SALT Blog 

    The newly created Fifteenth Court of Appeals has issued its first sales-tax opinion, and its early signals should be on the radar of every Texas business, as well as tax professionals, in-house counsel, compliance teams, and industries that rely on exemptions or navigate complex tax classifications. In Hancock et al. v. ChampionX, LLC, the court held that the Texas Comptroller’s policy requiring manufacturers to pay sales tax on returnable containers and associated services is unlawful. While the underlying dispute involved specialized chemical containers, the implications reach far beyond the manufacturing sector.

          This opinion also offers the first substantive look at how the Fifteenth Court will interpret Texas tax statutes and approach prior precedent, particularly decisions previously issued by the Third Court of Appeals, the court that previously handled most taxpayer suits. The Fifteenth Court expressly stated that it is “not bound” by the Third Court’s reasoning in East Texas Oxygen, demonstrating a willingness to independently evaluate legal questions that previously defaulted to Third Court precedent. Because the new court now holds exclusive intermediate appellate jurisdiction over cases involving the state—including taxpayer refund suits—its interpretations will shape the direction of Texas tax law for years to come.

          The ripple effects do not end with sales-tax treatment of containers. The court’s stance may also affect the Comptroller’s recent amendments to the data processing rule (Rule 3.330), which rely heavily on Third Court precedent to justify limiting the “essence of the transaction test” in mixed transactions. If the Fifteenth Court is not persuaded by that precedent, key portions of the new rule could face meaningful judicial scrutiny.

          In short, the Fifteenth Court’s first opinion is more than a procedural milestone—it is a substantive turning point that signals potential shifts in exemption analysis, statutory interpretation, appellate strategy, and the future of Texas tax policy.

I.            Texas created the Fifteenth Court of Appeals in 2023, which succeeded the Third Court of Appeals as the intermediate court of appeals that decides tax cases.

In 2023, the Texas Legislature passed Senate Bill 1045 which related “to the creation of the Fifteenth Court of Appeals with jurisdiction over certain civil cases.” Act of May 21, 2023, 88th Leg., R.S., ch. 459, 2023 Tex. Gen. Laws 1113. The purpose of that legislation, according to its sponsor, was as follows:

Civil cases of statewide significance frequently involve the state, a state agency, or a state official (sued in connection with their official action) as a party. These cases require courts to apply highly specialized precedent in complex areas of law including sovereign immunity, administrative law, and constitutional law.

Under the current judicial system, appeals in cases of statewide significance are decided by one of Texas’s 14 intermediate appellate courts. These courts have varying levels of experience with the complex legal issues involved in cases of statewide significance, resulting in inconsistent results for litigants.

S.B. 1045 addresses these problems by establishing an intermediate court of appeals with exclusive jurisdiction over cases to which the state, a state agency, or a state official is a party. The justices on this new Fifteenth Court of Appeals are elected statewide, ensuring that all Texans have a voice in the selection of judges who decide cases of statewide importance.

Bill Analysis, C.S.S.B. 1045, 83d Leg., R.S. (2023).

          Ultimately, the Fifteenth Court ended up with “exclusive intermediate appellate jurisdiction” over, among other things, “matters brought by or against the state or a  board, commission, department, office, or other agency in the executive branch of the state government . . . .” Tex. Gov’t Code § 22.220(d)(1). This includes suits brought by taxpayers for a refund of sales tax. See Tex. Tax Code §§ 112.051(a) & 112.151.

          Before the creation of the Fifteenth Court, the Third Court of Appeals decided tax cases. Travis County district courts have “exclusive, original jurisdiction of a taxpayer suit.” Tex. Tax Code § 112.001. The district over which the Third Court had jurisdiction includes Travis County. The Texas Supreme Court occasionally transferred tax cases to other courts of appeal to equalize the courts’ dockets, see Tex. Gov’t Code § 73.001, but prior to the creation of the Fifteenth Court, most tax cases were decided by the Third Court.

II.            The Fifteenth Court’s first sales tax opinion: Hancock et al v. ChampionX, LLC.

          The Fifteenth Court issued its first sales tax opinion on February 12, 2026: Hancock et al. v. ChampionX, LLC, Case No. 15-24-00111-CV, 2026 WL 392041 (Tex. App.—15th Dist. Feb. 12, 2026, no. pet. h.) (mem. op.). In that opinion, the Fifteenth Court held that the Texas Comptroller’s policy[1] that manufacturers must pay sales tax on returnable containers, and related services, is unlawful. Id. at *6.

