The state of Minnesota has repeatedly overvalued Enbridge Energy’s oil pipeline system, a state Tax Court judge ruled Tuesday, possibly leaving several counties on the hook to pay tens of millions of dollars in tax refunds.

The Minnesota Department of Revenue overvalued Enbridge’s pipeline system by $2.2 billion in 2014 and by $880 million and $156 million respectively in 2013 and 2012, wrote Judge Joanne Turner of the Minnesota Tax Court. Unlike most property, pipelines are assessed by the state, though much of the tax proceeds flow to counties.

“This is concerning for counties, though I can’t say it’s a surprise,” said Matt Hilgart, general government policy analyst for the Association of Minnesota Counties. “We have been holding our breath for the worst-case scenario.”

Enbridge’s pipelines traverse 13 northern Minnesota counties, and some of them count on Enbridge for a large portion of their tax base. At least two counties — Clearwater and Red Lake — could end up refunding more money than they raise annually from all of their taxpayers.

The tax court’s ruling didn’t directly establish refund amounts, but Turner agreed with Enbridge Energy’s position on some key points about pipeline valuation.

The company has said it was overtaxed by $15 million to $20 million during 2012 through 2014, the years covered by Tuesday’s court filing. Enbridge Energy has also sued the state for the tax years 2015 through 2017, cases which have yet to be heard. Enbridge claims that through all six years, it’s cumulatively due up to $55 million in refunds.

“The issue will be magnified by three more years,” Hilgart said.

Caught in the middle

Enbridge Energy is a subsidiary of Calgary-based Enbridge, the largest pipeline operator in North America. Enbridge has six pipelines on a common route that together transport about 2.5 million barrels of oil per day from Alberta to the company’s terminal in Superior, Wis.

“Enbridge recognizes counties are caught in the middle of this state-initiated tax dispute,” Enbridge said in a statement. “We do not want to cause any hardship on them and are committed to work with each county if needed at the appropriate time.”

The company said it doesn’t plan to take any “immediate action” on the court’s ruling, as an appeal can be made within 30 days to the Minnesota Supreme Court. An appeal seems likely.

“We disagree with the Minnesota Tax Court’s decision,” the Department of Revenue said in a statement. “We understand the concerns of the affected counties. This is not the end of the litigation process and we are exploring our options for appeal.”

The Revenue Department declined to make Commissioner Cynthia Bauerly, or any other top official, available for an interview.

Pipelines, utilities and railroads in Minnesota are assessed by the Revenue Department, and tax collections are then distributed to counties hosting the properties. The counties affected by the Tax Court ruling are: Aitkin, Beltrami, Carlton, Cass, Clearwater, Hubbard, Itasca, Kittson, Marshall, Pennington, Polk, Red Lake and St. Louis.

Red Lake is Minnesota’s third smallest county with just over 4,000 residents and a current tax levy of $2.9 million. The county has estimated it could be on the hook for $3.5 million if Enbridge prevails. “I don’t know where we would get the money for it,” said Bob Schmitz, the county’s auditor. “We don’t even have high enough reserves to cover that.”

Largest taxpayer

In Marshall County — population roughly 9,500 — Enbridge is the largest taxpayer, and its financial effect is “enormous,” said Scott Peters, county auditor. “We’d have the reserves if needed, but we don’t feel it’s fair to have to pay [any refund]. The mistake should be paid for by the people who made it. The state is the responsible party.”

Local governments and school districts could be hurt, too, by the Tax Court’s decision since they receive portions of tax collections from counties. The state also directly receives tax revenue collected from Enbridge, though it makes up only a small portion of the general fund.

Enbridge claims that it has “been unfairly assessed, unequally assessed, assessed at a valuation greater than the real or actual value of the property,” according to court documents.

Property taxes on pipelines are usually assessed on the cost of the system and the income it produces; some “market” values are also weighed. Enbridge sued in 2012, and claims the Revenue Department changed its assessment methodology. The Revenue Department has denied that allegation.

At least two other pipeline companies have sued the Revenue Department in recent years, also claiming they were unfairly assessed.

Minnesota counties have for the past three years urged the Legislature to do something about pipeline tax matters, particularly the Enbridge case, Hilgart said. Those requests range from having the state pay any refunds due from the counties to structuring county refund payments over several years and simply studying how to improve pipeline tax assessment.

“We need a more dependable and consistent assessment model,” Hilgart said.

Enbridge is currently seeking state permission to build a new pipeline to replace its aging and corroding current Line 3. Regulators are expected to make a decision next month on the controversial $2.6 billion pipeline.

The company says that a new Line 3 would help cushion the blow of county tax refunds, creating about $20 million in new property taxes annually.