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JOHN W. McGOWAN, ET AL. v. DR. C. A. MARX

DECEMBER 21, 1988

JOHN W. McGOWAN, ET AL.
v.
DR. C. A. MARX, CHAIRMAN, AND THE MISSISSIPPI STATE TAX COMMISSION



BEFORE HAWKINS, P. J., PRATHER AND ANDERSON, JJ.

PRATHER, JUSTICE, FOR THE COURT:

At issue in this appeal is whether John W. McGowan, appellant, was engaged in the oil field service business as contemplated by the Mississippi Sales Tax Law and, if so, whether the personal property consumed in performing these services is included in defining" gross income "in the Sales Tax Law.

The Chancery Court of the First Judicial District of Hinds County affirmed an additional sales tax assessment of thirteen thousand six dollars and sixty-nine cents ($13,006.69) levied by the Mississippi State Tax Commission against John W. McGowan. Feeling aggrieved, McGowan appealed assigning as error the following:

 The court erred in finding that the sales tax assessed against John W. McGowan for which recovery is sought was properly and legally assessed and denying plaintiff's prayer for refund of the same and dismissing McGowan's complaint as amended.

 This Court disagrees and affirms the decision of the Hinds County Chancery Court.

 STATEMENT OF THE FACTS

 During the period of time between January 1, 1982 and December 31, 1984, John W. McGowan was engaged in the business of developing, drilling, producing and marketing oil. As a part of his business enterprise, McGowan acted as operator for approximately sixty (60) wells and was so designated by the State Oil and Gas Board. The majority interest in these wells was owned by McGowan. The balance of the working interest was owned by employees of McGowan and various other individuals and corporations.

 McGowan entered into operating agreements with the various working interest owners. These agreements in essence provided that McGowan was to perform all functions relating to the operation of the oil wells. This would include, among

 other functions, paying bills, performing engineering services, setting up pumping units, running casings, and hiring certain contractors to perform a particular oil field service as opposed to performing the same himself. In addition, the agreements provided that McGowan, as operator, was to charge the other co-owners for their proportionate share of the costs incurred in operating the well. McGowan alleged that he received no profit from performing these services.

 McGowan claims he is not in the operating business. He contends he operates as agent for the other working interest owners only as an accommodation, purchasing the necessary equipment and supplies and performing all services necessary for the well's operation. McGowan then bills the other working interest owners their pro-rata portion of the total unit expense. This unit expense included all expenditures made by McGowan plus his overhead in performing the service.

 During the latter part of 1984, the Mississippi State Tax Commission audited McGowan's records and found that McGowan was in the oil field service business. In computing the sales tax, the auditor determined the gross income derived by McGowan in performing oil field services for the other working interest owners. McGowan filed returns and paid tax on that portion of his gross income billed out to co-owners for what he considered to be general overhead. This would include such items as salaries, office rent, utilities, and office equipment. McGowan had not paid sales tax on the income received from the other co-owners representing reimbursements for social security taxes, unemployment taxes, workmen's compensation expenses, employee bonuses, insurance and personal property used in performing the service. By including these items in gross income, an additional assessment of $27,747.00 was made.

 The Commission assessed sales taxes on that portion of the expenses billed by McGowan to the other working interest owners. The Commission did not assess tax on McGowan's pro-rata share of the expenses as the Commission deems McGowan under these circumstances to be performing oil field services for himself and thereby not generating taxable income.

 McGowan concedes that charges to co-owners for general overhead is properly taxable as an oil field service, but asserts that the Commission is in error by including charges to co-owners for the costs of equipment, supplies and other tangible personal property used and consumed by McGowan in performing his taxable service. He appealed this assessment through the administrative appeal process seeking a refund of

 $13,006.69, representing the additional tax attributable to the inclusion of the cost of personal property used and/or consumed in performing the oil field service which was purchased by McGowan and rebilled to the other owners.

 It is McGowan's position that he is acting as the agent of the other working interest owners in purchasing these supplies and that the only taxes due on these items are those sales taxes paid at the time of purchase from the vendor. The Commission contends that the law assesses the tax on the total gross income of someone engaged in the oil field service business which thereby mandates the inclusion of the costs of those supplies.

 WAS THE SALES TAX ASSESSMENT AGAINST JOHN W. McGOWAN PROPERLY AND LEGALLY ASSESSED?

 In reviewing the briefs of these parties this Court holds that the Tax Commission's interpretation of the statutes affecting this case is correct, and ...


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