I own the gas but a plant does the processing — do I owe New Mexico's natural gas processors tax?

Plain-English summary

Central Resources, Inc. owned natural gas that it produced in New Mexico. It hired two gathering companies — El Paso Field Services and Williams Field Services — to collect its gas and run it through their processing plants (the Blanco/Chaco plant and the Milagro plant), which removed carbon dioxide (and, at Blanco/Chaco, liquids). After processing, Central Resources took its gas back at the plant "tailgates." The Department assessed natural gas processors tax (NGPT) on two assessments (Nos. 1638 and 1639), totaling several thousand dollars in tax plus interest and penalty. Central Resources paid, sought refunds, was denied, and protested.

The Department moved for summary judgment, and Central Resources never responded — so under Regulation TA 24:12 the Department's facts were accepted as true, and the case was decided on the record. Central Resources had raised three arguments, all rejected:

1. "I'm not a processor, so I don't owe the tax." True, § 7-33-4(A) taxes "processors" — but § 7-33-4(C) separately makes every interest owner liable "to the extent of his interest in the value of such products." Central Resources owned the gas throughout, so it was an interest owner. Reading the statute to give effect to all its provisions (Mathieson v. Hubler), subsection C can't be ignored.
2. "Removing carbon dioxide to meet pipeline specs isn't processing." The Act's definition of "processor" includes extracting by-products from natural gas, and carbon dioxide is a by-product. The Department had already ruled (TRD Ruling 542-95-1) that removing carbon dioxide and water is "processing," industry sources agree, and the New Mexico Supreme Court in Pan American Petroleum Corp. v. El Paso Natural Gas Co. held that removing impurities from gas is "manufacturing" under a closely parallel definition. Agency interpretations get substantial weight (Battershall; § 9-11-6.2(G)).
3. "Tax me only on what I keep — and I keep nothing valuable." No. Section 7-33-2(C) defines "product" to include both the natural gas and the extracted by-products. Read into § 7-33-4(C), the tax is measured by the value of all the gas and by-products the owner held during processing — not just the carbon dioxide (which Central Resources didn't sell). This also matched the Department's longstanding reporting instructions, presumed proper and left unamended by the Legislature (Stratton; In re Sleeper).

Result: the protest was denied. Central Resources, as an interest owner of processed natural gas, owed the NGPT on the value of the gas and its by-products.

What this means for you

You can owe the natural gas processors tax even if you don't run the plant

New Mexico's NGPT isn't limited to the company that physically operates the processing plant. Under § 7-33-4(C), every interest owner of the processed products is liable to the extent of its interest. If you own gas that a third party processes for you, you can owe the tax as an interest owner — hiring out the processing doesn't move the tax off you.

Stripping carbon dioxide (and similar impurities) counts as "processing"

Removing carbon dioxide and water from gas at a centralized plant — even just to meet pipeline specifications — is "processing" for NGPT purposes, not an exempt field or lease operation like well-head separation or dehydration. If your gas goes through a plant that pulls out by-products, expect the processed volume to be within the tax.

The tax is measured by the value of the gas and by-products, not just what you sell

A common misconception is that you're taxed only on the extracted product you keep and sell. The Act taxes the value of both the natural gas and its by-products that you owned during processing. The fact that you receive nothing for a by-product (or credit it away to cover gathering costs) doesn't zero out the tax.

Respond to the Department's motions — silence is treated as consent

Central Resources lost partly by default: it filed protests but then never answered the Department's motion for summary judgment or its motion for decision on the record. Regulation TA 24:12 treats an unanswered motion as consent to the relief requested, and the Department's stated facts were accepted as true. If you protest, follow through on every filing deadline.

Common questions

Q: I hired a plant to process my gas — am I off the hook for the processors tax?
A: No. The tax reaches every "interest owner" of the processed products under § 7-33-4(C), not just the plant operator. Owning the gas through processing makes you liable to the extent of your interest.

Q: The plant only took out carbon dioxide to make my gas pipeline-ready. Is that really "processing"?
A: Yes. Carbon dioxide is a by-product, and extracting by-products at a centralized plant is "processing" — as the Department ruled in TRD Ruling 542-95-1 and as the New Mexico Supreme Court's Pan American Petroleum decision supports. It is treated differently from exempt field/lease operations.

