On April 11, 2012, Judge John Dietz (Travis County's 250th District Court) ruled from the bench that oil and gas production equipment is eligible for Texas's sales tax exemption for property used in manufacturing (Southwest Royalties Inc. v. Combs, D-1-GN-09-004284). Judge Dietz based his ruling on the plaintiff's argument that this type of equipment qualifies for exemption from sales tax under Texas Tax Code § 151.318 because it directly makes physical changes to extracted oil and gas by altering their pressure and temperature.

The bench ruling triggered significant publicity about its fiscal implications, leading Judge Dietz to hold a rehearing on April 26th. Yesterday afternoon, Judge Dietz issued a final judgment reversing his bench ruling. In the final ruling, he concludes that physical or chemical changes to extracted minerals are naturally occurring changes incident to the minerals' movement to the surface, and that the equipment was “merely an indirect cause of the changes.” Based on this conclusion, Judge Dietz held that production equipment does not qualify for the manufacturing exemption.

It is not yet clear whether Southwest Royalties intends to appeal the decision. In any event, the issue will reemerge in September when Apache Corporation v. Comptroller, et al., is heard.