Non-Indian lessees extracting oil and gas from the Ute Mountain Ute Reservation in northern New Mexico may find some state taxes reinstated under a 2-1 ruling by a three-judge panel of the U.S. 10th Circuit Court of Appeals July 27.
New Mexico state tax officials successfully appealed a lower court ruling that had been issued in favor of the Ute Mountain Ute Tribe. The ruling had held that five state taxes were preempted by federal law and it prevented the state from further imposing the taxes on the lessees.
In its reversal, the appeals court said the economic burden of reinstating the taxes would fall on the non-Indian operators rather than the tribe, and said that New Mexico “has asserted a sufficient justification for imposing the taxes” even taking into account relevant legislation and “the history of tribal sovereignty.”
There are 186 active oil and gas wells on the reservation that are operated under existing leases and agreements by 12 different oil and gas companies. Natural gas is the primary resource extracted under federal and state mineral development rules.
Once the oil and gas are extracted from tribal land, they are taken off-reservation to be processed and sold using an infrastructure generally comprising state-maintained roads over which oil goes to refineries in New Mexico and natural gas pipelines leading to main lines in that state, all of which increase the economic value of the oil and gas, the court said.
The Ute Tribe generates revenue from oil and gas operations on the reservation through royalties and taxes, receiving 13.1 percent of the wellhead value of the minerals in royalties which are distributed per capita to enrolled Ute Mountain Ute members, the court said, noting that in 2007 the tribe received nearly $4.5 million in those royalties.
In addition, the net effect of possessory interest and severance taxes has been, on average, a 9.5 percent tribal tax on the gross wellhead value of oil and gas extracted on the reservation, the court said.
Besides tribal taxes, New Mexico imposes the five state taxes addressed in current litigation–oil and gas severance, conservation, and emergency school taxes and two ad valorem production taxes—which are paid by the oil and gas operators and are not reimbursed by the tribe, according to the current ruling.
The lower court found that even though the taxes were paid by the non-Indian operators and were not passed on to the tribe, “the economic burden of the taxes—as a real-world matter—fell on the tribe because the evidence shows the taxes impair, in practically one-to-one proportion, the ability of the (tribe) to impose additional taxes,” the appeals court said, concluding, however, that the economic burden ultimately falls on the non-Indian operators.
By tribal resolution, the Utes in 1992 said if the five taxes were found unlawful, the tribe’s “severance tax will be increased by the amount of the five New Mexico taxes” with some $1.3 million in increased severance tax going to approximately 2,000 enrolled tribal members in an amount of about $650 per enrollee, the court noted.
In dissent from the majority ruling, Judge Carlos F. Lucero noted the additional $650 per tribal member would be “no small sum for a tribe whose yearly per capita income is a scant $8,159.”
He also said New Mexico’s taxation of on-reservation oil and gas extraction “imposes a substantial economic burden on the tribe” and neither the tribe nor private oil and gas companies “receive any on-reservation economic benefit in return.”
The district court in this case concluded that oil and gas production on Ute Mountain Ute lands would be “more attractive” to producers without the taxes and the state taxes “impose an economic burden on the (tribe) and its members.” Even though the tax falls on oil and gas companies, the Utes lose revenue “because they cannot impose the same taxes,” the lower court found.
“Because New Mexico provides no on-reservation services to the Ute Mountain Ute or to oil and gas companies, the state’s interest in taxation is minimal,” Lucero said, concluding that the lower court ruling should have been affirmed.
Troy A. Eid and Jennifer H. Weddle, Greenberg Traurig, Denver, filed a friend-of-the-court brief for the New Mexico Oil and Gas Commission and Council of Energy Resources Tribes. Filing for the tribe were Daniel H. Israel, Timothy A. Vollman, and Peter J. Ortego, Ute Mountain Ute Justice Department, who was not immediately available for comment.