Q: I didn't sell the carbon dioxide, so isn't my taxable value zero?
A: No. The tax is measured by the value of both the natural gas and the by-products you owned during processing (§§ 7-33-2(C), 7-33-4(C)), not just the by-product you retained or sold. Receiving no value for the carbon dioxide didn't eliminate the tax.

Q: Why did the taxpayer lose without a full hearing?
A: It never responded to the Department's motion for summary judgment or motion for decision on the record. Under Regulation TA 24:12, an unanswered motion is deemed consented to, so the Department's facts were accepted and the protest was denied on that record.

Citations and references

Statutes and regulations:

• Natural Gas Processors Tax Act, §§ 7-33-1 to 7-33-8 NMSA 1978
• § 7-33-4(A) — levies a 0.45% (forty-five one-hundredths of one percent) privilege tax on processors, measured by the value of their products
• § 7-33-2(B) — defines "processor" (one who processes natural gas or extracts by-products incidental to processing; excludes field/lease operations like well-head separation, dehydration, purification, desulfurization, compression, or trapping)
• § 7-33-4(C) — every interest owner is liable for the tax to the extent of his interest in the value of the products
• § 7-33-2(C) — "product" means natural gas or liquid hydrocarbons processed by the processor, or any by-product derived therefrom
• §§ 7-29-4(B), 7-30-4(A), 7-31-4(B), 7-32-4 — "interest owner" definitions in New Mexico's other oil-and-gas taxes, read in pari materia to supply the meaning omitted from the NGPT Act
• § 9-11-6.2(G) NMSA 1978 (1996 Cum. Supp.) — a Department ruling is presumed a proper implementation of the laws it administers
• Regulation TA 24:12 — a party has 20 days after service by mail to answer a motion, or is deemed to have consented to the relief requested
• TRD Ruling 542-95-1 — extraction/removal of carbon dioxide and water from natural gas qualifies as "processing" under the NGPT Act

Cases cited:

• Mathieson v. Hubler, 92 N.M. 381, 588 P.2d 1056 (Ct. App. 1978) — statutes are construed to give effect to all provisions and to reconcile them harmoniously
• State ex rel. Battershall v. City of Albuquerque, 108 N.M. 658, 777 P.2d 386 (Ct. App. 1989) — substantial weight is accorded the interpretation given a statute by the agency that enforces it
• Pan American Petroleum Corp. v. El Paso Natural Gas Co., 82 N.M. 193, 477 P.2d 827 (1970) — removal of harmful constituents from gas constitutes "manufacturing" under a definition closely tracking "processor"
• State ex rel. Stratton v. Roswell Independent Schools, 111 N.M. 495, 806 P.2d 1085 (Ct. App. 1991) — the Legislature is presumed to know the actions of state administrative agencies
• In re Application of Sleeper, 107 N.M. 494, 760 P.2d 787 (Ct. App. 1988) — the longer an agency's unamended interpretation stands, the more likely it reflects legislative intent

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Central Resources, Inc.
• Decision PDF: D&O 96-23

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
CENTRAL RESOURCES, INC., I.D.
NO. 3939, PROTEST TO DENIAL OF
CLAIM FOR REFUND. No. 96-23

DECISION AND ORDER ON SUMMARY JUDGMENT

This matter comes on for determination upon the Motion for Summary Judgment filed on

June 28, 1996 by the Taxation and Revenue Department (hereinafter "Department"). Regulation

TA 24:12 provides for a twenty day period following service of a motion by mail for an opposing

party to answer any motion or the opposing party shall be deemed to have consented to the

granting of the relief asked for in the motion. No response has been filed by Central Resources,

Inc. (hereinafter the "Taxpayer"). On August 23, 1996, the Department filed a Motion for

Decision Upon the Record herein, and the Taxpayer has also failed to file any response to said

Motion. In the absence of any answers from the Taxpayer, the Department's statement of

undisputed facts is accepted as true. Based upon those facts and the arguments presented, IT IS

DECIDED AND ORDERED as follows:

FINDINGS OF FACT

1. Following a desk audit, the Department issued Assessment No. 1638 to the
   Taxpayer, assessing $3,544.42 in natural gas processors tax, $771.75 in interest and $354.46 in

penalty for the September, 1993 through August, 1995 reporting periods.

