A district court judge in Texas has ruled that oil and natural gas production equipment used “below ground” is exempt from state sales taxes on extraction equipment.

According to media reports, Travis County District Court Judge John Dietz is expected to issue a signed judgment in the case, which pitted Southwest Royalties Inc. against the State of Texas, within a week. The state has 30 days to appeal, and indications are that an appeal is likely.

“It has long been [our] contention that below-ground equipment used in the processing of oil and gas qualifies for the Texas manufacturing exemption,” said G. Brint Ryan, CEO of Ryan, a global tax services firm that was assisting Southwest. “We will continue to work diligently to ensure that the manufacturing exemption is applied as written by the Texas Legislature.”

Southwest has been represented by Austin-based law firm Scott, Douglass & McConnico LLP. An attorney for the firm could not be reached for comment Friday.

At issue is whether the state’s tax exemption for manufacturing equipment, Texas Tax Code Section 151.318(a)(2), is applicable to oil and gas production equipment.

Dietz issued a bench ruling on April 12 in favor of Southwest, a subsidiary of Clayton Williams Energy Inc. (see Shale Daily, April 18). The judge said he agreed with the company’s argument that its oil and gas production equipment should qualify for the state’s sales tax exemption for manufacturing equipment.

It was not clear how much money the state could lose if Dietz’s ruling stands on appeal, but during the trial Texas Comptroller Susan Combs said the state could have to refund as much as $2 billion in sales tax revenue to oil and gas companies, plus interest. She said the state could also lose additional tax revenue in the years ahead, as much as $400 million in 2013 and $580 million by 2017.

The case is Southwest Royalties Inc. v. Combs et al. (Cause No. D-1-GN-09-004284).