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Texas Court Denies Sales Tax Exemption for Oil/Gas Pipes, Tubing

In a blow to Texas oil and natural gas producers but a boon to state coffers, the Texas Supreme Court Friday decided not to grant a sales tax exemption for pipes, tubing and other equipment used in the energy patch.

The case, brought by Midland, TX-based Southwest Royalties in its appeal of a lower court ruling, hinged upon the question of whether such equipment fit the parameters necessary for the tax exemption for goods and services used in the "manufacturing, processing, or fabrication of tangible personal property."

The state had argued that oil and natural gas are not "tangible personal property." It said extracting minerals is akin to gathering raw materials. Texas Comptroller Glenn Hegar had warned that granting the exemption from sales tax could cost the state billions in revenue.

"We are pleased with the court's unanimous decision, which applies the manufacturing exemption as the Legislature intended," Hegar said. "This is a positive ruling for the state of Texas and our fiscal health."

What's good for the state, though, this time isn't so good for Texas oil and gas producers.

"We are disappointed in the Court's decision," said Texas Oil & Gas Association President Todd Staples. "It is undeniable that oil and natural gas exploration and production today is more and more a manufacturing process.

"For a healthy oil and natural gas industry, our operators, who compete globally, need equitable tax treatment. We look forward to an ongoing discussion on the best overall tax policy to bring jobs and investment to Texas and to enhance our state's economic competitiveness."

Clayton Williams subsidiary Southwest Royalties had sought to recoup less than $500,000 for taxes paid on purchases made from 1997 to 2001. However, had a tax exemption been granted, it was estimated by the comptroller's office that it could cost the state $500 million a year in revenue.

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