Armed with a U.S. Supreme Court precedent, state government attorneys could put to rest a 10-year-old fight with oil companies over the state's right to tax for production on Indian Reservation lands, where oil and gas producers must also pay hefty severance taxes levied by Indian tribes.
But, the question remains whether it's in Utah's interest to double tax and possibly scare away an estimated $4 million to $6 million in annual tax revenues, or work out a compromise with Indian Tribal leaders and oil companies on a cooperative tax.The U.S. Supreme Court ruled Tuesday that a state has the right to tax energy production on reservation lands in a case filed by Cotton Petroleum Inc. against the state of New Mexico. The suit argued against a New Mexico tax on oil and gas production on the Jicarilla Apache reservation, where energy producers must also pay a tribal severance tax.
The decision has important implications in several western states where similar lawsuits have been filed, but were pending a decision in the Cotton Petroleum case. In Utah, 10 oil companies filed suit against state and county government in 7th District Court protesting double taxation on Navajo land in San Juan County.
Since filing that suit, the plaintiffs have paid under protest more than $40 million in state severance taxes, a spokesman for the state tax commission said. State taxes on energy development on Indian lands bring in about one-fifth of the $25 million in annual tax revenue paid by oil companies.
Also, the Ute Indian Tribe in the Uintah Basin has sued the state over double taxation, saying the state didn't have a right to tax business on Indian lands and that it could hurt economic development on the reservation.
But, the Supreme Court crushed those arguments, saying the state tax does not trample on Indian rights and is not unfair to a petroleum company - even though the company must pay taxes to the state and the tribe.
Utah officials agree. "Even with double taxation, oil companies will have a market for oil wells already under production," said Doug Bischoff, deputy chief of staff for Gov. Norm Bangerter.
Meanwhile, oil producers say it's too early to tell, with the Utah case still undecided and no one knowing at this point what the Supreme Court decision actually says, what impact possible double taxation will have on existing production or future exploration.
"Everyone will have to take a long hard look at things to see what the economics of this thing dictate," said Jay Christensen, a local legislative consultant for Penzoil Co., a major operator in the Uintah Basin.
He acknowledged that Penzoil has a multi-million dollar investment in eastern Utah energy properties and wouldn't just walk away from it.
Jim Peacock, executive director of the Utah Petroleum Association, has a more pessimistic view of the court decision and its impact on the state's struggling energy industry.
"The simple fact is that the petroleum industry cannot competitively sustain production on lands that have double taxation," Peacock said, noting Utah's oil and gas industry is already on the skids with exploration practically at a complete halt.
But driving out the oil industry doesn't jibe with Bangerter's pro-economic development agenda. Bischoff said Bangerter plans to establish a task force to work with newly elected Ute tribal leaders to negotiate a tax for energy production on Ute reservation land, where a sliding scale severance tax to a maximum 10 percent is levied on top of the state's 4 percent tax on production.
A spokesman for the tribe could not be reached for comment on the Supreme Court decision or future negotiations with the state.
Peacock hopes both taxing bodies can come up with a cooperative tax. "There must be a coordination of taxation or the petroleum industry in Utah cannot continue."