Emily Crowe Jun. 23, 2016, 5:17pm


AUSTIN – The Texas Supreme Court ruled unanimously against oil and gas company Southwest Royalties, Inc., in a tax-refund case that will ultimately save the state and its taxpayers more than $4 billion.

Southwest Royalties originally sued the state of Texas in 2009 after then-Comptroller Susan Combs rejected the company's claim for a tax refund on equipment purchases made between 1997 and 2001. The company lost its cases at the trial court and appeals court levels, and the Supreme Court agreed to hear the case in March.

It was held by Comptroller Glenn Hegar and Attorney General Ken Paxton that Southwest Royalties did not qualify for the sales tax exemption because the company could not prove that casing, tubing and other well equipment was used in the manufacturing, processing or fabricating of hydrocarbons, as put forth in the Texas Tax Code.

The statue in question states that any equipment qualifying for the tax exemption must directly make or cause a chemical or physical change to the hydrocarbons.

"The three Tax Code subsections under which Southwest sought an exemption require that the property at issue be used in actual 'processing' — application of materials and labor necessary to modify or change the characteristics of tangible personal property," the justices wrote in their opinion. "As noted previously, it is undisputed that hydrocarbons undergo physical changes as they move from underground reservoirs to the surface; the disagreement is about the role Southwest’s equipment plays in those changes.”

While Southwest Royalties argued that its equipment processes crude oil by separating it into sellable oil and gas, the State disagreed on the basis that underground minerals are not considered tangible personal property. Additionally, the State argued that natural pressure and temperature changes are the actual forces responsible for transforming oil as it rises to the surface, not the equipment in question.

According to the opinion, the high court's decision did not hinge on the fact that the alleged hydrocarbon processing occurred underground as opposed to above ground, but on the fact that the original trial court found no evidence that the equipment in question was used to cause the changes in the hydrocarbons' characteristics.

Southwest Royalties was looking to gain only $500,000 from the suit, but Hegar and his office warned that the court’s agreement with the company could have cost up to $4.4 billion in refunds to other oil and gas companies, as well as lost tax revenue. Additionally, the state would have lost out on $500 million in taxes every year.

"I am pleased that the Texas Supreme Court unanimously agreed that the law is clear and that Southwest Royalties does not qualify for a tax exemption," said Paxton in a written statement. "The Comptroller is faithfully executing the law and treating taxpayers fairly, in accordance with the wishes of the Texas Legislature. Bottom line: we saved the State, and taxpayers across the State, over $4 billion."

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