Brief ⁽¹⁾

Sub. for SB 571 would create the Natural Gas Producer Ad Valorem Tax Refund and Bond Retirement Fund in the State Treasury. The money in the Fund would be used to pay amounts due as a result of a Federal Energy Regulatory Commission order which disallowed the pass through of the Kansas ad valorem property tax in the sale of natural gas to first purchasers. Pipelines could file with the State Corporation Commission a claim for the payment of refunds and interest relating to a claim that refunds and interest associated with the ad valorem tax is due and owing. Producers which have already paid refunds also could file claims to recover amounts paid. Pipelines would be required to execute a release, satisfactory to the Commission, that would relieve the producer and any associated royalty owner from all liability for any claims for refunds and interest. The State Corporation Commission would be given the authority to promulgate rules and regulations necessary to administer the bill, and would determine whether or not the party is eligible for payment from the Fund.

In order to fund the costs of making the payments, the State Corporation Commission would be authorized to enter into an agreement with the Kansas Development Finance Authority to issue revenue bonds in an amount not exceeding $360,000,000 plus all amounts required for costs of the bond issuance. The proceeds from the bond issuance would be deposited into the Fund. The bonds would not constitute an indebtedness of the State of Kansas.

In order to raise revenue for payment of principal and interest due upon the revenue bonds, the bill would impose a tax at the rate of $.02 per thousand cubic feet of natural gas transported within and through the state by pipeline. If the natural gas is transported through interconnections between two pipelines, the tax would be paid by the last transporting pipeline prior to either leaving the state or being delivered to a local distribution company or direct sale customer. The tax would be remitted to the Director of Taxation each month. The bill would allow the Director of Taxation to inspect the paperwork and records of the natural gas transporter in order to determine if the correct amount of tax is being collected. The Secretary of Revenue would be authorized to promulgate rules and regulations regarding the imposition and collection of the tax.

The bill also would establish the Natural Gas Pipeline Privilege Tax Refund Fund, not to exceed $50,000. Refunds of the tax imposed by the bill would be paid from this fund. Of the tax collected, the Secretary of Revenue would first fund the Natural Gas Pipeline Privilege Tax Refund Fund and the remainder would be credited to the Natural Gas Producer Ad Valorem Tax Refund and Bond Retirement Fund.

The bill would prescribe various penalties for unpaid taxes under the provisions of the bill. Persons failing or refusing to make any return under the provisions of the bill would be subject to a penalty of $25 per day for each return. The bill also would establish a class C misdemeanor for any person to: fail to make a return or pay any tax as required; make a false or fraudulent return or fail to keep any books or records; willfully violate any rules and regulations adopted by the Secretary of Revenue; aid and abet another in attempting to evade the payment of any tax imposed by the bill; or violate any other provision of the bill.

The bill would become effective upon publication in the Kansas Register.

Background

This bill was introduced by the Senate Committee on Energy and Natural Resources.

The bill has its origins in a determination made in 1974 by the Federal Power Commission, FERC's predecessor, that Kansas ad valorem tax qualified for recovery under the Natural Gas Act as a severance tax, to be recovered in wellhead rates. FERC subsequently authorized recovery of the severance tax in rates under Section 110 of the Natural Gas Policy Act of 1978. In 1983, Northern Natural Gas, an interstate pipeline company, petitioned FERC to reconsider the Federal Power Commission's Kansas tax ruling. Northern Natural Gas contended that the Kansas ad valorem tax did not qualify as a severance tax. Consequently, the tax could not be collected from natural gas purchasers under Section 110 of the Natural Gas Policy Act. In 1986 and 1987, FERC denied Northern Natural Gas' request for rehearing and reaffirmed its earlier position that the Kansas ad valorem tax qualified as a severance tax. Colorado Interstate Gas Company appealed to the United States Court of Appeals for the D.C. Circuit the decision by FERC to reject Northern Natural Gas' petition. In 1988, the D.C. Circuit Court remanded FERC's order for further explanation as to why the Kansas tax qualified as a severance tax under Section 110 of the Natural Gas Policy Act. In 1993, five years after the Court's decision, FERC issued its order on remand and established that natural gas producers should not be able to recover the cost of the Kansas tax and ordered the payment of refunds by producers retroactive to 1988--the date of the Colorado Interstate Gas decision. Producers appealed the decision to the D.C. Circuit Court, which concurred with FERC that the Kansas ad valorem tax was not eligible for recovery. The D.C. Circuit Court ordered refunds for production retroactive to October 1983--the date upon which notice was published of Northern Natural Gas' petition in the Federal Register. Following that decision, producers filed petitions with the Supreme Court but on May 12, 1997, the Supreme Court refused to hear the appeal. Continued appeals occurred in 1998 and 1999.

1. *Supplemental notes are prepared by the Legislative Research Department and do not express legislative intent. The supplemental note and fiscal note for this bill may be accessed on the Internet at http://www.ink.org/public/legislative/bill_search.html