Possible Below Ground Equipment Sales Tax Exemption for Oil and Gas Producers and Operators

The Supreme Court of Texas recently agreed to hear a case on the issue of whether or not the downhole and below ground equipment used in oil and gas production could be considered exempt from sales tax. This not only affects the entire oil and gas industry but could also have a significant impact on the state. The Texas Supreme Court will review the appellate court decision and set oral arguments for March 8, 2016. This means that oil and gas producers have an opportunity to file a sales tax refund claim, and the time to do that is now. Weaver can help. 

Background

In Texas, the purchase of downhole or below ground equipment has historically been deemed taxable, tangible personal property subject to the Texas sales tax. Downhole equipment is defined as any piping, casing, pumps, packers, tubing, etc. that are used in or during the actual processing of the product to extract and separate the mixture of oil and gas into its components. The current opportunity brought to light by this case is for recovering sales taxes paid on purchases of these types of downhole equipment. The contention is that all equipment and machinery that is in use once processing has begun is within the meaning of the Texas sales tax manufacturing exemption. 

History of the Case

The Texas court case in the spotlight here is Southwest Royalties v. Glenn Hegar, Comptroller of Public Accounts. Southwest Royalties contends that below ground or downhole equipment used in oil and gas production should qualify for the Texas sales tax manufacturing exemption.

This case was originally tried in 2012, and the judge ruled against Southwest Royalties. In August of 2014, the Texas Court of Appeals, Third District, agreed with the lower court’s decision. Last week the Texas Supreme Court agreed to hear oral arguments on March 8, 2016. 

Although this case could still take some time to come to a final decision, the time to file for your sales tax refund claims should not wait.

What You Should Consider

Although it is extremely difficult to predict how the Texas Supreme Court will rule, we want you to be prepared to achieve maximum benefit, whatever the outcome. And the benefits of this ruling could mean significant refunds to your company. 

If we can help in any way, contact Shane Stewart at shane.stewart@weaver.com or 972-448-9250 or contact your Weaver partner.

Shane Stewart

Shane Stewart

Director-in-Charge, Indirect Tax, State and Local Tax Services

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Shane Stewart, CPA, has 12 years of experience in state and local tax matters, including former Big Four experience.…

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