W. Va. Code R. § 110-13AC-5

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

Section 110-13AC-5 - Accounting for Sales of Thermal or Steam Coal

5.1. The determination of whether the gross proceeds of sale are considered to be from the sale of thermal or steam coal in order to qualify the gross proceeds of sale for a reduced rate of taxation will be made based upon the coal sales contract and whether the coal is sold to an electric power company for the purpose of generating or producing electricity.

5.1.1. Taxpayers eligible for the reduced severance tax rates for thermal or steam coal are those taxpayers who sell coal to an electric power company, either directly or through the services of a broker, for the purpose of generating or producing electricity. The sale to the electric power company must occur on or after July 1, 2019, in order to be eligible for the reduced rates.

5.1.1.a. If the coal is sold by the producer of the coal to a broker, who resells the coal to an electric power company for use in the production or generation of electricity, the producer will be eligible for the reduced thermal or steam coal rates when the broker provides an attestation to the producer that the coal has been resold to an electric power plant as set forth in section 110-13AC-6 of this rule.

5.1.1.b. If the coal is sold by the producer of the coal to a third-party seller, marketer, processor, blender, or any other entity, other than an electric power company, either directly or through the services of a broker, the coal may be eligible for the thermal or steam coal reduced rates, provided that the coal is ultimately sold to an electric power company for use in the production or generation of electric power. To the extent the third-party seller, marketer, processor, blender or other entity is behaving as a broker and can attest to the producer that the coal is ultimately sold to an electric power company as set forth in section 110-13AC-6 of this rule, the producer may qualify for the reduced rate for thermal or steam coal.

5.1.1.c. In the case where there have been other intermediary sales, the coal may still be eligible for the reduced rate if it is ultimately sold to an electric power company for the purpose of generating or producing electricity and each party in the series of sales has provided the verifications and information described in section 110-13AC-6 of this rule.

5.1.2. In the case of coal, the term "production of coal" includes all activities and values arising from the severance or extraction of coal and ordinary processing activities, including cleaning, breaking, sizing, dust allaying, treating to prevent freezing and loading for shipment. When any of these 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.

Accordingly, if a taxpayer, such as a blender or processor, purchases raw coal and engages in the activities of cleaning, breaking, sizing, dust allaying, treating to prevent freezing, loading for shipment or such other activities that are defined as being production activities in W.Va. Code § 11-13A-1, et seq. or the Legislative Rule, that taxpayer may be eligible for the reduced rate on steam or thermal coal if that taxpayer sells the coal to an electric power company, on or after July 1, 2019, either directly or through the services of a broker, for the purpose of generating or producing electricity. If the coal is sold to any other entity, other than an electric power company, either directly or through the services of a broker, the coal is not eligible for the thermal or steam coal reduced rate. The producer of the raw coal would not be eligible for the reduced rate of tax because the producer did not sell the coal to an electric power company.

5.1.3. Examples.

5.1.3.a. Coal Company A produces bituminous coal which it sells to an electric power company, either directly or through the services of a broker, for the purpose of generating or producing electricity. When the sale is made after June 30, 2019, the gross value of the coal sold will be taxed at the reduced rate specified in section 110-13AC-4 of this rule.

5.1.3.b. Coal Company B produces bituminous coal which it sells to a third-party company that processes the coal, and later sells the processed coal to an electric power company for use in generating electricity. This third-party company cannot attest to Coal Company B how the coal will be used or sold. Coal Company B pays severance tax computed at the 5% rate of tax on the gross value of the raw coal it sells to the processing company. The processing company pays severance tax on the value added to the coal by the coal processing process. The processed coal is sold after June 30, 2019, by the processing company to an electric power company for use in generating electricity. The value added to the coal by processing will be taxed at the reduced rate specified in section 110-13AC-4 of this rule.

5.1.3.c. Coal Company C produces thin seam bituminous coal that it sells to an electric power company for use in generating electric power. The tax rates provided in section 110-13AC-4 of this rule do not apply to this thin seam coal sold to an electric power company. The applicable rate of tax will continue to be either 1% or 2% depending upon the thickness of the seam of coal from which the coal was produced.

5.1.3.d. After July 1, 2019, Company D, a coal producer, contracts with Company E to have E extract the coal and deliver it to Company F who crushes, cleans and loads the coal for shipment. Company D then sells the coal to a broker acting as a third-party reseller, who later sells the coal to an electric power company. The broker attests to Company D that the coal has been sold to an electric power plant for the purposes of generating electricity. In this instance, Company D would report and pay tax the reduced rate specified in section 110-13AC-4 of this rule, without any deductions for payments made to E and F.

