(Laura Granier, Esq.) – It is important that Nevada legislators have all of the facts as they consider the many challenging budget and revenue issues confronting them this session. This need for facts is especially true in the debate about the Net Proceeds of Minerals (“NPOM”) tax that applies to mining. Thoughtful consideration of the facts will enable legislators and the public to evaluate whether the NPOM statute should be modified, the scope of legislators’ existing authority to amend this statute, and whether changes to the Constitution are necessary or warranted.
Until recently, many of the key facts have been absent from this discussion. The resulting confusion has thwarted meaningful dialogue about the NPOM tax. I recently offered testimony to the Senate Revenue Committee to try to shed some light on these facts with the hopes of facilitating a productive dialogue based on facts about the NPOM tax.
My testimony was presented during the hearing on Senate Bill 492 to amend the structure of the mining claims fee enacted in the 2010 Special Session. During the 2010 Special Session, the Nevada Mining Association created the mining claims fee to dodge a discussion over changes to the NPOM deductions. Asserting that the Nevada Constitution prevented legislators from enacting any changes in the law governing NPOM deductions, they offered instead the claims fee to fill a $25.7 million hole in the budget. The claims fee was a slick maneuver that temporarily mollified the Governor and the Legislature; both were demanding more from mining to help balance the budget. It also was a fee-shifting scheme that placed the responsibility for paying roughly 62 percent of this fee on small exploration companies and individuals that do not operate at a profit or have any revenue from producing mines. These companies and individuals – not the big mining companies – own most of the claims in the state and thus bear the brunt of this fee.
Since the Special Session, nothing has changed in the NPOM dialogue. The Nevada Mining Association continues to say legislators’ hands are tied because the Constitution prohibits them from enacting changes to the NPOM statute that would diminish the range of allowable deductions. It is in this setting that I felt compelled to set the record straight.
History Repeats Itself
The debate over taxation of minerals is as old as our State itself. Some have described it as complex and suggested that the constitution might prohibit the Legislature from modifying the deductions allowed under the net proceeds tax. I disagree. In fact, this assertion flies in the face of the plain language of Article 10, Sections 1 and 5 of the Nevada Constitution which clearly establish how minerals that have been extracted from the ground must be taxed. These sections of the Constitution were added in 1989 by a vote of the people of the State and, therefore, the “150 years of Nevada Supreme Court cases” others are referring to are meaningless to interpret the Nevada Constitution as it exists today. This constitutional provision also dictates how the surface of the lands at mine sites must be taxed.
The Nevada Constitution does not limit the Legislature’s authority to identify what deductions should or should not be allowed. Rather, it mandates that the Legislature define “net proceeds” by statute and establish the procedure by which the State will collect up to 5% of those proceeds. So, it is not just within the Legislature’s authority – it is the Legislature’s obligation – as mandated by the people of this state – to define “net proceeds,” what deductions should be allowed to determine “net proceeds” and ensure that the State is collecting up to 5% of what is reasonably determined to be the “net proceeds.” Because “net proceeds” is different from “net profits” the NPOM tax is not based on 5% of the mine’s “net profits.” Thus unprofitable mines cannot deduct all of their costs to reduce net proceeds to zero and therefore pay nothing in NPOM tax. In 2009, according to the Net Proceeds of Minerals Bulletin published by the Nevada Department of Taxation, the gross proceeds were over $5.8 billion dollars but the “net proceeds” upon which the tax was imposed were just under $1.8 billion. So, deductions under the existing law totaled approximately $4 billion.
The plain language and legislative intent of the statutory deductions, up until more recently, was limited to expenditures at the mine here in Nevada for “actual costs” to extract the minerals and did not allow for the deduction of all business operating expenses of the companies. Several Nevada Supreme Court cases make this point. In one reported case our supreme court concluded that “taxes and insurance, and the cost of maintaining offices of the mining company outside the State were not deductible as actual costs.” State v. Tonopah Extension Mining Co., 49 Nev. 428 (1926). I see no reason the Legislature cannot get back to those reasonable expenditures tied directly to extracting the minerals to close up loop holes in the statute – and that would not be a tax increase. I will go further than that and say, it is the constitutional will of the people that the Legislature do so.
