LITTLE ROCK — Sand and other proppants used in hydraulic fracturing are exempt from taxation under an Arkansas law that excludes industrial equipment from the state sales tax, a divided state Supreme Court ruled Thursday.

LITTLE ROCK — Sand and other proppants used in hydraulic fracturing are exempt from taxation under an Arkansas law that excludes industrial equipment from the state sales tax, a divided state Supreme Court ruled Thursday.


In a 4-3 decision, the state’s highest court upheld Pulaski Circuit Judge Tim Fox’s February 2014 ruling that Weatherford Artificial Lift Systems should not have been required to pay sales taxes on proppants, which are used in wells to hold open fractures in rock to allow the extraction of oil and gas.


The decision means the state will have to refund about $24.5 million to Weatherford and other companies, according to the state Department of Finance and Administration.


Weatherford sued D&FA after the agency required it to pay $1.3 million in taxes on proppants purchased between Oct, 1, 2006 and July 31, 2009. After Fox ruled in favor of the company, the state Legislature wrote language into a budget bill during the 2014 fiscal session that specifically exempted proppants from the state sales tax.


Then-Gov. Mike Beebe vetoed the exemption, saying the Legislature had improperly approved it without voting to take up a non-budget issue during a fiscal session. The Legislature overrode the veto.


During this year’s regular session, the Legislature for the second time approved legislation specifically exempting proppants from the sale tax. DF&A continued to argue that proppants were not exempt when it collected the $1.3 million from Weatherford, however.


A majority of Supreme Court justices disagreed, saying in a decision Thursday written by Justice Josephine Hart that Weatherford had shown that proppants meet the state’s definition of equipment.


DF&A had argued that proppants do not meet the definition of equipment because they are not complex tools or devices, with continuing utility, that are used directly in the process of extracting oil and gas, and they do not cause a recognizable and measurable mechanical or chemical action to take place as a necessary and integral part of manufacturing.


The agency argued that sand is not complex; that it does not have continuing utility because once it is used in a well it cannot be used again in other wells; and that fracking makes removal of natural gas from wells more profitable for oil and gas companies but is not necessary for natural gas wells to operate.


Weatherford argued that before sand is used in fracking it is treated in a complex process; that it does have continuing utility because after it is injected into rock it continues to serve its purpose for the life of the well; and that without it, natural gas production in the Fayetteville Shale would cease.


A majority of the justices said Weatherford supported those claims with evidence when the case was before Judge Fox.


"Given this evidence, we cannot say that the trial court clearly erred in concluding that the proppants in the present case were equipment," Baker wrote in the majority opinion.


Justice Robin Wynne said in a dissenting opinion that he believed DF&A had reasonably interpreted the law.


"While hydraulic fracturing is clearly a complex process, and preparing sand to be used in that process may also be somewhat complex, the sand itself is not an implement, tool or device ‘of some degree of complexity,’" Wynne wrote.


Chief Justice Jim Hannah and Justice Paul Danielson joined in the dissent.


Michael Smith, attorney for Weatherford, said Thursday of the decision, "We are very pleased with it. We felt like it was the right decision."


DF&A Deputy Director Tim Leathers said the decision represents "a change in what we perceived the status of the law to be on prior court decisions."


Leathers said the state will refund Weatherford the $1.3 million plus 10 percent interest, or a total of about $1.5 million, and expects to refund an additional $23 million to other companies that have filed claims over the sand tax.


Leathers said he did not know whether any other companies would come forward to file new claims, but he noted that there is a three-year statute of limitations for such claims and that production in the Fayetteville Shale has declined in recent years, resulting in reduced use of proppants.


State revenues are far enough above forecast that the loss of $24.5 million should not require any budget cuts, Leathers said. He said the agency’s most recent projection, before Thursday’s ruling, was for the state to have a budget surplus of $92 million when the current fiscal year ends on June 30.