297 S.E.2d 836 | W. Va. | 1982
The State Tax Commissioner appeals from a judgment of the Circuit Court of Kanawha County which modified tax assessments levied against four companies [hereinafter referred to as taxpayers]
In 1976, the Commissioner audited the taxpayers’ business and occupation tax returns for the 1970-75 tax years. As a result of this audit, he issued deficiency tax notices against the taxpayers for a total amount of $121,386.51.
I.
To resolve the issue, it is necessary to understand the taxpayers’ participation in the logging system. The taxpayers cut timber and operate saw mills. They transport felled timber from the field to their saw mills.
The logging process begins by acquiring the right to cut and remove timber. The standing timber is called “stumpage.” After a tree is cut down, a logger removes the limbs (“delimbing”) and tree top (“topping”) from the trunk. The remaining tree trunk is then taken to a central collection and loading area. At this time, the trunk is cut into smaller log sections. This process is referred to as “bucking.” After bucking, the logs are loaded onto trucks and transported to a saw mill. After their arrival, bark is removed from the logs and they are either cut into lumber or used to manufacture wood chips.
The Commissioner argues that timber is produced for purposes of taxation when it arrives at the saw mill; therefore the timber should be valued at the mill. The taxpayers contend that production ends once the tree is severed from its root structure; therefore valuation should occur in the field. The effect of this disagreement is to either include or exclude the costs of del-imbing, topping, bucking and transporting in the production value.
II
By law, producers of natural resources and manufacturers pay a “privilege tax” on the value of their products. W.Va.Code § 11-13-2a imposes such a levy on persons “in the business of severing, extracting, reducing to possession and producing for sale, profit or commercial use any natural resource products _” W.Va.Code § 11-13-2b places a lower levy on persons “manufacturing, compounding, or preparing for sale, profit or commercial use” various types of goods and commodities.
Determining the value subject to the production levy is a straightforward procedure when the producer sells the natural resource on the open market. Difficulty arises, however, when the producer consumes the material in its own manufacturing process. The latter situation is present here because the taxpayers produce timber which they then use to manufacture lumber and other wood products. Prior to July 1, 1974, the production value of a natural resource was, by regulation, equated to 20 percent of the gross proceeds obtained for the product manufactured from the natural resource. Reg. BOT 6.50(b) (1964). Thus, prior to July 1,1974, the taxpayers paid the production levy on 20 percent of whatever sum they obtained for their manufactured products.
The controversy involved in this case developed after the Commissioner promulgated new regulations effective July 1, 1974.
After July 1, 1974, the taxpayers continued to report the production value of timber as 20 percent of the manufacturing gross proceeds. However, using the new methods authorized by the regulations, the Commissioner’s calculated values equaled approximately 50 percent of the gross proceeds. The tax difference created by application of the levy upon the 30 percent variation in valuation is at issue here.
Ill
In order for the regulations employed by the Commissioner to be valid, they must determine the production value at the locale where production of the natural resource ends.
*63 The measure of the tax under the Business and Occupation Tax Act on the privilege of producing for sale, profit, or commercial use, any natural resource product, is the value of the article produced at the point where production ends, and not the value at the point where it is sold. Code, 11-13-1 et seq., ll-13-2a.
Similarly, the “cost” alternative may measure only those costs incurred up to the end of production.
Therefore, in order for the regulations as written and as applied to be valid, production must end at the saw mill. For the reasons given below, a majority of the Court believes that production ends after the tree is severed from its root structure and its limbs and top are removed. Thus, we find that the Commissioner erred in promulgating a “place of use” regulation because “place of use” and “place of production” are quite commonly not the same. Additionally, the Commissioner improperly included costs incurred after delimbing and topping in his determination of production value.
The starting point for our decision is the statutes governing imposition of taxes on production of natural resources and manufacturing. W.Va.Code § ll-13-2a, which establishes the levy rate for the production of natural resources, includes “severing, extracting, reducing to possession and producing for sale, profit or commercial use any natural resource products .... ” The Commissioner argues that the phrase “producing for sale, profit or commercial use” encompasses all activities until the product is transformed into a commercially viable product. We reject this argument because it ignores the fact that timber is commercially saleable in many forms. The right to cut timber may be sold. Once timber has been cut down, it may be sold. Once it has been severed, delimbed and topped, it may be sold.
The record is replete with expert testimony that preparation of timber for manufacturing begins with “bucking,” the procedure in which trees are cut into logs of differing lengths in order to produce different products. For example, crossties, furniture veneer and plywood all require different lengths. Although other factors such as the quality of wood in a certain tree also determine the log length, it is clear that once bucking takes place, the available uses of the log have been greatly limited. Thus, bucking is the first conscious step in the preparation of the manufactured product.