Senator Horsford has clearly recognized there are problems with the deductions that require urgent attention in his petition to the Tax Commission requesting that they immediately amend their regulations to comply with the statutory limitations on the deductions. As he noted there are many deductions allowed by regulation that are not within the scope of the statutory authority. Each and every day those remain in place, the State is losing revenue it is legally entitled to collect under existing law. It is important to the industry, I believe, and to the State that certainty and transparency are brought to this discussion and the determination and collection of the net proceeds of minerals tax.
It appears Governor Sandoval understands this too having called an emergency meeting of the Tax Commission recognizing the importance of this. Although his former law partner from Jones Vargas seems to apparently disagree with my constitutional interpretation with respect to the net proceeds tax, the legislative history from the constitutional change in 1989 (passed for the first time by the Legislature in 1987) includes testimony from a Nevada Mining Association lawyer who contradicts some of the more recent statements made by Mr. Wadhams. A lawyer for the Nevada Mining Association previously testified to the Senate Committee on Taxation that the Net Proceeds Tax as it exists in the Nevada Constitution today is more like an “income tax” and would no longer be a property tax – for the very purpose of fixing the problems arising from it being considered a property tax. With the existing language in Nevada’s Constitution as modified in 1989, it no longer matters what you call this tax. It is a special tax on the net proceeds of minerals and the Constitution places no limitation on the Legislature’s definition of the appropriate deductions so long as the tax is only on the “net” as the Legislature defines that term. Moreover, I’m not aware of any published Nevada Supreme Court case challenging any modifications to the net proceeds deductions as unconstitutional since this amendment in 1989.
The will of the people and the express mandate under the constitution must prevail and I hope the Governor will agree that ensuring that Nevada is collecting what the constitution requires – up to 5% of the net proceeds as that term is defined by the Legislature would not be a new tax because that revenue is legally owed to the State. His Deputy Chief of Staff, Dale Erquiaga, has been quoted as saying that fixing flaws in the deductions to eliminate loop-holes may not fall within his no-new tax pledge. This is not about a tax increase on the industry – it’s about ensuring they’re paying what the constitution and existing statute require.
The Special Session Claims Fee Was Born Out of this Debate over the Deductions
What does this have to do with SB 492 to amend the Special Session mining claims fee? Everything. It is the debate out of which the supplemental claims fee was born. In 2010, prior to the special session, Governor Gibbons was looking at reducing the deductions allowed for the net proceeds tax by 50% which he estimated would have raised an additional $50-100 million in revenue. Governor Gibbons who came from the mining industry as a geologist and mining lawyer characterized some of the Net Proceeds deductions as “distasteful.” Leading up to the special session, Senator Townsend was quoted as agreeing with Governor Gibbons’ proposal to get more revenue from mining by reducing tax deductions allowed to calculate the net proceeds tax. As Senator Townsend put it, after a great many years, it was time for them to pay what we think is a substantially closer number to a “fair share.”
But, the Nevada Mining Association opposed any modifications to the net proceeds deductions and, instead, offered up a substantial increase in the mining claims fee – most of which is not paid by the big production companies. In fact, the mining claims fee is substantially paid by exploration companies who have no revenue sources at all. Now, Mr. Crowley says that was what the Legislature picked. But, in an Elko County Commission hearing last November Assemblyman John Carpenter explained that the special session mining claims fee bill was proposed by Jim Wadhams, Tim Crowley, and another lobbyist for the Nevada Mining Association. During that County Commission hearing, problems with this claims fee were discussed and then Assemblyman-elect Ellison very adamantly supported efforts to fix this mining claim fee to reduce the burden on the exploration community.
Following passage of the Special Session Mining Claims Fee, Lynn Hettrick, then Deputy Chief of Staff for the Governor explained that the original proposal was an adjustment to deductions which would have affected only producing mines. He said that it was ultimately determined that there could be constitutional issues with the proposal to adjust the deductions for the net proceeds tax and it was withdrawn. He said that during the Senate hearings, the Mining Association offered to pay an increase on mining claims that they said would generate $25.7 million. He said the rural Republican legislators fought hard to protect the exploration companies and non-producers and, in fact, that they structured the fee requirements so the issue could be addressed in this session, before the fee deadline in June of 2011.
