver the product to the
location where the products are used or consumed shall not be included in the
value of the natural resource product taxed.
4.7.3. Generally, in order to be deductible
from gross proceeds of sales, freight charges must be incurred by or paid by
the producer or processor for the delivery of natural resources to a bona fide
purchaser. To illustrate: Coal, at the place where production or processing
ends, has a value or in the case of a processor a value added of ten dollars
($10.00) per ton. If a purchaser buys the coal for said price, the producer or
processor will report under the coal production classification the gross value
or value added, $10.00. However, if the purchaser buys the same coal delivered
at eleven dollars ($11.00) per ton, and the producer or processor pays a common
carrier to make such delivery, the producer or processor may deduct such
freight charges ($1.00) from the gross proceeds of sale.
4.7.4. If the producer or processor of
natural resource products sells its products to a purchaser and agrees to
deliver such products in its own equipment the producer or processor may deduct
from the gross proceeds of sale in arriving at taxable value for severance tax
purposes, the transportation costs to the purchaser, if the costs are
separately stated on the invoice to the purchaser or if adequate cost records
are maintained to document the transportation deduction.
4.7.5. If a producer transports products to
another facility for further processing prior to sale by such producer, no
deduction is allowed for such transportation costs incurred by the
producer.
4.7.6. If a producer
sells natural resource products to a processor freight on board at the
processor's facility and transportation charges are incurred by the producer or
have been absorbed by the producer, such charges are deductible from the gross
proceeds of the sale to arrive at the taxable value. If the producer uses its
own equipment in transporting the natural resource products to the processor's
facility, it may deduct such transportation costs from the gross proceeds of
sale in arriving at the taxable value for severance tax purposes, provided a
fee is separately charged on the invoice or adequate cost records are
maintained to document the transportation deduction.
4.7.7. If a producer sells natural resources
products to a processor to be delivered at the producer's facility and
transportation charges are incurred by the processor to its own facility, the
processor may deduct such transportation charges from its gross proceeds of
sale in arriving at the taxable value for severance tax purposes. If the
processor purchases natural resource products from a producer and uses its own
equipment in transporting the natural resource products to its facility, it may
deduct such transportation costs from the gross proceeds of sales in arriving
at the taxable value for severance tax purposes, provided adequate cost records
are maintained to document the transportation deduction.
4.8. Transportation and Transmission
Allowance for Natural Gas Producers. -- The severance and production of natural
gas shall be valued at the well-mouth immediately preceding transportation and
transmission. In order to arrive at the well-mouth value of such severance and
production, transportation or transmission expenses incurred by producers of
natural gas before its sale shall be allowed as a deduction from the gross
proceeds of the sale of such gas. For these purposes, subject to the discretion
expressly reserved to the Tax Commissioner hereunder one of the following
alternative methods shall be selected by the taxpayer for obtaining the
well-mouth value of the severance and production of natural gas. No
transportation and transmission allowance is permitted for natural gas
purchased from the producer at the well-mouth.
4.8.1. From the gross proceeds of the sale of
the production of natural gas, there shall be allowed a deduction in the amount
of the costs of transportation or transmission of such gas through the system
of the producer from the well-mouth point of severance and production to the
point of sale. The deduction shall be limited to actual costs of transportation
or transmission incurred without reference to items unrelated to such
transportation or transmission such as general administration, overhead, or
return on investment. Such deduction must be supported by schedules and
statements of cost by the producer and will be subject to review and audit, and
possible assessment or refund as a result of such audit, by the Tax
Department.
4.8.2. As an
alternative to the method presented in Subsection 4.8.1 supra, producers who
are subject to regulation by the Federal Energy Regulatory Commission (FERC)
under the Natural Gas Act of 1978 may determine the well-mouth value of their
production which is subject to such regulation by utilizing the first sale
ceiling price as determined, adjusted and published by the FERC pursuant to
Section 2(21) of the said Natural Gas Policy Act. Producers subject to
regulation of the FERC shall report as the value of their gas production which
is subject to such regulation an amount equal to their Purchased Gas Adjustment
(PGA) as filed biannually with the FERC plus any reimbursement of personal
property taxes and business and occupation taxes or other severance taxes
received upon the sale of affected gas if such reimbursements are made by the
purchaser and included in the PGA costs. This method shall only apply to
production of natural gas defined as new gas by the Natural Gas Act of
1978.
4.8.3. As an alternative to
the method presented at Subsections 3.8.1 and 3.8.2 supra, the well-mouth value
of such severance and production may be determined by the average purchase
price of natural gas from the same pool or field, or, in the event no gas is
purchased from the same pool or field, by the average purchase price of natural
gas from the most proximate pool or field and of the same quality and
characteristics as that severed and produced; Provided, That in either case
such purchase price accurately represents the well-mouth value of the gas
severed and produced. This determination shall be supported by a statement of
the pool or field from which the gas severed and produced is obtained, and
shall be subject to review and audit, and possible assessment or refund as a
result of audit, by the Tax Department. The Tax Commissioner reserves the right
to disallow the application of this method for valuing the production of
natural gas at the well-mouth when it can be established that the "average
purchase price" does not accurately represent the current well-mouth value of
the gas severed and produced when compared to the ultimate selling price under
present market conditions.
In order to facilitate the establishment of a reasonable and
accurate current market value, producers utilizing this method will be required
to predicate their production value on current market prices negotiated by
independent arms-length transaction agreed to and entered into during the
subject taxable years.
4.8.4. As an alternative to the methods
presented at Subsections 4.8.4 through 4.8.3 supra, the well-mouth value of
such severance and production of natural gas not sold at the well-mouth may be
determined by a deduction of transportation and transmission costs in the
amount of 15% of the gross proceeds of the natural gas severed and produced.
This deduction shall be supported by a statement of the gross proceeds of sale
of the natural gas severed and produced, and a computation of the deduction
therefrom, and shall be subject to review and audit, and possible assessment or
refund as a result of audit, by the Tax Department. The Tax Commissioner also
reserves the right to disallow the application of this method of valuing the
production of natural gas at the well-mouth when it can be established that a
15% transportation deduction does not accurately represent the well-mouth value
of the gas severed, produced and sold.
