State defends claim for $160M in back taxes
State attorneys issued a wholesale rebuttal July 18 in responding to a lawsuit brought by three companies that work on the North Slope against the state Revenue Department over how detailed portions of the state’s oil tax laws are applied.
ExxonMobil, Hilcorp Energy and SAE Exploration, a seismic imaging company, sued the Department of Revenue in state Superior Court June 8 alleging Tax Division officials are using an unenforceable guidance document to improperly collect upwards of $160 million in oil production taxes.
The state’s 14-page response, signed by Assistant Attorney General Katherine Demarest, admits the advisory bulletin in question issued by Tax Director Ken Alper in March 2017 interprets oil tax law and acknowledges the companies sued in the proper venue, but in line-by-line fashion flatly denies the rest of the complaint.
ExxonMobil and Hilcorp contend the state informally adopted the six-page advisory bulletin as a regulation packet and subsequently applied to collectively increase their fiscal year 2018 oil production taxes by about $110 million and to collect another roughly $50 million plus interest in retroactive taxes since 2014.
The state’s filing rejects the allegation that tax regulations “incorporate” the advisory bulletin, but rather asserts that it “interprets statutes” as allowed by state law.
State attorneys also contend that one or more of the plaintiffs may lack standing in the lawsuit and that the state’s sovereign immunity may by applicable to this case.
They request the case be dismissed and the state be compensated for the costs of its defense.
SAE, which holds refundable tax credits earned through its seismic shoots, planned to sell those credits to producers, which in turn could use them against their tax liability. Limiting the amount of credits the producers can apply to their production taxes has in turn hampered SAE’s ability to sell its credits and reduced their market value, according to the original complaint.
The advisory bulletin explains that use of the sliding scale credit prevents a company from using tax credits to take their production tax liability below the 4 percent gross minimum tax floor. The sliding scale credit, which starts at $8 per barrel when oil prices are less than $80 per barrel and steps down to nothing at extremely high prices, is used as a way to install progressivity into the production tax for oil produced from the state’s large, legacy fields such as Prudhoe Bay and Kuparuk River.
However, if a producer were to forgo the per-barrel credit or use a fixed $5 per barrel credit for “new” oil production, the new oil credit and others could reduce a production tax liability to less than the 4 percent floor, according to the bulletin.
The companies insist that Revenue’s own regulations allow taxpayers to choose the order in which credits are applied.
The state’s filing does concur with that assertion, but additionally “denies that such an option relieves taxpayers of the duty to accurately report and pay tax,” the filing reads.
The companies argue further that a 2011 advisory bulletin, issued under former Gov. Sean Parnell’s administration, stated that North Slope producers could reduce their liability below the minimum tax by using new oil or other credits.
The Legislature and Parnell administration overhauled the oil and gas production tax system in 2013 with Senate Bill 21, which survived a voter referendum to repeal it in 2014.
Elwood Brehmer can be reached at [email protected].