Texas Court Holds that Mining Equipment Is Exempt

Thoughtware Alert Published: Oct 29, 2021
Tax FVS Paperwork Forensics

In Hegar v. Texas Westmoreland Coal Co., the Texas Third Court of Appeals (Court) ruled in favor of a coal company that mined and processed coal for sale and allowed a refund of sales taxes paid on equipment used in processing the coal for sale.

Westmoreland paid Texas sales tax on the lease of the excavators and on parts for the excavators and requested a refund based on Texas Tax Code Section 151.318(a)(2), which provides an exemption for tangible personal property “directly 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 [: (A)] the product being manufactured, processed, or fabricated for ultimate sale[;].”

The Comptroller argued that the exemption in Tax Code §151.318(a)(2) didn’t apply because the coal was actually real property rather than personal property when the excavators dug into the formation and that processing doesn’t include mining. The court focused on the plain language of Texas Tax Code §151.318(a)(2), which contemplated certain conditions that must be met with respect to the production of an end product for ultimate sale to entitle the taxpayer to the exemption. Thus, even if the inputs are real property, as long as the output is tangible personal property, Texas Tax Code §151.318(a)(2) is applicable. The Court noted the fact that the noun “processing” is listed with the noun “manufacturing,” an activity expressly having to do with the production of an end product or tangible good for sale, which indicates the focus of the activity is on the end product rather than inputs. 

To define “processing,” the Court cited three Comptroller decisions allowing exemption where equipment was used to shatter limestone formations to be processed into cement, explosives were used to blast rock and sandstone formations to be processed into gravel and sand, and dynamite was used to blast rock out of the earth to be processed into gravel. All of these past decisions contradicted the Comptroller’s argument in Hegar v. Texas Westmoreland Coal Co. that mining wasn’t processing. Most likely, the Comptroller’s strategy was to demonstrate potential ambiguity in the statute. If found to be ambiguous, the exemption would be construed against the taxpayer. However, this principle is only applicable if a clear meaning can’t be found after applying all relevant canons of construction. 

After Hegar v. Texas Westmoreland Coal Co., taxpayers in the oil and gas industry should carefully analyze whether equipment and materials used in Texas for extraction may qualify for the manufacturing and processing equipment exemption under the Court’s interpretation.

For more information, please contact your BKD Trusted Advisor™ or submit the Contact Us form below. 

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