Judge Reverses Own Decision to Extend the Texas Sales Tax Manufacturing Exemption to Include Oil and Gas Extraction Equipment

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On April 11, 2012, Judge John Dietz issued a ruling from the bench in Southwest Royalties, Inc. v. Combs, Case D-1-GNU-09-004282 (Travis County 250th Dist. Ct.) to extend the Texas sales tax exemption for manufacturing property to include certain items of property, such as well casing and “down-hole” equipment, used to extract oil and gas. On Monday, Judge Dietz reversed his decision and held that such equipment is not eligible for the Texas sales tax manufacturing exemption.

Under Texas law, to qualify for the manufacturing exemption from sales tax, property purchased generally must be necessary for the manufacturing or processing of, and directly cause a physical change to, the product produced for sale. At trial, Southwest claimed that the equipment was used during the extraction process and directly caused a physical change to the extracted oil and gas. The Comptroller contested both of Southwest’s positions and specifically stated that the physical change that occurred to the hydrocarbons in the wellbore was a mere consequence of the extraction process and the equipment did not directly cause a physical change to the extracted oil and gas.

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