W. Va. Code R. § 110-13A-2a

Current through Register Vol. XLI, No. 50, December 13, 2024

Section 110-13A-2a - Determination of Gross Value

For all natural resources, "gross value" is to be reported as follows:

2a.1. Gross Value Amount Received. -- For natural resources severed or processed (or both severed and processed), except natural gas, oil, and limestone or sandstone quarried or mined, and sold during a reporting period, gross value is the amount received or receivable by the taxpayer.

2a.1.1. Example. -- A owns land within West Virginia from which he mines coal. A sells his produced natural resources to B Power Company. A must report the value of such natural resources, as determined by the gross proceeds of sale, on the severance tax form. Therefore, A reports the full amount received from B and computes his tax liability thereon.

2a.1.2. Example. -- A owns land within West Virginia and produces coal therefrom. In 1988, A produced 55,000 tons of which 40,000 tons were sold to B Power Company at ten dollars ($10.00) per ton and 12,000 tons were transported without sale to a coal broker (or selling agent) without the State. The broker does not take title to the natural resource product and consequently has no ownership therein. The remaining 3,000 tons were sold, at the mine, to individuals for home consumption at twelve dollars ($12.00) per ton. The coal broker subsequently, and before the close of the taxable year 1988, makes sale of the coal at thirteen dollars ($13.00) per ton.

2a.1.2.1. A, on the 1988 severance tax return, must report the gross proceeds of the sale to B. (40,000 tons @ $10.00 per ton = $400,000)

2a.1.2.2. A must also report the amount of the sale made by the broker on A's severance tax return. (12,000 tons @ $13.00 per ton = $156,000.) Inasmuch as the fee or commission retained by the broker is an expense of doing business to A, A receives no deduction or exclusion from gross income for the amount retained by the broker.

2a.1.2.3. A must also report the amount of the sales at the mine to individuals for household consumption. (3,000 tons @ $12.00 per ton = $36,000.)

2a.2. Sale at Future Date. -- When natural resources are severed for sale at a future date, payment of the tax with respect to the severed natural resource is delayed until the point in time when the taxpayer recognizes gross income under the taxpayer's method of accounting.

2a.3. Transition rule for change in rate. -- Whenever natural resources are severed prior to the date on which the rate at which production under the appropriate classification is subject to tax changes, but the taxpayer does not recognize gross income under the taxpayer's method of accounting until after the effective date of the new rate, the gross income so reported will be taxed at the rate in effect during the period in which the gross income is recognized and reported and not at the rate in effect at the time the natural resources were severed.

2a.4. No Deduction of Expenses. -- In all instances, the gross value shall not be reduced by any state or federal taxes, including federal black lung tax, federal and state reclamation taxes, royalties, sales commissions or any other expense. Amounts paid to an independent contractor as renumeration for the severing, extracting, producing or processing of natural resource products are not to be deducted from the determination of gross value by the producer.

2a.4.1. Example. -- A, landowner, leases his land to B for the purpose of drilling for oil. The lease provides that B will pay A a one-eighth royalty in cash or in kind. The well is successful and produces 80,000 barrels of oil. B is a producer; therefore, he must pay severance tax under the oil production classification on the gross proceeds of sale or value of the entire production. B receives no deduction for any amount in cash or in kind paid to A as a royalty. A is not liable for severance taxes upon the royalty he receives.

2a.4.2. Example. -- A, the owner of land, leases said land to B who desires to mine the coal therefrom. B agrees to pay A a royalty of $.30 on each ton of coal mined by B. In the year 1988, B extracts 50,000 tons of coal and pays A his royalty of $15,000 (50,000 tons @ $.30 per ton = $15,000). B sells the tonnage to a manufacturer for $450,000.

2a.4.2.1. Inasmuch as B is producing natural resource products under a lease which gives him the exclusive right to sever or mine the mineral deposits and which obligates him to pay the owner of the deposits in place a royalty after severance, B is the producer of the natural resources and is not a contract miner. Therefore, B must report the gross proceeds of sale on his severance tax return ($450,000). B may not deduct the amount of royalty paid to A as it is a cost of doing business. A is not liable for severance taxes upon the amount he receives for royalties.

2a.4.2.2. If at a later date B subleases to C and C agrees to pay B a royalty of $.40 per ton, C becomes the producer and reports accordingly and A and B are royalty recipients not liable under the severance tax.