2. On February 2, 1996, the Taxpayer paid Assessment No. 1638 and filed a claim

for refund of said payment.

3. On February 23, 1996, the Department denied the Taxpayer's claim for refund.

4. On March 22, 1996, the Taxpayer filed a written protest to the Department's denial
   of its claim for refund.

5. On February 15, 1996, the Department issued Assessment No. 1639 to the

Taxpayer, assessing $4,758.76 in natural gas processors tax, $1,875.14 in interest and $475.87 in

penalty for the June, 1993 through August 1993 reporting periods.

6. On February 6, 1996, (based on the audit findings and before the assessment was

generated) the Taxpayer paid Assessment No. 1639 and filed a claim for refund of said payment.

7. On April 1, 1996, the Department denied the Taxpayer's claim for refund.

8. On May 2, 1996, the Taxpayer filed a protest to the Department's denial of its

claim for refund.

9. During all aspects of processing, the Taxpayer was the owner of the natural gas

upon which the Department's assessments of natural gas processors tax was imposed.

10. The Taxpayer contracted with two gathering services, El Paso Field Services ("El

Paso") and Williams Field Services ("Williams") to gather the Taxpayer's gas and deliver it to

processing plants which are owned by El Paso and Williams and which were downstream from

the production units where the gas was produced. After processing, the Taxpayer took redelivery

of the gas at the tailgates of the processing plants.

11. El Paso delivered the Taxpayer's gas to the Blanco/Chaco processing plant, which

El Paso Owns. El Paso charged the Taxpayer a fee for gathering the gas and for the extraction of

carbon dioxide and liquids. El Paso credited the value of the liquids extracted from the

Taxpayer's gas against the costs of gathering the gas.

12. Williams delivered the Taxpayer's gas to the Milagro plant which Williams owns.

Williams charged the taxpayer a fee for gathering and for the extraction of carbon dioxide from

the Taxpayer's gas. No other liquids are manufactured or refined by the Milagro plant.

13. The taxpayer did not sell the carbon dioxide extracted from the processed gas.

14. Since at least 1985, the Department's instructions to the natural gas processors tax

report have stated that every person having an interest in products processed at a New Mexico

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plant is liable for the natural gas processors tax to the extent of his interest in those products.

DISCUSSION
The Taxpayer disputes its liability for Natural Gas Processors Tax ("NGPT"). Its first

argument is that, although it is the owner of the natural gas being processed, it is neither engaged

in the business of processing gas nor is it a processor of natural gas, and thus, it is not liable for

NGPT. This argument is based upon the language of Section 7-33-4 of the Natural Gas

Processors Tax Act, §§7-33-1 through 7-33-8 NMSA 1978. Specifically, the Taxpayer relies

upon the language of § 7-33-4(A) which provides:
There is levied and shall be collected by the oil and gas accounting division of the taxation
and revenue department, a privilege tax on processors for the privilege of engaging
in the business of processing based on the value of their products. The measure of
the tax shall be forty-five one-hundredths of one percent of the value of the
products.

The Taxpayer also relies upon the definition of "processor" as found at §7-33-2(B) which

provides:
"processor" means a person who:

(1) processes natural gas or processes hydrocarbons incidental to the processing of natural
gas; or

(2) extracts by-products from natural gas or other hydrocarbons incidental to the
processing of natural gas, individually or any combination thereof. "Processor"
does not mean a person who refines or processes oil, natural gas or liquid
hydrocarbons or extracts by-products therefrom through a process which is
commonly considered a field or lease operation, such as well-head separation,
dehydration, purification, desulfurization compression or trapping;

Admittedly, a literal reading of only subsection A of §7-33-4 supports the Taxpayer's contention

that the NGPT is imposed only upon "processors" who are engaged in the business of processing

natural gas. This reading, however, completely ignores the language of subsection C of that same

statute. Section 7-33-4(C) provides as follows:
Every interest owner is liable for this tax to the extent of his interest in the value of such

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products or to the extent of his interest as may be measured by the value of such
products.

