United States: Preserve Possible Texas Sales/Use Tax Refund Claims With Respect To Machinery And Equipment Used In Oil And Gas Extraction

A recent bench ruling by Travis County District Judge John Dietz overturned prior Texas Comptroller's policy and concluded that various items of machinery and equipment used to extract oil and gas from wells were exempt from sales and use tax as property used in manufacturing. Southwest Royalties, Inc. vs. Combs, No. D-1GN-09-004284 (250^th District Court, Travis County).

Prior comptroller's policy applied the manufacturing exemption solely to surface processing equipment, including dehydrators, heater treaters, separators, scrubbers and compressors that support such equipment. However, the comptroller denied the exemption to extraction equipment on the ground that it does not cause necessary physical or chemical changes to the oil and gas. 

The court ruled that the extraction equipment at issue (casing, tubing, wellhead/pumping equipment)qualified for the manufacturing exemption in that it facilitated changes in temperature and pressure, thereby causing the requisite physical change in the oil and gas, both in the formation and in the wellbore. The precise scope of the ruling will not be clear until the court's judgment is issued, which may be several weeks away.

The comptroller already has stated that on account of the ruling's estimated revenue implications — $500 million annually — the District Court ruling will be appealed. Therefore, final resolution of the issue may take as long as two years.

Companies that have paid Texas sales and use tax on extraction machinery and equipment should consider filing protective refund claims for all open periods so that their refund rights are preserved during the pendency of the appeal.¹

By virtue of the ruling's substantial revenue implications, the Texas Legislature likely will address this issue in interim committee hearings over the next several months and in the regular session beginning in January 2013.

Footnote

1. As a general rule, a sales/use tax refund claim must be filed within four years from the date the tax was due and payable, unless the limitations period has been extended by written agreement with the comptroller. For most businesses, sales/use taxes are due monthly, with the taxes due and payable on or before the 20th day of the month following the month in which the tax accrued.

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