In Equinor Energy LP v. State of North Dakota, No. 08-2021-CV-00309 (Burleigh Cty. Dist. Ct. – January 7, 2022), the district court reversed the North Dakota Tax Commissioner’s denial of Equinor’s request for a refund of sales and use tax paid on gas separators.
Equinor produced oil and gas in North Dakota during the time period of the refund claim. As part of its operations, it purchased and paid North Dakota sales or use tax on oilfield equipment, including separators, for several facilities. Equinor applied for a refund based on N.D.C.C. § 57-39.2-4.5(1), which exempts from tax “tangible personal property used to construct or expand a system used to compress, process, gather, collect, or refine gas recovered from an oil or gas well in this state or used to expand or build a gas processing facility in this state…. To be exempt, the tangible personal property must be incorporated into a system used to compress, process, gather, collect, or refine gas.…”
At a hearing before an administrative law judge (ALJ), Equinor established that a separator’s purpose is to isolate and distribute, at relatively high pressure, oil, gas, and water produced from an oil well. Equinor contended the separators in question were installed in systems used to “compress” or “gather” gas, which is within the scope of the exemption. The Commissioner disagreed, contending that “initial separators” used “during production” do not qualify for the exemption, which applies only to equipment installed “downstream of the wellsite transfer meter, i.e., off the wellsite.” The Commissioner’s internal policy is based on the Department’s belief that “initial” and “integrated” separators are used in production that occurs before gas has been “recovered” from a well. The ALJ upheld the denial of the refund claim, and the Tax Commissioner adopted the ALJ’s findings of fact and conclusions of law. Equinor appealed to the district court, which reversed the Commissioner’s order.
The district court ruled that the Commissioner’s findings of fact and conclusions of law were not supported by the evidence or North Dakota law, and that the Commissioner had failed to sufficiently address the evidence presented by the taxpayer. Specifically, the district court determined:
- The statutory exemption does not support the ALJ’s definitions and disqualification of so-called “initial” or “integrated” separators and makes no such distinctions between separators;
- Equinor’s use of the separators in connection with artificial lift was consistent with the exemption’s legislative purpose of increasing productive use of natural gas resources and reducing gas flaring;
- The Commission’s narrow definition of “recovery” or “recovered” is not supported by any evidence presented at the hearing and lacks any other discernible basis;
- The ALJ’s finding that “an initial separator is never located off of the well site” directly conflicted with expert testimony that separators can be located either on or off the well pad;
- The ALJ’s findings generally ignored Equinor’s extensive evidence regarding well designs;
- Without providing adequate justification, the ALJ rejected Equinor’s comprehensive evidence supporting its proposed definitions of “production” and “gas gathering system”;
- The factual findings do not reference supporting evidence, and the summary conclusions of law are insufficient for the district court to fully understand the ALJ’s reasoning and conclusions; and
- The Commissioner’s bright line rule that qualifying equipment must be downstream of the wellsite transfer meter adds requirements that are not found in the statute, is not supported by the legislative history of the exemption, and lacks any other basis in law.
The district court reversed the order of the Commissioner and remanded it to the Tax Commission for findings and conclusions specific to the issues identified by the court.
TECHNICAL INFORMATION CONTACT:
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at email@example.com.