Justices rule; state to repay drillers $ 24M

Granules found tax- exempt

The state will have to pay back more than $ 24 million collected in sales taxes and interest to a handful of drilling companies after an Arkansas Supreme Court ruling Thursday.

In Thursday’s 4- 3 ruling, the high court upheld a February 2014 ruling by Pulaski County Circuit Judge Tim Fox that found that the proppants used by Weatherford Artificial Lift Systems Inc. in the drilling of natural gas in the Fayetteville Shale do qualify as equipment that is exempt from the state’s sales tax.

The company paid about $ 1.35 million in sales taxes on proppants between 2006 and 2009.

Proppants are granular substances, such as sand, that are injected into wells to keep fractures open so oil or gas can be removed.

The company paid the tax but filed suit and is to get a refund of about $ 1.5 million, including interest. Three other unnamed companies together are to receive $ 23 million in sales tax refunds for their purchases of proppants around the same time, according to Arkansas Department of Finance and Administration deputy director Tim Leathers.

The majority opinion, written by Justice Jo Hart, also found that an administrative rule used by the Arkansas Department of Finance and Administration to tax proppants was “contrary to state statute” and therefore “unenforceable.”

Justice Robin Wynne dissented, writing that the majority was wrong to not recognize the state’s authority to levy a tax. Chief Justice Jim Hannah and Justice Paul Danielson also dissented.

Michael Parker, an attorney for Weatherford, welcomed the ruling, noting that the close vote indicated that the justices grappled with the question of what should and should not be subject to the state’s tax authority.

“It was a difficult case,” Parker said. “In many respects there were sound reasons for the department’s position and sound reasons for the taxpayers’ position. I thought the [ courts] reached the right decision.”

Leathers said the Department of Finance and Administration will not ask the court to reconsider its ruling and will begin processing the proppants sales- tax refunds.

The question of whether proppants, which industry officials say are central to the fracking process, had the same tax- exempt status as other types of oil and gas drilling machinery also was addressed in the past two legislative sessions.

During the 2014 fiscal legislative session, Republican legislators sponsored an appropriations bill that they said clarified the allowable state sales tax exemptions on oil and gas manufacturing equipment.

The measure passed. Democratic Gov. Mike Beebe vetoed it, but the Arkansas Legislature overrode his veto.

A lawsuit was filed over the new law, arguing that the process used to approve it violated the provisions of the state constitution that govern fiscal sessions. During this year’s regular legislative session, the Legislature passed another bill making clear that proppants are tax- exempt.

During oral arguments on May 21, attorneys for the state pointed to the new law as evidence that proppants were clearly taxable before the new law passed.

Weatherford’s attorneys argued that the new statute merely clarified an existing tax exemption.

The legal standard for whether machinery used for oil and gas drilling is exempt was set in a 1987 ruling by the state’s highest court, which said the “equipment” in question had to be of “some degree of complexity and continuing utility.”

The state’s attorneys argued that there was nothing complex about proppants, saying during oral arguments that proppants are “just sand.” The state’s attorneys compared it to gravel, which is used to build roads and is subject to tax because it is not complex and is used only once per project.

The high court agreed with Fox that proppants, which can keep wells open for years, do have continuing utility and that proppants production is very elaborate.

Wynne’s dissent argued that before action was taken by legislators, there was no mention of sand or proppants in the list of exemptions from state taxes and that state law gave state finance officials the rule- making authority to carry out the tax.

The dissenting justices also found that “while hydraulic fracturing is clearly a complex process,” the proppants alone are not “an implement, tool, or device ‘ of some degree of complexity.’”