United States

Oklahoma: Commission Addresses Taxability of Fracturing Services and Failure to Schedule Hearing in a Timely Manner

May 22, 2017
From KPMG TaxWatch

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The Oklahoma Tax Commission recently issued a ruling addressing a couple of different issues related to an oil well operator’s sales tax refund claims, including whether vendors providing certain oil well fracturing (“fracking”) services were considered real property contractors. The taxpayer at issue, an oil well operator, filed Oklahoma sales and use tax refund claims, which the Commission denied. After the taxpayer protested the denials, it requested a hearing. By law, the Commission is required to set a date for the hearing that is not more than 60 days from the date the demand for hearing was mailed (unless the taxpayer agrees to a hearing beyond the 60-day period). In the instant case, the Commission failed to set the hearing date within the 60-day timeframe, and the taxpayer did not agree to a hearing beyond the 60-day date. Thus, the taxpayer argued that, due to the delay, the state had forfeited its denial of the refund claims. Despite the statutory mandate that the hearing be set within 60 days, the Commission rejected the taxpayer’s position. It noted that the taxpayer was not harmed by the delay, the taxpayer (upon notification that the hearing was set for outside the 60-day period) did not demand an earlier hearing, and that taxpayers routinely requested continuances because the 60-day period did not provide ample time to prepare for a hearing. The Commission also noted that the taxpayer could not claim estoppel— i.e., that the state was estopped from denying the refunds—when the state was acting, as it was here, in its sovereign capacity.

The next issue before the Commission was one of first impression that, in the Commission’s view, would have “far-reaching implications.” Specifically, the taxpayer argued that certain of its vendors were providing real property services or non-taxable services when they were hired to fracture an oil well. The Commission noted that a review of the taxpayer’s invoices made clear that the taxpayer did not pay sales tax on services; rather, it paid sales tax on tangible personal property and was now arguing that the vendors were “contractors” using the tangible personal property to provide non-taxable services to real property. After reviewing the invoices and the Master Services Agreement (MSA) between the taxpayer and its vendors, the Commission concluded that the taxpayer had structured its transactions to specifically separate the sale of tangible property from the provision of services. As such, the taxpayer failed to prove by a preponderance of the evidence that the vendors were contractors providing real property services. It was also appeared to the Commission that fracturing services did not meet the tests required to qualify as producing fixtures and improvements to real property.  The Commission likewise rejected the taxpayer’s third argument that the vendors were providing non-taxable services and were the users or consumers of the tangible personal property used in providing those services. The Commission noted that, per the MSA, title to the property passed to the taxpayer when it was delivered to the taxpayer’s wells. Thus, in the Commission’s view, a sale had occurred. Please contact Brian Culvey at 713-319- 3831 with questions.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.