The 15th Court of Appeals has affirmed a Travis County district court ruling in favor of the taxpayer in a dispute with the Comptroller over the application of the sales tax exemption for property used in the manufacturing process.
Kelly Hancock, Acting Comptroller of Public Accounts of the State of Texas and Ken Paxton, Attorney General of the State of Texas v. ChampionX, LLC (No. 15-24-00111-CV; February 12, 2026) arose from a dispute between a chemical manufacturer and the state over whether certain specially-designed containers the manufacturer used to hold hazardous chemicals were exempt from sales tax under §§ 151.318 (property used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale) and 151.3111 (a service performed on exempt property). Between 2011 and 2018, the manufacturer made chemicals used for water treatment and for customers in the oil and gas industry. It placed the chemicals in returnable, reusable porta-feed containers it designed for the purpose of transporting them without a change in composition and to comply with governmental regulations and standards. After creating a specified chemical in a reactor, the manufacturer transferred the product to the containers and stored them in a warehouse until ready for transport to customers. When customers finished with the containers, the manufacturer retrieved them through a third-party cleaning service contracted to recondition and clean them. At that point, the containers were returned to the manufacturer for reuse.
After paying sales and use tax on the containers at the time of purchase or lease, as well as on the purchase of cleaning services, the manufacturer filed for refunds of sales and use tax for the relevant tax periods. After the Comptroller disallowed the claims, the manufacturer requested a refund hearing. The Hearings Section issued position letters recommending denial of the exemption, which were submitted to SOAH. SOAH likewise recommended denial. The Comptroller adopted SOAH’s recommendations. The manufacturer’s timely motions for rehearing were denied, and it duly sought judicial review. Both parties filed motions for partial summary judgment. The trial court denied the state’s motion and granted the manufacturer’s motion, finding that the containers were exempt under §§ 151.318 and 151.3111. The state appealed.
In an opinion by Justice Farris, the court of appeals affirmed. The state argued that § 151.318 did not apply because the containers did not constitute a component of the manufactured product. It pointed instead to § 151.322, Tax Code, which exempts certain containers from sales tax, arguing that since the manufacturer didn’t qualify for an exemption under that section, the more specific section controlled over the more general manufacturing exemption. The question thus boiled down to whether two sections were irreconcilable, in which case § 151.322 would prevail. Looking to the text of § 151.318, the court saw nothing to indicate that the Legislature meant to exclude containers from the exemption, observing that the statute excluded other specific property, such as hand tools and intraplant equipment. Turning next to whether the statutes shared the same purpose and irreconcilably conflicted, the court found that the common purpose was avoidance of double taxation, whereas the manufacturing exemption was also designed to promote economic development. The court concluded that the statutes could be reconciled because even if a container didn’t qualify for exemption under the conditions of § 151.322, § 151.318 could still apply.
In its motion for summary judgment, the manufacturer claimed that the containers were exempt under three subsections of 151.318: (a)(5) (pollution control); (a)(8) (qualify control); and (a)(10) (required to comply with federal, state, or local laws related to public health). The trial court granted the motion without specifying which subsection applied and issued judgment on that basis. But the state failed to address the specific subsections in its opening brief, the only subsections under which the manufacturer claimed an exemption. Instead, the state’s brief argued only that the containers were not exempt under (a)(1). “When a trial court does not specify the basis for its summary judgment,” the court observed, “the nonmovant must show on appeal that the trial court erred by basing summary judgment on every ground asserted in the motion” (citations omitted). The state didn’t do that until its first reply brief, perhaps forgetting that “the rules of appellate procedure do not allow an appellant to raise a new issue in a reply brief.” Tex. R. App. P. 38.3. This mistake proved fatal to the state’s case. The court affirmed the trial court order granting the manufacturer’s MSJ.
The state argued further that the containers were excluded from exemption under § 151.318(c) (equipment or supplies used in transportation activities) and § 151.318(c)(4) (machinery and equipment or supplies not otherwise exempted used to maintain or store tangible personal propery). Rather than considering the containers as comparable to a “tanker truck delivering gasoline,” as the state argued, the court compared them to wrapping and packaging materials necessary and essential to the manufacturing process. And the court brushed aside the second exclusion because the containers were “otherwise exempted” elsewhere in § 151.318. Finally, the state argued that § 151.3111, which exempts services performed on exempt party, didn’t apply. Instead, the third-party cleaning services were subject to tax because by the time the containers reached the service providcr, the manufacturing process had ended so the containers were no longer exempt. The court observed that “[n]othing in the Manufacturing Exemption indicates that property used in manufacturing loses and regains its tax exempt status depending on whether it is being used or consumed in manufacturing at a particular moment.”
This is a big win for the Jones Day firm and attorneys Deborah Sloan, Antoinette Ellison, and John Allan. Fighting the Comptroller on any exemption is a high hill to climb, but the manufacturing exemption is especially so because of the magnitude of the taxable value involved and the revenue implications to the state (particularly if the ruling opens the door to further refund claims). The Comptroller has to guard the integrity of this exemption very carefully, indeed, and that means litigating it to the bitter end. We will see if SCOTX is next.
