HELENA — A Wyoming mining company asked a judge Tuesday to block Montana tax authorities from seeking to collect about $3.4 million the state claims it's owed after the company sold its coal for less than market value to affiliates it partially owns.
That practice of selling coal to affiliated companies also is under scrutiny by federal regulators investigating royalties paid on coal shipped to Asia.
Montana revenue officials say taxes, interest and penalties are owed on sales between 2005 and 2007 from Cloud Peak Energy's Spring Creek strip mine near Decker, a 260-worker operation that dug up more than 17 million tons of coal last year.
They contend the coal was undervalued by the company and that Cloud Peak owes an additional $1.9 million in taxes, $1.2 million in interest and $232,000 in penalties for the three years.
Cloud Peak calculated its tax based on the price of coal it sold to affiliates, which then resold the fuel. The company said the practice is acceptable and legal and filed a lawsuit in state court asking District Judge Jeffrey Sherlock to reject the state's claims.
The company may owe some back taxes for its sales to the two affiliated companies in those years, but the state used the wrong methodology to calculate how much, attorney Robert Sterup said.
State officials wrongly based the value of the coal on the date it was shipped, not taking into account that the negotiations for the contracts behind the shipments could have occurred at different times, he said.
As a result, the state placed a higher value on the coal than it was worth when Cloud Peak and its affiliated companies negotiated their contracts, he said.
"It's the date of contract negotiations that governs market value, not the date the coal is shipped," Sterup said.
Montana tax authorities audited Cloud Peak to compare the so-called non-arms-length sales to its affiliates against sales to outside companies from Spring Creek during the years in question.
Montana's coal taxes are not assessed when a contract is negotiated but when the coal is extracted, Special Assistant Attorney General Brendan Beatty told the judge.
That should also be how sales to affiliated companies are governed, he said.
"We don't know what the value of the coal is until it leaves the mine," Beatty said.
Sherlock did not make an immediate ruling.
Spokesman Rick Curtsinger said Cloud Peak paid $57 million in state and local taxes and royalties in Montana in 2012. Taxes for 2005-07 were not immediately available.
The U.S. Department of Interior in February announced it was investigating whether the same industry practice of selling coal to affiliates has been abused by companies including Cloud Peak when they calculate royalties for coal shipped to Asia and other export markets.
Results of sales audits in that investigation are pending after Sens. Ron Wyden, D-Ore., and Lisa Murkowski, R-Alaska, warned that taxpayers could lose many millions of dollars annually if royalties are unfairly calculated.