Texas Ruling Could Expand the Scope of the Manufacturing Exemption from Sales or Use Tax to Equipment Used in Oil and Gas Extraction

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In a recent Texas bench ruling, in the case of Southwest Royalties, Inc. v. Combs, Case D-1-GNU-09-004282 (Travis County 250th Dist. Ct.), the court expanded the Texas sales or use tax exemption for manufacturing property to include certain items of tangible personal property such as well casing and certain “down-hole” equipment used to extract oil and gas from wells. Texas imposes a sales or use tax upon all items of tangible personal property sold or used in Texas unless an exemption applies. One such exemption applies to the purchase of equipment used for manufacturing. The “manufacturing exemption,” applies, in relevant part, to "property used or consumed in or during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use or consumption of the property is necessary or essential to the manufacturing, processing, or fabrication operation and directly makes or causes a chemical or physical change to the product being manufactured or processed for ultimate sale or to any intermediate or preliminary product that will become an ingredient or component part of the product being manufactured or processed for ultimate sale." (Texas Tax Code section 151.318(a)(2)).

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