The Texas Supreme Court on Tuesday will hear arguments in a case that could deliver a multi-billion windfall to struggling oil and gas producers by taking a major bite out of state tax revenue.
The issue before the justices may sound arcane: Are metal pipes, tubing and other equipment used in oil and gas extraction exempt from sales taxes? But a yes to that question, brought by a Midland-based driller, could trigger a flood of refunds that would wipe out the state’s projected $4 billion budget surplus, Texas Comptroller Glenn Hegar warns.
“This one’s as big as they come,” the Republican said in an interview. “The neon light lights up, because of the sticker shock.”
Southwest Royalties, a subsidiary of Clayton Williams Energy, filed its lawsuit in 2009, just before improved technology unleashed a surge of oil production that transformed the U.S. energy landscape. Susan Combs, Hegar’s predecessor, was named in the original lawsuit, which has wound through the court system for years.
Granting the exemption would affect more than the company’s tax bill, Hegar argues in court filings. It would “impose a severe financial penalty on Texas taxpayers” amounting to $4.4 billion in 2017, and $500 million each year after that as companies around the state seek to cash in, according to estimates compiled in 2012.
On Tuesday, the justices will parse the language of a sales tax exemption for goods and services used in the “actual manufacturing, processing, or fabrication of tangible personal property,” and consider how that description relates to the mechanics of petroleum extraction.
The case hinges on whether certain extraction equipment — like casing, pipes, tubing and pumps — fits the definition cited in the exemption.
Ideally, judges decide such cases only on their merits, experts say, but the budget impact can factor into their decision-making.
Warnings from the comptroller’s office already seem to have helped its cause in this case.
At a hearing in 2012, Travis County District Judge John Dietz said he would rule in favor of Southwest Royalties, only to later reverse his position in a written decision.
The driller suggests that a Wall Street Journal article quoting dire warnings from Combs swayed the judge.
An appeals court in Travis County upheld Dietz’s written decision, backing the comptroller’s interpretation due to “a lack of clarity” in the way lawmakers wrote the exemption.
Hegar cited those earlier rulings in expressing confidence that Texas would ultimately prevail.
“The state’s legal arguments are 100 percent valid,” he said in an interview. “The law is not on the side of those asking for the tax refund.”
But Dietz’s initial inclination may have telegraphed that Southwest’s arguments are “pretty strong,” Dale Craymer, president of the business-backed Texas Taxpayers and Research Association and a former chief revenue estimator for the state, told the Tribune earlier this year.
See here for the background. Just a reminder, it is well within the Lege’s power to clear this up. Now maybe the Supreme Court will bail them out, and maybe if they don’t some other case will jump up and bite the state’s bottom line in the bottom. And again, the Lege could fix it if they wanted to. I think we both know how that’s going to go.