Panel passes bill to exempt well-drilling sales tax

A legislative panel Wednesday advanced proposals to exempt sand used for an existing or new oil or gas well and saltwater and drilling fluids created from oil or gas exploration from the state’s sales tax, over the objections of state officials who questioned their constitutionality.

In separate voice votes without any dissenting lawmakers, the Joint Budget Committee’s Special Languages Subcommittee added these amendments to the committee’s House Bill 1048 - an appropriation measure for the state Department of Finance and Administration.

State Sen. Jonathan Dismang, R-Searcy - who proposed the amendment to exempt sand and other “proppants” used for an existing or new oil or gas well from the state’s sales tax - said he doesn’t believe “that part of that construction or development of a well should be taxed,” and his proposal would “just provide clarification” about the Legislature’s intent to the finance department.

“Proppants” are granular substances that are injected into the wells to help keep the fractures open so that oil or gas can be removed.

Tim Leathers, deputy director for the finance department, said the proposed amendment would possibly reduce state tax revenues by “a substantial amount of money.” State officials haven’t computed how much yet because they only learned of the proposal Wednesday morning at the start of the subcommittee’s meeting, he said.

The state has been sued by at least one company - Weatherford Artificial Lift Systems, Inc. - after being forced to pay nearly $1.4 million in sales taxes on the sand. Pulaski County Circuit Judge Tim Fox has ruled that proppants were not taxable because state law exempts equipment and machinery from the sales tax if they’re used in manufacturing, Leather said.

Under Arkansas Code Annotated 26-52-402, “manufacturing” includes the process of “extracting oil and gas.”

“So as it stands right now we are just providing clarification on the sales tax on that sand and the revenue impact would be none because the courts have already determined … that you are not able to collect that sales tax on sand,” Dismang said.

“There is no revenue impact because you have no legal basis at this time for the collection of that tax,” he said.

But Leathers said that’s “not a correct legal basis” because the state plans to appeal Fox’s ruling to the state Supreme Court.

Sen. Bruce Maloch, D-Magnolia - who proposed the amendment to exempt saltwater, drilling fluids, hydraulic fracturing fluids, produced water, pit water, pit mud and similar materials from the state’s sales tax - said these fluids are generally injected back into the ground in a formation approved by the state Oil and Gas Commission and state Department of Environmental Quality.

The state is assessing the sales taxes on the basis of the fluids being solid waste, he said.

In the 2004 special session on education, the Legislature raised the state’s sales tax from 5.125 percent to 6 percent and extended the tax to numerous services, including the disposal of solid waste, he said. Former lawmakers, who he has consulted, thought that that the tax would apply to landfill tipping fees and didn’t apply to saltwater, drilling fluids and other similar materials.

Maloch said he’s proposing defining solid waste in the state’s sales tax law the same way it’s defined in the state’s income tax laws.

He said his proposed amendment would “give some direction of legislative intent and clarify that it was intended that those [fluids] not be subject to the gross receipts tax.”

Richard Weiss, director of the finance department, questioned the suitability of amendments dealing with tax law in an appropriation bill in a fiscal session.

Leathers added, “Not only is it unconstitutional, but it’s a precedent to be setting.”

Under Arkansas Constitution, a two-thirds vote of the House and Senate are required to introduce a non-appropriations bill in a fiscal session. Lawmakers are meeting in a fiscal session that started Feb. 10.

Afterward, Maloch said he plans to try to hold onto HB1048 to have discussions with finance department officials about the issue regarding constitutionality of his proposed amendment.

Asked about the constitutionality of his proposed amendment, Dismang said, “If someone wants to challenge its constitutionality, they are welcome to do so. But if it is incorporated into the law, it is part of the law until something says it is not.”

Front Section, Pages 6 on 02/20/2014

Upcoming Events