W. Va. Code R. § 110-26-2a

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

Section 110-26-2a - Production Of Natural Resource Products

2a.1. Producers of natural resource products. - For purposes of these rules and regulations, the word "Producer" shall mean and include, but not be limited to, every person who engages in the business of severing, extracting, mining, quarrying, reducing to possession or producing for sale, profit or commercial use any natural resource products from his own land or from the land of another under the right or license granted by lease or contract, either directly or by contracting with others for the necessary labor or mechanical services. A person who produces natural resource products for the use or consumption in his own business whether located within or without the municipality is a producer for the purposes of the municipal business and occupation tax.

2a.1.1. Persons who are producers, as described in the preceding paragraph, shall report the gross proceeds derived therefrom under the applicable production classification on the municipal business and occupation tax return. If it is not possible for the producer to determine gross proceeds of sale, he must determine the value of his produced natural resource products by employing one of the rules set forth in Section 2 of these rules and regulations. The measure of the municipal business and occupation tax shall be the value (said value, whenever possible, shall be determined by gross proceeds of sale) of the entire production within the municipality, regardless of the place of sale or the fact that delivery may be made to points outside the municipality.

2a.1.2. A person who produces natural resource products and does not make sale of the same but uses or consumes the resources in his business shall report the value of such resources under applicable production classification on the municipal business and occupation tax return. In determining the value of the natural resource products, the taxpayer must adhere to Section 2 of these rules and regulations.

2a.1.3. 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 one of the rules set forth in Section 2 of these rules and regulations.

2a.2. Producing natural resource products for others.

2a.2.1. A "Contract Miner" shall mean and include a person who has no title to or ownership in the natural resource products which he is producing for others. Persons performing under contract, either as prime contractors or subcontractors, labor or mechanical services for others who are engaged in the business of producing natural resources, are performing a service for the producer and are therefore taxable under the service classification rather than the production classification. All gross income received by the contract miner from the producer for such service is taxable under the municipal municipal business and occupation tax law in the municipality in which the service is rendered if the service is rendered within a municipality.

2a.2.2. The producer of the natural resource products that are extracted by the contract miner is taxable under the production classification on the municipal business and occupation tax form.

2a.3. Determination of producer and contract miner.

2a.3.1. Generally, a producer is one who has title to or an economic interest in mineral deposits or standing timber, and a contract miner is one who does not possess an economic interest but performs services for producers by contract. This contractual relationship will not affect the status of the parties in regard to municipal business and occupation tax liability. For example, a person who has ownership, title in or right by contract or lease in the mineral deposit or standing timber does not possess an economic interest merely because through a contractual relationship he possesses an economic advantage derived from production. In other words, an agreement between the owner of an economic interest and another entitling the latter to purchase or process the product upon production or entitling the latter to compensation for producing, extracting or cutting does not convey an economic interest.

2a.3.2. If a dispute should arise as to which party is the producer and which is the contract miner, the Tax Department shall consider, in addition to the substance of agreement between the parties, other elements which shall include, but not be limited to the following:

2a.3.2.1. Which person is entitled to claim a depletion allowance for federal income tax purposes.

2a.3.2.2. Is the person mining, cutting or extracting the natural resource product obligated to pay royalty to another.

2a.3.2.3. By lease or contract, does one person have the exclusive right to sever, mine, cut or extract the natural resource product.

2a.3.2.4. Does the contract between the parties contain an exclusive and mandatory sales/purchase agreement.

2a.4. Preparing natural resource products for others. - Any person who makes charges to the producer or to another for preparing natural resource products for sale or use is determined to be engaged in a service activity and shall report all gross income from such activity under the service classification on the municipal business and occupation tax return. Such person preparing the products in this instance is not deemed a manufacturer for he has no title to or ownership in the products but is only performing a service on products owned by another. As to the applicability of the municipal business and occupation tax statute to persons who prepare their own natural resource products, See Section 2b of these rules and regulations.

2a.5. Royalties derived from natural resources.

2a.5.1. Persons who receive payments, as royalties, from producers of natural resource products are not deemed to be producers thereof but shall report all payments under the rental and royalty classification on the municipal business and occupation tax return. The fact that the payment is called by a name other than royalty shall not alter the taxation of such payment if the recipient thereof has furnished real property which has a situs in the municipality and which includes minerals in place, or any interest therein, for hire, loan, lease or otherwise.

2a.5.2. Lessees, sublessees or other denominated lessees are producers of all the natural resources produced, regardless of any payment, in kind or otherwise, to lessors, sublessors or other denominated lessors of a part of such natural resources as rents or royalties.

