A years-old dispute between state finance officials and a hydraulic fracturing company unfolded Thursday before the Arkansas Supreme Court as state attorneys sought to keep the more than $1.3 million collected in sales tax from the business.
The dispute, which centered on whether proppants used in the fracking process by Weatherford Artificial Lift Systems are exempt from sales taxes, first reached state court in 2011 after the company paid what the state said was owed.
Proppants -- typically sand or other granular filler material -- are used to hold open cracks in a surface well and allow the extraction of oil and gas.
Attorneys for the company argued that proppants were exempt from sales tax like other manufacturing items, and in February 2014, Pulaski County Circuit Judge Tim Fox sided with the company, finding that the proppants used by the company were not taxable and that the agency's rules that required the tax were unjustified.
Since then, there have been two separate efforts in the state General Assembly to make sure that proppants receive the same sales-tax-exempt status as other manufacturing tools.
On Thursday, Jeff Webber, an attorney with the state Department of Finance and Administration, said the case was simple.
"It is sand. It is nothing other than sand. It isn't complex," Webber said. "[Weatherford] tries to get by that problem by describing in [their arguments] the process it takes to find the right kind ... the testing may be complicated ... but the sand is not complex."
Attorneys for Weatherford countered by saying that the manicured sand is a key element to the production of oil and gas in fracking and that it qualifies under the manufacturing related exemptions listed in Arkansas Code Annotated 26-52-402.
The state first claimed Weatherford owed the roughly $1.3 million in unpaid sales tax receipts on the sand after an audit review for the period between 2006 and 2009.
An agency rule, which was crafted with public comment, stated that "water, sand, proppants, explosives" were specifically not exempt.
But Weatherford argued that the agency rule contradicted the state law.
Ultimately, Fox found that the finance department rule was arbitrary and exceeded the agency's authority.
The proppants dispute was waged in the Capitol during the 2014 fiscal session and again this year.
Republican lawmakers pushed a new appropriations bill meant to clarify that the state's manufacturing exemptions applied to oil and gas drilling, as well as the use of proppants.
Beebe vetoed the measure which was then overridden by the Legislature.
Critics said that the new law was unconstitutional because it was nonbudgetary legislation that had been improperly approved during a fiscal session. A suit was filed to block it.
In this year's regular legislative session, the Legislature passed a bill ensuring that proppants used in oil and gas wells were tax exempt. Gov. Asa Hutchinson signed the measure into law.
On Thursday, Webber pointed to the clarifying language in 2014, and the new law enacted this year, as evidence that the taxes exacted from Weatherford were appropriate.
"The fact they had to exempt [proppants] tells us it wasn't exempt before," Webber said.
However, lawmakers and Weatherford said the new law was needed only because the department had misinterpreted the old law.
Attorneys for Weatherford argued that there was no inference for the court to draw from the recent legislation.
It is unclear when the court will render a verdict.
Metro on 05/22/2015