State v. Four States Drilling Co.
| Decision Date | 12 August 1965 |
| Docket Number | 1 Div. 112 |
| Citation | 278 Ala. 273,177 So.2d 828 |
| Parties | STATE of Alabama v. FOUR STATES DRILLING CO., Inc., formerly known as Jett Drilling Co., Inc. |
| Court | Alabama Supreme Court |
Richmond M. Flowers, Atty. Gen., Willard W. Livingston and Herbert I. Burson, Jr., Asst. Attys. Gen., for appellant.
John W. McConnell, Jr., Armbrecht, Jackson, McConnell & DuMouy, Mobile, for appellee.
The controlling question in this case is whether certain casing, tubing, and other equipment, which is used in the operation of producing oil wells, constitutes a 'machine used in . . . processing . . . tangible personal property,' as such a machine is defined in the use tax law.
§ 789, Title 51, Code 1940, as amended prior to October 1, 1959, as here pertinent, recites:
'The storage, use or other consumption in this state of the following tangible personal property is hereby specifically exempted from the tax imposed by this article: . . . (p) Machines used in mining, quarrying, compounding, processing, and manufacturing of tangible personal property; provided that the term 'machines,' as herein used, shall include machinery which is used for mining, quarrying, compounding, processing or manufacturing tangible personal property, and the parts of such machines, attachments and replacements therefor, which are made or manufactured for use on or in the operation of such machines and which are necessary to the operation of such machines and are customarily so used. . . .'
§ 788, Title 51, Code 1940, as amended and made effective October 1, 1959, by Act No. 99, approved August 18, 1959; 1959 Acts, page 295; Recites in pertinent part as follows:
If the equipment here in question constitutes a machine used in processing tangible personal property, the equipment is exempt from use tax altogether during the period prior to October 1, 1959, and, after that date, is taxable under subdivision (b) of § 788 at one and one-half per cent instead of three per cent under subdivision (a).
The State assessed a tax of three per cent of the purchase price of the equipment for the entire two-year period.
The record discloses that the testimony presented orally before the trial court showed that oil in its natural state is a hydrocarbon, consisting of basic sediment or sand, oil, and gas, the percentage of each varying from place to place and time to time. Also present with the hydrocarbon is water in varying percentages from one per cent to ninety per cent. The equipment involved in this proceeding was installed and used in producing oil wells in the Citronelle Field in Mobile County. We understand that taxpayer does not claim exemption for conductor pipe which is concerned primarily with drilling. Two types of casing are at issue. The 'surface casing,' which in the Citronelle Field extends to a normal depth of approximately 1400 feet, serves the dual purpose of protecting the hole and anchoring the tubing. 'Production casing,' extending to the bottom of the well, a depth of approximately 11,000 feet in the Citronelle Field, houses the tubing or production string inside. Within the tubing and at the bottom of the well is located an engine and pump which operate by hydraulic action. This engine and pump are activated by a unit located on the surface that forces oil (known as power oil) through the tubing and casing, down to the engine at the bottom of the well. This function provides the hydraulic action by which the engine is operated. The engine and pump move up and down within the tubing a maximum of thirty inches. The upward stroke of the engine and pump creates a suction within the lower extremity of the casing which draws the oil and water from the adjacent sand strata into the tubing. At the same time, a liquid demulsifier, introduced into the power oil at the surface, flows down the tubing and is mixed with oil sucked into the tubing on the upstroke of the engine and pump. This demulsifier begins a chemical change or process in the production oil, makes it flow more easily, and breaks down and separates the water from the oil, thereby 'starting the process of making it into a marketable product.' The power oil, the demulsifier, and the production oil (including the water and sediment) are then brought to the surface through the same tubing and casing where the entire mixture goes into a separator, where the gas is separated from the oil. The gas actually begins to change from liquid from to gas and separate or come out of the solution with the reduction in the pressure as the compound approaches the surface. However, a small percentage of gas remains in the hydrocarbon until it is entirely separated in the separator. The oil and water pass to the treater where they are in turn separated. The oil then passes into the power oil tank where the cycle begins anew, i. e., the engine on the surface (power oil triplex) forces the oil into the tubing to activate the engine at the bottom of the well. The excess of the oil in the power oil tank passes off into a storage or stock tank and is there sold as marketable crude oil to the pipeline company. The only equipment involved in this controversy is the equipment through which the solution passes or which is used on the hydrocarbonbefore the mixture enters the separator. The above recited facts as they relate to appellee's modus operandi at the well site are not in dispute.
Taxpayer's witness, Norman, a graduate petroleum geologist since 1929, testified as follows:
'Q In other words, the process of your separation of these various matters that are in solution, the gas and the water and the oil and the sand, the process of separating that to make marketable crude begins at the botton of the well?
'A That's correct, that's when your chemicals mix with your product that need (sic) treating.'
This witness also testified to the effect that no tubing and only a small amount of casing is installed in a dry hole, i. e., the equipment which taxpayer is claiming as exempt is not used in speculation but only in the actual production of marketable crude oil.
The question for determination, therefore, is whether the equipment below the surface of the ground actually 'processes' the crude oil so as to bring that equipment within the use tax exemptions granted by the code sections noted above. The State contends that the equipment involved merely conveys or transports the crude oil to the...
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...Co., 62 C.C.P.A. 53, 510 F.2d 1387, 1391 n. 3 (1975) (" 'Processing' means a process of manufacture."); State v. Four States Drilling Co., 278 Ala. 273, 177 So.2d 828, 832 (1965)(to "process" is "to subject to some special treatment, to prepare for market, to convert into marketable form");......
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