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SOAH DOCKET NO. 304-23-11660
CPA HEARING NO. 118,189
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: July 1, 2013 THROUGH December 31, 2016
Natural Gas Prod/RFD
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
GLENN HEGAR
Texas Comptroller of Public Accounts
DANIEL NEUHOFF
Representing Respondent
**************
Representing Claimant
COMPTROLLER’S DECISION
This decision is considered final on July 21, 2023, unless a motion for rehearing is timely filed; this date of finality is calculated based on the Administrative Procedure Act (APA).[1] The failure to timely file a motion for rehearing may result in adverse legal consequences.
Administrative Law Judge (ALJ) Kathy Pickup of the State Office of Administrative Hearings (SOAH) issued a Proposal for Decision (PFD) that includes Findings of Fact and Conclusions of Law. SOAH served the PFD on each party and each party was given an opportunity to file exceptions and replies with SOAH in accordance with SOAH’s rules of procedure. The ALJ recommended that the Comptroller adopt the PFD as written.
After review and consideration, IT IS ORDERED that the PFD is adopted as written.
The result from this Decision is Attachment A. The ALJ’s recommendation letter is Attachment B. The PFD as written is Attachment C. Attachments A, B, and C are incorporated by reference.
Attachment A reflects a zero amount due.
SIGNED on this 26th day of June 2023
GLENN HEGAR
Comptroller of Public Accounts
By: Lisa Craven
Deputy Comptroller
Attachment A, Texas Notification of Hearing Results
Attachment B, ALJ’s recommendation letter
Attachment C, Proposal for Decision as written
ATTACHMENT C
SOAH Docket No. 304-23-11660
TCPA Hearing No. 118,189
**************
TAXPAYER NO: **************
v.
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS
Corrected Proposal for Decision
************** (Claimant) requested a refund of natural gas production tax paid on various transactions. The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) granted the refund request in part, denying the claimed marketing cost deductions. Claimant requested a refund hearing to contest the partial denial of its refund claim. Staff maintains Claimant did not provide sufficient documentation to prove its contentions. A Proposal for Decision (PFD) was issued on May 16, 2023 by the Administrative Law Judge (ALJ). Staff filed exceptions to the PFD for the sole purpose of requesting corrections for minor clerical issues. Claimant did not file a response. In this Corrected PFD, the ALJ recommends affirming the refund denial.
I. NOTICE, JURISDICTION, AND PROCEDURAL HISTORY
Staff referred the case to the State Office of Administrative Hearings (SOAH) and on February 22, 2023, issued a Notice of Hearing by Written Submission to Claimant. On February 23, 2023, ALJ Kathy Pickup issued an Order Setting Written Submission Hearing setting the hearing and establishing filing deadlines. The contested case record closed on May 15, 2023. Daniel Neuhoff represented Staff, and Claimant was represented by **************.
There are no issues of notice or jurisdiction; therefore, those matters are set out in the Findings of Fact and Conclusions of Law without further discussion.
II. REASONS FOR DECISION
A.Evidence
Staff submitted the pleadings exchanged by the parties while the case was in redetermination at the Comptroller and filed the following exhibits for the written submission hearing:
1. 60-Day Letter;
2. Refund Denial Letter;
3. Refund Audit; and
4. Refund Audit Plan.
Claimant submitted the following exhibits, attached to its pleadings, for the written submission hearing:
1. Schedule of Leases;
2. Purchaser Paid Taxes; and
3. Assignments of Right to Refunds.
The exhibits were admitted without objection.
B. Agreed Adjustments
Staff did not agree to any additional refund amounts.
C. Facts Demonstrated by the Evidence
During the period at issue, Claimant owned and operated an oil and gas production company in CITY, Texas. In September 2017, Claimant filed a refund claim for natural gas production tax paid during the period July 1, 2013, through December 31, 2016. The claim was based on previously unclaimed and under-claimed marketing cost deductions, and Staff conducted a refund audit to verify the claim.
On May 28, 2019, Staff notified Claimant that its refund claim was partially denied. The total refund request was $318,803.31. Staff issued Claimant a refund of $183,403.36, which included $176,490.07 tax and $6,913.29 credit interest. The refund was decreased due to denied lease operating expenses with no supporting records, denied depreciable assets with no supporting records and non-marketing equipment. Denied transactions also included parts, materials, and electricity purchased for non-marketing equipment.