Any Indian tribe, Indian pueblo or Indian is liable for this tax to the extent authorized or
permitted by law.

This subsection clearly provides that every interest owner is liable for this tax to the extent of his

interest in the value of the products. Although interest owner is not defined in the NGPT Act,

giving the term its plain meaning as one who owns an interest in the products processed,

Subsection C cannot be reconciled with the interpretation given by the Taxpayer to subsection A1.

Statutes are to be construed so as to give effect to all of their provisions, and to reconcile

different provisions so as to make them consistent and harmonious. Mathieson v. Hubler, 92

N.M. 381, 588 P.2d 1056 (Ct. App. 1978). Subsection C would be meaningless if the Taxpayer's

interpretation of the NGPT were to be accepted. Since it is fair to infer that the legislature did not

intend to enact a meaningless provision of law, it must be concluded that Subsection C means

what it says and that the NGPT is applicable to the Taxpayer as an interest owner of the natural

gas which was processed.

The Taxpayer next argues that removal of carbon dioxide in order to meet the

requirements for pipeline transportation is not processing. Processing is not specifically defined

in the NGPT Act, although "processor" is defined to include a person who "extracts by-products
from natural gas...incidental to the processing of natural gas." Section 7-33-4(B)(2). Since

carbon dioxide is a by-product, this definition would appear to cover the removal of carbon
dioxide as is done to the Taxpayer's natural gas.

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Although not defined in the NGPT Act, "interest owner" is defined in New Mexico's other oil and gas
taxes, specifically, Sections 7-29-4(B), 7-30-4(A), 7-31-4(B) and 7-32-4 as follows:
a person owning an entire or fractional interest of whatsoever kind or nature in the products at the time of
severance from a production unit, or who has a right to a monetary payment which is determined
by the value of such products.
I believe it is reasonable to draw on this definition as well, since I believe it reasonable to interpret the state's
various and gas taxes in pari materia, since they deal with the same subject matter. Under this definition, it
appears that the Taxpayer qualifies as an interest owner.

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Additionally, the Department, in TRD Ruling 542-95-1 has specifically ruled that the

removal of carbon dioxide and water from natural gas constitutes processing under the NGPT Act.

The facts forming the basis of that ruling request are:
X is an oil and gas well owner/operator in New Mexico. A certain portion of the gas
produced by X is "dry gas", which has a low BTU content and contains significant
amounts of carbon dioxide and water.

...

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Fact Situation 2:

After gathering, but before being put into the transmission pipeline, the gas must be
stripped of carbon dioxide and water to meet the pipeline's specifications. ... X
maintains that facilities of this type only perform dehydration and purification.

The ruling requestor posed the question, "Does this subject the owner of the gas to the natural gas

processor's tax?"

In answering this question, the Department recognized that the NGPT Act does not

specifically define processing, and the ruling analysis relies on the industry definition contained in

H. Williams & C. Myers, Manual of Oil & Gas Terms, 850 (8th ed., 1991):
"Processing" means any process designed to remove elements or compounds (hydrocarbon
and non-hydrocarbon) from gas, including absorption, adsorption, or refrigeration.
Field processes which normally take place on or near the lease, such as natural
pressure reduction, mechanical separation, heating, cooling dehydration, and
compression are not considered processing.

The ruling concludes that "[t]he extraction or removal of carbon dioxide and water from natural

gas qualifies as processing for purposes of the Natural Gas Processors Tax Act." It further ruled

specifically on the question posed, stating:
The large centralized facilities used to remove water and carbon dioxide from dry gas are
processing plants. The equipment making up these plants is not commonly found
servicing individual wells in the field or on the lease.
...

The owners of natural gas that is processed in a centralized facility designed to remove
water, carbon dioxide or other impurities from the gas are subject to New Mexico's
natural gas processors tax.

