A Texas Supreme Court ruling has spared the state from having to issue billions of dollars in tax refunds to oil and gas drillers — a prospect that had had threatened to shake up the next legislative session.
The justices on Friday sided with Texas Comptroller Glenn Hegar in an arcane tax dispute that the Republican feared could have far-reaching consequences for the state’s budget outlook.
Denying Midland-based driller Southwest Royalties’ request for a refund, the court ruled that state law did not exempt metal pipes, tubing and other equipment used in oil and gas extraction exempt from sales taxes.
“Southwest did not prove that the equipment for which it sought a tax exemption was used in “actual manufacturing, processing, or fabricating” of hydrocarbons within the meaning” of the tax code, Justice Phil Johnson wrote for the majority in an opinion that affirmed decisions in lower courts. “Thus, Southwest is not entitled to an exemption from paying sales taxes on purchases of the equipment.”
See here, here, and here for the background. As noted in the story, some $4 billion or more would have had to be refunded to various businesses if the Supremes had ruled for the plaintiffs. Needless to say, that would have been bad news for the state, as well as for cities and counties who get their share of sales tax revenue, too. Thankfully, there is a bottom to the stupidity in our tax code. Good to know.
Any taxpayers who are concerned that they are not sufficiently supporting the oil and gas industry as a result of this ruling can relax. There are now thousands of abandoned, rusting and leaking wells in Texas that the taxpayers are going to be paying to clean up and plug, as sufficient bond monies to cover this problem were not collected from the industry.
This was a good ruling. The law is designed to exempt consumables used in the extraction of oil, like drilling mud, or lubricity agents used to help gasoline flow through pipelines better, not to exempt the capital equipment used.
Saying drill pipe and casing is a consumable is a novel argument, but yeah, it should have failed. All businesses get exemptions on paying taxes on certain things. If I print t-shirts, for example, I buy the blank shirts and the decals tax free, but charge sales tax when I sell the finished product, and I pay tax on the machinery I use to print the t-shirts. Nothing evil about this, whether it is oil related or not.
Another example is your bug spraying company. When he buys the product he sprays, that product is tax exempt. He charges the tax on it to you when he applies it at your house.
If we really want to look at the tax code, we should be making EVERYBODY collect and remit sales taxes….your lawyer, your accountant, your barber, your mechanic, etc.