Following the special session, Emily Nunez, then Operations Deputy, for the Office of the Governor, agreed with concerns regarding the impact of the mining claims fee increase. She said that during the special session, the Nevada Mining Association testified before the entire Senate that the industry supported increasing the fees. She explained that after Mr. Crowley’s testimony and after the estimated revenue was added to the bill, issues were raised regarding the burden on the exploration sector and non-producers. The fee structure was then modified in an effort to minimize the impact on claim holders with smaller numbers of claims. Unfortunately, the modified structure still leaves an inordinate burden on the non-producers.
Reports of the $25 million to be raised from the mining claim fee described a three tier division to “protect smaller mining companies from being hurt.” Las Vegas Review Journal – Feb. 28, 2010. The structure provided to the Legislature by the Nevada Mining Association did not work as was intended. It hurts smaller mining companies and the little guy conducting exploration to discover tomorrow’s mines. It is therefore harmful to Nevada’s economic development.
A bit of history is important here. Mr. Crowley was quoted in an article on April 12, 2011 saying that the Nevada Mining Association didn’t like this bill but it is what the Legislature picked. But others have told a different story. A story that takes us right back to a debate about the net proceeds tax. So, I’ll begin there.
The Special Session Claims Fee Is Contrary to Long Standing Policy
It has always been the policy of this state to tax the production of mining and not the exploration sector that has no revenue. The Constitution again becomes important here. The same discussion we are having today was part of the debate in 1863 at the first constitutional convention. Here’s a quote from that discussion:
“I suppose the intention of gentlemen is that only mines producing ore shall be taxed, and to make sure of that they want to tax only the proceeds. That makes it sure that no mine will have to pay a tax that does not produce ore.” – Constitutional Debates on Taxation, page 443 -12th day.
The records of the constitutional debates in the convention disclose that reaching an agreement as to the method of taxing mines took a large portion of the convention time, with the result after all that debate being adoption of a provision for taxing the proceeds of mines only. See Goldfield Consolidated Mines Co. v. State, 35 Nev. 178, 186 (1912). Looking at the constitutions and statutes of the western mining states and territories, the Nevada Supreme Court has observed that two general systems of taxation of mines have been in vogue – one the taxing of mines as real property, and the other the taxing of the proceeds of the mines. Nevada was the first state to adopt the system of taxing the proceeds only. See Goldfield Consolidated – 1912.
Out of these debates and this long established recognition that taxes should be collected from the production of mining and not at the early and unprofitable stage of holding and exploring claims, came our constitutional provision that remains today – excluding the value of the minerals from any tax on the surface or other interest in the land including the claims.
The Special Session Claims Fee Has Been Challenged as Unconstitutional
Article 10 Section 1 of our Constitution excludes mines and mining claims from the ad valorem tax and equal assessment clause applicable to other property tax and provides that “mines and mining claims” shall only be taxed as provided for under Section 5 of Article 10 – the net proceeds provision. The language in that section allows for tax on patented mines and mining claims as other real property is assessed and taxed provided no value is attributable to the minerals.
Article 10 Section 5 (subsection 3) provides: Each patented mine or mining claim must be assessed and taxed as other real property is assessed and taxed, except that no value may be attributed to any mineral known or believed to underlie it, and no value may be attributed to the surface of a mine or claim if one hundred dollars’ worth of labor has been actually performed on the mine or claim during the year preceding the assessment. (Bold emphasis added)
This mining claims exemption applies to the surface ground making up the claim as established in Gold Hill v. Caledonia Silver Mining Co., 10 Fed. Cas. 550 (No. 5512) (C.C.D. Nev. 1879).
