The Colorado Court of Appeals has ruled against Montezuma County in a tax assessment challenged by Kinder Morgan CO2 Company.
The Jan. 29 decision overturns a lower court ruling that upheld Montezuma County’s assertion that Kinder Morgan was under-reporting its production and therefore owed additional taxes.
If the new decision stands, Montezuma County, Montezuma County School District RE-1, Southwest Memorial Hospital, the Montezuma County Sheriff’s Office and other districts would have to pay Kinder Morgan back more than $2 million in property-tax revenues.
“It’s a surprise, and we plan to fight it,” said Montezuma County Assessor Scott Davis. “The ruling implies we cannot audit oil and gas companies.”
The county is seeking a re-hearing on the matter, Davis said, and if that fails, it will consider appealing the case to the Colorado Supreme Court.
The complicated tax assessment case has a long and winding history that dates to 2008.
That year, then-Assessor Mark Vanderpool conducted an audit of Kinder Morgan’s reported sales for 2007 and concluded that “omitted production has been discovered.”
The audit resulted in an increased assessed valuation of $56.7 million and increased Kinder Morgan’s property taxes in the amount of $2.03 million.
The dispute centered on a tariff deduction claimed by Kinder Morgan for transporting the carbon dioxide through the Cortez Pipeline to West Texas oil fields.
Vanderpool’s audit claimed Kinder Morgan is a majority partner in the Cortez Pipeline, making it a “related party.” Because of the business relationship, Kinder Morgan didn’t qualify for the tariff deduction that lowers its taxable revenues.
“It is like they are paying themselves. We disallowed it,” Vanderpool said at the time.
James Wuerth, president of CO² for Kinder Morgan, argued that the two companies were unrelated and qualified for a tariff deduction applied to the price of gas at the wellhead.
Kinder Morgan paid the additional tax under protest, and in 2013 appealed the increased valuation to the Board of Assessment Appeals, which ruled in favor of Montezuma County’s higher assessment.
Kinder Morgan, the nation’s fourth-largest energy company, then took the case to the Colorado Court of Appeals, arguing that the retroactive valuation is not authorized by state statute.
On Jan. 29, a three-judge panel agreed and overturned the Board of Assessment Appeals decision.
According to the decision, “We hold the BAA erred in concluding that the statutory scheme allows for retroactive taxation based on the undervaluation of oil and gas leaseholds. The order is reversed, and the case is remanded to the BAA with directions to grant Kinder Morgan’s refund petitions.”
Davis said that if the court ruling holds, it will have a serious impact on county special districts and departments. The $2 million in additional taxes from 2008 already have been paid and distributed to county departments, including rural fire departments.
“Back then, letters were sent out to all the districts to not spend the money pending the outcome of this case,” Davis said.
According to the assessor’s office, the largest payback would be from the Montezuma County School District RE-1, which would owe $942,000.
Other significant amounts owed would include $513,000 from Montezuma County’s General Fund, $129,000 from the Road and Bridge Fund, $71,000 from the Sheriff’s Office, $64,000 from Social Services and $50,000 from Southwest Memorial.
Kinder Morgan has continued to use the contested tariff deduction. The county assessor’s office had plans to conduct audits for 2008-2013 on the company, a potential tax windfall for the county that now is in question.
