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[In the News] Tax Showdown: Will Texas E&P See Refunds?

March 10, 2016 at 4:24 PM / by Wood Mackenzie Supply Chain

A debate over tax exemptions for oil and gas extraction equipment is bubbling to the surface in Texas. On Tuesday, the Texas Supreme Court heard arguments as to whether equipment used in oil and gas extraction is exempt from sales taxes.

What's at stake? 

 A potential $4.4 billion refund for 2017 tax filings is at stake for E&P firms, as well as an estimated $500 million for each additional year should the exemption remain. In a world where cost reduction is more important than ever before, this case is a welcome respite amidst constant pressure on the bottom line.

The decision rests on whether or not such extraction equipment is involved in the “actual manufacturing, processing, or fabrication of tangible personal property” and therefore sales tax-exempt.

The case brought forth by Southwest Royalties, a subsidiary of Clayton Williams Energy, rests on the rationale that once oil is brought up from the ground it is no longer a part of the mineral owner’s estate—and that throughout the entire process the oil remains personal property with a definite owner.

Conversely, the state’s argument relies primarily on the logic that minerals are not and should not be considered as personal property and that the equipment used in extraction is not necessarily responsible for transforming the crude, but rather gathering it.

This is not the first time this case was brought to court. This lawsuit, originally filed in 2009, was brought to lower courts, which sided with the state due to ambiguity in the exemption language. It’s important to note that should the exemption language prove unclear to the court, it must apply a narrow interpretation of the tax code, meaning the exemption status would remain unchanged and not applicable to oil and gas extraction equipment. 

How will this affect you?

With any luck, E&P firms could see unexpected tax refunds headed their way—and lower taxes in the years to come. Should the court instead side with the state, firms will continue paying the sales tax that they always have. The good news is, whichever way the court decides there is no risk to E&P firms.

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