Alaska ~ Severance Tax: Aggregation Decision Under Former Production Tax Provisions Upheld

The Alaska Office of Administrative Hearings (OAH) held that a Department of Revenue decision aggregating participating areas of the Prudhoe Bay Unit for purposes of calculating the economic limit factors under former provisions of the oil and gas production tax did not constitute a regulation and was an acceptable means of addressing the tax treatment of the affected participating areas.

In their appeal, the taxpayer oil companies focused exclusively on the process by which the department arrived at its interpretation of the statutory phrase “economically interdependent.” The 2005 aggregation decision did not purport to be a regulation, and it was therefore issued without the rulemaking processes prescribed in the Alaska Administrative Procedure Act (APA). The OAH ruled that the department’s decision did not meet the first requirement under the APA definition of “regulation” of being a rule, regulation, order, or standard of general application. The aggregation decision was, on the contrary, narrow and situation specific. The OAH next ruled that the department’s decision did not meet the APA requirement that it “make specific” a law administered by the department. The taxpayers contended that by placing a specific gloss on the phrase “economically interdependent,” the decision acted to make specific that phrase and thus fit within that prong of the APA definition of regulation. The OAH stated that, although this was a closer question, the APA leaves agencies free to make specific the laws they administer without using regulations, so long as they do not do it through a rule, order, or standard of general application. Therefore, the aggregation order fell short of the second criterion as well.

The OAH also rejected the taxpayers’ contention that the aggregation decision must have been a regulation because it was not an adjudication. The decision was a step, envisioned by statute, that triggered an opportunity for adjudication.

Chevron U.S.A. Inc., Alaska Office of Administrative Hearings, No. 08-0673-TAX, October 13, 2012, released December 28, 2012

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