Equipment, Supplies, and Texas Sales Tax in Energy Audits

Companies involved in Texas’ energy industry can face substantial state sales tax liability. However, equipment and supplies used within the energy industry are also subject to state sales tax exemptions in many cases. As a result, when facing Texas sales tax audits, it is imperative for companies in Texas’ energy industry to ensure they have a clear understanding of their compliance obligations—and are prepared to affirmatively demonstrate compliance if necessary.

5 Key Considerations for Energy Companies Facing Texas Sales Tax Audits

While all companies can face significant risks in the event of a Texas sales tax audit, energy companies often face particular risks due to three key factors: (i) the total value of their potential sales tax liability; (ii) the complexity of the industry-specific rules and regulations that apply; and, (iii) the Texas Comptroller’s focus on enforcing compliance within the energy industry. With this in mind, it is absolutely essential for energy companies that are facing Texas sales tax audits to ensure that they are prepared as possible.

Here are five key considerations:

1. Various Texas Sales Tax Exemptions May Apply

While companies involved in Texas’ energy industry are generally subject to the same sales tax requirements as all other businesses that have nexus with the state, they are also eligible for various exemptions. This includes exemptions that are both specific and non-specific to the energy industry.

With regard to industry-specific exemptions, there are two categories of exemptions that are particularly noteworthy. The first is the exemption for equipment and supplies used for oil and gas processing. Treaters, scrubbers, separators and various other types of processing equipment are generally exempt from Texas sales tax, as are replacement parts and other relevant supplies.

The second is the exemption for oil and gas well services. While services are broadly subject to sales tax in Texas, there is an express exemption for oil and gas well services. However, these services are subject to the state’s well servicing tax; and, when facing Texas sales tax audits, energy companies must be prepared to demonstrate compliance with this tax as well.

2. Purchasers Are Required to Pay Texas Sales Tax Even if Sellers Do Not Collect It

As a general rule, companies that sell taxable goods and services are required to collect and remit applicable sales tax. If a purchaser pays sales tax to a seller, the purchaser has complied with its statutory obligations, and no further action is required.

However, if a seller does not collect Texas sales tax, this does not excuse the purchaser from paying the tax owed on the transaction. As a result, companies in the energy industry cannot rely exclusively on sellers to ensure compliance. Energy companies must affirmatively address their Texas state sales tax obligations; and, if a seller does not collect tax on the sale of taxable goods or services, the tax must still be paid to the Texas Comptroller’s Office in a timely manner.

This can be of particular concern when purchasing taxable equipment and supplies from out-of-state sellers. Out-of-state sellers that lack economic nexus are not required to collect and remit Texas sales tax, and not all out-of-state sellers with nexus comply with the law. But this is not an excuse for non-compliance; if an audit reveals that an in-state purchaser has failed to pay sales tax, this could expose the purchaser to substantial liability for back taxes, interest, and penalties.

3. Energy Companies’ Texas Sales Tax Liability Can Be Substantial

Despite the exemptions that apply within the energy industry, energy companies’ Texas sales tax liability can be substantial. Energy companies must ensure they pay what they owe on their taxable purchases, and they must also ensure they collect and remit the applicable tax on their sales of taxable goods and services.

Due to the value of energy companies’ sales tax liability, the Texas Comptroller’s Office routinely audits companies operating in all segments of the industry—from equipment sellers to well operators, and from serving companies to transportation providers. As a result, all companies involved in Texas’ energy industry must not only prioritize Texas sales tax compliance but also ensure they are prepared to withstand scrutiny from the Texas Comptroller’s Office, if necessary.

4. Texas Sales Tax Audits Can (and Do) Lead to Unwarranted Liability

This raises another key point: While Texas sales tax audits can pose substantial liability risks, these audits can (and do) lead to unwarranted liability. With this in mind, energy companies targeted in these audits must be prepared to represent and protect their interests effectively. When facing a Texas sales tax audit, a proactive approach is critical, and targeted companies must be able to identify when auditors’ methods, techniques, or assumptions are misguided.

5. Companies Facing Texas Sales Tax Audits Must Protect Their Ability to Appeal

Given the potential for unwarranted liability arising from Texas sales tax audits, and the need to protect their interests during the audit process, targeted energy companies must also safeguard their ability to file an appeal. It is not unusual for appeals to be necessary, and energy companies may challenge auditors’ determinations on various grounds.

Texas sales tax audit appeals present unique challenges, and energy companies facing the prospect of filing an appeal must make informed, strategic decisions about how much to pay (if any), what grounds to assert, and how best to proceed. In this scenario, pursuing an administrative appeal and going to court may both be viable options, each presenting its own unique set of risks and opportunities.

Is Your Energy Company Facing a Texas Sales Tax Audit? Request a Confidential Consultation at Brown PC

At Brown PC, we represent energy companies and other clients during high-stakes Texas state sales tax audits and appeals. If your energy company is facing an audit, we invite you to call 888-870-0025 or contact us online to arrange a confidential initial consultation.