June 23, 2019

Colorado Court of Appeals: Return on Investment Not Deductible Cost for Severance Tax Purposes

The Colorado Court of Appeals issued its opinion in BP America Production Co. v. Colorado Department of Revenue on Thursday, November 7, 2013.

Return on Investment—Severance Tax—Deductable Cost.

The Colorado Department of Revenue (Department) appealed the judgment entered in favor of BP America Production Company (BP) on BP’s motion for summary judgment. The Court of Appeals reversed the judgment and remanded the case for entry of judgment in the Department’s favor.

The trial court found that return on investment (ROI) is a deductible cost for severance tax purposes under CRS § 39-29-102(3)(a), and allowed BP to deduct such expenses from its tax returns. BP’s ROIs were associated with facilities used for transporting, manufacturing, and processing natural gas.

The Department contended that the trial court erred in holding that ROI is a deductible transportation or processing cost under CRS § 39-29-102(3)(a). CRS § 39-29-105(1)(a) imposes a tax on “the gross income of crude oil, natural gas, carbon dioxide, and oil and gas severed from the earth” in Colorado. A taxpayer’s gross income is “the net amount realized by the taxpayer for sale of the oil or gas.” The net amount is calculated based on “the gross lease revenues, less deductions for any transportation, manufacturing, and processing costs borne by the taxpayer.” ROI is not a cost that has already been expended to transport or process oil or gas from its point of extraction at the wellhead. Because only costs incurred directly for the transportation or processing of oil or gas are allowable deductions under the statute, ROI is not a deductible cost. Therefore, the trial court erred when it allowed ROI as a deductible transportation or processing cost under CRS § 39-29-102(3)(a).

Summary and full case available here.