Use tax suit could mean millions for Rio Blanco

County hopes Colorado Supreme Court will hear case against ExxonMobil
RBC — Rio Blanco County is knocking at the door of the Colorado Supreme Court. It remains to be seen if the door will be opened.
“It’s at the supreme court’s door,” said Debbie Morlan, RBC sales and use tax administrator. “They are going to let us know whether they are going to let us in the door.”
Attorneys for RBC have asked the state’s highest court to review a Colorado Court of Appeals’ decision in favor of ExxonMobil Oil Corp. RBC attorneys filed a reply to opposition brief Oct. 10.
In July 2008, a three-member court of appeals backed previous rulings, saying, “… we conclude that the trial court was correct in determining that the definition of ‘construction and building materials,’ as set forth in Rio Blanco County Resolution 81-1, and as interpreted by the county, was invalid and in determining that the equipment in question was not subject to the county’s use tax.”
Attorneys for ExxonMobil filed an opposition brief with the state supreme court Sept. 22. They declined a request to comment on the case.
“We would prefer not to comment on the case until the supreme court has completed its review,” said Neil Pomerantz of Denver, one of the attorneys for ExxonMobil.
The stakes are high. If the court of appeals’ decision stands, officials estimate it could impact the county to the tune of $12.5 million. County Administrator Pat Hooker called that figure “our best guess.”
“It all depends upon how the courts would come up with their decision, and how far back we may or may not have to go considering repayment,” Hooker said. “It would depend on what part of the use tax we have collected (that may have to be refunded). Some of it may fall under a refund provision, and some may not. That’s what we don’t know. What we’re trying to do in putting together that $12.5 million figure is we’re trying not to overstate a potential liability, nor to understate a potential liability. We just don’t know at this time, until we find out more from the court.”
The dispute between Rio Blanco County and ExxonMobil has been going on for several years. From 2003 to 2004, the county claimed ExxonMobil underpaid its use tax by nearly $750,000.
“In the past, they (ExxonMobil) had been paying a dramatically higher amount (of use tax), based on special use activity,” said Malcolm Murray, one of the attorneys for RBC. “Then, all of a sudden, it dropped off significantly. That’s the way it got started.”
ExxonMobil appealed the notice of deficiency, but county commissioners upheld the assessment.
However, since then, Rio Blanco County has lost every other round in this legal fight. RBC presented its case to the State Department of Revenue, the Denver District Court and the Colorado Court of Appeals, and lost each time.
Murray is hopeful the supreme court will hear the case.
“I think the chances are really pretty good,” said Murray, who is with a law firm in Denver. “This is the kind of case they show a lot of interest in. They usually take cases of a significantly public importance, or to resolve conflicting decisions from the court of appeals. This is the kind of case the supreme court would take, based on cases they have taken in the past.”
Murray thinks the RBC case qualifies on both counts. He said the outcome would have far-reaching effects.
“It’s a lot of money to Rio Blanco County,” Murray said. “It’s a lot of money in anybody’s book. If ExxonMobil gets off the hook, there are 120 plus operations (of those, 30 percent file use tax in Rio Blanco County), not any probably as big, but a lot are substantial, that could be affected. And it could have an effect on any other statutory county that imposes a use tax.”
Murray said there are 20 counties in Colorado that have a use tax on construction and building materials.
“This is a case that has an impact on a lot of jurisdictions around the state,” Murray said. “There is a lot of money involved.”
Asked about the reported $12.5 million number potentially affecting Rio Blanco County’s budget, Murray said, “That’s consistent with the figures I’ve seen. It would mean about 20­ percent of the county’s budget. It’s a big impact to the county.
“That’s a very rough estimate (the $12.5 million figure), because use tax can vary from year to year,” Murray said. “It (use tax) is not a property tax; it’s more like a sales tax. If a company bought a lot in one year, it can go way up. If it cut back on drilling and expansion of processing facilities, that number can go down. It’s very much a moving target.”
Murray expects the county will have its answer at least by the end of the year.
“Generally, the supreme court rules on these petitions in 60 to 90 days, but it could be sooner,” Murray said. “ That would be a reasonable time to hear. I would say December, sometime about then.”
The question is: Did Rio Blanco County correctly assess a use tax on construction and building materials associated with ExxonMobil’s natural gas processing facilities in the county?
ExxonMobil, in its opposition brief to the supreme court, said, “… at least 18 of the other 20 statutory counties that impose the same use tax on ‘the construction and building materials’ do not apply their tax on any of the items at issue in this case.”
Murray, attorney for Rio Blanco County, sees it differently.
“ExxonMobil has always characterized it as equipment that is mobile (and not subject to the use tax), that it’s not really construction and building materials,” Murray said. “But of lot of the stuff is concrete, it’s steel, it’s nuts and bolts and fasteners.
“Not everything that ExxonMobil buys and uses in its facilities is building material,” Murray concedes. “The county certainly understands that desks and chairs and computers (used at ExxonMobil gas processing operations in Rio Blanco County) are not construction building materials. A drilling rig brought on to to the site and moved off a couple of months later after the hole is drilled is not construction and building material either. It (the use tax statute) implies the kinds of things you would find at Home Depot. It’s steel, lumber, pipe, concrete, those kinds of things.”
Murray said the state’s use tax statue was left open to interpretation.
“It simply says people will pay use tax on construction and building materials, period,” Murray said. “The big question is what is a construction and building material.
“Had the legislature given us the definition (of construction and building material), or given us a good idea, we probably wouldn’t be having this argument,” Murray said. “All the statute reads is you can impose a use tax on construction and building materials, without any elaboration on what the definition includes.”
In Rio Blanco County’s view, the use tax can be applied to what is known as trade fixtures.
“Improvement to real property can include a trade fixture,” Murray said. “(The statute) doesn’t exempt the trade fixtures. It’s fair to limit (the use tax) to those items that are incorporated or affixed to real property. There’s case law out there that says anything that is attached to real estate becomes an improvement to real property.”
However, the court of appeals didn’t agree.
“The equipment and components … may be considered ‘personal property’ or ‘trade fixtures’ that do not become part of an improvement to real property, but frequently are, and ultimately will, be removed by ExxonMobil,” the court wrote in its ruling. “The county’s interpretation of ‘construction and building materials’ is so broad that it would tax nearly every item of personal property.”
Murray points to another court of appeals case involving Kerr-McGee and ruled on by a different three-member panel. The case was cited in the county’s petition to the supreme court.
“In Kerr-McGee, the qualities of an improvement to real property are that it be an integral and essential component of the facility, that it enhance the value or utility of the property, and that it be affixed to the real property,” the county’s petition read.
The supreme court did not hear the Kerr-McGee case.
“It deals with much the same issue,” Murray said. “The fact they (the supreme court) declined to take the case actually works in our favor. There is some tacit or implicit approval of the outcome, which is what we’re relying on. It seems like it leans favorably in our direction.
“It would have been nice had (the supreme court) taken it up and affirmed the lower court decision,” Murray said. “If they thought it was wrongly decided, they could have called it up and reviewed it, but they didn’t do that.”
Despite the previous legal setbacks, Murray and the county are sticking to their position, and hoping the state supreme court will hear their case.
“I think we have an awfully good argument,” Murray said. “All we’re doing is asking the supreme court to adopt the reasoning used in that Kerr-McGee case. If it’s used and incorporated into real property, it should be classed as construction and building material, and it should be subject to the tax. That’s the basis of our argument.”