In the attached decision, the Comptroller held that proppants and other chemicals used in the hydraulic fracturing process did not qualify for the Texas sales tax sale-for-resale exemption. Comptroller Hearing No. 110,819 (November 6, 2015). Although this decision was unfavorable, the analysis leaves ample room for challenge in district court. The claimant, an oilfield service provider, furnished oil and gas hydraulic fracturing (“fracking”) services to Texas well owners. Fracking is a process where fluid and other materials like sand, ceramic materials (“proppants”), and chemicals are pumped into a well at a high pressure to create open fractures in the well formation through which oil and gas may flow. See id. at 5. The oilfield service provider filed refund claims for periods spanning July 2009- September 2011 for sales tax paid in error, arguing that the purchase of proppants and chemicals used during the fracking process qualified for the sale-for-resale exemption. See id. at 1, 5; See Tex. Tax Code §§ 151.0006(a)(1), (a)(3), and Tex. Tax Code § 151.302(a).

In order to qualify for the sale-for-resale exemption, the oilfield service provider had to prove that proppants and chemicals used during the fracking process constituted tangible personal property that was ultimately transferred to the well operators. See id. at 5. The oilfield service provider argued that the fracking process did not change the physical properties of the proppants and chemicals, which remain in the well formation after fracking is complete− propping open cracks in the formation through which oil and gas may flow. Id. The oilfield service provider testified that it retained no rights to the proppants and chemicals once they become embedded in the well formation, so the well owner assumed care, custody, and control of the proppants once they were pumped downhole. Id. at 6.

In opposition, the Comptroller’s attorney argued that a portion of the proppants and chemicals injected into the well formation were later removed from the wellbore and disposed as waste. Id. at 7. This could occur through either the vacuuming of impediment from the wellbore, or through the release of pressure at the surface of the well. Id. Because a portion of the proppants are disposed of as waste, the Comptroller’s attorney argued that care, custody, and control of these proppants never transferred to the well owner. Id. As such, the Comptroller’s attorney argued that the oilfield service provider did not qualify for the sale for resale exemption because it failed to state the portion of proppants that remained in the formation and the portion removed and disposed of as waste. Id. at 7.

The Comptroller’s analysis turned on the lack of evidence presented at the hearing, rather than a technical analysis of the physical property of different proppants. The Comptroller noted that the oilfield service provider had the burden to prove by clear and convincing evidence that care, custody, and control of the proppants was transferred to the well owner. Id. at 9. The oilfield service provider presented several news articles, technical tables, and an unsworn affidavit attempting to explain the fracking process, generally, and the physical properties of proppants injected into the well. Id. at 9-10. The Comptroller concluded that the oilfield service provider’s evidence failed to prove by clear and convincing evidence that proppants remained in the well formation and were not removed as waste or lost through the release of pressure at the surface. Id. at 10. As a result, the Comptroller denied the oilfield service provider’s claims.

Comment: The fact that some of the proppants and chemicals are disposed of after the fracking process seems irrelevant to the issue of whether they were transferred to the customer prior to injection downhole. As a result, the Comptroller’s analysis leaves ample room for the oilfield service provider to challenge the decision in district court.