Oil & Gas Extraction Equipment May Be Exempt from Texas Sales Tax

April 2012

On April 11, 2012, the 250th District Court judge in Travis County, Texas, issued a bench ruling that well machinery and oil and gas extraction equipment are eligible for Texas’ sales tax exemption for property used in manufacturing (Southwest Royalties Inc. v. Combs). A formal written decision is expected soon.

The basis of the court’s decision is that this type of equipment qualifies for exemption from sales tax under Texas Tax Code Section 151.318(a)(2) because it directly makes or causes physical changes to extracted oil and gas by altering their pressure and temperature.

Texas has a four-year statute of limitations, which would allow companies that purchased qualifying equipment and paid sales or use tax to seek a refund dating back to April 2008.

While the full implications of this decision will not be known until the court issues its written opinion, initial estimates from the Texas Comptroller of Public Accounts estimate this ruling, if upheld, could cost the state up to $4.4 billion in lost revenue.

Texas Comptroller Susan Combs has indicated the court’s final decision will be appealed. However, taxpayers may wish to pursue protective refund claims to preserve the full extent of the refund claim before the statute of limitations expires. Unlike income taxes, where the statute of limitations expires on an annual basis, the statute of limitations for sales tax refund claims expires monthly. Filing a protective refund claim is a low-risk opportunity with potentially high rewards for oil and gas companies that could be entitled to millions of dollars in refunds if the decision is upheld.

For further information, please contact your BKD advisor or Dallas Packer.

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