Liens, Taxes and Bankruptcy in Wyoming – Oh My! 2020 Changes to Ad Valorem Tax and Lien Law

There is a sign near the Casper airport that reads:  “Oil and Gas Pay Most Our Taxes.”  In a State with no income tax, no franchise tax, no transfer taxes and low sales tax rates, the sign sums up a known truth:  taxes on mineral production are the primary revenue streams that fill Wyoming’s State and local government coffers.[1]  Wyoming imposes two primary taxes on mineral production:  severance taxes on extracted minerals and ad valorem taxes on mineral producing property.  Severance taxes are imposed on the taxable proceeds of extracted minerals and are collected by the Wyoming Department of Revenue.  Each Wyoming county assesses and collects ad valorem taxes on real and personal property located within the county borders, including ad valorem tax on mineral producing properties.  The assessed value of the mineral producing property for a given production year equals the value of the minerals produced from the property during the production year.  That is, the amount of ad valorem tax owed to a county is calculated based on the proceeds received by the taxpayer for the minerals produced within the county during the production year.

For mineral producing property, taxpayers report production to the county assessor and ad valorem taxes are assessed on an annual basis in the calendar year following the production year (“Assessment Year”).  Through the 2018 production year, the taxes are paid in two installments, with one due on November 10th of the Assessment Year and one due on May 10th in the year following the Assessment Year.  Yes, this means there is more than 17 months from the end of a production year until the second installment of the ad valorem taxes is due on the production for that year.  In contrast, severance taxes are reported and paid two months following the production month.

The delay in reporting ad valorem production values and paying ad valorem taxes causes various collection and planning problems for the counties[2] especially when mineral prices are low and companies are filing for bankruptcy.  Between 2009 and 2019, mineral production tax delinquencies totaled more than $100 million according to data compiled by the Wyoming County Commissioners Association.  To add insult to injury, and unlike most taxes throughout the nation, bankruptcy claims for unpaid ad valorem taxes lack priority status causing Wyoming counties to stand behind third party creditors and, all too often, to collect $0 from bankrupt taxpayers.  The Wyoming legislature first began addressing these issues in 2004 when it instituted specific legislation concerning liens for ad valorem taxes on mineral production.  See Wyo. Stat. 39-13-108(d)(vi) (“Section 108”).  Section 108 underwent further changes in the 2017, 2019 and 2020 legislative sessions to not only the lien provisions but also reporting and payment requirements.

With mineral producers experiencing cash flow problems and filing for bankruptcy, the 2004 lien provisions of Section 108 are starting to play a key role for creditors (including Wyoming counties), debtors and their attorneys.  However, as of this writing, there is no published case law interpreting those provisions.  A further word of caution, the differences between the various Section 108 versions enacted in 2004, 2017, 2019 and 2020 are significant enough that each production year may have unique notice requirements, perfection requirements and superiority results.

In 2020, the Wyoming Legislature took its most significant steps towards changing its antiquated system and eliminating the substantial delays and problems in collecting ad valorem taxes on mineral producing properties.  First, the tax lien will perfect automatically upon production beginning on January 1, 2021.  See 2020 WY Legis. 141 (Enrolled Act 60).  Second, the legislature enacted changes to cause reports for ad valorem taxes on mineral producing property to be filed with the State Department of Revenue and required those taxes be paid concurrently with severance taxes.  In order to lessen the payment burden on industry, the enacted legislation provides for a graduated change in the ad valorem tax payments to a monthly payment system.  For example, taxes for the 2019 production year are due in five (5) payments instead of two (2) with 25% of the taxes due on October 10, 2020, 25% on November 10, 2020, 16.66% on April 10, 2021, 16.67% on May 10, 2021 and 16.67% on June 10, 2021.  See 2020 WY Legis. 142 (Enrolled Act 78)[3].

While the changes to a monthly reporting system for ad valorem taxes were supposed to begin on January 1, 2020, as of this writing, the Wyoming Department of Revenue does not have a process or system in place for the monthly reporting of ad valorem taxes; production should still be reported to each county and taxes continue to be assessed by the county assessors and collected by the county treasurers.  Like the changes to the lien portion of the statute, the reporting and payment changes are just beginning to impact taxpayers and the various government agencies.  And while a plain reading of Enrolled Acts 60 and 78 may seem to be fairly clear as to reporting, collection and assessment responsibilities as well as payment timelines, reality is lot like looking through the witness’ cruddy screens, dirty windows, bushes and trees in My Cousin Vinny.

During the November 19, 2020 Joint Revenue Committee meeting,[4] there was an acknowledgment that there are several disagreements among the governmental agencies as to the interpretation of the 2020 legislation and, in particular, the implications of Enrolled Act 78 Section 3.  The Department of Revenue, in particular, interprets Section 3 in a manner that is vastly different than the counties’ interpretation and, seemingly, quite astray from what the Legislature thought it enacted.  Additionally, the Director of the Department, Dan Noble, testified that the enactment of Section 3 as a non-codified law has resulted in a lack of clarity for taxpayers, particularly for taxpayers that are not familiar with Wyoming’s tax system.  While the “correct” reading of the 2020 legislation may ultimately have to be decided by courts (including the bankruptcy courts), the Committee requested proposed legislation be drafted to address the problems and various interpretation issues.  The proposed legislation is to be drafted prior to the 2021 Legislative Session.  Accordingly, at least one detail is crystal clear:  the Legislature intends to make more changes to Wyoming’s ad valorem tax laws in 2021.  As to the precise nature of those changes, the saga continues…. In the meantime, it is highly recommended that taxpayers contact the county treasurer for each applicable county and obtain assistance as to the best course of action on the timely payment of ad valorem taxes.

[1] Casper is the “Oil City” and understandably promotes its “hometown” energy.  However, the nearby Powder River Basin produces 40% of the nation’s coal and Wyoming is also home to the nation’s largest supply of trona (soda ash) among other minerals in the State.  The tax discussion applies to all minerals produced in Wyoming.

[2] For an illustration of the devastating impacts of tax delinquencies on Wyoming counties, see:  http://www.buffalobulletin.com/news/article_75df7f40-017b-11ea-8ebb-57ec8281b8d0.html

[3]   Importantly, while only Sections 1 and 2 are codified into the Wyoming Statutes, all Sections of the Enrolled Act are part of the Session Laws and are law.  Interestingly, during the November 19 Joint Committee Meeting, Converse County Treasurer Joel Schell testified that, despite the graduated payments permitted for the 2019 production year, of the taxpayers that have paid taxes for the 2019 production year, 95% paid their first half of production payments in November and did not make a separate October payment.

[4] The pertinent discussion begins approximately 1 hour and 25 minutes in.