Legislation exempting sand used in oil and natural-gas drilling from sales taxes sailed through the Arkansas Senate on Thursday.
The Senate voted 34-0, without debate, to approve Senate Bill 801 by Jason Rapert, R-Bigelow. The bill now goes to the House.
The bill would provide a sales and use tax exemption for sand and other proppants used to complete a new oil or gas well or to recomplete, redrill or expand an existing well, according to the state Department of Finance and Administration. Proppants are granular substances that are injected into wells to keep fractures open so oil and gas can be removed.
"No one had ever thought or conceived that that would be something that would be taxed because everybody knows that it's considered part of their manufacturing process," Rapert said afterward.
"The Legislature agrees with the businesses and the industry that that should not have been taxed, and we made that clear," he said.
In its tax code, Arkansas allows materials used in manufacturing or production of other products to be exempt from the sales tax.
In last year's fiscal session, the Republican-controlled Arkansas Legislature overturned then-Gov. Mike Beebe's veto of a specific section of an appropriation bill to exempt sand and other proppants used in drilling.
In June, a lawsuit was filed by Robert Nunn asking a Pulaski County circuit judge to rule the law unconstitutional, contending that the state Legislature passed the exemption without following the constitutionally required procedure for considering nonappropriation bills during the fiscal session.
Last year, a circuit judge ruled in a lawsuit filed by Weatherford Artificial Lift Systems Inc. that the state had wrongly collected the sales tax on proppants. Judge Tim Fox ordered that the state refund more than $1.3 million in sales tax to Weatherford but issued a stay on that order in May until an appeal of the case can be heard.
The state has appealed the ruling in the lawsuit filed by Weatherford to the state Supreme Court.
Assuming that proppants are currently taxable under state law, the bill would reduce state revenue by about $390,000 per year based on current activity, though that amount fluctuates, a Department of Finance and Administration report said.
In a related development, the Senate Revenue and Taxation Committee on Wednesday endorsed SB802 by Rapert.
The bill would provide a sales-tax exemption for the collection and disposal of saltwater, drilling fluids, hydraulic fracturing fluids, produced water, pit water, pit mud and similar materials produced from oil, gas or other natural resource exploration and development activities, the finance department said.
The bill would reduce state tax revenue by $300,000 in fiscal 2016 and $450,000 in fiscal 2017, the finance department estimated.
Rapert said Thursday that he "is holding" the bill in the Senate until "we get a better picture of the [state] budget situation."
Earlier in the day, Rapert's proposal to transfer $15 million in surplus funds to the state Department of Human Services failed to get the required 29 votes for approval in the Joint Budget Committee.
The money was sought for construction, improvements, equipment, renovation and maintenance expenses for the state's five human-development centers.
The vote on his SB175 was 17-4. The committee expunged the vote to clear the way for another vote on his proposal.
The state has human-development centers in Arkadelphia, Booneville, Conway, Jonesboro and Warren. They provide residents with medical care, therapy and other services.
Metro on 03/20/2015