A proposal to exempt sand used for oil and gas wells from the state’s sales tax failed to clear the Legislature’s Joint Budget Committee on Tuesday.
But state Sen. Jonathan Dismang, R-Searcy, said he plans to ask the committee to again consider his proposed amendment in House Bill 1048 - an appropriation measure for the state Department of Finance and Administration’s Revenue Division for the fiscal year starting July 1.
The committee’s 21 votes for Dismang’s proposal fell eight votes short of the 29 votes required for approval on the 56-member committee. The committee later expunged its initial vote at Dismang’s request, paving the way for the issue to be voted on again later in the session.
Dismang’s amendment would exempt sand and “other proppants” used for an existing or new oil or gas well from the state’s sales tax.
“Proppants” are granular substances that are injected into wells to keep the fractures open so that oil or gas can be removed.
Dismang said his amendment would clarify that “this collection of tax has already been defeated once in the court and [the finance department] already has lost.
“I understand that they want to appeal,” he said.
The state was sued by Weatherford Artificial Lift Systems Inc. after being forced to pay nearly $1.4 million in sales tax on the sand. Pulaski County Circuit Judge Tim Fox has ruled that the proppants were not taxable because state law exempts equipment and machinery from the sales tax if they’re used in manufacturing, said Tim Leathers, deputy director of the Department of Finance and Administration.
Under Arkansas Code Annotated 26-52-402, “manufacturing” includes the process of “extracting oil and gas.”
Leathers told lawmakers Tuesday that Dismang’s amendment would reduce state tax revenues by about $5.1 million a year, including about $3.5 million a year in general revenue.
That’s roughly what the proposed 1 percent cost-of living increase for most state employees would cost the state in fiscal 2015, and “that would be the first place that we would be looking to cut the budget to make that deficiency up,” Leathers said.
Dismang said he doesn’t believe that it follows generally accepted accounting principles to include “that [money] in future revenue.”
“Today, as it stands right now, the courts have determined that those funds are not available for the state of Arkansas to use and to say there is a future impact on an item that has already been ruled against, I think it is difficult to do and should not be done by [the finance department],” he said.
Leathers said state officials warned lawmakers last month against placing tax exemptions into appropriation bills because they violate the state’s constitution. A two-thirds vote is required in the 100-member House and 35-member Senate to introduce nonappropriation measures in a fiscal session.
“By attaching [tax exemptions] to appropriation bills, if you can do this, then you can do tax increases in the future,” he said. “It’s a bad precedent.”
Afterward, Dismang said, “It’s well within the purview of the legislative body to want to designate what legislative intent was. [The finance department] is operating outside of legislative intent now. The court has already decided that once … so if we can provide clarity, then I want to provide clarity.”
Front Section, Pages 6 on 03/05/2014