Texas Comptroller Draws a New Line in the Sand Effective October 1, 2025

 Many businesses in Texas have long accepted that equipment used to extract or prepare raw materials, like sand, gravel and lignite, didn’t qualify for the state’s sales tax manufacturing exemption. This narrow interpretation resulted in denied exemptions or missed refund opportunities. A recent court decision and upcoming policy shift are challenging that view, creating new opportunities for tax savings.

Background

For more than 30 years, Texas law has allowed a sales and use tax exemption for unprocessed sand, defined as sand that has been washed, dried, screened or sorted. However, equipment used in these pretreatment activities was traditionally excluded from the manufacturing exemption under Tex. Tax Code Section 151.318. The Texas Comptroller has long taken the position that such activities occur before the start of the manufacturing process, therefore, the equipment did not qualify for exemption.

The Westmoreland Decision

In Hegar v. Texas Westmoreland Coal Co., 649 S.W.3d 230 (Tex. App. — Austin 2022, pet. denied), the Third Court of Appeals affirmed the district court’s ruling that equipment used to sever lignite from the earth qualified as processing equipment under the manufacturing exemption. The court reasoned that the statutory definition of “processing” under Tex. Tax Code Section 151.318(a)(2) includes the physical treatment or operations applied to materials in preparation for manufacturing or sale. By recognizing activities like excavation, blasting and extracting as forms of processing, the decision expands the potential for sales tax relief on related equipment.

The Westmoreland decision marks a significant departure from longstanding administrative interpretation, expanding the scope of activities that may qualify for the manufacturing exemption. The court explicitly recognized excavation, cutting, extracting and blasting as forms of processing when performed on materials intended for sale, making the related equipment potentially exempt under Tex. Tax Code Section 151.318(a)(2).

After October 1, 2025: New Policy Applies Going Forward

Effective October 1, 2025, the Texas Comptroller will formally begin applying the Westmoreland interpretation. The agency will consider certain activities such as excavation, blasting, cutting and extracting materials intended for sale as qualifying forms of “processing” under the manufacturing exemption.

To meet the exemption requirements, the item (e.g., equipment) must directly make or cause a chemical or physical change to the product (e.g., materials) being produced and the product must be tangible personal property held for ultimate sale. Equipment purchased or used on or after this date may be exempt from sales and use tax if it meets the criteria under the updated policy.

The manufacturing exemption does not apply to equipment that does not cause a chemical or physical change to the materials as required under Tex. Tax Code Section 151.318(a)(2).

Weaver Can Help

If your business engages in extraction or related preparatory activities, now is the time to revisit your tax exemption status. Contact us. Weaver’s tax professionals can help you assess the impact of the Westmoreland decision, identify refund opportunities and plan more strategically in light of the Comptroller’s policy change.

Authored by Tony Burgess and Blake Fuqua

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