A Pulaski County resident filed a lawsuit Monday against the Arkansas Department of Finance and Administration, asking that a law exempting proppants used in gas drilling from sales tax be ruled unconstitutional.
The lawsuit was filed by Robert Nunn, "a representative of all citizens of the state," in Pulaski County Circuit Court. It alleges that the Legislature passed the exemption without following the constitutionally outlined procedure for consideration of nonappropriation bills during a fiscal session.
Lawyers for Nunn said the lawsuit was more about the Legislature following its rules and less about the actual tax exemption for proppants -- usually sand or other granular filler material used to keep fractures for natural gas or oil drilling open so the gas and oil can be removed.
"It's an effort to make sure that the Legislature holds to the notion that when we established the fiscal session, it was only for fiscal matters," said attorney John Burnett. "We're really interested in the underlying constitutional issues, not just about fracking sand. That is an interpretation issue that could go either way. We're not really interested one way or the other about whether the tax should or shouldn't be charged. Our issue is with the process."
John Theis, assistant revenue commissioner at the Finance and Administration Department, said the state had not been served with the lawsuit as of late Monday afternoon. He said he could not comment until he had time to review the allegations.
Nunn's attorneys noted in the lawsuit that the act containing the regulation exempting proppants from sales tax was an appropriation bill, but said the language establishing the tax law was improperly included inside that bill without the litmus test that other nonappropriation bills have to go through during a fiscal session.
Burnett noted that his client had not raised an issue about a bill passed during the fiscal session to allow the governor to forgo calling a special election within 150 days of Lt. Gov. Mark Darr resigning in February, and allowing the office to remain vacant until the November general election. He said that bill was separate from any appropriation and was approved for consideration by the required supermajority of both houses.
During the fiscal session, nonappropriation bills require a two-thirds vote from the two chambers to be considered on the floor for approval.
"That process didn't happen with this law; it was just slipped in there," Burnett said. "In addition to our argument about the constitutional provision, we also cite other doctrines as well that say you can't do that [change the sales tax exemption] this way."
The exemption originated as an amendment in the Senate to an appropriation bill for the Finance and Administration Department. Gov. Mike Beebe vetoed the specific section of the bill pertaining to the tax break, but that veto was overridden by a majority in both chambers without much discussion.
The lawsuit filed Monday also means the state is simultaneously being sued for collecting the sales tax in previous years and for plans to not collect the sales tax starting July 1.
Nunn's lawsuit is the second one filed against the Finance and Administration Department regarding whether to charge sales tax on proppants.
In its tax code, Arkansas allows materials used in manufacturing or production of other products to be exempt from sales tax. Oil, gas and drilling companies have argued that proppants are used to help produce natural gas and oil.
A circuit judge ruled in March in the first lawsuit, filed in 2011 by Weatherford Artificial Lift Systems Inc., that the state had wrongfully collected the sales tax on proppants.
Judge Tim Fox ordered that the state refund $1.356 million in sales tax to Weatherford, but issued a stay on that order in May until an appeal of the case can be heard.
Metro on 06/24/2014