2a.6. Treatment of freight charges incurred by producers.

2a.6.1. In certain instances, producers of natural resource products are permitted to deduct outgoing freight charges from the gross proceeds of sales to arrive at taxable value under the applicable production classification.

2a.6.2. In order to determine the value within the municipality and at the place where production ends, there may be deducted from gross proceeds of sales certain outgoing freight charges actually paid by the producer, but no deduction will be allowed for expenses incurred by him through the use of his own equipment in transporting item produced.

2a.6.3. 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 will not be allowed as a deduction, unless due consideration has been given to them also in the method by which the values were determined.

2a.6.4. Generally, freight charges to be deductible from gross proceeds of sales must be paid by the producer to a common carrier to deliver natural resources to a bona fide purchaser. To illustrate: Coal, at the place where production ends, has a value of ten dollars ($10.00) per ton. If a purchaser buys the coal production at the mine for said price, the producer will report under the coal production classification the gross proceeds of sale, ten dollars ($10.00). However, if the purchaser buys the same coal delivered at eleven dollars ($11.00) per ton, and the producer pays a common carrier to make such delivery, the producer may deduct such freight charges one dollar ($1.00) from the gross proceeds of sale eleven dollars ($11.00) reported under the coal production classification to arrive at the taxable value of ten dollars (10.00).

2a.6.5. If the producer of natural resource products sells his products to a purchaser and agrees to deliver such products in his own equipment for a fee, the fee may be deducted from the gross proceeds of sale in arriving at taxable value under the production classification. The fee charged for transportation by the producer is not taxable under the service classification because this activity had been taxed under the carrier income tax up until July 1, 1987.

2a.6.6. Producers may not deduct expenses incurred in the transportation of coal or other natural resource products from the mining operation to the tipple for preparation.

2a.6.7. If hauling or transportation charges are incurred by the producer and have been absorbed by the producer, such charges are outgoing freight charges and are deductible from gross proceeds of sale to arrive at taxable value.

2a.6.8. A contract miner may not deduct any transportation charges incurred by him for hauling or transporting natural resource products whether in his equipment or in the equipment of another.

2a.6.9. The severance and production of natural gas shall be valued for purposes of the municipal business and occupation tax 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 shall be allowed a deduction from the gross proceeds of the sale of gas. For these purposes, one of the following alternative methods shall be used for obtaining the well-mouth value of the severance and production of natural gas.

2a.6.9.1. 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, limited to actual costs of transportation or transmission incurred without reference to items unrelated to such transportation or transmission such as general administrative, overhead, or return investment. Such deduction must be supported by schedules and statements of cost by the producer.

2a.6.9.2. As a alternative to the method presented at Subsection 2a.6.9.1, 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 the purchase price shall accurately represent the well-mouth value of the gas severed or produced. This determination shall be supported by a statement of the pool or field from which the gas severed or produced is obtained.

2a.6.9.3. As an alternative to the methods presented at Subsections 2a.6.9.1 and 2a.6.9.2, the well-mouth value of such severance and production may be determined by a deduction of transportation and transmission costs in the amount of 15 percent (15%) of the gross proceeds of the natural gas severed and produced, and a computation of the deduction therefrom.

2a.6.10. Producers, other than utilities, must report under the service classification the difference between the gross proceeds of sale from the gas and the tangible well-mouth value reported under the natural gas production classification.

2a.7. Reserved for Future Use.

2a.8. Business of producing timber.

2a.8.1. General. -- A person engaged in a municipality in the business of severing, reducing to possession and producing timber for sale, profit or commercial use is subject to municipal business and occupation tax under the production of timber classification. A timber producer will also be taxable under other classifications of the municipal business and occupation tax when the activity engaged in is not taxable under this classification. The privilege of producing timber ends once the tree is severed from its root structure and its limbs and top are removed. R.S. Burruss, d.b.a. R.S. Burruss Lumber Co., et. al. v. Tax Commissioner, W. Va., 297 S.E.2d 836, 839 (1982). All cuts thereafter are taxable under the manufacturing classification. The value taxed under this classification which is attributable to the production of timber privilege will not again be taxable to the producer of the timber products under the manufacturing classification. W. Va. Code '11-13-2b (1987). Beginning April 13, 1985, however, manufacturers of timber products are required to report gross proceeds derived from wholesale sales made in the municipality under the wholesale classification if the municipal business and occupation tax ordinance so provides.

2a.8.2. Taxable value. -- 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. When a sale occurs at the 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.

2a.8.2.1. Rule 1.

2a.8.2.1.a. 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.

