Taxability of Compressors Under Review

March 7, 2014
On January 29, 2014, the Comptroller released “Taxability of Compressors – Memo for Discussion with Industry,” which could signal a significant change in the taxability of compressors.  The Memo posits that compressors used to support separators and heater-treaters are exempt from sales and use tax, while those used for transportation of gas are taxable.  Further, the taxpayer bears the burden to show a compressor is exempt and is not used for transportation. If a compressor is used for any type of transportation, there is no basis for any divergent use analysis. The Memo states that its position is not a formal statement of Comptroller policy but is intended as a starting point for discussion with the oil and gas industry.

The Texas Taxpayers and Research Association (“TTARA”) filed a response letter on February 21, 2014.  TTARA disputes the Comptroller’s contentions regarding the facts of natural gas processing, and argues against the Comptroller’s legal conclusions.  TTARA devotes particular attention to the Comptroller’s position that no divergent use should be allowed for compressors used in part for the transportation of gas.

SD&M is currently working to resolve several cases regarding sales tax paid on the exempt use of compressors in the oil and gas industry.  The issues are inherently challenging because a characteristic of all compressors is that they move fluids, making them vulnerable to exclusion as intraplant transportation equipment.  The question becomes the degree to which the fluid movement is integral to an exempt manufacturing process, which includes making the product marketable.

While the Comptroller may be moving towards a change in the treatment of compressors, no policy change has yet occurred.  Give us a call if you’d like to discuss ways to provide feedback to the Comptroller regarding compressors, or to discuss the possibility of sales tax refunds for compressors under the current law.
The information in this article and any attached or referenced pages have been written or gathered for informational purposes only, are not legal advice, and may now be outdated. Persons receiving information from this article should not act upon the information without seeking professional legal counsel.