CHAPTER 9 STATE MINERAL TAXATION: AN OVERVIEW

• Jurisdiction: United States

Mineral Taxation
(Mar-Apr 1977)
CHAPTER 9
STATE MINERAL TAXATION: AN OVERVIEW
John Fleming Kelly
Holland & Hart
Denver, Colorado

ACKNOWLEDGEMENT

The writer wishes to acknowledge the assistance in preparing this paper of Ms. Bonnie Starr Mandell of Holland & Hart.

TABLE OF CONTENTS

SYNOPSIS

I. INTRODUCTION

II. TYPES OF TAXATION WITH STATE-BY-STATE EXAMPLES

A. General Corporate Taxes

1. Initial and Other One-Time Fees and Taxes

2. Franchise Taxes and Annual Reports

B. Income Taxes

1. In General

2. Net Income Taxes

3. Gross Income Taxes

4. Personal Income Taxes

5. Corporate Income Taxes

C. Property Taxes

1. In General

2. Types of Property

3. Oil and Gas

4. Mines

[Page ii]

D. Severance and Production Taxes

1. In General

2. Oil and Gas

a. Severance Taxes

b. Miscellaneous Oil and Gas Taxes

3. Coal

a. Severance Taxes

b. Miscellaneous Coal Taxes

4. Other Mines and Minerals

5. Pending Legislation

E. Sales, Use and Gross Receipts Taxes

III. CONCLUSION

———————

[Page 9-1]

I. INTRODUCTION

Any attempt to describe the existing state schemes which affect mineral development can easily fall into one of two traps: the explanation can be either too general so as to be almost useless, or too detailed, so that the perspective of the forest is lost. Hopefully, by describing generally each of the various kinds of taxes which may be encountered, and by giving specific state-by-state examples and differences where appropriate, this paper will hew a middle path.

Not that distinctions are that real, or differences that clean cut. Nomenclature for various taxes seems to have developed almost at random, and certainly often without a logical reason. That is to say that what may be labeled as income tax or gross receipts tax in one state may be called a severance tax in another state or a property tax in yet another.

Some of the particular taxes that will be discussed are general in their application, affecting businesses of all sorts, mining, and others. Others are peculiar to the mining or extractive industry. Both types must be kept in mind to arrive at the answer to the question of what is the total tax cost of mining in a particular state.

In writing this paper, the state laws of the following states have been examined: Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, North Dakota, South Dakota, Utah and Wyoming. Such a survey runs the risk of failing to appreciate a distinction or nuance well known to those with a greater familiarity with the laws of a particular state. Hence, it seems well to apologize in advance for any error in interpretation, and to welcome corrections.

II. TYPES OF TAXATION WITH STATE-BY-STATE EXAMPLES

A. General Corporate Taxes

Most sophisticated mining operations today are carried on by means of employing the corporate form of doing

[Page 9-2]

business. Hence, it seems appropriate to discuss taxes peculiar to corporations and levied on the privilege of doing business in the corporate form.

1. Initial and Other One-Time Fees and Taxes:

Each of the Rocky Mountain states collects fees from both corporations organized under the laws of the state ("domestic corporations") and these organized under the laws of other states and qualified to do business in the taxing state ("foreign corporations"). These fees are charged for the filing of certain documents such as the original articles of incorporation, articles of amendment, annual reports, certificates of authority to transact business, change of designated office or agent, applications to reserve name, reduction of stated capital, articles of dissolution, change of registered office or agent, articles of merger or consolidation, and other miscellaneous fees. The documents required to be filed vary from state to state.

All fees charged in Arizona and Colorado are fixed at a flat rate.¹ Montana, Nevada, New Mexico, North Dakota, South Dakota, Utah and Wyoming base their fees for filing articles of incorporation and articles increasing authorized capital stock on a rate schedule based upon the value of the authorized capital stock.² Depending upon the amount of capital stock of a corporation these fees can be substantial, for instance a New Mexico corporation having ten million dollars of authorized capital stock would pay ten thousand dollars ($1 per $1,000 of stock). Idaho charges an initial fee for the transaction of business therein on such a schedule, and this is in addition to an annual franchise tax. Other Idaho fees charged are fixed.³ The disparity in fixed amounts is not substantial.