2a.4.2.3. If, at a later date, C contracts with D whereby D will mine the coal and deliver it to C at a stipulated fee per ton, C remains liable under the severance tax as the producer; A and B remain as royalty recipients and D becomes a contract miner. A, B and D would not be subject to severance tax liability.

2a.5. Processing When Not Severed By Taxpayer. -- When natural resource products are purchased from an unrelated party, or are severed outside this State either by the taxpayer, or by another person from whom the taxpayer purchases such products, for the purpose of processing such products in activities which are deemed to be the exercise of a privilege subject to the severance tax pursuant to Section 4 of these regulations, the taxpayer must report the gross value of such processing according to the following rules:

2a.5.1. When the natural resource products are purchased from an unrelated party to be processed for resale, the gross value subject to tax shall be the amount received by the taxpayer from the sale of the processed natural resource product, reduced by the amount paid or payable to the person actually severing the natural resource.

2a.5.2. When the natural resource product is severed by the taxpayer or a related party outside of the State of West Virginia, to be processed in West Virginia for resale, the gross value subject to the tax shall be the amount received by the taxpayer from the sale of the processed natural resource product, reduced by the gross value of the unprocessed natural resource product as determined under Section 2a.6 of these regulations.

2a.5.3. When the taxpayer purchases natural resource products or severs natural resource products outside of the State of West Virginia and imports those products, to be processed in West Virginia for the purpose of sale to related parties or to be used or consumed in the taxpayers business, the values determined under Section 2a.6 of these regulations shall be substituted for the amount received from the sale of the processed natural resource product under Subsections 2a.5.1 and 2a.5.2.

2a.5.4. In no case may the taxpayer owning natural resource products purchased or brought into the State of West Virginia for processing activities subject to the severance tax pursuant to Section 4 of these regulations take a deduction or allowance from gross value for amounts paid to an independent contractor to perform the processing services.

2a.6. Sales to Related Party or Used or Consumed By Taxpayer. -- In a transaction involving related parties, or in the absence of a sale where the taxpayer produces the natural resource for consumption by the taxpayer in the taxpayer's business, gross value shall not be less than the fair market value for natural resources of similar grade and quality, and the gross value shall be further determined by applying regulations 2a.5.1 through 2a.5.3 in the order as follows:

2a.6.1. The value of the natural resource product sold to a related party or consumed by the taxpayer shall be determined by applying the average prices at which sales of like kind, grade and quality are made by the taxpayer during the taxable year to non-related customers of the producer.

2a.6.2. If there are no sales of similar products by the taxpayer to non-related customers of the taxpayer by which gross value may be determined, the gross value shall be determined according to the selling price at the place of use or consumption of similar products of like quality and character by other taxpayers. Under no circumstances, however, may the value ascertained under either of the two above discussed methods be less than the actual gross proceeds of sale or the actual total cost of producing the natural resources, whichever is greater.

2a.6.3. In the absence of sales of similar natural resource products as a guide to value, such value may be determined by a cost basis. In such cases there shall be included every item of cost attributable to the particular natural resource product produced, including direct and indirect overhead costs. There shall be added to this total production cost the average mark-up realized by the taxpayer on all natural resource products produced and sold.

2a.7. Take or Pay Contracts. -- Under certain purchase contracts, "take or pay" clauses require purchasers of natural resource products to pay for certain quantities of the product whether or not they are actually taken by the purchaser at that time. Amounts paid to producers for such products not taken can be offset against future quantities of the product when actually taken by the purchaser. Producers receiving receipts from such "take or pay" contracts shall not be required to report such income under the severance tax until such natural resource products are delivered to the purchaser and the purchaser's account so credited. This treatment will only be afforded to taxpayers who maintain adequate records to accurately reflect the accounting procedures utilized by the taxpayer.

2a.8. Example. -- Company A, a Maryland Corporation, severs 1,000 tons of coal in Maryland and ships the coal to Company B in West Virginia to be cleaned and tippled for Company A. Company A retains ownership of the coal at all times and pays Company B $5.00 per ton to clean and tipple the coal. Company A makes other sales of unprocessed coal at its mine for $20 per ton to unrelated customers. After the coal is cleaned and tippled by Company B, Company A sells the 1,000 tons of coal to an unrelated purchaser for $30 per ton. Company A would report the sale of the 1,000 tons of coal at the difference between the value of the processed coal and the value of the unprocessed coal or, $30.00/ton - $20.00/ton = $10.00/ton for a total of $10,000, as the gross value of the 1,000 tons of coal on Company A's severance tax form. See Subsections 2a.4 and 4.1.1 of these regulations. Company B would not be subject to the severance tax because it does not have an economic interest in the coal being processed. Company A is not permitted any allowance for the $5,000 paid to Company B to process the coal as it is a cost of doing business to the producer, Company A.

