Supreme Court Weighs in on Mineral Rights Taxation Case

Ralph L. Carr Colorado Judicial Center
The Colorado Supreme Court released its opinion in People v. Hall. / Law Week file.

The Colorado Supreme Court on Sept. 14 ruled in a 4-3 decision that while all owners of surface property must assent to inclusion in a special tax district, the assent of owners or lessees of subsurface mineral estates is not required.

In doing so, the majority affirmed the decision of the Court of Appeals. However, the three dissenting justices said the majority didn’t answer the question before the court and echoed concerns from oil and gas leaseholders about the due process rights of mineral rights owners. 

In 2015, the owners of 70 Ranch in Weld County successfully petitioned for the 13,000-acre tract to be included in the South Beebe Draw Metropolitan District, which provides sanitation and other services. After the property’s inclusion, the district began taxing the leaseholders of subsurface mineral rights for the oil and gas produced at their wellheads on the property. 

Leaseholders Bill Barrett Corporation, Bonanza Creek Energy and Noble Energy sued 70 Ranch and the district, arguing their mineral interests could not be included in the special district because neither they nor the owners of the mineral rights consented to inclusion, which they said was required by the state’s Special District Act.

One of the questions before the court was whether the Special District Act permits inclusion of “real property” into a special district when inclusion occurred without notice or consent by the property owners and the property can’t be served by the district. 

“The answer to this question is ‘no,’ but that does not save Lessees here,” states the majority opinion written by Justice Melissa Hart. The majority concluded that subsurface estates are not the “real property” contemplated by the act’s procedures for including territory in a special district, pointing to the act’s use of words such as “territory,” “area,” “boundaries” and “tract” to show the procedures are only concerned with surface property.

But in a dissent joined by Justices Brian Boatright and Carlos Samour, Justice Richard Gabriel said the majority misinterpreted the question it purported to answer. 

“The question does not ask us to decide whether the surface owner’s real property may be joined into a special district without notice to and the consent of those with interests in subsurface severed mineral estates,” states the dissent. “No one contests that point.”

“The question asks us to consider whether the subsurface estates may be joined into a special taxing district without notice and consent,” Gabriel wrote, adding the subsurface estates are the “real property” in question, not the surface interests. 

By answering a question “of its own derivation,” Gabriel said, the majority concluded the owners of 70 Ranch could, by joining their own surface interests into the district, effectively join the mineral interest owners into the district, subjecting them to taxation. Allowing one property owner to include the property of another within a special district without notice or consent could, Gabriel said, “implicate significant due process concerns” because it might mean one property is taxed to fund facilities for other property owners.

“Subsurface minerals or mineral rights have long been recognized by Colorado courts and in Colorado law as a real property right,” said attorney Cindy Bargell, who filed an amicus brief on behalf of the Colorado Alliance of Mineral and Royalty Owners in support of the oil and gas industry leaseholders.

“The reason CAMRO weighed in is because the case does have far-reaching impacts,” she said, adding the decision affects not just operators but all mineral rights owners, from retired school teachers to pensioners who rely on royalty income. “This is taxing those royalty payments in a manner that, from our perspective, isn’t fair based on a statutory interpretation that raises serious constitutional issues,” she added, referring to the lack of due process. 

The majority noted that under the Special District Act, “all taxable property,” including oil and gas leaseholds for wellheads located within the district’s boundaries, is subject to ad valorem taxation by the district. “And, of course, it is this aspect of the Special District Act to which Lessees most object,” states Hart’s majority opinion, “but this section of the Act has not been challenged here and we do not opine on it.” 

In its brief, CAMRO had raised concerns about the proliferation of special districts and their reliance on oil and gas revenue. “These policy concerns, however, are better directed to the General Assembly than to this court,” said the majority.

“We are pleased with the Colorado Supreme Court’s well-reasoned opinion affirming that oil and gas leases by oil companies are properly included in the tax rolls of governmental public districts in which they operate,” Donald Ostrander, an attorney representing the owners of 70 Ranch, said in a statement.

“As the legislature has found in earlier years, the impact of oil and gas operations are felt at the surface at the well head, and on all roads and parks in the area,” Ostrander said. “The Court’s decision confirms decades of practice by fire, school and water districts that have historically relied on these income streams to provide valuable services to their citizens — services that are much needed to respond to the increasingly significant impact of oil and gas exploration.”

“Our state legislators — of both parties — showed great foresight over the last 40 years in crafting the statutes requiring contribution to local governments impacted by oil and gas activities.”

—Jessica Folker

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