UNDER PRESSURE

Change in equipment designation will hit taxing entities' bottom line

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A recent Texas Supreme Court decision supported a major change to the way certain types of oil and gas equipment are taxed in the Lone Star State – and it’s likely to have a significant effect here.

In March, the court ruled in favor of gas compressor company Archrock and against an argument filed by the Galveston County Appraisal District.

These changes will affect how and where equipment can be appraised for tax purposes, said Libby Neely, chief appraiser for the Gregg County Appraisal District.

“Basically, there were two big changes,” Neely said. “The appraisal districts, by law, are to appraise things at market value. The state tells us what is taxable and everything is supposed to be appraised for what it would sell for in an arm's-length transaction.”

Neely explained, after that court ruling, leased movable gas compressors will now be taxed on the total amount of revenue generated by a compressor for the leasing company during one year, divided by 12. In addition to changing how equipment is appraised, the court ruling will change where tax revenues generated by leased compressors will end up.

“So here we have oilfield compressors, which are movable, and movable assets are generally taxed where they sit January 1 of the year,” Neely said. “So these compressors are generally located onsite at a well. They are part of the operation for the pumping and they're worth a lot of money. The changes they made was that rather than those compressors being taxable where they sit, they will now be taxable at their yard. So just because it's located here does not mean it's taxable here.”

According to a statement posted to the website of Baker Botts, the law firm representing Archrock in the dispute, the state legislature changed the tax code in 2011 and Archrock complied with the changes. However, over 100 Texan appraisal districts complained the change was unconstitutional. Now, in 2018, the highest court in the state has said these appraisal districts are mistaken about their interpretation of the constitution.

Many oil and gas equipment leasing companies will now pay less tax on specific pieces of equipment. Also, a large number of entities which depend on tax revenue will have to refund a portion of their revenues and will collect less revenue in coming years. The reason for the payback arrangement is the new ruling is retroactive to 2012, when the changes were first made but were still being disputed. Excess tax revenues collected between 2012 and 2017 will now have to be returned after the new appraisal guidelines are applied.

The total amount of money to be refunded is still unknown but it's almost certain some local entities will take a hit. However, it may not be as painful a hit as some might think.

Revard Pfeffer, chief financial officer for Kilgore ISD, said there will be a financial impact but its size has yet to be determined.

“It will [have an effect] but I can't tell you how much. I've been staying in contact with the appraisal districts. I'm trying to get it closed out in this fiscal year and we still don't know,” Pfeffer said.

He said he expects the effect of the lost revenues will be significant but not overly so.

“There's debate on how much at this point in time it will be. It will eventually affect our tax revenue because there will be new values. Will there be a material effect? Yes, but a major effect, no. But every dollar counts.”

A lack of certainty about the final effects of the ruling is common among entities affected by its changes.

Kevin Yandell, director of business operations at Sabine ISD, has an idea how much the district will have to pay back in refunds but doesn't yet know when.

“From what we've been told by the appraisal district, we will probably have to refund to various entities approximately $28,000. Compared to what I saw on the spreadsheet for other districts that's not a lot, but it's still $28,000,” Yandell said.

Yandell said he also is in the dark about when the refund process will be finalized.

“When we get ready to close out our year at the end of this month, I will record that number as a liability to pay on the date that the tax office tells me. There's so much of it that still is vague even from their point of view. They have not given us much direction other than giving us a heads-up about funds that we will have to refund,” Yandell said.

The effects of the changes will be widespread but not evenly distributed.

“This affected every county in the state of Texas,” said Libby Neely.

Counties which generate little revenue from the oil and gas industries will not be impacted as much as oil and gas-rich counties. Smaller counties may see a proportionately smaller impact and counties with few leased compressors may not see as much tax revenue being sent elsewhere.

“The compressor has to be a leased compressor, not an owned compressor,” Neely said. “If you're an oil company that owns your compressor you will pay market value. Some of the compressors qualify for this special valuation and some of them do not.”

Neely also said it may be possible not every gas compressor in Kilgore will be affected and some of them might still contribute tax revenue to Gregg County. However, she said the total impact of the refunds on Gregg County is likely to be in the millions of dollars.

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