Greater variations in fees exist with respect to fees charged foreign corporations. For instance, for the filing of articles of incorporation, Nevada has established a maximum fee of $25,000, plus an additional maximum fee of $25,000 for each stock-increasing amendment.⁴ The maximum would only be reached in extreme situations where capitalization is in the billions. New Mexico, South Dakota and Utah include in the valuation only the capital stock represented in the state.⁵ Wyoming charges a flat rate of $10 plus $1 per $1,000, or fractional part thereof, of assets located and employed within the state.⁶ North Dakota charges a fixed initial license fee ($75) plus additional amounts based on the prorated value of corporate property located in

[Page 9-3]

North Dakota compared to all the corporation's property for the calendar year, and gross receipts of the corporation from business transacted in North Dakota compared to all the corporation's gross receipts for the calendar year.⁷ Montana combines all three approaches: It charges a flat, initial license fee of $50, then ascertains the amount which would be due from a domestic corporation based on the value of authorized capital stock, then multiplies such amount by a fraction which is the sum of the value of corporate property in Montana and gross receipts from business transacted in Montana, over the sum of the value of all the corporation's property and gross receipts. The flat license fee is credited toward the amount determined by the multiplication.⁸

2. Franchise Taxes and Annual Reports:

Each state, except Utah, requires each domestic corporation and each foreign corporation authorized to transact business in the state to file an annual report with the designated official.⁹ Variations exist as to what must be disclosed in the reports, the amount of the filing fees, and the time the report must be filed. The filing fee is generally a flat fee.

However, in South Dakota if the annual report of a foreign corporation shows that the proportion of authorized stock has increased, an additional fee is imposed based upon the increase in capital stock.¹⁰

Of the ten Rocky Mountain states, only New Mexico, Wyoming and Idaho impose a "true" franchise or license tax, i.e., a privilege tax on the right to do business or exist in the taxing state. Montana's corporation license tax and Utah's franchise tax are based upon net income, and thus are more in the nature of a corporate income tax. These items will be treated infra under income tax. New Mexico's franchise tax is imposed on, with some exceptions, domestic corporations and foreign corporations for profit engaged in doing business in the state at a rate based upon the book value of the proportion of authorized and issued capital stock represented by property and business in the state. A minimum tax of $10 is imposed.¹¹ Similarly, the annual license tax imposed, with certain exceptions, on domestic corporations and foreign corporations having the right to do business in Wyoming is based on the corporate property and assets located and employed in Wyoming. Rates are graduated.¹² Idaho imposes a franchise (license) tax on, with certain exceptions, all domestic corporations and foreign corporations doing business

[Page 9-4]

in the state, which tax is based on authorized capital stock. The rates are specified. The tax is prorated during the year the articles of incorporation are filed.¹³

B. Income Taxes:

1. In General

With the exception of Nevada, Wyoming and South Dakota, every Rocky Mountain state imposes an income tax on corporations and individuals. Severance and other production taxes, though frequently having the character of income and receipts taxes, are treated infra.

Income taxes are based either on gross income (income received from all sources) or net income (gross income less authorized deductions). Most states follow the Internal Revenue Code in enumerating income from various sources and concluding with a clause designed to reach all income from whatever source unless specifically excluded. Under such statutes income is taxable unless expressly exempt. Several states, such as Colorado, use net income as determined under the Internal Revenue Code with certain adjustments as the income taxable by that state. Adjustments vary among the states, but include such items as the addition of state income taxes and net operating loss deductions. Amounts generally permitted as deductions from gross income are ordinary and necessary business expenses, interest paid or accrued, taxes, uninsured losses, bad debts, reasonable allowances for depreciation, charitable deductions and net carryovers.

2. Net Income Taxes

Arizona and Utah, which are the only two Rocky Mountain states which impose an income tax and which do not use federal income as the state tax base, define net income as gross income less allowable deductions which include trade or business expenses; interest; certain taxes; and reasonable allowances for depreciation, obsolescence and depletion, among others. Both states also allow a deduction of federal income taxes. (North Dakota is the only other Rocky Mountain state to so permit.¹⁴ ) No deduction is allowed in either state for amounts expended in restoring property or making good the exhaustion for which an allowance has...