Friday, April 29, 2011

Report Flawed Representation without taxation: how natural gas producers escape taxes in PA

We came across the report Representation without Taxation: How Natural Gas Producers Escape Taxes in Pennsylvania the other day as no doubt it had been used by PA state representatives touting a new tax on Marcellus Shale drillers. We saw no indication on the site of any admission of errors!

Now, we learn in Group admits errors in energy tax report the report is flawed, with errors.

Of course, the error and biased (and potentially unsubstantiated) title of the report Representation without Taxation: How Natural Gas Producers Escape Taxes in Pennsylvania won't matter to the representatives claiming some tax or other is needed on Marcellus Shale drillers...

It is worth noting, a spokesman for the Marcellus Shale Coalition, according to the Tribune-Review article, said of the report:

PBPC used "blatantly wrong and faulty information" to drive its political agenda

Meanwhile, according to the Tribune-Review article, PBPC denies the charge.

We also wonder whether all the talk about imposing an extraction tax is just that, talk, since there will be years and years of litigation should legislation be passed, litigation that goes to the heart of the Constitutionality of the tax and how it could pass Constitutional review.

Net the Truth Online

The following is an informative article, Real Property Taxation of the Marcellus Shale and Other Mineral Interests in Pennsylvania Oil & Gas/Real Estate Alert by Raymond P. Pepe . April 17, 2009

Real Property Taxation of the Marcellus Shale and Other Mineral Interests in Pennsylvania Oil & Gas/Real Estate Alert by Raymond P. Pepe . April 17, 2009
This Alert reviews Pennsylvania’s current assessment laws pertaining to mineral interests and improvements made to land to extract and process minerals; summarizes pending legislative proposals to modify the state’s assessment laws to tax real property interests in gas reserves; and discusses critical issues that should be considered by businesses engaged in the extraction of natural gas and other mineral resources in Pennsylvania, property owners and local governments relating to the assessment of natural gas reserves and other mineral rights.

The Alert also considers whether it is permissible for real property tax purposes to assess mineral interests severed from fee-simple title to property, but to exempt from taxation equivalent mineral interests retained by the surface owners of properties in order to minimize the extent to which taxes will be imposed upon Pennsylvania residents...


Proposed Legislation
House Bill 10 of 2009, sponsored by Representative Bill DeWeese and 27 other members of the General Assembly, provides that rights held pursuant to a lease or other agreement to extract, remove or recover gas, oil or coal bed methane shall be subject to taxation as real estate and assessed and taxed separately from the surface property in the name of the holder of such rights. The legislation further provides that these mineral interests will be assessed utilizing the discounted income approach to value as supplemented by the sales comparison data.

To facilitate the assessment of mineral interests, House Bill 10 requires a lessee or operator to provide annually to the county assessor “such nonproprietary lease and lease income information as the assessor determines is reasonably needed to determine value.” Using this information, the legislation would allow counties to change the assessed value of gas, oil, and coal bed methane mineral rights whenever “information becomes available that would significantly affect the valuation” of the property, including the “commencement of production on or near the property,” or the “depletion of the hydrocarbon gas subject to the lease and related production.”


D. Avoiding Constitutional Litigation
The Uniformity Clause of the Pennsylvania Constitution requires all taxes to be uniform upon the same class of subjects within the territorial limits of the authority levying the tax. The Pennsylvania Constitution further specifies circumstances in which exemptions or special provisions for taxation of property are permissible, and provides that all laws exempting property from taxation other than those specifically enumerated by the Constitution “shall be void.” Various provisions of the U.S. Constitution further impose limitations upon state taxes, including the due process and equal protection requirements of the 14th Amendment and the Commerce Clause.

House Bill 10 would allow counties to change the value of oil, gas, and coal bed methane mineral interests whenever events significantly affect the valuation of the property. This procedure contrasts with existing Pennsylvania law that authorizes the reassessment of properties only pursuant to countywide reassessments or in the event of subdivisions, the construction of new improvements, or as necessary to correct errors and omissions in a county’s assessment records. As a result, significant questions will arise regarding whether, in the context of tax assessments statutorily required to be determined based upon a common base year, establishing different reassessment schedules for certain types of property violates uniformity and equal protection requirements.

Similarly, House Bill 10 deviates substantially from existing law by taxing mineral interests severed from fee-simple title by a lease or other agreement, but exempting the same mineral interests if retained by the landowner. It is difficult to identify a rational basis for exempting from taxation mineral interests held by fee-simple landowners, but imposing taxes on identical mineral interests severed from the remaining interests in the property, other than a patently discriminatory intent to impose taxes primarily upon businesses engaged in interstate commerce that focus their efforts upon mineral development and to confer benefits upon the owner occupants of properties located within Pennsylvania...

Representation without Taxation: How Natural Gas Producers Escape Taxes in Pennsylvania

State Budget and Tax Policy
April 25, 2011

Download Full Report

Natural gas drillers in Pennsylvania pay very little in state and local taxes, despite industry claims to the contrary. In tax year 2008, the oil and gas industry[1] paid $38.8 million in Pennsylvania state business taxes.[2]
Of the 783 companies to file corporate net income tax returns, only 15% owed any tax. A significantly larger number of drillers — including nine of the top 10 permit holders in the Marcellus Shale — structure their businesses as limited liability companies (LLCs) or limited partnerships (LPs). This allows them to avoid the corporate net income tax altogether and pay the much lower personal income tax on company profits.

In 2008, 120 companies paid $17.8 million in corporate net income taxes. 51% of companies had capital stock and franchise tax liability, paying $8 million. While a greater proportion (56%) of LLCs and partnerships had tax liability, they paid in total $13 million in personal income taxes.

By Jeremy Boren
Friday, April 29, 2011

A Harrisburg group said on Thursday there are flaws in its report on corporate income taxes paid by energy companies drilling for natural gas in Pennsylvania's mile-deep Marcellus shale formation.

The Pennsylvania Budget and Policy Center's report, "Representation without Taxation: How Natural Gas Producers Escape Taxes in Pennsylvania," overestimated how frequently firms use their status as limited-liability companies to pay the state's 3.07 percent personal income tax, instead of the much higher 9.99 percent net corporation income tax, a center spokesman said.

"As soon as we realized there was a problem, we corrected it, and we posted it to our website," said spokesman Chris Lilienthal.

The correction notes that individuals and corporations receive profits through an energy company limited liability corporation or limited partnership, meaning a mix of personal and corporate taxes are paid. The original version said energy companies could avoid paying corporate income tax "altogether" as an LLC or LP.

Errors in the report, which relies on 2008 tax data collected by the state Department of Revenue, go deeper than that, said Elizabeth Brassell, a spokeswoman for the Department of Revenue.

The center's researchers relied on flawed mathematical calculations, Brassell said.

She said because of high interest, the department plans to release a report soon about tax revenues generated by Marcellus shale drilling operations. That report, however, likely won't pinpoint how much energy companies pay in corporate and personal income taxes.

Travis Windle, a spokesman for the Marcellus Shale Coalition, an industry group, said PBPC used "blatantly wrong and faulty information" to drive its political agenda, a charge PBPC denies.

The board of directors that runs the center is made up of labor union and public university officials. It is advocating for state lawmakers to impose a severance tax on natural gas drillers, which has been controversial.

Read more: Group admits errors in energy tax report - Pittsburgh Tribune-Review

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