TECHNICAL ASSISTANCE ADVISORY 90-003Re: COAL PURCHASED OUTSIDE OF WEST VIRGINIA SUBJECT TO SEVERANCE TAX ON VALUE ADDED BY TREATMENT PROCESSES CONDUCTED IN WEST VIRGINIA Recently, this Office received a letter requesting a technical assistance advisory as to whether taxpayer's post production treatment process activities are subject to West Virginia Severance Tax when the taxpayer performs such activities on coal taken from the ground in another state and purchased by the taxpayer to be loaded for shipment in West Virginia. The taxpayer washes a small percentage of the coal and runs all the coal through a crusher where it is blended and then loaded for shipment by barge, rail or truck. The request for a technical assistance advisory was properly verified and otherwise in conformance with the requirements for such requests. See W. Va. Code § 11-10-5r and TAA 86-001. Taxpayer's letter provides the following statement of facts: X, Inc. is a Delaware corporation that has its principal office in Morgantown, West Virginia. X, Inc. is engaged in the business of buying and selling coal and does not itself own or operate coal mines, either directly or through contract miners. IN connection with its business, X, Inc. owns and operates the X, Inc. Rail and River Terminal (Terminal) located in Monongalia County at which it receives coal purchased from third parties and loads coal into rail and river transportation facilities for sale and shipment to its customers. Occasionally, coal is transported by truck from the Terminal when the river or rail facilities are not available. At the Terminal, the coal purchased by X, Inc. is sampled and analyzed. Less than 10% of the purchased coal is washed at a small preparation plant located at the Terminal. All of the coal is loaded for shipment by means of three feed bins and a conveyor system that moves the coal from the stockpiles to the barge, rail car or truck. The three feed bins are used to combine the appropriate portions of different quality coal to meet the specifications of X, Inc.'s customers. The conveyor system from the feed bins contains a built-in crusher so that the coal passes through the crusher whether it needs to be crushed or not. ON occasion, during extremely cold weather, a freeze-proofing process is applied to the coal as it is loaded for shipment. Most of the coal purchased by X, Inc. is purchased FOB the mine, and X, Inc. pays for having the coal hauled to the Terminal. X, Inc. does not own or operate any facility other than the Terminal for the purpose of receiving, handling and shipping coal to its customers. West Virginia Code § 11-13A-4 provides in part as follows: (a) Treatment process considered as mining. ­ The following treatment processes (and the treatment processes necessary or incidental thereto) when applied by the mine owner or operator to natural resources minded in this state shall be considered as mining and part of the privilege taxed under this article. (Emphasis supplied). (1) Coal. - In the case of coal: Cleaning, breaking, sizing, dust allaying, treatment to prevent freezing and loading for shipment. The taxpayer contends that it is not subject to severance tax when engaged in the treatment processes considered as mining because those treatment processes were not applied by the mine owner or operator. The West Virginia Department of Tax and Revenue determines that the Legislature did not intend to exclude such treatment processes from severance tax by its use of the phrase "when applied by the mine owner or operator to natural resources mined in this State" in setting forth those activities subject to the privilege for which the severance tax is imposed. The severance tax is imposed by the provisions of W. Va. Code § 11-13A-3(a) which states: Upon every person exercising the privilege of engaging or continuing within this state in severing, extracting, reducing to possession and producing for sale, profit or commercial use any natural resource product or products, there is hereby imposed a tax in the amount to be determined by the application of rates against the gross value of the articles produced, as shown by the gross proceeds derived from the sale thereof by the producer, except as otherwise provided, multiplied by the rates, in the classifications and according to the effective dates in subsection (b) of this section. Subsection (c) of W. Va. Code § 11-13A-3 provides as follows: (c) Tax in addition to other taxes. - The taxes imposed by this article shall apply to all persons severing or processing g(or both severing and processing) natural resources in this state and shall be in addition to all other taxes imposed by law. The Legislature's use of the conjunction "or" clearly indicates that the processing of natural resources in this State is subject to the severance tax even though such natural resources may not have been severed in West Virginia. Further evidence of the Legislature's intent to tax treatment processes by all taxpayers (and not just when applied by the mine owner and operator) is found in the following definition of "gross value" under W. Va. Code § 11-13A-2(b)(6): (6) "Gross value" in the case of natural resources means the market value of the natural resource product, in the immediate vicinity, where severed, determined after application of post production