Texas Supreme Court to Hear Case on Exemption for Downhole Equipment

The Texas Supreme Court has agreed to review the appellate court decision in Southwest Royalties v. Glenn HegarComptroller of Public Accounts. The case addresses the taxability of oil and gas production equipment used below ground by upstream petroleum companies, primarily big dollar items such as casing and tubing. Southwest Royalties is arguing that the below-ground equipment used in oil and natural gas production qualifies as processing equipment under Texas Tax Code Sec. 151.318, and Comptroller Rule 3.300 – Manufacturing; Custom Manufacturing; Fabricating; Processing.

Gilbert Zamora - Former Texas Comptroller Auditor & Tax Policy Expert, 31 Years

Gilbert Zamora – Former Texas Comptroller Auditor & Tax Policy Expert, 31 Years

The case was tried in 2012 before Travis County Judge John Dietz, who initially said he agreed with Southwest Royalties that the below-ground equipment used in or during the actual processing of oil and gas qualified for the manufacturing exemption under the state’s tax code. However, Dietz subsequently reversed himself in his written judgment and the Texas Court of Appeals, Third District, upheld the decision on August 13, 2014. In 2012 then Comptroller Susan Combs estimated the potential cost in sales tax refunds to the state would be $2 billion if the state lost this case.

The oral arguments on this case will be heard on March 8 at the Supreme Court Building, located at 201 W 14th Street, Room 104 in Austin, Texas.

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