One of Wyoming’s larger oil and gas producers scored a $5.3 million tax refund last spring, requiring the state and local governments across five counties to repay the money in the fall.

Merit Energy won most of the refund in March, when the Wyoming State Board of Equalization ruled the company shouldn’t have been required to pay sales taxes on much of the electricity it consumed between early 2017 and early 2020. Because Merit uses a substantial amount of electricity, the taxes — and refunds — were significant. 

The Park County government, for example, learned in September that it would need to repay nearly $743,000.

“It really caught us off guard,” Park County Treasurer Barb Poley said last fall.

The City of Powell, meanwhile, repaid $168,325 — council members approved a budget amendment in September to cover the unexpected expense — while Cody had to give back nearly $172,000.

In a September letter to local governments, the Wyoming Department of Revenue said it “understands these situations cause uncertainty and frustrations at the local level.”

“We receive amended returns, refund requests, and court decisions on a daily basis,” the department added, “but they usually don’t involve this level of monetary impact for our local partners.”

Merit significantly expanded its presence in the state in 2016, when it acquired Marathon Oil Corporation’s Wyoming assets. Today it operates in the Oregon Basin area south of Cody, the Garland Field near Byron and in other parts of Park, Big Horn, Hot Springs, Fremont and Campbell counties. As a result, the five county governments and 23 municipalities were impacted by the refund.

While the Park County government’s bill was the biggest, Hot Springs County — which has a significantly smaller population and budget — had to repay $358,210 while the Town of Thermopolis had to pay back $277,416.

The refunds can be traced back to a state audit of Merit’s financials for February 2017 to January 2020. Based on the findings of the Wyoming Department of Audit, the Department of Revenue initially determined Merit owed about $648,950 in sales and use taxes. However, after the company disputed the findings, the department reversed course and concluded that Merit was actually owed about $295,700.

Merit didn’t stop there, either, arguing it had wrongly been charged sales tax on roughly half of the electricity consumed by its submersible pumps. 

Merit uses the devices to bring production fluid from the bottom of a wellbore up to the wellhead, and there’s no dispute the electricity used in that process is taxable. However, the pumps also move the fluids through Merit’s gathering system and the company argued that 49.3% of its electricity was consumed in that horizontal process and exempt from sales tax.

When the dispute reached the State Board of Equalization, the three-member board agreed with Merit and ordered the government to repay the collected taxes.

Wyoming law says individuals and businesses don’t have to pay sales taxes on “tangible personal property” like electricity if it’s “consumed in production” and falls into one of several categories. One of those tax exemptions covers “sales of power or fuel to a person engaged in the transportation business when the same is consumed directly in generating motive power for actual transportation purposes.”

The Board of Equalization expressed skepticism that company qualified for the exemption, writing that, “we aren’t convinced that Merit is ‘engaged in the transportation business.’”

“A plumber transports materials and tools to a job site; a bakery transports a cake to a wedding reception; an art gallery transports a sculpture for installation in a client’s building. They all transport things in the course of their businesses, but we don’t believe they’re engaged in ‘the transportation business,’” says a footnote to the decision. However, the Department of Revenue had already conceded that Merit was “engaged in the transportation business,” so the board was unable to rule on that point.

Instead, the decision largely hinged on whether the electricity in question was “consumed directly in generating motive power for actual transportation purposes.” Since Merit uses the electricity to transport or “convey” its production fluids, the board found the company qualified for the exemption. That resulted in the multi-million dollar refund.

The administrator of the Department of Revenue’s Excise Tax Division, Bret Fanning, has asked the Legislature to clarify the exemption.

With the current language referring to any people “engaged in the transportation business,” Fanning said, “We get a bunch of questions: What does this exactly mean?”

“There’s an argument out there that everyone may be able to claim this exemption, depending on how you look at it,” he told the Joint Revenue Committee in October.

The department has proposed amending the language to say power and fuel sales are tax exempt when a person is “transporting tangible personal property by railroad or by pipeline.” Fanning said that’s how the department has historically interpreted the exemption and it’s among several other sales tax clarifications being considered by the Legislature.

Meanwhile, the Board of Equalization is asking lawmakers to give it more flexibility to sort out tax disputes.

In a 2018 case involving Solvay Chemicals, a split Wyoming Supreme Court ruled that the board must stick to the legal interpretations presented by the parties, lacking the authority to reach its own determination.

In his own October remarks to the Revenue Committee, Board Chair Martin Hardscog said Merit’s appeal marked roughly the fifth time the board believed that the parties had misapplied the law, but could do nothing about it.

“We had to say, ‘Look, you both have come to us with an incorrect interpretation of this, but because [the ruling in] Solvay tells us we can’t get it right, we basically have to tell you which of your wrong answers is least wrong,’” Hardscog told the committee. “And that’s absurd.”

Lawmakers have introduced a bill this session that would modestly expand the board’s authority, specifying that when it comes to questions under the panel’s purview, “the board is not limited to the legal interpretations presented by the parties.”

Both that change and the sales tax revisions are being considered in the ongoing Budget Session, with lawmakers voting overwhelmingly to introduce them.

In the meantime, it’s possible for other oilfield companies to claim refunds for the past three years and going forward, Fanning told the Tribune in November. He added that the department “would like to remain silent on any pending litigation related to whether or not oilfield companies are ‘engaged in the transportation business’ and thus qualify for that exemption.”