Certiorari to the Colorado Court of Appeals Court of Appeals Case No. 12CA1897
Attorneys for Petitioner: The Poe Law Office LLC Alan Poe Rachel Poe Centennial,
Holland & Hart LLP Christina Gomez Denver, Colorado
Attorneys for Respondents: Cynthia H. Coffman, Attorney General Robert H. Dodd, Jr., Senior Assistant Attorney General Noah C. Patterson, Assistant Attorney General Denver, Colorado
Attorneys for Amicus Curiae Colorado Petroleum Association: Davis Graham & Stubbs LLP Shannon Wells Stevenson Benjamin B. Strawn Denver, Colorado
Colorado Department of Revenue and Barbara Brohl, in her official capacity as the Executive Director of the Colorado Department of Revenue.
¶1 Colorado's "severance tax" statute levies a tax on income derived from the sale of natural gas extracted from Colorado. § 39-29-105(1)(a), C.R.S. (2015). In so doing, the statute permits taxpayers to deduct "any transportation, manufacturing, and processing costs" from revenue in valuing oil and gas resources for tax purposes. § 39-29-102(3)(a), C.R.S. (2015). The question before us is whether this section permits a deduction for the "cost of capital" associated with natural gas transportation and processing facilities. In general terms, the cost of capital is defined as the amount of money that an investor could have earned on a different investment of similar risk. See Atl. Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1147 (10th Cir. 2000). In this case, the cost of capital is the amount of money that BP America Production Company's ("BP") predecessors could have earned had they invested in other ventures rather than in building transportation and processing facilities. Petitioner, BP, claims it can deduct the cost of capital because it is a cost associated with transportation and processing activity. Respondent, the Colorado Department of Revenue ("the Department"), argues that the cost of capital is not a deductible cost because it is not an actual cost. The court of appeals held that the cost of capital is not a deductible cost under the statute. BP Am. Prod. Co. v. Colo. Dep't of Revenue, 2013 COA 147, ¶ 29, P.3d .
¶2 We reverse and hold that the plain language of section 39-29-102(3)(a) authorizes a deduction for any transportation, manufacturing, and processing costs and that the cost of capital is a deductible cost that resulted from investment in transportation and processing facilities. Accordingly, we reverse and remand to the court of appeals with instructions to return the case to the district court for proceedings consistent with this opinion.
I. Facts and Procedural History
¶3 In the 1980s BP's predecessors in interest developed a method for producing natural gas from coal seams in southwest Colorado. In addition to extracting gas, the companies constructed facilities to process the gas and transport it to market. Since then, the predecessor companies and BP have been successfully producing, transporting, and selling natural gas from the coal seams.
¶4 Colorado levies a tax on income generated from the extraction of nonrenewable natural resources, such as natural gas, from within the state. § 39-29-101, C.R.S. (2015). This tax is called the "severance tax." Id. BP and its predecessor companies filed annual severance tax returns on which they reported income and expenses with respect to gas extracted from land in Colorado. In 2005 BP filed amended severance tax returns for tax years 2003 and 2004, seeking to deduct the cost of capital related to its transportation and processing facilities from revenue generated by natural gas sales.
¶5 The Mineral Audit Section of the Department denied the cost of capital deduction. BP requested that the Department's hearing officer review that decision. The hearing officer also prohibited the cost of capital deduction, concluding that the "clear and unambiguous language" used in the statute allows deductions for transportation and processing costs only. He distinguished the cost of capital from transportation and processing costs and depreciation, reasoning that the cost of capital is neither a transportation nor processing cost but is an "opportunity cost that reflects the cost alternatives that were forfeited to pursue a certain action." The hearing officer continued that the statute does not allow deductions for "tying up money that could have been used elsewhere, " reasoning that BP would recover its investment through depreciation deductions. The hearing officer thus issued a final determination that the cost of capital does not qualify as a deduction under section 39-29-102(3)(a).
¶6 BP contested the final determination in district court. The parties stipulated that if the cost of capital is allowed as a deduction, BP is entitled to refunds of $629, 186 and $669, 202 plus interest for tax years 2003 and 2004, respectively. Further, they agreed that there were no disputed issues of material fact and thus submitted cross-motions for summary judgment. Subsequently, the district court ruled that BP is entitled to a refund for its cost of capital because section 39-29-102(3)(a) unambiguously provides a deduction for "any transportation, manufacturing, and processing costs borne by the taxpayer." The court reasoned that absent language to the contrary, the cost of capital is a cost related to transportation and processing and is intended by the General Assembly to be included as an ...