2a.9. Example. -- X, a manufacturer of chemicals, owns land within West Virginia which contains coal deposits. X contracts for the production of such coal with B. The contract between X and B provides that B will produce the coal and deliver the same to X and in payment for such service, X will pay B one dollar ($1.00) per ton. In the year 1988, B mines and delivers to X 750,000 tons of coal of which X consumes 700,000 tons in its manufacturing process. Of the remaining tonnage, X sells 40,000 tons to an unrelated wholesaler at $12.00 per ton and sells 10,000 tons to an affiliated company at $3.00 per ton. X pays B $750,000 for the service performed by B in 1988.

2a.9.1. X is the producer of the natural resource product, and B is a contract miner; for X owns the coal in place and is entitled to immediate possession upon extraction thereof by B, whereas B has no economic interest in the mineral and may only sever for X and deliver the product to X for a stipulated fee. Therefore, X must report the gross income from the sale and use of the coal on the severance tax return.

2a.9.2. Since X is a producer of a natural resource product which he uses or consumes in his business, he must determine the value of said production (700,000 tons) under the applicable rule set forth in Subsection 2a.5 of these regulations and report the same as taxable income on the severance tax form. The provision of Subsection 2a.5 of these regulations which applies to the determination of value of natural resource products used or consumed by the producer provides that such regulations shall be applied in the order stated. Therefore under such circumstances, to determine the value of the 700,000 consumed tons of coal, X would apply regulation 2a.5.1. Said regulation makes use of the average prices at which sales are made to customers during the year. The average price in this instance would be based on the sale of the 40,000 tons made to the wholesaler which was at $12.00 per ton. Therefore, for the used or consumed natural resource products, X must report $8,400,000 ($12.00 X 700,000 = $8,400,000) as the value thereof on the severance tax return.

2a.9.3. The 10,000 tons sold to an affiliate must also be reported on the severance tax return. However, the selling price ($3.00/ton) was not indicative of the true value of the products. Therefore, X must apply the applicable regulation set forth in Subsection 2a.5 of these regulations. Since the selling price to the affiliate was not at true value, this sale was not used in determining the value of the products used or consumed by X. In order to determine the proper value of the products sold to a related party, X will apply regulation 2a.5.1. Said regulation provides that whenever sales are made to related parties, the value shall correspond to the gross proceeds from sales to nonrelated purchasers of similar products of like quality and character. In this example, a sale was made to a nonrelated purchaser (the wholesaler) at $12.00 per ton. Therefore, X must place a value of $12.00/per ton on that tonnage sold to the affiliate and report the resultant amount (10,000 tons @ $12.00/ton = $120,000) on the severance tax return.

2a.9.4. The gross proceeds of sale derived from the sale to the wholesaler (40,000 tons @ $12.00/ton = $480,000) will also be included on the severance tax return.

2a.9.5. For purposes of this example, the 1988 severance tax return of X will reflect taxable income of $9,000,000. This taxable amount ($9,000,000) is a total of the value of consumed products ($8,400,000), the value of the products sold to the affiliate ($120,000) and the gross proceeds of the sale to the wholesaler ($480,000).

2a.9.6. B, who performed services for X, is a contract miner and will not report his fee ($750,000) on the severance tax return.

2a.10. Natural Gas. -- For natural gas, gross value is the value of the natural gas at the well head immediately preceding transportation and transmission. To determine the value of the gas prior to transportation and transmission the producer shall apply Subsection 4.8 of these regulations to calculate his transportation allowance.

2a.10.1. Example. -- A is a producer of natural gas within West Virginia. The entire output of natural gas from A's well is purchased at the well head by a public utility for $25,000. On his severance tax return, A will report $25,000 as gross income.

2a.11. Limestone and Sandstone. -- For limestone or sandstone quarried or mined, gross value is the value of such stone immediately upon severance from the earth.

W. Va. Code R. § 110-13A-2a