The Associated Press May 10, 2012, 6:28PM ET

Kansas agencies wrangle over $19M pipeline taxes

The Kansas Department of Revenue believes a state law allowing oil company TransCanada to avoid paying nearly $19 million in property taxes has been misinterpreted, but the company said Thursday that it is simply following tax rules approved years ago by the state and noted its large investments in Kansas.

The department recently filed a petition asking the state Court of Tax Appeals to reconsider its decision to approve Calgary-based TransCanada's exemption from state property taxes in 2011. The pipeline began moving crude oil across six Kansas counties last summer, and some county officials say they're losing valuable property tax revenue.

The department argues that the company doesn't provide refineries in the state proper access to the pipeline's oil, which the department says is required under the law. The law also requires that the pipeline be at least 190 miles long, said David N. Harper, property valuation director for the department.

"They meet the mileage requirement. It's just `access' that's the point of contention," Harper said Wednesday. "This hasn't been argued before. We're kind of setting precedent here."

TransCanada spokesman Shawn Howard responded Thursday, saying the property tax issue was "part of a political and legislative discussion." He said TransCanada invested more than $680 million into the Kansas economy with the pipeline, which runs about 210 miles from Nebraska through Kansas and into Oklahoma.

"The decision on the taxes that we are expected to pay on our pipeline was made by the legislature some time ago. We are following the rules that the legislature in Kansas established," Howard said in an email.

The section in Kansas is separate from TransCanada's disputed Keystone XL project, which has not begun construction. But the Kansas section would link Keystone XL to facilities in Cushing, Okla., and onto the Gulf of Mexico.

Kansas lawmakers passed the property tax exemption in 2006 when TransCanada was exploring the route through Kansas. The law was designed to encourage energy projects in the state and included income tax credits, financing and 10-year property tax exemptions for such projects, including pipelines. Kansas is the only state along the Keystone pipeline route with such a property tax exemption.

The Court of Tax Appeals ruled last month that TransCanada met the access requirement because Kansas refineries have access to the oil from facilities in Cushing, Okla., a major oil storage hub about 100 miles from the Kansas border.

"The statute requires no direct connection and no particular means of access," the court said. "Nor does the statute require that access be established at any particular location or proximity to refineries in Kansas."

In asking the court to reconsider, the state Revenue Department disputed whether access to oil from Cushing met the statutory requirement and said the tax court "engaged in no meaningful analysis and, therefore, failed to strictly construe the exemption."

The department believes the company owes $18.8 million in 2011 property taxes for the pipeline.

The tax court is expected to make decision within about a month. If it again determines the pipeline is eligible for the exemption, the Revenue Department may appeal to the Kansas Court of Appeals, Harper said.

Jerry Mayo, a Clay County commissioner, said his county is losing about $1 million a year in taxes because of the exemption -- which he estimates is nearly 20 percent of the county's annual budget.

"It's bizarre," Mayo said. "Things are tight, and our property owners have a big load on them the way it is tax-wise. ... They have a presence in our country, and they should be carrying their share of the load also."

Daniel Holub, Marion County commissioner, said Thursday that the exemption is costing his county about $1.3 million annually. He said while he has "nothing but praise" for the Department of Revenue, he's not optimistic the counties will see any property taxes from the Keystone pipeline for another decade.

Holub said he will, however, continue to contest the issue.

"There's just any number of things we could use that money for," he said. "It's a lot of money, especially to a rural county."


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