Borough files to dismiss suit by Red Dog over severance tax

  • The owner of the Red Dog mine 90 miles north of Kotzebue and the Northwest Arctic Borough are engaged in a lawsuit over the borough’s decision to replace a payment-in-lieu-of-taxes regime with a severance tax that will triple the mine’s annual bill to more than $30 million. Photo/File/AJOC

The Northwest Arctic Borough has filed for summary judgment to dismiss a lawsuit brought against it by Teck Resources, the Canadian owner of Red Dog Mine 90 miles north of Kotzebue.

Teck filed a lawsuit against the borough on Jan. 15, alleging the borough’s new severance tax is unconstitutional. The borough insists it has the taxing authority granted to any home rule government.

The new severance tax would increase the amount Teck pays the borough from $12 million in 2015 to an estimated $30 million to $40 million in 2016. 

The mine, the world’s largest zinc source and a large lead producer, forms the backbone of the region’s economy. The state formed the borough in 1986, coinciding with the mine’s development and opening in 1987.

Because the new borough would take time to decide its tax structure, it enacted a payment in lieu of taxes, or PILT, agreement with Teck in 1987. Under the PILT, Teck has paid approximately $140 million to the borough and the borough school district over the years.

The borough relies on Red Dog for about 70 percent to 80 percent of its annual revenue, alongside its annual $12.5 million state general fund allotment. The borough levies no property or sales taxes on private citizens or any other taxes on businesses.

According to Teck, Red Dog supports 715 mine-related jobs with $75 million in annual payroll, and the company spends $160 million on supplies within Alaska each year. More than 600 of the jobs are held by shareholders of NANA Regional Corp., the Alaska Native regional corporation for the area.

PILT vs. severance

Teck makes several key arguments against the severance tax.

Most pointedly, Teck argues that the tax unfairly singles out the mine, which uses virtually no borough services.

“Rather than distributing the tax burden among different classes of taxpayers or different economic activities, this Borough imposed its entire tax burden on one taxpayer,” reads the most recent filing from Teck, dated April 29.

“There is evidence that the Borough has taken this approach for illegitimate reasons, deliberately targeting only one captive taxpayer and doing so with the stated purpose of confiscating what the Borough considers its ‘equitable share’ of Teck’s profits, while declining to take any share of the profits earned by any other person or entity in the Borough.”

Teck also argues the borough failed to live up to its terms of agreement. The borough created the severance tax by ordinance, rather than through negotiations with Teck. 

In 2009, the borough created a severance tax effective Jan. 1, 2012. In 2011, the borough renegotiated a PILT agreement with Teck that exempted it from the 2009 severance tax. Under this agreement, Teck paid the borough and its school district more than $57 million between 2011 and 2015.

The 2011 PILT expired at the end of 2015, but gave Teck the option to renegotiate another PILT. Instead, Teck argues the borough passed two ordinances that terminated the ability of mining operations to negotiate another PILT, and another that raised the severance tax rate by 50 percent.

“The combined effect of these ordinances was to dramatically increase the tax, prohibit the Borough from entering into a PILT that would provide for reduced payments, and prevent the Borough from renegotiating the 2011 PILT Agreement in good faith, as provided in paragraph 5 of the 2011 PILT Agreement,” the complaint argues.

The borough says the it has every right to implement constitutionally sound excise taxes how it sees fit, and that it never intended the current PILT system to stick around forever. When the mine first broke ground, the borough said, its prospects were uncertain. Now the time has come to properly tax a profitable organization.

“The Northwest Arctic Borough has an obligation to raise revenue to fund greatly-needed public services,” reads the motion to dismiss filed March 1. “The PILT structure was intended to support an uncertain prospect and an unprofitable mine; it was never intended to continue indefinitely to the benefit of Teck shareholders and to the detriment of Borough residents.”

The borough cites several correspondences between the two entities as proof it negotiated with Teck; the fact the two parties were unable to reach an agreement Teck liked, attorneys said, does not mean there were no negotiations.

As a home rule government, the borough says, it can implement excise taxes as it pleases, which includes severance taxes.

“In Liberati v. Bristol Bay Borough, the Alaska Supreme Court stated, ‘[a] severance tax is a tax upon the taking or extracting of a resource,’” reads the motion to dismiss.

The borough cites similar taxes in Montana enacted on coal industry as proof they meet constitutional muster.

In the April 29 response, Teck wrote the Montana tax is dissimilar; it wasn’t literally the only tax in the area, as it is for Teck.

“The Borough has arbitrarily singled out Teck as the sole ‘person’ that must pay virtually 100 percent of the Borough’s tax burden, and it has arbitrarily singled out Teck’s mining activity and NANA’s mineral resources to bear virtually 100 percent of the Borough’s tax burden,” the filing reads.

NANA’s stake

NANA Regional Corp., the Alaska Native regional corporation for the area, owns the land on which Red Dog Mine operates. As both a direct beneficiary of Teck’s operations and the representative organization for the Alaska Natives in the borough, NANA has a vested interest for both parties to remain happy.

Shelly Wozniak, senior communications director for NANA, said the corporation wants to find a balanced way to provide the borough with revenue without cutting too far into Teck’s bottom line.

“Finding a solution that’s a win-win is in the best interest of the region,” said Wozniak.

The borough mentions the “detriment of borough residents” as a possible outcome of failure to implement a severance tax, but Teck’s royalties to NANA, at least, have been substantial.

NANA underlines the mine’s importance to the region’s residents as both an employment source and a mainstay for the corporation’s revenue.

“We are concerned about jobs,” according to an official NANA statement on its website. “A reduced operating budget for the mine will mean fewer jobs for NANA shareholders. Since 1989, NANA shareholders have received more than $469 million in wages by working at Red Dog. In 2015, approximately 603 NANA shareholders worked at the mine earning $39.3 million in wages.”

Aside from the employment, Teck’s presence fills Alaska Native corporation coffers. Since 1989, Teck ‘s operations at Red Dog Mine have paid $1.3 billion to NANA.

Not only NANA has befitted directly from the mine. The other 11 Alaska Native regional corporations have collected between $12 million and $172 million apiece from Teck since the mine began operations.

As part of the Alaska Native Claims Settlement Act, which established regional Native corporations in 1971, Native corporations distribute royalty income from their lands in what’s called 7(i) sharing. Named for the section of ANCSA, it requires all regional Native corporations to give 70 percent of all timber and subsurface mineral resource revenues to the other regional Native corporations, relative to how many shareholders each has.

ANCSA then requires half of the 7(i) funds from the regional Native corporations to be distributed to the Native village corporations within that respective region.

Under 7(i) sharing, NANA has paid $820 million since 1989 as a direct result of Red Dog Mine’s revenue.

NANA has retained $480 million from Red Dog Mine. In the mine’s lifetime, NANA paid a total $221 million to its shareholders from the mine’s proceeds.

The borough’s argument to raise severance taxes in some ways mirrors the debate over raising state oil taxes.

NANA has concerns that the severance tax will stymie mining exploration projects. NovaCopper, Inc. is currently exploring mineral projects in the Upper Kobuk region. If the borough’s severance tax cuts too deeply into Teck’s pockets, other mining operations could be scared off.

“We believe the tax endangers NANA and non‐NANA funded exploration projects by changing the economics,” according to the statement on NANA’s website. “Future responsible development in the region is a key business strategy so NANA can continue to deliver cash benefits to shareholders.”

DJ Summers can be reached at [email protected].

 

Updated: 
05/04/2016 - 8:14pm

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