STUDY: TX Supreme Crt. Ruling Will Provide Substantial Long-Term Economic Benefits

AUSTIN, TX— A new study conducted by The Perryman Group, a prestigious economic and financial analysis firm, indicates a long-term positive economic impact to the State of Texas in the event of a favorable ruling by the Texas Supreme Court in the case of Southwest Royalties v. Glenn Hegar, Comptroller of Public Accounts.  The report was sponsored by the Texas Association of Business (TAB), and concludes that exempting items used in the processing of oil and gas from sales tax levies is not only consistent with Texas tax law, but is a fiscally sound policy that will pay dividends to the state and taxpayers for decades to come.

The case addresses the taxability of subsurface oil and gas production equipment. Southwest Royalties contends that subsurface processing equipment qualifies for the sales tax exemption that is provided for in Texas law.  This exemption protects against multiple levies of the sales tax in the production of finished products that also will be subject to the tax when sold. The Perryman study found that within five years, total state and local tax gains substantially outweigh losses stemming from a sales tax exemption for “below ground” processing equipment, and these net benefits continue to grow over time.

“Although exempting the below-ground assets from sales tax would initially reduce sales tax collections, it also would tend to increase exploration activity by reducing costs to drill and stimulating incremental production,” said TAB CEO Bill Hammond. “The study shows that oil and gas exploration and production results in substantial long-term gains in economic activity, providing opportunity for Texas businesses, taxpayers and the state.”

The Perryman study found that the short-term impact to the state would be $2.4 billion in tax refunds—nearly half of the $4.4 billion originally estimated by the state.

In addition, research shows that if the sales tax exemption had been made available and fully known to decision makers since 2001, the long-term economic stimulus would have been significant, representing $36.7 billion in cumulative gross product for the state over the past 16-year period.

“It’s clear from these findings that reducing sales taxes from subsurface equipment would generate a long-term economic benefit that would ultimately offset the short-term impact to the state,” said Hammond.

The case was initially tried in 2012 before Travis County Judge John Dietz, who announced from the bench at the conclusion of oral arguments that he was inclined to agree with the taxpayer that “below-ground” equipment used in or during the actual processing of oil and gas qualified for the manufacturing exemption under Texas Tax Code Sec. 151.318. However, Dietz subsequently reversed himself in his written judgment, and the Texas Court of Appeals, Third District, upheld the decision on Aug. 13, 2014. The Texas Supreme Court agreed to review the appellate court decision in January 2016. View the oral arguments heard March 8, 2016, on the Texas Supreme Court website.