The Colorado Supreme Court on Monday ruled in favor of Montezuma County in a long-running tax case against Kinder Morgan.
The final decision opens the door for the county to collect millions of dollars in back taxes owed by the energy company, which extracts carbon dioxide from Montezuma and Dolores counties.
“It will help pay off our new courthouse and go toward local taxing districts,” said county commissioner Keenan Ertel. “It could be in the tens of millions of dollars.”
All special districts will get a share of the payments, including the county, school districts, towns, law enforcement, fire departments, Southwest Memorial Hospital, libraries, water districts and cemeteries.
The complex case began in 2009 when then-Montezuma County Assessor Mark Vanderpool concluded after an audit that Kinder Morgan had underpaid its county property taxes by about $2 million for 2008 production.
The company’s taxable value increased by $56.7 million after Vanderpool rejected a Kinder Morgan request for tariff deduction for transporting its carbon dioxide, saying that Kinder Morgan didn’t qualify because it is a 50 percent owner of the Cortez Pipeline. The pipeline carries carbon dioxide about 500 miles from the McElmo Dome and Doe Canyon to a hub in Denver City, Texas.
Kinder Morgan paid the higher tax bill for 2008, but petitioned for a tax-bill adjustment and refund, claiming that it did qualify for the tariff deduction, and that the county’s retroactive valuation on its carbon dioxide production was not authorized by state statute.
Taxing districts were told to not spend their portions of the additional $2 million paid by Kinder Morgan pending the outcome of the case.
The higher valuation for 2008 was upheld by the Montezuma County Board of Appeals and the Colorado District Court of Appeals in Denver in 2015.
Kinder Morgan then appealed the decision to the Colorado Supreme Court, which agreed last spring to make the final decision. The Supreme Court ruled in favor of the county by affirming the appeals court decision.
In the state Supreme Court opinion, written by Justice Monica Márquez, the court ruled that the “Montezuma County assessor had the authority to retroactively assess property taxes on oil and gas leaseholds operated by Kinder Morgan, after the assessor determined that Kinder Morgan had underreported the wellhead selling price of CO2 gas produced at the leaseholds.”
The court further upheld the county’s claim that Kinder Morgan and the Cortez Pipeline are “related parties because they are in a partnership relationship with each other” and therefore do not qualify for the tariff tax deduction.
Kinder Morgan has continued to claim the disputed tariff pending the outcome of the case. But now the court has ruled Kinder Morgan does not qualify for the tariff deduction.
Montezuma County has been auditing the company’s tax filings since 2008, and recalculating their assessed valuation minus the tariff deduction, which is boosting each year’s tax bill by millions of dollars.
“The audits will continue,” Ertel said.
Because of the court ruling, the county assessor can now bill the company retroactively for the taxes it owes from past years. County officials said they don’t have specific plans for their share of the tax windfall.
“Once it’s in the bank, then we can have that discussion,” said county Administrator Melissa Brunner.
She added that because of the Supreme Court ruling, special districts can keep their share of the $2 million from 2008 tax revenues.
In its conclusion, the Supreme Court did not accept Kinder Morgan’s interpretation of the tax statutes, saying it produces inequitable results.
According to the ruling, “Kinder Morgan contends that if a taxpayer fails to accurately report the value of the oil or gas it sells, thereby causing the assessor to undervalue the taxpayer’s leasehold property, the assessor lacks authority to remedy this undervaluation by issuing a corrective assessment. In such a scenario, the taxpayer would never be taxed on the full value of its leasehold property. In short, Kinder Morgan’s proposed interpretation would produce a tax windfall for the taxpayer – due to the taxpayer’s own error – and would contravene the constitutional principle that a taxpayer’s property tax liability shall be determined based on the ‘actual value’ of the taxable property.”
Kinder Morgan spokeswoman Sara Hughes said Tuesday that the company had no comment on the Supreme Court decision. The Houston-based infrastructure company, the largest in North America, specializes in owning and controlling oil and gas pipelines and terminals.
The Supreme Court case has had many twists and turns, including at one point where county lost at the appeals court level, then had the decision reversed in its favor two months later.
On Monday, a new twist emerged when Montezuma County Assessor Scott Davis abruptly resigned and cited the Kinder Morgan tax case. In a June 14 letter to county commissioners, Davis said that he received notice that he failed to properly notify or respond timely to the Kinder Morgan petition to the State Board of Assessment Appeals.
“This will result in decreased revenues for Montezuma County,” he wrote. “I feel that this has harmed all the citizens of Montezuma County who have put their trust in me, therefore I cannot in good conscience continue to act as assessor.”
In a phone interview Tuesday, Davis said his paperwork mistake does not impact the county’s overall retroactive tax claims with Kinder Morgan. When asked Monday about the paperwork mistake referenced in the letter, county attorney John Baxter said he could not comment because it was a legal issue he was still researching.
Just days after Davis’ resignation, the Supreme Court ruled in the county’s favor, much to his delight.
“I’m very happy for the county, and wish I could have been there to spread the good news. It was a lot of work and expense, but now it will pay off,” Davis said.
He predicts the Supreme Court decision will have a ripple effect for the Colorado oil and gas industry and county assessor offices that collect tax revenues.
“Believe me, the industry is paying attention to this,” Davis said. “The lesson for counties is to conduct regular audits of the industry to make sure they are correctly reporting property values.”
Because of the complexity of oil and gas tax filings, he advised that counties should hire a contractor with energy-company audit expertise.
Davis, 68, said retirement has been on his mind, and that health problems made the decision practical.
“I’ll really miss the people,” he said. “But it’s the right time. I’ve been working my whole life, including 23 years with the county assessor’s office.”