The Taxpayers are the owners of all or a portion of the oil, gas, and other minerals in, on, and under each of their real property located in the counties party to this lawsuit. On April 1, 2010, the Taxpayers filed a complaint against the Counties, seeking declaratory judgment and injunc-tive relief. The first-amended complaint, adding additional parties, was filed on October 7, 2010.
The Taxpayers asserted the following: (1) the Taxpayers are the owners of all or a portion of the oil, gas, and other minerals in, on, and under their real property; (2) the Taxpayers have leased the oil, gas, and other minerals to third-party oil and gas exploration and production companies that, pursuant to the lease agreements, have installed wells and pipelines on the Taxpayers’ property, or lands unitized therewith; (8) those third-party companies are producing oil or gas from the wells and selling the oil or gas at market value, which fluctuates substantially over short periods of time, to one or more third-party purchasers; (4) the Taxpayers are paid royalties on the oil or gas, or both, that is produced from their properties and lands unitized therewith, while the production companies are paid the remainder of the purchase price of the gas as their “production” or “working interest”; |4(5) the produced
The Taxpayers cited the following reasons for alleging the tax described is an illegal exaction: (1) the assessment of an ad valorem tax on properties from which there is production of oil and gas, without assessment of such ad valorem tax on properties that contain oil and gas but from which there is no production violates the Equal Protection Clauses of Arkansas ^Constitution article 2, section 18, and of the Fourteenth Amendment to the United States Constitution; (2) money paid to the Taxpayers as royalty for the sale of oil or gas produced from their properties is “intangible personal property,” and as such, ArlcCode Ann. § 26-3-302 prohibits levying an ad valorem tax on the money; (3) the oil or gas upon which the royalty is paid is included in the ad valorem taxes assessed against the Taxpayers prior to the time that the oil or gas is removed from the Taxpayers’ property, resulting in double or multiple taxation of the same property; (4) the oil or gas upon which the royalty is paid is assessed a severance tax and an income tax that is paid to the State of Arkansas, again resulting in multiple taxation of the same property; (6) the tax upon which royalty is paid for oil or gas production and sale is a privilege or excise tax in that it is assessed after the oil or gas is separated from the realty in which it is located, and is a tax upon the privilege of separating such oil or gas, or upon the sale of such oil or gas, and is therefore a privilege or excise tax in violation of Ark. Code Ann. § 28-58-110; (6) payments received by the Taxpayers from the royalty paid for oil or gas extracted from their property are assessed an income tax by the United States Government and the State of Arkansas and the tax the Counties assess upon the Taxpayers is also an income tax that they are not authorized by law to assess; and (7) the' “average contract price” used in the determination of the ad valorem tax is not based upon and does not reflect the actual contract prices paid for oil or gas produced from the property owned by the Taxpayers, a violation of Arkansas Constitution article 16, section 5.
Various motions to dismiss were filed, and the circuit court held a hearing on January 14, 2011. The circuit court concluded that the Taxpayers had failed to make a proper illegaljexaction6 challenge and dismissed their lawsuit. Specifically, the circuit court found that Arkansas Constitution article 16, section 5 provides that all real and tangible property shall be taxed according to its value, a value to be ascertained in such manner as the General Assembly shall direct; the value of real
On February 28, 2011, the Taxpayers filed a motion for new trial or rehearing, which was denied by an order of the circuit court entered March 18, 2011. The Taxpayers now present the instant appeal.
Before turning to the merits, we must determine the appropriate standard of review. The circuit court’s order of dismissal reflected that the circuit court considered “the motions, the pleadings, evidence presented, the law and other matters” and had held a hearing on the motions to dismiss to consider the arguments of counsel. It is well settled that when a circuit court considers matters outside the pleadings, the appellate court will treat a motion to dismiss as one for summary judgment. See Koch v. Adams,
The Taxpayers argue that the circuit court erred in dismissing their claim because the allegations contained in their complaint supported an illegal-exaction claim. They contend that the claim properly alleged that the tax complained of is, itself, illegal. While the Counties filed several separate briefs, the crux of the argument they collectively counter is that the Taxpayers’ claim actually took issue with the manner in which the tax was assessed. Several of the Counties further allege that the Taxpayers’ claim was improperly raised to the circuit court.
Article 16, section 13 of the Arkansas Constitution grants Arkansas citizens standing to pursue an illegal-exaction claim. See Comcast of Little Rock, Inc. v. Bradshaw,
Here, the Taxpayers are not pursuing a “public funds” type of illegal-exaction claim; rather, they are attempting to make an “illegal-tax” claim. However, the assessments at issue |swere made for the purpose of ad valorem taxation on a mineral, here, the gas, and the Taxpayers in no way dispute that an ad valorem tax on gas as a mineral is legal.
