The Coal Case and the Impact on the Budget

In a post on December 30, 2009 I noted that the budget deficit could increase due to some pending tax refund cases, one of which deals with the taxability of coal burned in power plants in Nevada.  This particular case began in 2002 when Southern California Edison (Edison) requested a refund for use taxes paid on coal burned in its Southern Nevada power plant.  Edison argued that because coal could be subject to Nevada’s net proceeds of minerals tax it would be unconstitutional to also subject it to Nevada’s use tax.  The coal at issue was mined in Arizona, mixed with water to form a coal slurry, and piped into Nevada where the water was removed and the pulverized coal powder was burned in Edison’s power plant.

The Nevada Department of Taxation denied the refund claim and a hearing officer upheld the denial.  The case was appealed to the Nevada Tax Commission.  The Commission reversed the decision of the hearing officer and ordered a refund.  Thereafter, the Nevada Attorney General filed an open meeting law complaint, alleging that the Commission reached its decision in violation of Nevada’s open meeting law.  That complaint went up to the Nevada Supreme Court, who agreed with the Attorney General and voided the Commission’s decision to grant a refund.

The case was remanded to the Commission for further deliberation in compliance with the open meeting law.  On February 27, 2009, the Commission changed course and voted to deny the refund.  The Commission held that because coal is not mined in Nevada and because Edison was therefore not subject to Nevada’s net proceeds of minerals tax on the coal, it was appropriate to subject Edison to the use tax.  The Commission also held that Edison’s refund request was time-barred and that Edison was not entitled to any offset for taxes paid in Arizona.  Edison appealed the Commission’s decision to the courts, where the case is currently pending.

The refund case caught the attention of the Nevada Legislature, who created a supplemental account in the state’s rainy day fund with over $30 million in the event a refund was ordered.  However, that supplemental account was drained (along with the rest of the rainy day fund) in a 2008 special session to plug holes in the state budget, leaving no contingency plan for a refund should Edison prevail in the courts.

The financial impact of a potential refund would be significant as interest on refunds accrues at 6% per year, and would run for over 10 years as the initial refund period claimed by Edison began in early 1998.  Moreover, Edison is not the only power company to import and burn coal in Nevada, and other power producers are surely watching this case closely to determine whether further refunds may be justified.

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