State Short $40 Million in Coal Taxes Since 2000

Colorado has failed to collect nearly $40 million in coal severance taxes since 2000 that should have been paid under state statutes.

In a July 6, 2007 opinion, Attorney General John Suthers found that the Department of Revenue had incorrectly ruled that coal severance tax rates should not be raised because of TABOR (Taxpayer Bill of Rights) restrictions. Under the coal severance tax law, the rate is supposed to be adjusted for inflation each year. However, in 1992, the Department of Revenue stopped adjusting the rate for fear of violating TABOR.

The request for an AG’s opinion came as result of a report by the State Auditor.

The result is that the 2006 severance tax rate was only 54 cents per ton, while the actual rate should have been about 71 cents per ton. In addition, Colorado coal production has increased since 1993 by about 73 percent. So the state has collected less money on much more coal production.Colorado coal production in 1993 was about 22 million tons; in 2006, 36.2 million.

In 1977, the Colorado General Assembly passed a severance tax law that tied the tax rate paid by coal companies to the U.S. commodity price index. The law was amended in 1988 so that the tax rate was supposed to be increased or decreased by one percent for each 1.5 percent change in the federal commodity price index. The idea was to keep the tax rate apace with commodity prices when they rose or fell.

In a memorandum dated April 7, 1993, however, the Department of Revenue unilaterally froze coal severance tax rates at 54 cents a ton. The memorandum said:

Beginning with the tax rate for November 1992, no further increases or upward revisions to tax rates will be made. Rates will be adjusted downward should appropriate index of producers’ prices declines occur (as in December 1992). Until further notice the severance tax rate on coal for fiscal quarters beginning on or after December 1, 1992 will be 54.0 cents per ton.

But in July 2007, Suthers said this decision was clearly wrong. In a strongly worded opinion, Suthers wrote:

Because this statute was enacted prior to TABOR’s November 4, 1992 effective date, it does not conflict with TABOR and a vote is not required prior (to) the Department assessing the increased coal severance tax rate as required by statute. The Department’s failure to impose the tax since 1993 was erroneous, and it must implement the statute as written.

Furthermore, the Department has no discretion in calculating the current tax rate. The Department must apply the plain language of the statute and calculate the current coal tax rate using the increase or decrease in the index of producers’ prices based on the level of that index on January, 1978.

The upshot is that by failing to enforce the law, the state has allowed coal companies to escape nearly $40 million in severance tax payments since 2000. Prior to 2000, increases in the commodity price index were relatively small, and coal production relatively stable, so the tax collections roughly equaled what they should have been.

According to several people at the Department of Revenue, the department has not yet calculated exactly how much money was missed. Colorado Confidential’s calculations — which we ran past department experts — show that the tax rates and payments totals should have been as follows:

It isn’t clear whether the state can collect the back taxes that the coal industry should have paid. Nate Strauch, spokesman for the attorney general’s office, said that the Department of Revenue didn’t ask that question when it requested the AG opinion.

John Vecchiarelli, senior director of taxation for the Department of Revenue, says, “The statute of limitations would only allow us to go back three or four years. But I don’t think that question has been addressed yet.”

Jim Meyers, manager of the revenue department’s mineral audit section, said that when the tax bills were sent to the coal companies, a clause was inserted qualifying the amount being charged, saying that the issue of the tax rates was still open and the companies could still be liable for the additional funds eventually. However, Meyers said that the documents containing this information couldn’t be released because they contained confidential information from the companies.

Under Colorado’s coal severance tax formula, the first 1.2 million tons of coal mined annually is exempt from the levy. Surface-mined coal pays the full tax rate, while underground coal pays one-half of the rate. Three-quarters of Colorado’s coal is mined underground.

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