Virginia Supreme Court hears dispute over Wise County's taxation of natural gas reserves

The Virginia Supreme Court heard competing readings of the state's mineral-land tax scheme on oral argument in Production Company et al. v. Wise County. Michael H. Brady, counsel for the appellants, told the court that "this case asks whether assessments of mineral lands must assess the minerals," and argued the courts below wrongly upheld assessments that valued only extraction improvements using a cost approach.

Brady said §58.1-3286 requires assessors to "ascertain the fair market value of ... the gas" and to separately list and value mineral reserves unless a locality has adopted the statute's specific severance-tax alternative. He told the justices the record shows county experts considered only replacement cost for wellheads, compressors and pipelines and provided no valuation of the mineral reserves themselves; Brady said that failure, together with a lack of scrutiny of a 2018 sale, meant the county's assessments could not be presumed correct.

Paul G. Beers, counsel for Wise County, urged the court to affirm the court of appeals. "The statute provides the commissioner of the revenue with a choice," Beers said. He argued §58.1-3286 presents an either/or scheme: a locality may tax reserves under Subdivision 1 or, as an alternative under paragraph 4, impose a severance (license) tax under the county's ordinance. Beers said Wise County had enacted a local levy that functions as a severance/license tax and that, having chosen the paragraph-4 route, the commissioner appropriately taxed the improvements under paragraph 2 using the cost approach.

Justices pressed both sides on textual and historical points. One justice asked whether paragraph 4 or §37-12 (the license-tax provision discussed at argument) prevents a locality that uses the paragraph-4 alternative from also valuing reserves under Subdivision 1; counsel debated whether the local "$37.12" levy and §37-12's license language are functionally equivalent to the paragraph-4 severance tax and what the General Assembly's subsequent enactments imply about legislative intent. Brady pointed to statutory history beginning in 1972 and the 1973 enactment adding license-tax language to argue the alternative was intended to be exclusive; Beers countered that longstanding local practice and administrative acquiescence support the county's interpretation.

The arguments also turned on valuation practice: Brady said the only evidence in the record valuing mineral lands by income was presented by appellants' expert, and that county testimony focused on replacement cost without addressing gas reserves. Beers said the trial record contained evidence that assessors considered alternative approaches sufficiently for purposes of judicial review and that the county's ordinance and regional practice justify deference.

No decision was announced at the close of argument. The court recessed and the clerk announced it would reconvene at 9:00 a.m. tomorrow.