Less than three weeks after an initial indication that he would rule in favour of the taxpayer, Travis County District Court Judge John Dietz has reversed course, issuing a final judgment in favour of the state in Southwest Royalties, Inc v Combs (Travis Cty Dist Ct Cause 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.

During a recent hearing on the state's motion for reconsideration before any order was issued, the judge heard additional arguments as to whether such equipment could qualify for the exemption. In the final judgment, signed on April 30 2012, he ruled that the taxpayer failed to show that the equipment at issue directly caused physical changes to the petroleum. According to the judge, the taxpayer's equipment which brought oil and gas to the surface "was merely an indirect cause of the changes". While the refund sought in this case was 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.

For further information on this topic please contact Jasper G Taylor III or Jay M Chadha at Fulbright & Jaworski LLP by telephone (+1 202 662 0200), fax (+1 202 662 4643) or email (j[email protected] or [email protected] or [email protected]).