In today’s opinion, the Supreme Court of Virginia reversed the Court of Appeals and held that Wise County was required to assess the fair market value of natural gas reserves—not just well infrastructure—when calculating property taxes on mineral lands under Code § 58.1-3286.
EQT Production Company and EQT Gathering, LLC owned mineral lands in Wise County containing natural gas reserves, which they sold to Diversified Production, LLC in July 2018. For tax years 2018 through 2020, the County assessed the well infrastructure using the cost approach but entirely excluded the gas reserves from the assessment. The County’s valuations ranged from roughly $104 million to $134 million.
At trial, the taxpayers’ expert, applying the income approach and factoring in reserve value, arrived at figures between $22 million and $33 million. He argued that the cost approach was inappropriate and that well infrastructure has no value independent of the reserves. The County’s expert appraised the property higher than even the County’s own figures, but also excluded the reserves. The trial court upheld the County’s assessment, and the Court of Appeals affirmed on the theory that because the County had levied a license tax under Code § 58.1-3712, it was excused from assessing the reserves under subdivision 1 of § 58.1-3286.
The central question was whether a county’s election to impose a license tax under § 58.1-3712 also excuses it from assessing gas reserves under subdivision 1 of § 58.1-3286. The Court held it does not. Applying de novo statutory interpretation, the Court concluded that the General Assembly created three, and only three, permissible avenues for taxing mineral lands: (1) assess the full fair market value under all three subdivisions; (2) levy a § 58.1-3286 severance tax on gross receipts and assess only improvements and undeveloped land under subdivisions 2 and 3; or (3) levy a § 58.1-3712 license tax and still assess the full fair market value under all three subdivisions, including subdivision 1.
The Court emphasized the distinction between the two types of taxes. A severance tax falls on the value of resources extracted from the ground and is paid by the landowner; a license tax falls on the privilege of being in the business of severing gases and is paid by whoever does the severing, which may not be the landowner at all. Because § 58.1-3712’s prohibition on enacting § 58.1-3286’s gross receipts provisions refers only to Paragraph 4 (the severance tax provision) it has no effect on the subdivision 1 assessment obligation. The County, having chosen the license tax route, remained obligated to assess the reserves. Because the County failed to assess a critical component of fair market value without statutory excuse, the Court found its assessment plainly wrong.
A Virginia Appellate Law Blog 