High court says Fayette cannot tax oil, natural gas as real estate
In what Fayette County’s chief assessor terms a “landmark decision” with statewide implications, the Pennsylvania Supreme Court has ruled that Fayette can’t tax oil and natural gas as real estate The Supreme Court ruling, authored by Chief Justice Stephen A. Zappala, reversed Commonwealth Court and Fayette County Court of Common Pleas rulings that supported the county’s four-year-old taxation of oil and natural gas.
James A. Hercik, the county’s chief assessor, said the Supreme Court decision changes the picture in all 67 Pennsylvania counties, many of which taxed oil and natural gas long before Fayette, under pressure from a few citizens, took that step in 1998.
“This potentially is a landmark decision that has far-reaching consequences,” said Hercik. “This affects every county in Pennsylvania. So, in 67 counties, anybody with a gas well will be affected.”
Within the county, Hercik said, the ruling “could have a significant impact” on local real estate taxing bodies: the county, its municipalities and its school districts.
Hercik said the ruling wouldn’t derail the Fayette reassessment program, which goes into effect Jan. 1 as scheduled; however, it could dramatically alter the $36.5 million in 2003 assessed value attributed to minerals, a category that had included coal, stone, oil and natural gas.
Although that amount is miniscule in comparison to the county’s $4.14 billion aggregate assessed value for 2003, Hercik said it’s clear that any shortfall caused by deletion of oil and natural gas assessments means that owners of surface properties will make up the difference.
“If they’re lost (from the tax rolls), they’ll have to be made up somewhere,” said Hercik. “And you know who that is.”
Hercik said that he and assistant county solicitor John Cupp were informed of the Supreme Court decision Friday morning, at which time they met to determine what next steps might be available. Hercik said they also informed the county commissioners of the court decision.
“We don’t know what our options are on appealing this,” said Hercik, who added that he’s hopeful those details can be worked out by this week.
He said that since other counties had been taxing oil and natural gas for decades and Fayette had prevailed in two lower courts, he felt confident in the county’s legal position and was surprised by the high court’s reversal.
“We were doing what everybody else had been doing for years. Now the Supreme Court has reversed all those (prior legal) rulings,” said Hercik.
Basically, the Supreme Court clarified once and for all that oil and natural gas are not covered by the General County Assessment Law of 1933 or by the Fourth to Eighth Class County Assessment Act of 1943.
In doing so, the Supreme Court held that the county court erred by determining that oil and natural gas fell under the term of “real estate,” and that the Commonwealth Court erred by determining that those items fell under the term of “lands.”
The Supreme Court also ruled that because both laws mention specific items on which real estate taxes can be levied, including coal, it follows that any items not mentioned on that list cannot be taxed.
“As the General Assembly saw fit to enumerate the types of ‘real estate’ that are properly the subject of taxation, this court is not at liberty to expand the items authorized for taxation beyond those subjects,” wrote Zappala. “Based on the foregoing (legal reasoning), we agree with appellants that the General Assembly did not authorize the ‘ad valorem’ (real estate) taxation of their oil and gas interests as found by the lower courts.
“As there was no statutory authority for the assessment of appellants’ interests as such, we reverse the Commonwealth Court’s order affirming the trial (county) court’s denial of appellants’ motion for summary judgment on this basis.”
The suit against Fayette County and its Tax Assessment Appeals board was brought by the Independent Oil and Gas Association of Pennsylvania; George O. Scott, doing business as Dorso Energy; Lomak Resources Co.; Phillips Production Co.; Castle Exploration Co. Inc.; Douglas Oil & Gas Inc.; Oil & Gas Management Inc.; and William S. Burkland.
Fayette County Commissioner Sean M. Cavanagh said the Supreme Court ruling appears to finalize the issue of whether oil and natural gas reserves are subject to taxation, which surfaced in Fayette back in 1997 when the commissioners came under fire for not taxing those natural resources.
“When the (state) Supreme Court lays down the law, that’s the law,” said Cavanagh. “I guess sometimes in this life, everybody thinks they’re a lawyer. It’s a done deal, so there’s no reason to cry over spilled milk.”
Cavanagh said that with the growing number of natural gas wells cropping up in Fayette, he thinks the state Legislature might want to implement a “use tax” that would permit taxation of those resources as they are extracted from the ground.
“They’re putting gas wells all over Fayette County. Obviously, there’s money to be made at it. I didn’t read the opinion, but what I was told it’s hard to quantify where the gas is. It’s underground, floating back and forth,” Cavanagh said.
Commissioners Vincent A. Vicites and Ronald M. Nehls could not be reached for comment late Friday afternoon.