United States

Wyoming: “Buy Down” Payments Not Part of Taxable Sales Value of Extracted Coal

Mar 14, 2016
From KPMG TaxWatch

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Recently, the Wyoming State Board of Equalization ruled that “buy down” payments received by a coal producer were not part of the consideration received for extracting coal.  Wyoming imposes a severance tax on extracted coal based on its “sales value.”  Certain of the taxpayer’s customers, for various reasons, desired to be released from contracts to accept large volumes of coal for the year at issue. After negotiations, these customers agreed to pay the taxpayer in exchange for releasing the customers from their obligation to purchase the contractually allotted coal. On audit, the Department determined that these payments constituted additional consideration for the sale of coal and therefore should have been reported as part of the coal’s “sales value” for severance tax purposes.

Under Wyoming law, the coal severance tax is generally imposed on the sales value of extracted coal. The sales value of coal is generally the selling price. To the extent not included in the selling price, certain other types of consideration that may be provided to the seller are included in computing “sales value.” On appeal, the taxpayer argued that the buyout payments were not for extracted coal, but instead for its agreement to release its customers from their obligations to buy and receive coal yet to be extracted.

The Board agreed with the Department that the statute should be read broadly and that any type of consideration may contribute to the “sales value of extracted coal.”  However, the Board concluded that the taxpayer had offered credible evidence to overcome the presumption that the buy down payments were included in the severance tax base.  Although the Department argued that the ongoing and continuous nature of the contractual relationships between the taxpayer and its customers indicated that the buy down payments were in reality consideration for past production, the Board concluded that the buy down payments appeared to be specific payments to obtain relief from future purchase obligations. Next the Department argued that the taxpayer’s negotiations with its customers were driven by “price-tiering” considerations and that the payments were actually retroactive adjustments to the price paid for produced coal because less coal was being purchased by the customer.  The Board determined that, while “price-tiering” could possibly influence coal supply transactions, the Department had only offered theory and conjecture to support its position that the “buy down” payments were actually “price-tiering” retroactive adjustments. The Board concluded that the buy down payments were not consideration for extracted coal and reversed the Department’s assessment based on the contrary. For more information on In re Powder River Coal Co., please contact Stephen Metz at 303-382-7177.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.