On March 27, 2019, Governor Justice signed two bills that impact the coal severance tax in West Virginia: 1) HB 3142, which reduces the rate of severance tax imposed on steam or thermal coal and 2) HB 3144, which creates a new severance tax rebate program for coal producers. Both bills have a June 7, 2019 effective date.
House Bill 3142 is relatively straightforward, and provides for a three year phasedown of the severance tax imposed on steam or thermal coal from 5% to 3%. On July 1, 2019, the severance tax rate for steam or thermal coal falls from 5% to 4.3%, on July 1, 2020 the rate is reduced to 3.7%, and on July 1, 2021 the rate is reduced to 3%. Thermal or steam coal is defined as coal sold for the purpose of generating electricity.
HB 3142 also establishes minimum amounts of distribution of the portion of coal severance taxes dedicated for the use and benefit of coal-producing counties, with the amount to be distributed to be equal to or in excess of the amount distributed for the fiscal year beginning July 1, 2018. This is a “hold harmless” provision to ensure that the coal producing counties will not lose their portion of the coal severance tax as a result of the rate reduction.
House Bill 3144 creates a new article in the West Virginia tax code in order to establish a coal severance tax rebate program. The rebate program applies to capital investment in new machinery and equipment or improvements to real property when purchases or certain leases of tangible personal property or improvements to real property occur on or after the June 7, 2019 effective date. Also, importantly, this is a rebate program wherein taxpayers claim the rebate at the end of the calendar year, in conjunction with filing of the taxpayer’s annual coal severance tax return, not a credit program wherein taxpayers can take credits against the severance tax when monthly severance tax estimated returns are filed.
The rebate offsets the portion of West Virginia severance taxes attributable to the increase in the production of coal that is attributable to, and the consequence of, the taxpayer’s capital investment directly used at a West Virginia coal mine, or coal preparation and processing facility. The maximum amount of rebate allowable is determined by multiplying the amount of the taxpayer's capital investment by 35%. The amount of rebate that can be claimed on the return is determined by applying the calculated maximum rebate amount (35% of the capital investment) against 80% of the state portion of the severance tax that is directly attributable to the increased production of coal at the mine due to the taxpayer’s capital investment.
The amount of severance tax attributable to the increase in coal production at a mine due to the capital investment is determined by comparing the “base” severance tax to the amount of severance tax for the calendar year for which the rebate is being claimed. When the amount of severance tax for a particular calendar year exceeds the “base” severance tax, the difference is the amount of state severance tax due to the increase in coal production at the mine that is attributable to the capital investment. The base severance tax varies depending on the number of years that an operator has produced coal from a particular mine. For established operators, the base is the lesser of calendar year 2018 property taxes or, if the operator has produced coal at a mine for five years or more, the average of the state portion of severance tax collections for the mine for 2014-18. To be eligible for the rebate, an operator must pay coal severance taxes for at least two years before the capital investment is placed in service or use in West Virginia, and the base for new operators is the average amount of the state portion of the coal severance tax during this two-year period.
The rebate program also prevents double dipping by taking both a West Virginia tax credit for the capital investment, while also claiming a rebate against severance tax for the same capital investment.
When the amount of rebate claimed exceeds 80% of the additional state severance tax paid, the unused portion may be carried forward for a period not to exceed 10 years from the date the capital investment is placed in service or use in West Virginia. Prior to claiming the rebate, the taxpayer must make a written application to the Tax Commissioner for allowance of the rebate, and the application must be filed no later than the last day for filing the taxpayer’s annual severance tax return, including any extensions of time to file the return, for the taxable year in which the capital investment to which the rebate relates is placed in service or use. A separate application is required for each taxable year during which the taxpayer places new capital investment in service or use in a mine or coal preparation and processing facility in West Virginia. Failure to file the rebate application results in the forfeiture of 25% of the rebate amount otherwise allowable.
A taxpayer’s rebate can be suspended if the taxpayer is delinquent on any state, local or federal taxes or fees until the delinquency is cured. The rebate may also be “recaptured” if the taxpayer fails to use the capital investment for at least five years in the production of coal in West Virginia.
Given that the two aforementioned bills were just passed and signed into law, the West Virginia State Tax Department has provided no guidance to taxpayers in the form of legislative, interpretive or emergency rules, or draft forms. However, the Tax Department released Administrative Notice 2019-17 on March 13, in which the Tax Commissioner invited public comment on tax bills enacted during the 2019 legislative session. Any suggestions or recommendations must be submitted by May 1, 2019. Coal industry entities should consider requesting further guidance on the rebate program, given that the program will present some complex tax administration issues for the Tax Department. The Tax Department is authorized to promulgate an emergency rule for the rebate program prior to January 1, 2020.