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October 14, 2022

Texas Supreme Court lets stand mineral extraction case involving sales and use tax exemption for manufacturing- lower court ruling creates potential refund opportunities

On September 30, 2022, the Texas Supreme Court denied review in Hegar v. Texas Westmoreland Coal Co.,1 in which the Third Court of Appeals (Appeals Court) held that a mining company was entitled to a refund of sales and use tax paid on the lease of three excavators, which the company used to extract and break apart lignite coal ore.

The company argued that the manufacturing exemption from sales and use tax in Tex. Tax Code Section 151.318(a)(2)(A) applied because the excavators were used in processing lignite coal. The Texas Comptroller of Public Accounts (Comptroller) disagreed arguing that the lignite coal extracted from the ground was real property, not tangible personal property. The Comptroller also asserted that "processing" did not encompass extracting minerals from the ground.

The Appeals Court rejected the Comptroller's arguments, holding that Section 151.318(a)(2)(A) does not require raw materials or inputs in the manufacturing process to be tangible personal property, only that the output at the end of the process differ from one or more inputs along the way. Additionally, the Appeals Court held that the excavators undeniably made physical changes to the lignite coal by extracting it from the ground.


The holding in Texas Westmoreland Coal Co. has potentially significant implications for taxpayers in the oil and gas, mineral extraction, and sand production industries. Based on this decision, the sales and use tax exemption for manufacturing may apply to sales or leases of equipment or the sales of materials used by these industries. Taxpayers should consider assessing whether any equipment or materials used in the extraction or severance process qualify for the manufacturing exemption and if they are potentially due a refund from the Comptroller.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Tax Group
   • Edward Corts (
   • David Yerkes (
   • Robert Wehr (


1 636 S.W.3d 61 (Tex. App. 2021), review denied (Tex. S.Ct. Sept. 30, 2022).