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Case on Severence Tax of Exports May Cost State $500 Million If It Loses

Posted on: Thursday, 8 September 2005, 00:00 CDT

pjnyden@wvgazette.com

West Virginia must repay coal companies between $400 million and $500 million for taxes paid since 1997, plus interest, if coal companies win a lawsuit to recover severance taxes on exported coal.

In addition, the state and its 55 counties will lose about $45 million a year from three different severance taxes imposed on coal mined in the state.

Lawyers will make oral arguments in the case - called U.S. Steel Mining Co., et al. v. Helton - to the West Virginia Supreme Court on Sept. 20. The court will hear arguments at Marshall University in Huntington, as part of the university's celebration of the 250th anniversary of John Marshall's birth.

Coal companies are arguing that the "Import-Export Clause" in the U.S. Constitution prohibits state governments from imposing any "imposts or duties on imports or exports."

Kanawha County Circuit Judge Tod Kaufman ruled against the coal companies in May 2004.

"The severance taxes at issue are not levied on the coal because it is an export, but the taxes apply equally to every person privileged to sever, extract, reduce to possession, or produce for sale, profit or commercial use coal, and not just the foreign exporters of coal," Kaufman wrote in his decision.

In a March 25 letter to potential allies in the lawsuit, acting Revenue Secretary John C. Musgrave warned that losing the lawsuit would have "a severe negative impact" on state agencies, on counties and municipalities that receive severance tax revenue and on the state's Department of Environmental Protection.

The DEP uses coal severance taxes to help reclaim land and treat acid mine drainage flowing from abandoned coal mining sites.

In their legal brief, the companies argue that Appalachian coal exports have declined in recent years in part because of taxes that make it harder "to compete with less expensive coal from South Africa and Eastern Europe, as well as coal from Australia, Colombia, Venezuela, Indonesia and China."

Total coal tonnage moving through seaports in Virginia declined from 58.5 million tons in 1991 to 24.2 million tons in 2000, the brief states.

"Because West Virginia's taxation of coal exports significantly impairs U.S. foreign commerce and interferes with the federal government's regulatory prerogatives in that sphere, it runs afoul of the Import-Export Clause," the brief states.

In recent years, between 14 percent and 21 percent of all coal produced in West Virginia has been exported.

The United States exports nearly 60 million tons of coal a year, about 40 percent of which comes from West Virginia, according to the West Virginia Coal Association.

Today, the United States is a relatively minor supplier of coal to international markets. It accounts for about 20 percent of all metallurgical coal and 4 percent of all steam coal on that market, according to a legal brief filed by state Tax Commissioner Virgil T. Helton.

Helton notes, "As coal reserves are depleted through mining, the value of those coal properties declines for future property tax purposes... Severance taxes hold a rather unique place in the pantheon of taxes, because of the one-time nature of the thing being taxed."

Helton quotes a recent academic study, noting, "Manufacturers create the goods they sell, farmers grow their crops, and even the timber industry ... regrows the forests it cuts down.

"But mining companies and oil producers extract wealth from the earth that is irreplaceable."

Other states that impose severance taxes on coal include Virginia, New Mexico, Montana and South Dakota.

"The idea that the federal government can demand that any state hand over its natural bounty for export, free of any taxation, is simply ludicrous," Helton concludes.

If West Virginia loses this case, the DEP predicts in its amicus brief, the loss will "establish a perverse incentive for coal companies to export the coal they produce in West Virginia in order to avoid [tax] liability."

The West Virginia Association of County Officials has detailed the potential impacts on counties.

Kanawha County, for example, has used coal severance taxes to support 14 volunteer fire departments, buy equipment for the sheriff's department, contribute to food banks and support county water and cleanup projects.

In addition to U.S. Steel, other companies filing the lawsuit are Consolidation Coal, Laurel Run Mining, McElroy Coal (a Consolidation Coal affiliate), Arch Coal, Mid-Vol Leasing, Coastal Coal-West Virginia, Elk Run Coal (a Massey Energy subsidiary), Paynter Branch Mining, Kingston Resources and Pioneer Fuel Corp.

Three similar lawsuits filed by other coal companies are pending in three West Virginia circuit courts.

Whichever side loses this case before the state Supreme Court is highly likely to appeal to the U.S. Supreme Court.

To contact staff writer Paul J. Nyden, use e-mail or call 348- 5164.

Source: Charleston Gazette, The

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