Texas Court of Appeals Holds Oilfield Chemical Manufacturer's Porta-Feed Containers Qualify for Manufacturing Exemption from Sales Tax
ChampionX, a manufacturer of chemicals for oil and gas exploration, production, and refining, successfully claimed sales and use tax refunds on returnable porta-feed containers (ranging from 30 to 700 gallons) and associated cleaning and transportation services under Tax Code Section 151.318's manufacturing exemption. The Comptroller argued the containers were taxable under the specific Container Exemption in Section 151.322 and were excluded from the manufacturing exemption under Section 151.318(c) because they were used to distribute, transport, maintain, and store chemicals rather than being used or consumed during actual manufacturing.
Background and Business Context
ChampionX manufactures chemicals for the energy and water industries, including hazardous chemicals used in water treatment applications and by oil and gas customers involved in exploration, production, refining, and chemical processing. Between March 2011 and October 2018, ChampionX placed its manufactured chemicals in returnable, reusable porta-feed containers designed specifically to hold the chemicals during transport. The company used three types of containers—stainless steel, polyethylene-lined, and plastic bottle inside stainless steel shell—varying in size from 30 to 700 gallons. These containers ensured chemicals did not react during transport, preserved chemical composition, and met governmental regulations and standards.
ChampionX's manufacturing process involved charging raw materials in bulk tanks, blending, adding catalysts, testing products to meet customer and industry specifications, cooling, and then transferring the finished product from reactors into selected containers at the plant. The containers were then transferred to a warehouse for storage until ready to be transported to customers.
When a customer finished with a container, the customer contacted a ChampionX representative to arrange container retrieval. A third-party vendor picked up the containers and transported them to a third-party cleaning service contracted to recondition and clean the returned containers. The cleaning service provider cleaned and inspected the containers and certified them to ensure compliance with Department of Transportation regulations. The cleaned and repaired containers were transferred back to ChampionX and put back into the manufacturing process.
The Tax Dispute
ChampionX paid sales tax and accrued use tax on the containers when it purchased or leased them from vendors and paid sales tax or accrued use tax on the purchase of cleaning services related to the containers. ChampionX also paid sales or use tax on services for the delivery and pickup of the containers to and from customers. Later, ChampionX filed sales and use tax refund claims for the periods at issue.
The State argued in its summary judgment motion that ChampionX's containers did not qualify for the manufacturing exemption under Section 151.318 and were taxable under the specific Container Exemption statute in Section 151.322. Specifically, the State contended the containers were excluded from the manufacturing exemption under Section 151.318(c) because they were used to distribute, transport, maintain, and store chemicals rather than being used or consumed during actual manufacturing.
The Court's Decision
The trial court granted ChampionX's motion for partial summary judgment and denied the State's motion, concluding that the containers qualified for exemption under Tax Code Section 151.318 as tangible personal property used or consumed in actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale. The Court of Appeals affirmed the trial court's judgment, concluding that the trial court correctly determined that the property and services at issue are exempt from sales taxes.