Claimant timely requested redetermination of the denied portion of its refund claim. Staff disagreed with Claimant’s contentions, contending Claimant did not provide sufficient documentation to prove its contentions, and referred the matter to SOAH.
D. ALJ Analysis and Recommendation
The Comptroller shall refund a tax, penalty, or interest that has been unlawfully or erroneously collected. See Tex. Tax Code § 111.104(a). However, when a taxpayer requests a refund, it must establish by a preponderance of evidence that taxes were erroneously collected or paid. See, e.g., Comptroller’s Decision Nos. 117,324 (2022), 109,787 (2015); 34 Tex. Admin. Code § 1.26(e). If a claimant relies on an exemption to establish the error, it must provide clear and convincing evidence. 34 Tex. Admin. Code § 1.26(c); Comptroller’s Decision Nos. 117,324 (2022), 100,477 (2012).
Texas imposes on each producer of natural gas a tax at a rate of 7.5% of the market value of gas produced and saved in this state by the producer. Tex. Tax Code §§ 201.051, .052. The market value of the gas is its value at the mouth of the well from which it is produced. Id. § 201.101(a). The value of gas at the mouth of the well is determined by ascertaining the producer’s actual marketing costs and subtracting those costs from the producer’s gross cash receipts from the sale of the gas. Id. All operators must file the producer’s report showing the entire volume of production sold or delivered in-kind during the reporting period. 34 Tex. Admin. Code §3.17(b)(1). The operator is primarily liable for the payment of the tax on production sold by the operator. Id. §3.17(b)(2).
Marketing costs are those costs that are incurred by the producer to get the gas from the mouth of the well to market. Tex. Tax Code §201.101(b). Marketing costs shall include the following: (1) costs for compressing the gas sold; (2) costs for dehydrating the gas sold; (3) costs for sweetening the gas sold; and (4) costs for delivering the gas to the purchaser. Id. §201.101(b). Marketing costs shall not include the following: (1) costs incurred in producing the gas; (2) costs incurred in normal lease separation of the oil or condensate; (3) insurance premiums on the marketing facility. Id. §201.101(c).
Claimant’s marketing cost refund request included hot oil treating, gas meter testing and inspection, electric repair, electrical installation, electrical material, valves and connectors, gas pipeline, ES electrical installation, engineering and patriot supervision, electrical material and automation, and gas flowline and installation.
Marketing cost deductions are the subject of a formal Audit Policy Memorandum. See State Tax Automated Research Document No. 200802434L (Feb. 4, 2008). There are three general rules with regard to marketing costs. First, marketing costs do not include any costs associated with producing natural gas or with the separation of natural gas from oil, condensate, and water. Id. Second, the cost must be necessary and essential to marketing the gas. Id. Third, the cost should be directly related to the physical handling of the gas. Id.
Claimant provided no evidence for the hearing and therefore the ALJ agrees with Staff that Claimant failed to meet its burden to show, by a preponderance of the evidence, that any of the contested refund items are allowable as marketing costs. The partially denied refund claim should be upheld.
III. Findings of Fact
1. During the period at issue, ************** (Claimant) owned and operated an oil and gas production company in CITY, Texas.
2. In September 2017, Claimant filed a refund claim for the period July 1, 2013, through December 31, 2016.
3. The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) conducted a refund audit to verify the claim.
4. The refund claim was for natural gas severance tax for previously unclaimed and under-claimed marketing cost deductions.
5. On May 28, 2019, Staff notified Claimant that its refund claim was partially denied.
6. The total refund request was $318,803.31. Staff issued Claimant a refund of $ 183,403.36, which included $176,490.07 tax and $6,913.29 credit interest.
7. The refund was decreased due to denied lease operating expenses with no supporting records, denied depreciable assets with no supporting records and non-marketing equipment. Denied transactions also included parts, materials, and electricity purchased for non-marketing equipment.
