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VideoThe Benefits of Direct Pay Permits in Texas’ Oil and Gas Industry
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A Texas direct pay permit allows eligible businesses to purchase taxable goods and services without paying sales tax at the point of sale. Instead, the permit holder remits the tax directly to the Texas Comptroller. This approach is particularly advantageous for industries with complex supply chains, such as oil and gas, where tax compliance can be challenging.
Benefits of Direct Pay Permits
Many companies today are leveraging direct pay permits for sales and use tax compliance to gain significant tax savings advantages. These benefits include: (1) the ability to defer tax payments until the purchased items are placed into service, or at the very least, deferring payments until the 20th day of the month following the purchase; (2) paying taxes based on the location where the items are placed into service, which could potentially reduce the tax rate from 8.25% to 6.25%; and (3) allows taxpayers to avoid paying tax on exempt items at the time of purchase eliminating the need to file refund claims for taxes paid. These benefits improve companies’ cash flow.
Deferring Payments
A direct pay permit grants companies greater control over when sales and use taxes are paid. By deferring the tax remittance until the reporting period, businesses can align tax payments with their cash flow schedules. This flexibility is crucial in capital-intensive industries like oil and gas, where liquidity is critical for ongoing operations and investments. In addition, managing taxes in bulk rather than at each transaction helps streamline financial planning.
Texas law allows businesses to assess taxes more accurately by using internal resources or experienced consultants familiar with tax exemptions and specific industry applications. For example, direct pay permits are invaluable in distinguishing between taxable and exempt purchases, such as equipment used in exploration and production operations or when a certain downhole well service qualifies as nontaxable versus taxable. This precision minimizes overpayment and reduces the risk of penalties for underpayment during audits.
Applying Correct Tax Rates
One significant challenge in managing sales tax is ensuring vendors apply the correct local and state tax rates. Direct pay permits eliminate vendor-calculated errors by transferring responsibility for tax calculations and taxability determinations to the permit holder. According to the Texas Comptroller, this reduces disputes and improves vendor relationships by simplifying transactions. This process allows businesses the necessary time to accurately determine how much tax to assess on their purchases.
Companies operating in multiple jurisdictions benefit from consolidating tax reporting under a single local jurisdiction or to multiple jurisdictions where the local tax rates are lower than where the seller is located. For example, we find that oil and gas operators with well sites in nonincorporated locations in the Permian Basin or Eagle Ford can save a significant amount of sales taxes by taking advantage of the local tax rate where the well sites are located instead of paying the sales tax at the rate where the seller is located — typically Houston or another high tax jurisdiction.
On a typical drilling and completion operation for a multi-well pad, an operator could save hundreds of thousands in sales taxes by sourcing the sale to the well site location that doesn’t have a local sales tax rate. This approach avoids paying sales tax on item such as casing, tubing, drill pipe and other related equipment at higher rates where vendors are located.
Another scenario where oil and gas operators benefit greatly from a direct pay permit is when Texas-based operators develop cross-border assets in New Mexico. Often, we find Texas-based operators developing New Mexico-based assets will use Texas-based suppliers and service providers who mistakenly charge Texas sales tax instead of the New Mexico gross receipts tax. This is effectively a complete overpayment since Texas sales taxes were never due in the first place.
As of 2025, there are nearly a thousand active direct pay permits in Texas. Permit holders span diverse industries, including oil and gas, manufacturing and retail. Specifically, oil and gas companies account for a significant proportion due to their complex supply chains and high volume of taxable transactions. The widespread adoption in the energy sector reflects the strategic benefits of enhanced tax compliance and operational efficiencies.
For manufacturers, companies use them to streamline taxes on raw materials and equipment. Retailers similarly rely on these permits for better inventory management and centralized reporting.
Why Oil and Gas Companies Should Act
Given the active nature of the oil and gas industry, adopting a direct pay permit helps executives mitigate risk and ensure compliance with Texas sales tax regulations. Moreover, using a direct pay permit can safeguard against audits, particularly in high-stakes industries where minor missteps can result in substantial penalties. By simplifying compliance, improving cash flow and reducing errors, a direct pay permit becomes a valuable financial tool for oil and gas leaders aiming to maximize operational efficiency.
Considerations Before Implementing a Direct Pay Permit
Before implementing a Direct Pay Permit, companies should carefully consider several key factors to ensure compliance and mitigate potential risks. Companies must be prepared to meet the reporting requirements associated with the permit. This includes maintaining accurate records of all taxable and exempt purchases, as well as the proper documentation to substantiate these transactions. In addition, companies should have the necessary knowledge base in-house or through external advisors to make precise taxability determination for use tax accrual decisions, as improper decisions could lead to tax assessments with penalties and interest. Ensuring that employees responsible for these decisions are well-versed in state sales tax rules and regulations is critical.
Other considerations include the need to retain detailed supporting documentation for each Direct Pay tax returns filed and use tax accrual decisions applied. This documentation could include vendor invoices, purchase orders, supplier contracts, engineering schematics and other relevant records to demonstrate that the taxes accrued and remitted were accurately applied as exempt at the time of purchase. The need to retain detailed supporting documentation is important due to the likelihood of sales tax audit by the State which is a standard protocol for taxpayers who utilize direct pay permits. Proper preparation, attention to detail, and ongoing training on rules and regulations are essential to avoid non-compliance and to be prepared to defend against any potential audit challenges.
Making the Most of Direct Pay Permits
For businesses in Texas — especially in the oil and gas sector — a direct pay permit offers numerous financial and operational benefits. By providing a streamlined approach to managing sales and use tax obligations, companies can reduce costs, enhance compliance and improve cash flow. With nearly a thousand permits already in use across multiple industries, adopting this tax strategy is a proven way to stay competitive while meeting regulatory requirements.
For further information or to apply for a direct pay permit, please reach out to Weaver’s state and local tax team.
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