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Montana high court backs coal company in tax case that challenged sales to affiliates

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BILLINGS, Montana — The Montana Supreme Court has sided with a Wyoming mining company in a dispute with state tax authorities who challenged the pricing of coal industry sales through affiliated companies.

The unanimous ruling means Montana tax authorities must recalculate a $3.4 million tax bill for Gillette-based Cloud Peak Energy for coal sales between 2005 and 2007.

The coal was sold to affiliates that Cloud Peak partially owns — a common industry practice that also is under scrutiny by federal regulators investigating royalties on coal shipped to Asia.

A spokesman for Cloud Peak, Rick Curtsinger, said the company was pleased with the outcome of the case. He said the ruling confirmed that Cloud Peak used an appropriate method to value its coal.

Department of Revenue spokeswoman Molly Petersen said Monday that officials still were examining the Jan. 13 ruling and were uncertain when the recalculation would be completed.

"This is still a work in progress," Petersen said. "We are examining the implications going forward."

In the 11-page ruling, justices upheld an October 2013 decision from District Judge Jeffrey Sherlock in Helena.

Sherlock determined Cloud Peak had followed state law when it valued the coal it sold to affiliates by using as a comparison contracts with third parties that were reached at the same time.

Based on that value, the company then paid taxes on coal from its Spring Creek Mine near Decker, Montana.

The state said the sales to affiliates should instead have been compared to sales to third parties at the time the coal was shipped.

State officials wanted Cloud Peak to pay an additional $1.9 million in taxes, $1.2 million in interest and $232,000 in penalties for the three years.

Department of Revenue attorneys alleged coal sales to affiliates needed to be treated differently than other sales because a company could wait until coal prices fall, renegotiate its deal with an affiliate and then use that price to value the coal.

Justice Jim Rice wrote that the market value of coal only can be determined by taking into account the economic forces at play at the time the basic price to an affiliate was set.

He said the state's approach would value coal "based on negotiations at different times and under different economic conditions."

"The department's approach is not an 'apples to apples' comparison," Rice wrote.

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