processing generally applied by the industry to obtain commercially marketable or usable natural resource products. For all natural resources, "gross value" is to be reported as follows: * * * (D) If severed natural resources are purchased for the purpose of processing and resale, the gross value is the amount received or receivable during the reporting period reduced by the amount paid or payable to the taxpayer actually severing the natural resource. If natural resources are severed outside the state of West Virginia and brought into the state of West Virginia by the taxpayer for the purpose of processing and resale, the gross value is the amount received or receivable during the reporting period reduced by the fair market value of the natural resources of similar grade and quality and in the same condition immediately preceding the processing of the natural resources in this state. Clearly, the Legislature would not have included the provisions in W. Va. Code § 11-13A-2(b)(6)(D) if it did not intend that activities such as those the taxpayer engages in were to be subject to West Virginia Severance Tax upon the value added through those treatment processes made subject to the privilege taxed pursuant to W. Va. Code § 11-13A-4(a)(1). This Department rejects the taxpayer's contention that the processing activity referred to in W. Va. Code § 11-13A-2(b)(6)(D) applies only to the situation where amine owner or operator purchases severed coal from another operator and processes the coal for resale. No such limitation is expressed in the terms of gross value provisions of W. Va. Code § 11-13A-2(b(6)(D) and such an interpretation would result in a determination that the Legislature intended to limit the provisions of W. Va. Code § 11-13A-4(a) in a fashion that would violate other taxpayers' rights to equal protection under the United States Constitution. After examination of the statutory language involved it cannot be found as a matter of law that the phrase "when applied by the owner or operator" was meant to limit the application of W. Va. Code § 11-13A-4 as opposed to merely clarifying that such class was specifically to be included in its application. Therefore, the Legislative regulations promulgated by this Department which address this issue are controlling. Severance Tax Regulations 110 C.S.R. 13A, § 3.5 provide as follows: 3.5 Processing When Not Severed By Taxpayer. ­ When natural resource products are purchased from an unrelated party, or are severed outside this State either by the taxpayer, or by another person from whom the taxpayer purchases such products, for the purpose of processing such products in activities which are deemed to be the exercise of a privilege subject to the severance tax pursuant to Section 5 of these regulations, the taxpayer must report the gross value of such processing according to the following rules: 3.5.1 When the natural resource products are purchased from an unrelated party to be processed for resale, the gross value subject to tax shall be the amount received by the taxpayer from the sale of the processed natural resource product, reduced by the amount paid or payable to the person actually severing the natural resource. 3.5.2 When the natural resource product is severed by the taxpayer or a related party outside of the State of West Virginia, to be process in West Virginia for resale, the gross value subject to the tax shall be the amount received by the taxpayer from the sale of the processed natural resource product, reduced by the gross value of the unprocessed natural resource product as determined under Section 3.5 of these regulations. 3.5.3 When the taxpayer purchases natural resource products or severs natural resource products outside of the State of West Virginia and imports those products, to be processed in West Virginia for the purpose of sale to related parties or to be used or consumed in the taxpayers business, the values determined under Section 3.5 of these regulations shall be substituted for the amount received from the sale of the processed natural resource product under Subsections 3.4.1 and 3.4.2. 3.5.4 In no case may the taxpayer owning natural resource products purchased or brought into the State of West Virginia for processing activities subject to the severance tax pursuant to Section 5 of these regulations take a deduction or allowance from gross value for amounts paid to an independent contractor to perform the processing services. For the foregoing reasons, taxpayers who process natural resources which were severed by the taxpayer or another party outside of this State, must pay West Virginia Severance Tax upon the value added to the natural resources by such processing activities. When coal is purchased outside of the State and brought into the State and subjected to "cleaning, breaking, sizing, dust allaying, treatment to prevent freezing and loading for shipment," severance tax is due upon the difference in value of the coal as determined by reducing the amount received by the taxpayer from the sale of the processed coal by the amount paid or payable to the person actually severing the coal. State Tax Commissioner Charles O. Lorensen has delegated authority to issue this Technical Assistance Advisory to General Counsel Dale W. Steager Dale W. Steager General Counsel Issued: June 3, 1990