2a.8.2.1.a.1. Character and quality of the timber as determined by species, age, size, condition, etc.;

2a.8.2.1.a.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.

2a.8.2.1.a.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 process of exploitation, the probable cost of exploitation and the climate and the state of industrial development of the locality); and

2a.8.2.1.a.4. The freight rates charged by common carriers to important markets.

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 Rule 2 of this subsection.

2a.8.2.2. Rule 2.

2a.8.2.2.a. At the election of the taxpayer, or in the absence of books and records to substantiate fair market value determined under Rule 1, above, the following rule shall be used to determine the gross value of timber at the point where production ends.

2a.8.2.2.a.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 (75%) of the gross proceeds of sale under the timber production classification and the remaining twenty-five percent (25%) shall be reported under the manufacturing classification. Additionally, one hundred percent (100%) of gross proceeds of sales shall be reported under the appropriate sales classification after April 13, 1985.

2a.8.2.2.a.2. A person who produces timber, sells and delivers his timber products, in the same condition that they leave the forest, to a saw mill, other manufacturer or consumer, shall report fifty percent (50%) under the manufacturing classification, regardless of whether the sale is made within or without the municipality. Additionally, if the sale is made in the municipality, one hundred percent (100%) of the gross proceeds of sales shall be reported under its appropriate sales classification after April 13, 1985.

2a.8.2.2.a.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 or commercial use shall report twenty-five percent (25%) of his gross proceeds of sale under the timber production classification and seventy-five percent (75%) under the manufacturing classification. 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 2.4 and twenty-five percent (25%) of that amount shall be reported under the production classification. Additionally, if a sale is made in the municipality, one hundred percent (100%) of gross proceeds of sales shall be reported under the appropriate sales classification after April 13, 1985.

2a.8.3. Who is the producer. -- Whenever standing timber is cut, someone is the producer of that timber for purposes of the municipal business and occupation tax. Not every person who cuts timber from the stump, however, is the producer of that timber. Under the municipal business and occupation tax law, the person who owns the timber immediately after its severance is the producer.

2a.8.3.1. A person who hires another to cut timber for him is generally the producer of that timber.

2a.8.3.2. A person who cuts timber for another, to which he does not take title, reports the gross income from his cutting activity under the service classification. See Section 2h of these regulations.

2a.8.4. Taxability of person who severs and uses or consumes timber in his business. -- A person exercising the privilege of producing timber who uses or consumes the same in his business is deemed to be engaged in the business of producing timber for sale, profit or commercial use and is required to make municipal business and occupation tax returns on account of the production of the business showing the gross value of the timber production determined in accordance with Subsection 2a.8.2. Source: W. Va. Code '11-13-2(1985). See Owens-Illinois Glass Company v. Battle, 151 W. Va. 655, 154 S.E.2d 854 (1967): Gilbert Imported Hardwoods, Inc. v. Dailey, W. Va., 280 S.E.2d 260 (1981).

2a.8.5. Contract right to cut. -- The holder of a contract right to cut timber, who has both the right to cut the timber and to use the products from the cutting for his own account, is the producer of that timber for purposes of the municipal business and occupation tax. Comment. -- A quick test for differentiating between a holder of a contract right to cut and a logging contractor is that the former qualifies for depletion under Section 631(a) of the Internal Revenue Code of 1954, as amended, whereas a logging contractor does not qualify.

2a.8.6. Logging contractor.

2a.8.6.1. A logging contractor may have the right under a contract to cut certain timber, but is required to deliver the logs, that he never owned, to the mill or log yard designated by the owner of the timber. The contract in this instance is merely a service agreement. The logging contractor reports his gross income under the service classification of the municipal business and occupation tax. See Section 2h of these regulations. The owner of the timber reports the gross value of the timber, at the point where production ends, under the production classification, and the balance under the manufacturing classification. Additionally, one hundred percent (100%) of the gross proceeds of sale are reportable under the wholesale classification, if sale is made in the municipality after April 13, 1985.

2a.8.6.2. Although the base contract may not require the logger to deliver the logs to the owner, another contract entered into simultaneously may require it. If the two contracts are, in substance, part of one transaction, the logger has not acquired a contract right to cut and sell the timber in his own behalf.

2a.8.7. Wholesale sales. -- Prior to April 13, 1985, A producer who sells his timber products to producers of natural resources, manufacturers, wholesalers, jobbers, retailers or commercial or industrial consumers for use or consumption in the purchaser's business is not required to pay tax again under the wholesale sales classification. W. Va. Code '11-13-2 (1978). Sales of timber products to the United States of America, its agencies and instrumentalities or to the State of West Virginia, its institutions or political subdivisions are also classified as wholesale sales and similarly treated. Beginning April 13, 1985, however, persons who manufacture timber or timber products are also required to report the gross proceeds of sale of wholesale sales made in the municipality under the wholesale classification. W. Va. Code '11-13-2(1985).

