Montana authorities take on coal sales to affiliates, say practice subject to manipulation

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FILE - In this April 4, 2013 file photo, a mechanized shovel loads coal onto a haul truck at the Cloud Peak Energy's Spring Creek mine near Decker, Mont. Montana tax authorities argue Tuesday, Nov. 25, 2014, before the state Supreme Court that a Wyoming mining company owes $3.4 million for selling coal to an affiliate at less than market value. At issue is whether coal should be valued for tax purposes at the time the fuel is mined and shipped or when a sale is negotiated. (AP Photo/Matthew Brown, File)


BILLINGS, Montana — Montana authorities charged Tuesday that coal sales between mining companies and their own affiliates are subject to manipulation and need to be treated differently from other sales.

Coal sales to affiliates have come under increased scrutiny as state and federal regulators investigate whether mining companies are underpaying taxes on coal sold to U.S. and overseas power companies.

The state's concerns over the common industry practice emerged during a Tuesday hearing before the state Supreme Court in a tax dispute involving Cloud Peak Energy.

The Department of Revenue says the Gillette, Wyoming-based company owes $3.4 million after selling coal to affiliated companies at less-than-market prices between 2005 and 2007.

Cloud Peak said it was following state law when it valued the fuel sold in those deals by comparing it to so-called "arms-length" transactions to third parties.

Company attorney Kyle Gray said assigning coal a taxable value at the time a sales agreement was reached was the only way to achieve an "apples-to-apples" comparison.

But Department of Revenue attorney Brendan Beatty said sales to affiliates need to be valued at the time the coal actually changes hands — not when a contract between related companies is signed.

"If I'm selling to myself, I am very capable of manipulating the situation" Beatty said. "In a non-arms-length situation, it's really different."

Beatty made no allegation that Cloud Peak itself sought to manipulate prices. But he said a company could wait until coal prices fall, renegotiate its deal with an affiliate, and then use that price to value the coal.

Cloud Peak's case involves coal sales that predate the recent spike in exports. But a decision in the state's favor could have broad implications for how such sales are taxed.

"It very well could impact all those other sales as well," Department of Revenue Deputy Director Gene Walborn said. "We're in the process of reviewing those contracts with other producers."

During Tuesday's hearing, justices questioned whether it made sense to tax coal sold to affiliates differently. That's because such sales can simply be compared to other contacts with unrelated companies reached at the same time. But justices also suggested tax authorities held some discretion in how they determine the value of coal.

Cloud Peak's attorney disagreed.

"The Department of Revenue is required to follow what the statute says," Gray said. "The problem comes in when the department says it wants to treat these (sales to affiliates) as really suspect."

Montana officials are seeking back taxes, interest and penalties on sales from Cloud Peak's Spring Creek strip mine near Decker. The 280-worker operation just north of the Wyoming border dug up 17.6 million tons of coal last year. State officials want the company to pay an additional $1.9 million in taxes, $1.2 million in interest and $232,000 in penalties for the three years

In 2013, Montana received $55 million in taxes and royalties from Cloud Peak — exceeding the company's 2013 net income of $51.9 million, Cloud Peak spokesman Rick Curtsinger said.

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