Substantial weight is to be accorded to the interpretation given a statute by the agency which

enforces that law. State ex rel. Battershall v. City of Albuquerque, 108 N.M. 658, 777 P.2d 386

(Ct. App. 1989). Moreover, any ruling by the Department is presumed to be a proper

implementation of the provisions of the laws that are charged to the Department. Section

9-11-6.2(G) NMSA 1978 (1996 Cum. Supp.)

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Finally, the Department's conclusion is also supported by the New Mexico Supreme

Court's decision in Pan American Petroleum Corporation v. El Paso Natural Gas Company, 82

N.M. 193, 477 P.2d 827 (1970). In that case the gas owner, El Paso, asserted that the gas had to

have harmful constituents removed in order to be accepted by the gas transmission lines or to

avoid injury to the ultimate consumer. El Paso argued that it bought the product as natural gas

and sold it as such, "without materially affecting it in such a was as to constitute manufacturing."

The court held, under the definition of "manufacturer," which closely tracks the definition of

"processor" in the NGPT Act, that El Paso's removal of impurities constituted manufacturing.

Id., 82 N.M. at 197, 477 P.2d at 832. Given this substantial authority, it is concluded that the

removal of carbon dioxide at the Milagro and Blanco/Chaco plants constitutes "processing" for

purposes of the NGPT Act.

Lastly, the Taxpayer argues that the NGPT is imposed only on the value of the extracted

products to which it retains title, and not on the value of all of its natural gas and products going

through the plant. The Taxpayer maintains that because El Paso receives the liquids extracted

from the Taxpayer's gas as a credit toward the cost of El Paso's gathering services, the Taxpayer's

liability for NGPT is limited to the value, which is zero, of the carbon dioxide extracted from the

natural gas at the Blanco/Chaco plant. Similarly, the Taxpayer argues that because it receives no

value for the carbon dioxide extracted at the Milagro plant, there is no basis for imposing NGPT.

This argument ignores the language of § 7-33-2(C) which explicitly defines "product" to

include both the natural gas and the products extracted from the gas. In pertinent part, it

provides:
"product" means natural gas or liquid hydrocarbons, individually or any combination
thereof, which has been processed by the processor or any by-product which has
been derived therefrom by the processor.

Reading this definition into § 7-33-4(C), which imposes NGPT upon every interest owner "to the

extent of his interest in the value of such products or to the extent of his interest as may be

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measured by the value of such products," it is clear that the tax is assessed on the total value of the

natural gas and the by-products of the gas which the Taxpayer owned during processing.

Finally, the Taxpayer's construction of the NGPT also runs afoul of the Department's long

standing interpretation and application of the tax as reflected in the Department's instructions for

reporting the tax. These instructions are presumed to be a proper implementation of the laws

administered. Section 9-11-6.2(G) NMSA 1978. The legislature is presumed to know of the

actions taken by administrative agencies of the state. State el rel. Stratton v. Roswell Independent

Schools, 111 N.M. 495, 502, 806 P.2d 1085, 1092 (Ct. App. 1991). Thus, the more longstanding

the agency's interpretation of the statute without amendment by the legislature, the more likely

that the agency's interpretation reflects the legislature's intent. In re Application of Sleeper, 107

N.M. 494, 760 P.2d 787 (Ct. App. 1988). Given the Department's longstanding interpretation of

the NGPT, it must be presumed that if the legislature thought that the Department was

misapplying the NGPT, it would have amended the statute to clarify its intent. Accordingly, the

weight of authority supports the Department's interpretation of the NGPT and the Taxpayer's

protest should be denied.

CONCLUSIONS OF LAW

1. The Taxpayer filed timely, written protests to the Department's denial of its claims

for refund and jurisdiction lies over both the parties and the subject matter of this protest.

2. As an interest owner of natural gas which it has processed, the Taxpayer is subject

to the natural gas processors tax pursuant to §7-33-4(C) NMSA 1978.

3. The removal of carbon dioxide from natural gas at a processing plant is

"processing" which is subject to the natural gas processors tax.

4. The natural gas processors tax is applied to the value of both the natural gas and

any by-products removed from the natural gas.

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For the foregoing reasons, the Taxpayer's protest IS HEREBY DENIED.

DONE, this 27TH day of September, 1996.

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