Less than three weeks after his initial indication that he would rule in favor of the taxpayer, Travis County District Court Judge John Dietz reversed course, issuing a final judgment in favor of the State in Southwest Royalties, Inc. v. Combs, Travis Cty. Dist. Ct. Cause No. D-1-GN-09-004284. The final judgment held that the taxpayer did not meet its burden of proof in seeking to have equipment used in oil and gas extraction qualify for the manufacturing exemption from Texas sales and use tax under Section 151.318 of the Texas Tax Code.
Last week, during a hearing on the State's motion for reconsideration before any order was issued, Judge Dietz heard additional arguments whether such equipment could qualify for the exemption. In the final judgment signed yesterday, Judge Dietz ruled that the taxpayer failed to show that the equipment at issue directly causes physical changes to the petroleum. According to Judge Dietz, the taxpayer's equipment which brings oil and gas to the surface "is merely an indirect cause of the changes." While the refund sought in this case is less than $1 million, the total potential refund liability for the State related to this issue had been reported at $2 billion.
Taxpayers with equipment of this type should follow developments in any appeal filed in this case, and should consider what actions to take in order to preserve refund rights that would otherwise expire in the interim.
This alert was prepared by Jasper G. ("Jack") Taylor III (jtaylor@fulbright.com or 713 651 5670) and Jay M. Chadha (jchadha@fulbright.com or 713 651 3770) of the firm's Tax Practice Group. If you have any questions or need any assistance related to these or any other state and local tax controversy matters, please contact any of the authors listed above, Charles W. Hall (chall@fulbright.com or 713 651 5268), Stephen A. Kuntz (skuntz@fulbright.com or 713 651 5241) or Robert C. Morris (rmorris@fulbright.com or 713 651 8404).
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