Exemptions from tax — Manufacturing exemption — Specific businesses — Refining and extracting oil, brine, and natural gas — Services to oil, brine, and natural gas wells

# (a) Refining — Exempt

(a) Refining — Exempt. The following items of tangible personal property are examples of exempt machinery and equipment purchased by oil, brine, and gas refiners to construct new or expand existing refining plants or facilities in Arkansas:

(1) Tanks or containers in which the actual refining takes place;

(2) Pipes, valves, and pumps through which crude oil, brine, or natural gas is actually transported during refining operations from wellhead through treatment tanks at the well site; and

(3) Machinery and equipment used to refine or process oil, brine, or natural gas into articles of commerce.

# (b) Refining — Nonexempt

(b) Refining — Nonexempt. The following items of tangible personal property are examples of nonexempt machinery and equipment purchased by oil, brine, and natural gas refiners:

(1) Storage tanks or containers used to store oil, brine, or natural gas prior to or subsequent to the actual refining process; and

(2) Pipes used to transport oil, brine, or natural gas from separators and treatment tanks at a well site to refineries or processing facilities and pipes used to transport the finished product after refining or processing has been completed.

# (c) Extraction

(c) Extraction.
(1)(A) Machinery and equipment purchased to construct new oil, brine, or natural gas extraction plants or facilities in Arkansas or machinery and equipment purchased to recomplete or redrill existing oil, brine, or natural gas extraction plants or facilities in Arkansas are exempt from tax if the provisions of this section and 26 CAR § 30-1136 are satisfied.

(B) “Recomplete” or “redrill” shall have the same meaning as indicated in subsection (f) of this section.

(2) A “new” well is a well that has not been put into production.
(3)(A) To qualify for the exemption, the machinery must be used directly in the extraction process.
(B)(i) The extraction process for oil shall be considered as beginning with the erection of the drilling rig at the drilling location and shall be considered as terminating at the heater treater or settling tank immediately prior to transportation.

(ii) Oil tanks used for storage alone shall be subject to tax.
(C)(i) The extraction process for natural gas shall be considered as beginning with the erection of the drilling rig at the location of the well and shall be considered as terminating once the gas has reached the Christmas tree.

(ii) Once the gas has reached the bee catcher or separator for the first stage of removing impurities from the gas, refining has begun and shall be considered as continuing until the gas leaves the outlet on the discharge side of the final gathering compressor station.

(iii) The pipeline from the outlet to the transmission line shall be subject to tax.

# (d) Extraction — Exempt

(d) Extraction — Exempt. The following items are examples of exempt machinery and equipment used directly in the extraction process:
(1)(A) Drilling rigs.

(B) All machinery and equipment that becomes a component part of a newly constructed drilling rig, e.g., crown block, drill bit, drill string are exempt.

(C) However, any subsequent replacement of drilling rig components will be taxable unless the replacement is made in conjunction with a complete or substantial replacement of an entire drilling rig;

(2) Production casing, production tubing, pumps, motors, and other machinery or equipment that becomes a component part of a newly constructed well or a redrilled well;

(3) Christmas trees, meters, regulators, separators, and treaters located at the wellhead and auxiliary equipment used around the well, e.g., electrical generators, pumps, air compressors, shakers, hoists, blow-out preventers (BOPs);

(4) Drilling mud;

(5) Machinery and equipment purchased to completely or substantially replace an existing oil or gas well; and (6)(A) Brine supply well.
(B)(i) New or rebuilt pump, motor, and protector when all three (3) items are purchased to replace an existing pump, motor, and protector at the same time.

(ii) However, if less than all three (3) items are replaced at the same time, a “substantial replacement” has not occurred and the items purchased will be taxable.

# (e) Extraction — Nonexempt

(e) Extraction — Nonexempt. The following items of tangible personal property are examples of nonexempt machinery and equipment used in the extraction process:

(1) Machinery and equipment purchased for a drilling rig when the rig is not being completely or substantially replaced;

(2) Machinery and equipment purchased to rework or workover an existing well;

(3) Dump trucks or other transportation vehicles;

(4) Pipe and compressors located beyond the outlet on the discharge side of the final gathering compressor station;

(5) Monitoring equipment used to monitor the pressure and flow rate of gas;

(6) Water, sand, proppants, explosives, chemicals (unless the chemicals qualify as exempt chemicals pursuant to 26 CAR § 30-1137), and other consumable supplies purchased and used by contractors and oil and gas service providers in their performance of well services; and

(7) Storage tanks, dog houses, and portable trailers.

# (f) Services

(f) Services.
(1)(A) The total gross receipts derived from the services of alteration, addition, cleaning, perforating, fracturing, refinishing, replacement, repair, rework, or workover of any part of an existing oil, brine, or natural gas drilling rig or an existing oil, brine, or natural gas well are taxable as services performed upon manufacturing machinery and equipment.

(B) However, perforating, fracturing, and other completion services performed on a new well to begin initial production, or in conjunction with the redrilling or recompletion of an existing well, are not subject to tax.
(2)(A) “Completion” means the first configuring of the well inside the production casing and perforating of the casing to allow gas from the surrounding rock into the casing and to the surface.

(B) Completion services include running casing, cementing, logging, perforating, fracturing, acidizing, swabbing, and other special services depending on the characteristics of the formation.

(3) “Recompletion” means completion operations performed in a source of supply that is separate and distinct from the source of supply in which the well was successfully completed prior to the commencement of the current completion operations, e.g., an existing well is perforated and fractured to initiate gas production from a new and different zone from the zone that was already producing.

(4) “Redrill” means an expansion (see 26 CAR § 30-1136(c)) of an existing well by drilling the well to a deeper depth to enhance production from another zone.

(5) “Rework” or “workover” means work of a remedial nature performed within the vertical confines of the same source of supply.

(6) Service providers should pay tax on all consumables used in providing the services, regardless of whether the service is a taxable service under this section.

(g) The following oil, brine, and natural gas extraction equipment is exempt from tax under the pollution control provisions of 26 CAR § 30-1150:

(1) Surface casing and concrete used to enclose the casing, down hole casing, injection tubing, and well bottom packer;

(2) Brine disposal well, including the inline pipeline pumps and wellhead booster pumps, valves, and pipes used to transport the brine to a brine disposal well; and

(3) Pit liners.