Texas High Court Eliminates Sales Tax Exemption for Wellbore Equipment, Yet Potentially Extends Exemption to Additional Equipment

by | Jun 17, 2016 | Business & Professional License Defense

Texas oil and gas companies have argued for decades that some of their equipment is exempt from state sales tax. These exemptions add up to hundreds of millions of dollars in potential costs for businesses, or tax revenue for the state. Today, the Texas Supreme Court ruled that one category of oil and gas equipment—well casing, tubing, pumps, and associated services—is subject to sales tax, and is not exempt.[1]

The ruling will affect other categories of oil and gas equipment in the future, which could create staggering costs for the energy industry or, maybe, the state. Whether equipment is tax exempt depends on whether the use of a piece of equipment is necessary for the processing of a product for ultimate sale and, if it is necessary, whether the equipment causes a physical change to the product during processing. Tex. Tax Code Ann. § 151.318 (2015).

In this case, the Court reasoned that, although oil and gas physically changes as it rises through wellbore equipment, the change is created by natural processes, not the equipment through which it rises, so the equipment is not eligible for the sales tax exemption. The Court’s ruling will impose huge costs on the industry because it removes a tax exemption from all categories of equipment that do not, themselves, change oil or gas.

Ultimately, the Court’s reasoning could end up helping the energy industry in the future. Some pieces of equipment—like compressors and dehydrators, among many others—create physical changes to oil and gas. Exempting those extremely expensive pieces of equipment could lower costs for the businesses that use them—primarily pipeline companies—and the producers and refiners that, in turn, pay those businesses to move their oil and gas products.

The ruling is a loss for the industry; there is no question about that. But it is a loss that could create some victories for the Texas oil and gas industry down the road.

[1] Sw. Royalties, Inc. v. Hegar, 500 S.W.3d 400 (Tex. 2016).

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