Consistent with this expert testimony, both the present and the past Tax Department regulations covering determination of production value indicate that production does not include bucking and transportation, but ends once the tree has been severed, delimbed and topped. The 1964 regulation, in effect for 10 years, applied to persons producing timber “by cutting” it. Reg. BOT 6.50(a). The present regulation contains an instructional example which informs taxpayers that they must calculate the “value of the timber on the ground after severance.” Reg. BOT 1.2a(G)(7). These factors, while not determinative, rebut the Commissioner’s assertion that production begins upon severance and extends to delivery at the saw mill.
Prior to the 1974 rule changes, tax commissioners applied a 20 percent of gross proceeds formula to determine production value for at least 40 years. The record does not contain testimony indicating whether the 20 percent figure is an arbi
Additionally, we note that the Legislature has amended W.Va.Code § 11-13-2a to provide a more specific definition of timber production. Effective March 31, 1982, production of timber ends when the tree is severed and its limbs removed. W.Va.Code § 11-13-2a (1982 Cum.Supp.). Although the amended statute does not control the disposition of this case, we find the Legislature’s view compelling as we determine what constitutes timber production.
The parties have cited a number of cases which they believe support their positions. These cases may be classified into two categories. The first classification contains decisions which establish the general rule that the value of a natural resource must be determined at the place of production. Soto v. Hope Natural Gas Co., supra; Hope Natural Gas Co. v. Hall, 102 W.Va. 272,135 S.E. 582 (1926), aff'd, 274 U.S. 284, 47 S.Ct. 639, 71 L.Ed. 1049 (1927). The second category contains cases which are individualized determinations in specific factual settings concerning when production of a particular natural resource ends for purposes of the business and occupation tax production levy. Gilbert Imported Hardwoods, Inc. v. Dailey, 167 W.Va. 587, 280 S.E.2d 260 (1981) (coal); Bishop Coal Co. v. Dailey, 166 W.Va. 548, 276 S.E.2d 220 (1981) (coal); United Fuel Gas Co v. Battle, 153 W.Va. 222, 167 S.E.2d 890 (1966) (natural gas).
In the present cases, we must determine when the production of timber occurs for it is at that point that the value must be calculated. Soto v. Hope Natural Gas Co., supra. We believe a reasonable application of W.Va.Code § 11-13-2a to the facts present results in a finding that for purposes of W.Va.Code § 11-13-2a [1974 Replacement Vol.], production of timber ends upon the severance, delimbing and topping of the tree. Our conclusion is supported by the expert testimony contained in the record, administrative actions by previous tax commissioners, and the Legislature’s 1982 amendment of W.Va.Code § 11-13-2a.
Consequently, we find that the Commissioner erred in calculating the deficiency assessments in this case. The “place of use” alternative contained in Reg. BOT 1.2a is incorrect as a matter of law because timber production must be valued at the point of production. That location is in the field, not at the saw mill. Likewise, the assessments based on the “cost” method are in error because they included factors such as bucking and transportation to the saw mill. These costs are not to be included in determining the production value.
There remains a related issue to be considered. Because the Commissioner calculated production as continuing through delivery to the saw mill, he refused to give Georgia-Pacific industrial expansion credit for construction of an area at the saw mill designed to store logs prior to manufacture. Such credit was given for a similar area designed to store manufactured lumber. Since production ends in the field, Georgia-Pacific is logically entitled to the industrial expansion credit provided by W.Va.Code §§ 11-13C-2, -3.
For the reasons given above, we affirm the judgment of the Circuit Court of Kana-wha County.
Affirmed.
. The appellees are R.S. Burruss, doing business as R.S. Burruss Lumber Co.; Kessel Lumber Supply, Inc.; Georgia-Pacific Corp.; and Hinchcliff Lumber Co.
. The original deficiency assessments per company were $13,412.88 for Burruss; $3,674.74 for Kessel; $93,107.31 for Georgia-Pacific; and $31,191.58 for Hinchcliff.
. Individual penalties were $2,716.23 for Bur-russ; $887.26 for Kessel; $17,459.05 for Georgia-Pacific; and $7,086.21 for Hinchcliff.
. Final assessments imposed by the Commissioner were $8,502.70 for Burruss; $3,674.74 for Kessel; $83,869.35 for Georgia-Pacific; and $21,091.58 for Hinchcliff.
. The lower court imposed deficiency assessments of $7,089.07 for Burruss; $6,051.61 for Georgia-Pacific; and $20,194.24 for Hinchcliff. The assessment against Kessel was vacated and a refund awarded.
. Although the Commissioner’s audit covered the 1970-75 tax years, this dispute concerns only the valuation of timber from July 1, 1974, to the end of the 1975 tax year. We note that the Legislature has amended the production value provision by defining timber production as the severing and delimbing of a tree. W.Va. Code § 11-13-2a(7) (1982 Cum.Supp.) This statute does not affect this case since it was not enacted until 1982.
. The Commissioner used the "place of use” alternative to calculate production value in the Georgia-Pacific and Hinchcliff cases.
. The Commissioner used the "cost" alternative to calculate the production value in the Burruss and Kessel cases.