On December 8, 2015, the Taxpayer filed an application for refund with the Department for $44,454,836 in gross receipts tax for periods between 2011 and 2015. The taxpayer then filed another application for refund on December 28, 2015 for $3,462,261 in gross receipts tax for periods between 2012 and 2014. On February 11, 2016, the Department denied the first claim for refund which the Taxpayer then protested, and on March 11, 2016, the Department denied the Taxpayer’s second claim which it also protested. Both protests were consolidated into one by agreement. The Taxpayer provides hydraulic fracturing, or “fracking,” services to oil and gas companies. The primary issue to be decided in the case was whether the Taxpayer was selling products to their customers when it performed fracking. The process involves pumping into the well a mixture of water and certain chemicals to make the well more productive. The Department argued that the tangible chemicals are consumed as part of the performance of the service rather than sold. The Taxpayer argued that under the “predominant ingredient test,” where the relative costs of the chemicals are measured against the costs of the service, the chemicals could be considered the sale of a product and would qualify for a deduction under Section 7-9-65 NMSA 1978. The Hearing Officer, however, determined that a plain language reading of the statute showed that the Legislature intended to distinguish between the sale of chemicals and the sale of a service. The statute provides for a deduction for certain chemicals sold that will be then used in performing various processes, but this is distinct from the sale of a service that uses the chemicals as an ingredient in performing the process. The Hearing Officer found the test suggested by the Taxpayer to determine if the sale was a service did not recognize the intent of the statute and as interpreted by the Taxpayer would almost always result in every challenge to the deduction concluding that the transaction was a sale of tangibles. Regulation 18.104.22.168 NMAC states that when tangible property is consumed in the performance of a service the tangible property is not sold, making the chemicals consumed in fracking not a sale of tangible property. Moreover, the Hearing Officer observed that fracking has been interpreted as performing services by several other states in the decisions of their state supreme courts. This having been decided, the Hearing Officer ordered the protest denied.
Halliburton Energy Services Inc