5.1.3.e. Company G, a coal producer, extracts the coal and sells the coal to Company H for $20.00 a ton without any attestation as to how the coal will be used or sold. Company H crushes, cleans and sells the coal to Company I for $30.00 a ton. Company I, a coal broker who has taken title or ownership of the coal, blends the coal with other purchased coal, loads and freeze treats the coal. The coal is ultimately sold on July 15, 2021, for $35.00 a ton to an electric power company for purposes of generating or producing electricity. Company I provides an attestation to Company H that the coal was sold to an electric power company. Company G reports and pays tax on $20.00 a ton, under the 5% regular severance tax rate. Company H reports and pays tax on $10.00 a ton, the value added by processing, at the reduced rate specified in section 110-13AC-4 of this rule; and Company I reports and pays tax on $5.00 a ton, at the reduced rate specified in section 110-13AC-4 of this rule.

5.1.3.f. Company J, a coal producer, extracts the coal and sells the coal to Company K for $20.00 a ton. Company K crushes and cleans the coal. Company K then uses the services of a coal broker, Company L. Company L takes possession of the coal, but it does not take title or ownership of the coal. Company L blends the coal from Company K with other coal and negotiates a sale of the blended coal to an electric power company. The blended coal is ultimately sold on July 15, 2021, for $35.00 a ton to an electric power company for purposes of generating or producing electricity. Company K provides Company J with an attestation that the coal was sold to an electric power company for the purposes of generating electricity. Company J reports and pays tax on $20.00 a ton, under the reduced rate specified in section 110-13AC-4 of this rule. Company K reports and pays tax on $15.00 a ton, the value added by processing, at the reduced rate specified in section 110-13AC-4 of this rule without deduction for any payments made to Company L.

5.1.3.g. Company M, a coal producer, has a long-term sales contract with an electric power company that was negotiated in 2017. The sales contract provides for sales of thermal coal to the power company with deliveries in 2018 and 2019. Deliveries of coal made after June 30, 2019, will be eligible for the reduced rate specified in section 110-13AC-4 of this rule.

5.1.3.h. Company N, a coal producer, extracts the coal and sells the coal to Company O for $20.00 a ton. Company O crushes, cleans and sells the coal to Company P for $30.00 a ton. Company O provides an attestation that the coal has been sold to Company P. Company P, a coal broker who has taken title or ownership of the coal, blends the coal with other purchased coal, loads and freeze treats the coal. The coal is ultimately sold on July 15, 2021 for $35.00 a ton to an electric power company for purposes of generating or producing electricity. Company P provides an attestation to Company N and Company O that the coal was sold to an electric power company. Company N reports and pays tax on $20.00 a ton, at the reduced rate specified in section 110-13AC-4 of this rule. Company O reports and pays tax on $10.00 a ton, the value added by processing, at the reduced rate specified in section 110-13AC-4 of this rule; and Company P reports and pays tax on $5.00 a ton, at the reduced rate specified in section 110-13AC-4 of this rule.

5.2. When natural resources are severed for sale at a future date, payment of the severance 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.

5.2.1. Whenever coal is severed prior to the date on which the rate at which thermal or steam coal 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 coal was severed from the ground.

5.2.2. Example -- Company A uses the cash method of accounting.Company A, a coal producer,extracts coal in June 2019, but sells that coal to an electric power company for purposes of generating electricity on July 15, 2019, and, therefore, does not recognize gross income from that sale until after the 4.3% tax rate for thermal or steam coal becomes effective. That producer would be able to claim the 4.3% tax rate on the steam coal.

5.3. Thermal and steam coal receiving the reduced rates in this section is subject to the annual minimum severance tax imposed under W. Va. Code § 11-12B-3.

5.3.1. Example -- After July 1, 2019, Coal Company A produces coal and sells it to an electric power company for use in generating electric power. The producer will be able to claim the 4.3% tax rate on the steam coal. The coal is also subject to the minimum severance tax under W. Va. Code § 11-12B-3. A producer who pays minimum tax is allowed that payment as a credit against the severance tax, but only after other allowable credits have been applied, and the credit cannot exceed the severance tax due. No credit is allowed against the additional severance tax imposed for the benefit of the counties and municipalities under W. Va. Code § 11-13A-6.

5.3.2. Example -- Coal Company B produces thin seam bituminous coal that it sells to an electric power company for use in generating electric power. The tax rates provided in section 110-13AC-4 of this rule do not apply to this thin seam coal sold to an electric power company. The applicable rate of tax will continue to be either 1% or 2% depending upon the thickness of the seam of coal from which the coal was produced. Thin seam coal taxed under W. Va. Code § 11-13A-3(g) is not subject to the minimum severance tax.

W. Va. Code R. § 110-13AC-5