Taxation of Colorado's Sand and Gravel Reserves

• Publication year: 1983
• Pages: 927
• Citation: Vol. 12 No. 6 Pg. 927

12 Colo.Law. 927 Colorado Lawyer 1983.

1983, June, Pg. 927. Taxation of Colorado's Sand and Gravel Reserves

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Vol. 12, No. 6, Pg. 927

Taxation of Colorado's Sand and Gravel Reserves

by G. Scott Briggs

In 1886, the Colorado Supreme Court declared unconstitutional three bills which had been transmitted to the court by the Senate concerning the taxation of mining claims.(fn1) The court found that it was unconstitutional to assess metallic lode and placer mining properties at an arbitrary per acre value without regard to their actual value and that a just valuation was a prerequisite to a valid levy. However, no constitutional infirmity was found in the use of the gross output of producing mines as the criterion for determining the valuation of metallic classes of mining property.(fn2)

Perhaps as a result of the 1886 decision and subsequent statutory enactments, as well as the gold strikes of the era, a clear method of taxing metallic mining properties was legislated.(fn3) Metallic mines, referred to as "Article 6 Mines," are classified by statute as either producing or nonproducing.(fn4) The statute provides for a real property tax base, using a modified production tax method.

Currently, each county assessor considers the operator's declaration,(fn5) as well as the statutory mandates, and values a producing Article 6 mine at an amount equal to 25 percent of gross proceeds. An exception is made if net proceeds exceed 25 percent of gross proceeds; then, the mine shall be valued for assessment at the amount of net proceeds.

Although entitled "Valuation of Mines," Article 6 does not provide a taxation framework for the following nonmetallic mines:(fn6) coal, asphaltum, rock, limestone, dolomite, other stone products, sand, gravel and clay or earths. These mines are valued for assessment in the same manner as other real property.(fn7) Unfortunately, the methodology for taxation of nonmetallic mining properties is not defined by statute.

Taxation as Other Real Property

The Colorado Constitution declares, in part:

All taxes shall be uniform upon each of the various classes of real and personal property located within the territorial limits of the authority levying the tax, and shall be levied, assessed, and collected under general laws, which shall prescribe such methods and regulations as shall secure just and equalized valuations for assessments of taxes upon all property, real and personal, located within the territorial limits of the authority levying tax; ...(fn8)

This constitutional provision is designed to subject all taxable property to the payment of its fair and equitable proportion of tax revenue necessary for governmental purposes.(fn9)

The difficulty encountered by county assessors charged with the statutory duty of valuing sand and gravel properties for taxation is that such properties are not like other real property. In order to tax sand and gravel reserves as other real property, producing nonmetallic leaseholds and lands have been valued in recent years by using a formula designed by the Property Tax Administrator's office to determine the productive capacity factor (present worth of future income to the landlord).(fn10) A secondary approach is to determine the market value in the ordinary course of trade.

The Formula:

The formula described above is set forth in the Property Tax Administrator's Publication AH 402, "Land Valuation Manual."(fn11) Notwithstanding Tax Advisory Committee approval and review by the Legislative Council, it has been argued that this manual should not be accorded the weight of law. It has been challenged as not being in compliance with the rule-making requirements of the Administrative Procedures Act.(fn12) Although Colorado law expressly authorizes the Administrator to create manuals and appraisal procedures and instructions,(fn13) and the valuation formula is construed as a substantive rule affecting individual rights and obligations and not merely interpretive in nature, the lack of public notice and public hearing may render the formula unenforceable.(fn14)

It is clear that an administrative body does not have the power to impose a new tax and that regulations are limited to executing the will and policy established by the legislature.(fn15) On the other hand, the Colorado Supreme Court has held that construction of a statute by administrative officials charged with its enforcement is to be given deference by the courts.(fn16)

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Under the Colorado Constitution, only a general law can prescribe the methods to secure a valuation of sand and gravel properties. Thus, the Property Tax Division, county assessors and individual operators would benefit from a legislative declaration regarding information required from the taxpayer and the method to be used to reach a just valuation of sand and gravel reserves, as was done for producing Article 6 mines.(fn17) Since there is no clear legislative direction, the Property Tax Administrator's formula for valuing nonmetallic leaseholds and lands has had to serve this tax purpose.

Publication AH 402 advises the assessors that to value producing nonmetallic leaseholds and lands, the following information is needed:(fn18)

--- Economic life of the reserves;

--- Projected annual production of the operation;

--- Applicable market price;

--- Applicable economic royalty rate;

--- Applicable capitalization rate; and

--- The Inwood present worth of one per period factor for economic life of the reserves at the recommended capitalization...