2a.8.8. Retail sales. -- A timber producer who sells his timber products at retail in this State is required to report his gross value of his timber products under the production classification and his gross proceeds of sale under the retail sales classification. W. Va. Code '11-13-2(1978).

2a.8.9. Definitions. -- As used in this regulation, the term:

2a.8.9.1. "Bucking" means the process of cutting the tree into log lengths which is generally, but not always, done prior to skidding.

2a.8.9.2. "Bumping" means the process of removing limbs from the trees after they have been severed. Depending upon the particular job, this is sometimes done at the place of severance, but is also often done after the tree has been removed to the collection and loading point.

2a.8.9.3. "By-product" means any additional product, other than the principal or intended product, which results from production or manufacturing activities and which has a market value, regardless of whether or not the additional product was an expected or intended result of the production or manufacturing activities.

2a.8.9.4. "Christmas trees" means evergreen trees commonly known as Christmas trees, including fir, hemlock, spruce and pine trees, which are sold for use as Christmas trees.

2a.8.9.5. "Commercial use" means the use or consumption of a produced or manufactured product, including any by-product, in a business activity of the producer or manufacturer. "Commercial use" also means the use or consumption of a product in a business activity of the purchaser.

2a.8.9.6. "Consumer" means any person who purchases, acquires, owns, holds, or uses any article of tangible personal property irrespective of the nature of his business.

2a.8.9.7. "Contract right to cut".-A contract right to cut timber is the right to cut timber under a binding contract and to sell the timber cut for the holder's own account or to use such cut timber in his trade or business. Not all cutting contracts give a contract right to cut. If the holder does not own the timber immediately after severance, then the cutting contract is a service contract under which the holder is performing services for compensation.

2a.8.9.8. "Fair market value of timber production" is the amount which would induce a willing seller to sell and a willing buyer to purchase timber products at the point where the timber production privilege ends.

2a.8.9.9. "Logs" refers to the section or sections of a tree which have been cut or sawed from the trunk after the same has been severed from the stump.

2a.8.9.10. "Orchard" means a systematic planting of fruit trees as opposed to individual plantings for ornamental purposes.

2a.8.9.11. "Owner of timber" means any person who owns an interest in timber, including a sublessor and an owner of a contract right to cut timber. Such owner of timber must have a right to cut timber for sale on his own account or for use in his trade or business in order to own an interest in timber within the meaning of W. Va. Code '11-13-2a.

2a.8.9.12. "Producing timber" includes the severing and bumping or delimbing of the tree. All cuts thereafter which ultimately result in a timber product are taxed under the manufacturing classification.

2a.8.9.13. "Pulpwood" means wood cut or prepared primarily to manufacture into wood pulp, for subsequent manufacture into paper, fiber board or other products, depending largely on the species, cut and the pulping process.

2a.8.9.14. "Sapling" means young trees with trunks not over four inches in diameter.

2a.8.9.15. "Skidding" means to pull logs from the stump to the skidway, landing or sawmill.

2a.8.9.16. "Timber" means and includes trees of any marketable species, whether planted or of natural growth, standing or down, located on public or privately owned land, which are suitable for commercial or industrial use. The term "timber" does not include:

2a.8.9.16.a. Trees marketed as Christmas trees,

2a.8.9.16.b. Saplings, brush and undergrowth,

2a.8.9.16.c. Fruit trees planted in an orchard,

2a.8.9.16.d. Other trees which are usable only for firewood or for decoration, except when the wood of such is sold for a commercial or industrial use other than for use as fuel or decoration, or

2a.8.9.16.e. Trees lifted from the soil and sold with roots intact for transplanting.

2a.8.9.17. "Timber producer" means every person who from his own land or from the land of another under a right or license granted by lease or contract, either directly or by contracting with others for the necessary labor or mechanical services, fells, cuts and takes timber for sale, profit or commercial or industrial use. This does not include a person who is under contract to provide the necessary labor or mechanical services to a timber producer.

2a.8.9.18. "Timber products" includes tree tops, tree limbs, logs, wood chips and stumps, etc., produced from "timber".

2a.8.9.19. "Trees of marketable species" means those species of trees growing in West Virginia which have a commercial use.

2a.8.9.20. "Undergrowth" and "underbrush" include shrubs, bushes, small trees, etc., growing beneath standing timber having no commercial value.

W. Va. Code R. § 110-26-2a