Equipment Used in Gas and Oil Extraction Not Eligible for Manufacturing Exemption in Texas

Monday, August 18th, 2014

Gas and oil extraction pumps.

The Texas Third Court of Appeals ("Court") recently ruled that a taxpayer's purchases of equipment used in oil and gas extraction did not qualify for the manufacturing exemption.

Texas exempts sales of items directly used in the manufacturing, processing, or fabrication of tangible personal property. The items must be necessary or essential to the process and must directly make or cause a physical change to the product. Texas also exempts items used in manufacturing, processing, or fabrication if the items are necessary and essential for a pollution control process or for compliance with public health laws.

The taxpayer extracted natural gas and oil from the ground. The taxpayer argued that the manufacturing exemptions applied to casing, tubing, pumps, and related parts used in the extraction process.

The Court ruled that these exemptions did not apply. The extraction process was not manufacturing, processing, or fabricating tangible personal property. The state distinguished between manufacturing and extraction in other contexts. There were separate exemptions for items used in mineral exploration and production. Dictionary and industry definitions of "manufacturing" would not include extraction. The Court therefore concluded that the manufacturing exemptions did not apply to equipment used in oil and gas extraction.

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