Wichita The Kansas Court of Appeals upheld the taxation of oilfield machinery Friday, ruling surface pumping and down-hole equipment do not qualify for the sales and use tax exemptions given to the state's processing facilities.
Edmiston Oil Co. and several other oil and gas producers had claimed in a lawsuit that their purchases of pumping equipment and other machinery such as gas compressors, engines, tubing and other items were used as part of a production operation and thus were eligible for exemption under Kansas law.
But the appellate court's ruling agreed with an earlier Kansas Court of Tax Appeals ruling, concluding such equipment is not an integral part of production operations by a processing plant and is therefore not eligible for the exemption.
In its analysis of what the court termed a "complex statutory exemption," the appellate court noted the Legislature had not changed the dual requirements that to be eligible for the exemption the machinery must both be used as a part of the production operation and used by a manufacturing or processing plant.
The amended statute also added additional requirements that defined a processing business as operations where the gas or oil extracted from the earth is subject to a list of treatments or preparations.
The court also said in its ruling that it agreed with attorney Thomas Hattan of the Office of Policy and Research at the Kansas Department of Revenue, who stated sales of pumps and derricks to extract oil also are subject to tax since these are extraction rather than production operations.