Gov. Mike Beebe on Monday vetoed a provision added to an appropriation bill to exempt sand used in oil and gas wells from the state’s sales tax, saying the tax break is unconstitutional.
The Democratic governor said he vetoed Section 16 of House Bill 1048 because the section’s sponsor, Sen. Jonathan Dismang, R-Searcy, failed to get the required two-thirds vote of the 100-member House and 35-member Senate to introduce the measure under the Arkansas Constitution.
But Dismang said that section of the bill merely clarifies legislative intent of state law in response to a Pulaski County circuit judge’s ruling that the state can’t collect that tax. The provision didn’t require a two-thirds vote to be introduced, he said.
Senate Republican leader Eddie Joe Williams of Cabot and House Republican leader Bruce Westerman of Hot Springs later called for Beebe’s veto to be overridden before the Legislature adjourns Wednesday.
“I am encouraging all Republican caucus members to show up … to override the veto,” said Williams.
Overriding a veto requires a majority vote in both chambers.
The House has 51 Republicans, 48 Democrats and one Green Party member. Twenty-two Republicans and 13 Democrats are in the Senate.
In addition to sand, Section 16 of HB1048 also exempts other “proppants” from the state’s sale tax. Proppants are granular substances that are injected into wells to keep fractures open so oil or gas can be removed.
The state Department of Finance and Administration estimates that the tax exemption would reduce annual tax revenue by $5.1 million, an estimate that Dismang has disputed.
Beebe’s line-item veto had been widely expected, after Tim Leathers, deputy director of the Finance and Administration, Department told lawmakers that the amendment was unconstitutional, a view Beebe repeated last week.
In his veto letter to lawmakers, Beebe said he believes that Section 16 violates the letter and spirit of Amendment 86 to Arkansas Constitution, which voters enacted in 2008 to allow for fiscal sessions. The Legislature holds regular sessions in odd-numbered years; it holds shorter fiscal sessions in even-numbered years.
It’s clear that when voters approved Amendment 86 they intended to limit the matters considered during fiscal sessions, Beebe said.
Section 16 “purports to make a substantive change to the Arkansas Code (effective July 1, 2014) by establishing a new, additional category of items exempted from the existing gross receipts tax,” Beebe wrote.
“While this proposed change to the Arkansas Code is clearly not an appropriation of funds, Section 16 of the bill was considered and adopted without first obtaining the required two-thirds vote of both chambers” to introduce the measure under Article 5, Section 5 (c) (c2), the governor wrote.
“If substantive changes to Arkansas law could be adopted in this manner during a fiscal session, the provisions of Article 5, Section 5 (c) (2) would be meaningless and fiscal sessions could, as a practical matter, be rendered indistinguishable from regular sessions,” Beebe wrote.
He told reporters Monday that he hopes the Republican-controlled Legislature doesn’t override his veto.
“I hope they have got enough judgment that they agree that it is unconstitutional,” said Beebe. “The folks we have talked to are totally supportive of sustaining the veto,” he said, while declining to cite any particular lawmakers’ names.
But Dismang said that his proposal is constitutional.
“It’s well within our right to provide clarification when it’s needed,” he said, adding his intent “wasn’t to dramatically change the law.”
Dismang said he wouldn’t have proposed his “legislative clarification” if the state finance department hadn’t promulgated rules imposing the sales tax on sand that a Pulaski County circuit judge later ruled is tax-exempt.
“I think there is some uniqueness to the issue,” he said.
John Theis, an assistant revenue commissioner for the state, told lawmakers earlier this month that the state finance department adopted a 2008 rule to specify that proppants are taxable after it received questions from the energy industry. The Legislature provided a sales-tax exemption to equipment used in manufacturing in the 1960s and the finance department concluded in 2008 that “a grain of sand that gets shoved into a crevice under the earth is not a piece of equipment,” he said.
The finance department was sued by Weatherford Artificial Lift Systems Inc. of Houston after the firm was forced to pay nearly $1.4 million in sales tax on the sand.
Pulaski County Circuit Judge Timothy Fox recently ruled that the proppants used by Weatherford are exempt from the state’s sales tax because they constitute “equipment” under the state law exempting manufacturing machinery and equipment from the tax. Fox ordered the state to pay nearly $1.4 million plus interest and court costs to Weatherford.
Leathers said the finance department plans to challenge Fox’s ruling.
Dismang, who is the Senate Republican whip and is in line to be the Senate president pro tempore in 2015 and 2016, said Monday afternoon that there’s sufficient support in the Senate to override Beebe’s veto.
Westerman - the House Republican leader and a congressional candidate for his party’s nomination in the 4thdistrict - said in a written statement that Beebe’s veto “must be overridden.”
He said Beebe credited Arkansas’s natural gas industry “with keeping our state’s unemployment numbers low earlier in his term.
“However, now that Arkansas unemployment is higher than the national rate, his choice to veto Section 16 is a real head-scratcher,” Westerman said.
Senate Democratic leader Keith Ingram of West Memphis and House Democratic leader Greg Leding of Fayetteville said they plan to consult with their respective Democratic caucuses before deciding what to do. But Leding said he’ll likely oppose overriding Beebe’s veto.
Beebe has vetoed 15 bills and exercised his line-veto authority to strike provisions in three other bills since he became governor in 2007, said Beebe spokesman Matt De-Cample. The Legislature has overridden those vetoes three times, DeCample added.
In 2013, the Republican-controlled Legislature overrode Beebe’s vetoes of bills barring most abortions after 12 weeks of gestation and 20 weeks of pregnancy and requiring voters to present photo identification before casting their ballot.
Front Section, Pages 1 on 03/18/2014