W. Va. Code R. § 110-13A-4

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

Section 110-13A-4 - Treatment Processes as Production

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.

W. Va. Code R. § 110-13A-4