Property taxes are authorized by virtue of the Arkansas Constitution and are required to be levied upon all personal and real property, not exempt, for the levy of taxes for schools, cities, counties, roads, hospitals, and public libraries made within the county in accordance with the Arkansas Constitution and laws of Arkansas. See Ark. Const, art. 16, § 5; art. 14, § 3; amend. 59; amend. 61; art. 12, § 4; art. 16, § 9; amend. 32; amend. 38; amend. 40; amend. 71; amend. 72; amend. 74;
Mineral interests, which include ownership of natural gas deposits, constitute tangible |9real property. See Sorkin v. Myers,
(1) Because of the difficulty of ascertaining the value of a nonproducing mineral right and in order to ensure equal and uniform taxation throughout a state, a nonproducing mineral right has zero (0) value for the purpose of property tax assessment and is included in the value of the fee simple interest assessed.
Therefore, the gas that remains as a mineral in the ground is valued at zero, but a value is assessed for tax purposes if it is produced and sold. As noted in the complaint, there is an equation used for the assessment based on values gathered at the mineral’s point of sale.
A review of the Taxpayers’ first-amended complaint reveals that the crux of their argument was that the tax assessed against them is illegal because of when it is assessed — at the point of sale. The Taxpayers argue that to value the gas for an ad valorem tax based upon a price at a distant market, after it is separated from the ground, is a misapplication of an ad valorem tax and greatly distorts the value to the prejudice of the landowner because, at that point, the value of the gas has been enhanced by capture, treatment and transportation to a point of sale. The Taxpayers’ claim and their argument on appeal, however, ignore our well-settled precedent. This court has strictly adhered to the rule that “if the taxes complained of are not themselves illegal, a suit for illegal exaction will not lie” and that “a flaw in the assessment or collection procedure, no matter how serious from the taxpayer’s point of view, 11fldoes not make the exaction itself illegal.” Hambay v. Williams,
The instant case is similar to that presented in Comcast, supra. In Comcast, the cable-television-services provider had asserted that the Commission’s Tax Division erroneously included' the value of Com-cast’s intangible personal property, property that Comcast contended fell within a statutory exemption, when calculating its assessments. We held that Comcast’s claim did not challenge the validity of the underlying tax, but alleged that the assessment was carried out in an illegal fashion and, therefore, the suit did not come within Arkansas’s illegal-exaction provision. Comcast,
The Taxpayers attempt to present their challenge in a few additional ways. They allege that the way in which the taxes are assessed transform the tax into a tax on intangible personal property or into an income tax; however, as they concede, the values used in the assessment formula are not unique based on the income of each taxpayer. Instead, the assessment is based on average contract prices, production figures, and a standard assessment rate. Any issue with the values used in the formula is an issue with the assessment of the tax. While the Taxpayers claim that the tax at issue is an illegal duplicative tax because it is also subject to a severance tax, such circumstances were explicitly contemplated by the legislature. Arkansas Code Annotated section 26-58-109 (Repl.2008) expressly provides, “[t]he severance tax imposed |nby this subchap-ter is in addition to the general property tax.” Therefore, the co-existence of ad valorem property taxes on minerals, oil, and natural gas interests and the subsequently enacted severance tax on minerals has been explicitly authorized.
Finally, the Taxpayers argue that the tax violates the Equal Protection Clause because landowners that own non-producing mineral interests are not taxed the same way. There are two reasons that argument simply lacks merit here. First, they have not shown how they are similarly situated to those landowners, a requirement to state a claim under equal protection. See Arkansas Beverage Retailers Ass’n v. Langley,
We have held that an allegation that the assessment of taxes was carried out in an unconstitutional and illegal manner does not fall within the illegal-exaction provision. See Pledger v. Featherlite Precast Corp.,
The proper appeal process for allegations of improper ad valorem tax assessments is set forth in Ark.Code. Ann. §§ 26-27-317 to -318 (Repl.1997 & Supp. 2011). An aggrieved property owner’s first step is to contest the ad valorem property tax assessment to the county equalization board. See Ark.Code Ann. § 26-27-317. The board’s decision, once rendered, can be appealed to the county court. See Ark.Code Ann. § 26-27-318. See, e.g., Crittenden Hosp. Ass’n v. Bd. of Equalization of Crittenden County,
For the above-stated reasons, the circuit court was correct in dismissing the Taxpayers’ complaint. The Taxpayers’ avenue
Affirmed.