Under our Constitution, mining claims cannot be taxed in a way that places any value on any mineral known or believed to exist. Unlike the net proceeds on the minerals, tax on the surface of the land where mines and mining claims are located is intended to be “assessed and taxed as other real property” and, therefore, is subject to the equal assessment provision in the Constitution. Therefore, we must question whether $195 per claim where the surface is being used only for exploration and is not part of a mine in production can pass muster under that equal assessment provision of the Constitution. For example, for lands valued at $100 per acre – a typical valuation for the non-mining use of rural real property – taxed at 35% of assessed value at the tax rate of 3.65%, the maximum property tax would be approximately $25.55 per claim. Importantly, under Subsection 3 of Section 5, “no value may be attributed to the surface of a claim if one hundred dollars’ worth of labor has been actually performed on the claim during the year preceding the assessment.” Accordingly, there is a constitutional prohibition on any tax on the mining claim where such work has been performed.
And, in fact, the constitutionality of the Special Session Claims Fee bill has been questioned. Although I am not participating in that case, I understand this very question is being litigated in Elko County. So, our State is spending scarce and valuable resources defending the Special Session Claims fee. The record from the testimony provided in the Special Session is clear that this additional “fee” was offered by the Nevada Mining Association to generate revenue. That is another problem in light of the constitutional challenge because it suggests the Special Session claims fee is a tax rather than a fee. The law is clear that if the primary purpose of a “fee” is to raise revenue, the fees are not regulatory but are fiscal and constitute a tax.
Alternatively, if the claims fee really is a fee and not a tax, it should be associated with and focus on the services provided for the fee rather than the amount of revenue generated by its collection. If that is the case, a much lower fee would be appropriate and, also, could potentially resolve the litigation. That is what has been proposed in SB 492. The $2.50 and $5.50 per claim fee proposed in SB 492 are incremental increases over the current mining claim filing fee of $10.50. As such, the State might be able to successfully characterize these proposed amended fee rates as having the appearance of a fee in contrast to the high fee increase created by the 2010 Special Session mining claims fee which imposes a substantial tax. In proposing the amended claims fee in SB 492, I believe the Senate Revenue Committee has found not only what is the right policy in Nevada but is also the constitutionally proper way to address the supplemental claims fee offered by the Nevada Mining Association in the Special Session.
What we now know is the purported “claims fee solution” provided to the Legislature by one segment of the industry as an acceptable alternative to reducing allowable deductions under the Net Proceeds has proven itself to be contrary to long established policy to encourage exploration and development and onerous to the people and companies who are saddled with paying 62% of these fees. It also has landed the Legislature in litigation over the constitutionality of their proposal. SB 492 will restore good policy to Nevada law to encourage economic development and also bring an end to litigation calling into question whether the supplemental claims fee can ever even be collected.
The Heated Dialogue about Mining Taxes and Fees is Harmful to Nevada’s Future and to the Mining Industry
The NPOM debate is causing substantial erosion of political and public support for mining which I find very disturbing. Our hope is that actions taken by the Legislature this session will be a step in the right direction to restore public support for mining. This can only be accomplished if the public is confident that mining is paying what the constitution and laws require – 5% of their net proceeds. Enduring public skepticism that the industry is taking excessive reductions to reduce its NPOM tax liability will only lead to further controversy and the likelihood of another ballot initiative to change the NPOM to a gross proceeds tax and to lift the 5% taxation rate ceiling. That would not be good for the industry or the State.
During these most challenging of economic times, we must work together to create an enduring vision for our future and we must make the best use of what we have – including our world-class endowment of mineral resources. We must focus on our existing strengths to find near-term solutions to the State’s financial problems. Our state’s mineral resources are one of those strengths. Responsible development of the State’s mineral resources holds great promise for future economic development and can play an important role in our economic recovery. In order to capitalize fully upon the Silver State’s mineral resources, we must have policies that encourage investment in mineral exploration and mine development. The amended claims fee provision proposed in SB 492 is an example of such a policy. Responding to the public outcry for more revenue from mining is essential to the future of Nevada’s mining industry. The industry and the Legislature must engage in a meaningful dialogue about the NPOM deductions to assure the public that mining is paying what it is supposed to pay under the constitution.
(Laura Granier is a shareholder with Lionel Sawyer and Collins in Reno, Nevada.)