8. Claimant timely requested redetermination of the denied portion of its refund claim.
9. Staff referred the above-referenced case to the State Office of Administrative Hearings (SOAH) and on February 22, 2023, issued Claimant a Notice of Hearing by Written Submission. The notice contained a statement of the nature of the hearing; a statement of the legal authority and jurisdiction under which the hearing was to be held; a reference to the particular sections of the statutes and rules involved; and a short, plain statement of the factual matters asserted, or an attachment that incorporated by reference the factual matters asserted in the complaint or petition filed with the state agency.
10. On February 23, 2023, the Administrative Law Judge issued an order setting the written submission hearing.
11. The record closed May 15, 2023.
12. Claimant did not provide evidence for the hearing.
1. The Comptroller has jurisdiction over this matter. Tex. Tax Code ch. 111.
2. SOAH has jurisdiction over matters related to the hearing in this matter, including the authority to issue a proposal for decision with findings of fact and conclusions of law. Tex. Gov’t Code ch. 2003.
3. Staff provided proper and timely notice of the hearing. Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.105.
4. Texas imposes on each producer of natural gas a tax at a rate of 7.5% of the market value of gas produced and saved in this state by the producer. Tex. Tax Code §§ 201.051, .052.
5. The market value of the gas is its value at the mouth of the well from which it is produced. Tex. Tax Code § 201.101(a).
6. The value of gas at the mouth of the well is determined by ascertaining the producer’s actual marketing costs and subtracting those costs from the producer’s gross cash receipts from the sale of the gas. Tex. Tax Code § 201.101(a).
7. The Comptroller shall refund a tax, penalty, or interest that has been unlawfully or erroneously collected. See Tex. Tax Code § 111.104(a).
8. When a taxpayer requests a refund, it must establish by a preponderance of evidence that taxes were erroneously collected or paid. See, e.g., Comptroller’s Decision Nos. 117,324 (2022), 109,787 (2015); 34 Tex. Admin. Code § 1.26(e).
9. If a claimant relies on an exemption to establish the error, it must provide clear and convincing evidence. 34 Tex. Admin. Code § 1.26(c); Comptroller’s Decision Nos. 117,324 (2022), 100,477 (2012).
10. All operators must file the producer’s report showing the entire volume of production sold or delivered in-kind during the reporting period. 34 Tex. Admin. Code §3.17(b)(1).
11. The operator is primarily liable for the payment of the tax on production sold by the operator. 34 Tex. Admin. Code §3.17(b)(2).
12. Marketing costs are those costs that are incurred by the producer to get the gas from the mouth of the well to market. Tex. Tax Code §201.101(b).
13. Marketing costs shall include the following: (1) costs for compressing the gas sold; (2) costs for dehydrating the gas sold; (3) costs for sweetening the gas sold; and (4) costs for delivering the gas to the purchaser. Tex. Tax Code §201.101(b).
14. Marketing costs shall not include the following: (1) costs incurred in producing the gas; (2) costs incurred in normal lease separation of the oil or condensate; (3) insurance premiums on the marketing facility. Tex. Tax Code §201.101(c).
15. Marketing cost deductions are the subject of a formal Audit Policy Memorandum. See State Tax Automated Research (STAR) Document No. 200802434L (Feb. 4, 2008).
16. There are three general rules with regard to marketing costs. First, marketing costs do not include any costs associated with producing natural gas or with the separation of natural gas from oil, condensate, and water. Second, the cost must be necessary and essential to marketing the gas. Third, the cost should be directly related to the physical handling of the gas. STAR Document No. 200802434L (Feb. 4, 2008).
17. Claimant failed to meet its burden to show, by a preponderance of the evidence, that any of the contested refund items are allowable as marketing costs.
18. The partially denied refund claim should be upheld.
SIGNED June 14, 2023.
KATHY PICKUP
PRESIDING ADMINISTRATIVE LAW JUDGE
ENDNOTES:
[1] The date calculated is 25 days after this decision is signed. See APA, Tex. Gov’t Code § 2001.146(a); S.B. 1095, Acts 2017, 85th Leg. For additional guidance, refer to the Frequently Asked Questions Related to Motions for Rehearing, found here: http://comptroller.texas.gov/taxes/publications/96-1789.pdf