Analysis

Arkansas court holds proppants used in fracking are exempt from sales tax

Multistate tax alert | June 12, 2015

The Supreme Court of Arkansas recently affirmed a lower court decision, holding that for the tax periods at issue (2006 through 2009) proppants used in hydraulic fracturing were exempt from Arkansas gross receipts tax (sales/use tax) pursuant to Ark. Code Ann. § 26-52-402(a).

Overview and considerations

​Overview

The Supreme Court of Arkansas recently affirmed a lower court decision, holding that for the tax periods at issue (2006 through 2009) proppants used in hydraulic fracturing1 were exempt from Arkansas gross receipts tax (sales/use tax) pursuant to Ark. Code Ann. § 26-52-402(a) (the Manufacturing Exemption Statute).2 In relevant part, the statute provides an exemption for purchases of “machinery and equipment used directly” in producing, manufacturing, and processing “articles of commerce at manufacturing or processing plants or facilities . . . in Arkansas . . . .” The court ruled that the proppants purchased by the taxpayer were “equipment used directly” in the process of extracting oil and gas and, accordingly, such purchases were exempt from Arkansas sales/use tax under the Manufacturing Exemption Statute.3 The Arkansas high court also affirmed the lower court’s finding that Ark. Gross Receipts Tax Rule GR-57(E)(5), which characterized proppants as nonexempt, is invalid and unenforceable.4

The case is significant because it appears to bring proppants within the Manufacturing Exemption Statute for tax periods that pre-date the amendment of that statute to expressly include proppants. Under the law as amended, the sales/use tax exemption for machinery and equipment used directly in manufacturing includes “Sand and other proppants used to complete a new oil or gas well or to re-complete, re-drill, or expand an existing oil or gas well.”5

Considerations

The Arkansas Rules of the Supreme Court provide that a petition for rehearing may be “filed within 18 calendar days from the date of the decision” (thus, in this instance, on or before June 22).6 As of the date of this alert, a petition has not been filed, but the filing period remains open. Accordingly, the case is not yet final. Although the case remains pending, providers of oil field services involving hydraulic fracturing in Arkansas may wish to consider whether based on the reasoning contained in this court decision they should file refund claims for Arkansas sales/use tax paid on their purchases of proppants for periods that precede the effective date of the amended Manufacturing Exemption Statute.

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