FISCAL NOTE



FUND(S):

Division of Forestry Funds

Sources of Revenue:

Special Fund

Legislation creates:

Neither Program nor Fund



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


The stated purpose of this bill to clarify the measure of the severance tax imposed on the privilege of producing timber in the case of a person who does not sell the timber he or she severs and produces, but further processes that timber into other wood products for sale, profit or commercial use. This bill, as written, defines green lumber as “boards of wood that have been sawed from one or more species of logs into various lengths, widths and thicknesses but have not undergone any further processing, including, but not limited to, drying in a dry kiln or otherwise.” The bill would require integrated timber producer-processor businesses to value green lumber, for purposes of the Severance Tax levied by West Virginia Code §11-13A et seq., at 25 percent of the gross proceeds from the sale of the green lumber, or 25 percent of the value of the green lumber before further processing or manufacturing. The bill mandates that value be determined at the value of similar green lumber in the area of the saw mill, or by use of market reports for sales of similar green lumber in lieu of the use of taxpayer gross receipts related to such activities. The bill indicates that the provisions are to be applied retrospectively to the 1993 effective date of West Virginia Code §11-13A-3b. Currently, Legislative Rules provide a “safe harbor” calculation severance tax valuation whereby timber and by-products sold after the logs have been sawn, milled or otherwise manufactured into lumber, cross ties, timbers, veneer and other products for sale, profit or commercial use are valued at 25 percent of gross proceeds on sales. The Rules also provide a similar 25 percent valuation when no sale occurs but the timber is further processed or manufactured. While the 75 percent reduction in value provided by the current Legislative Rule accounts for the value added by kiln drying and manufacturing into lumber, the bill would provide a further discount by applying the 25 percent valuation before kiln drying. This bill appears to be in part related to previous West Virginia circuit court litigation, and would revise the long-standing timber valuation rules embodied in Legislative Rule CSR 110-13A. Regarding the aforementioned litigation, the circuit court ruled in favor of the State Tax Department (i.e., maintaining the valuation rules in Legislative Rule CSR 110-13A). The Taxpayer petitioned to the West Virginia Supreme Court, and the Taxpayer has subsequently withdrawn the appeal with West Virginia Supreme Court. Passage of this bill would result in a reduction in the tax on timber of roughly $50,000 to $100,000 per year for both the WV Code §11-13A tax dedicated to the Division of Forestry and the WV Code §11-13V Workers’ Compensation Debt Reduction Tax. Additionally, the retrospective application of the change could result in some refund claims for prior years. However, for tax years beginning in 2010, 2011 and 2012, the temporary elimination of the WV Code §11-13A-3b tax will result in no revenue loss related to these years for funds dedicated to the Division of Forestry. Additional administrative costs to the State Tax Department associated with passage of this bill would be minimal.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2012
Increase/Decrease
(use"-")
2013
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 0 0
Personal Services 0 0 0
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 0 0
2. Estimated Total Revenues 0 0 0


Explanation of above estimates (including long-range effect):


This bill, as written, defines green lumber as “boards of wood that have been sawed from one or more species of logs into various lengths, widths and thicknesses but have not undergone any further processing, including, but not limited to, drying in a dry kiln or otherwise.” The bill would require integrated timber producer-processor businesses to value green lumber, for purposes of the Severance Tax levied by West Virginia Code §11-13A et seq., at 25 percent of the gross proceeds from the sale of the green lumber, or 25 percent of the value of the green lumber before further processing or manufacturing. The bill mandates that value be determined at the value of similar green lumber in the area of the saw mill, or by use of market reports for sales of similar green lumber in lieu of the use of taxpayer gross receipts related to such activities. The bill indicates that the provisions are to be applied retrospectively to the 1993 effective date of West Virginia Code §11-13A-3b. Currently, Legislative Rules provide a “safe harbor” calculation severance tax valuation whereby timber and by-products sold after the logs have been sawn, milled or otherwise manufactured into lumber, cross ties, timbers, veneer and other products for sale, profit or commercial use are valued at 25 percent of gross proceeds on sales. The Rules also provide a similar 25 percent valuation when no sale occurs but the timber is further processed or manufactured. While the 75 percent reduction in value provided by the current Legislative Rule accounts for the value added by kiln drying and manufacturing into lumber, the bill would provide a further discount by applying the 25 percent valuation before kiln drying. This bill appears to be in part related to previous West Virginia circuit court litigation, and would revise the long-standing timber valuation rules embodied in Legislative Rule CSR 110-13A. Regarding the aforementioned litigation, the circuit court ruled in favor of the State Tax Department (i.e., maintaining the valuation rules in Legislative Rule CSR 110-13A). The Taxpayer petitioned to the West Virginia Supreme Court, and the Taxpayer has subsequently withdrawn the appeal with West Virginia Supreme Court. Passage of this bill would result in a reduction in the tax on timber of roughly $50,000 to $100,000 per year for both the WV Code §11-13A tax dedicated to the Division of Forestry and the WV Code §11-13V Workers’ Compensation Debt Reduction Tax. Additionally, the retrospective application of the change could result in some refund claims for prior years. However, for tax years beginning in 2010, 2011 and 2012, the temporary elimination of the WV Code §11-13A-3b tax will result in no revenue loss related to these years for funds dedicated to the Division of Forestry. Additional administrative costs to the State Tax Department associated with passage of this bill would be minimal.



Memorandum


The stated purpose of this bill to clarify the measure of the severance tax imposed on the privilege of producing timber in the case of a person who does not sell the timber he or she severs and produces, but further processes that timber into other wood products for sale, profit or commercial use. The stated purpose of the bill, as presented above, only mentions green timber not sold but further processed into other wood products for sale, profit or commercial use, however, the actual bill provisions also appear to apply to timber that is sold. Although the inclusion of the retrospective application to 1993 would appear to allow amended returns and refunds of tax previously paid, W. Va. Code §11-10-14(l)(1) limits the time period in which a taxpayer can claim a refund to three years after the due date of the return.



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@wv.gov