          The taxpayer in that case, ChampionX, manufactured chemicals “for use in water treatment applications and for customers in the oil and gas industries who were involved in oil exploration, production, refining, and in chemical processing.” Id. at *1. ChampionX delivered its chemicals in returnable porta-feed containers, which “ensured the chemicals did not react while being transported, preserved the chemical composition of the product, and met governmental regulations and standards.” Id.

          The Fifteenth Court described the process through which ChampionX’s customers returned the containers to ChampionX as follows:

When a customer finishes with a Container, the customer contacts a ChampionX representative to arrange Container retrieval. A third-party vendor picks up the Containers and transports them to a third-party cleaning service that is contracted to recondition and clean the returned Containers. The cleaning service provider cleans and inspects the Containers and certifies them to ensure compliance with Department of Transportation regulations. The cleaned and repaired Containers are transferred back to ChampionX and put back into the manufacturing process.

Id.

          ChampionX sued the Comptroller asserting that it was entitled to a refund of sales tax paid on containers and the cleaning, delivery, and pickup services for the containers. Id. ChampionX claimed that the containers qualify for the manufacturing exemption under Tax Code Section 151.318, and the services qualify for the exemption under Tax Code Section 151.3111. Id.

          The Comptroller denied ChampionX’s refund claim. The Comptroller explained why it denied that claim it is opening brief to the Fifteenth Court as follows:

The Texas Legislature has set out a specific provision under which a manufacturer is exempt from paying sales tax on containers, known as “the Container Exemption.” Tex. Tax Code § 151.322. Champion’s Containers do not qualify for an exemption under the plain language of the Container Exemption. Id. A statutory construction principle requires a specific statute control over a more general one. Since Champion’s Containers do not qualify under the specific Container Exemption, they also cannot qualify under more general exemptions.

Appellant’s Brief at 10.

         The Comptroller cited a 1984 opinion from the Third Court for support: East Texas Oxygen Company v. State, 681 S.W.2d 741 (Tex. App.—Austin 1984, no writ).

          In that case, East Texas Oxygen Company (“ETOC”) purchased empty returnable cylinders to fill with gas that was sold to buyers. Id. at 744-46. ETOC claimed a tax exemption under the sale for resale exemption, but the Third Court concluded that even assuming ETOC’s purchase of the cylinders constituted a sale for resale, the provisions specifically dealing with the sale of containers controlled. Id. at 742, 744-45. The Third Court explained that it was “necessary first to infer from the express exemption for sales of returnable containers in connection with the retail sale of the goods, that the initial purchase of the containers by the seller of the goods is not exempt.” Id. at 745. The Third Court reasoned that unless such an inference was made, the “provisions are meaningless because these sales are already exempt as ‘sales for resales.’” Id.

          The Fifteenth Court rejected the Comptroller’s argument and held as follows:

We are not bound by the Third Court’s holding in East Texas Oxygen and do not find it applicable in this case. ETOC did not seek a Manufacturing Exemption so the Third Court did not address whether the Manufacturing Exemption could be reconciled with the Container Exemption. And as explained above, we have concluded that the Container Exemption and Manufacturing Exemption can be reconciled.

ChampionX, 2026 WL 392041, at *6.

          The Fifteenth Court did not reach the merits of whether the containers qualify for the manufacturing exemption because it found that the Comptroller waived those arguments. In the trial court, ChampionX moved for summary judgment on the grounds that the containers qualify for the manufacturing exemption under subsections (a)(5) (pollution control), (a)(8) (quality control), and (a)(10) (required to comply with federal, state, or local laws related to public health) of Tax Code Section 151.318. Id. In its Opening Brief, the Comptroller argued that the containers did not qualify under subsection (a)(1). The Comptroller did not address subsections (a)(5), (a)(8), or (a)(10).

          The Fifteenth Court held that “[w]hile the State asserted for the first time in its reply brief that ChampionX’s containers do not qualify for a tax exemption under subsections (a)(5), (a)(8), and (a)(10), the rules of appellate procedure do not allow an appellant to raise a new issue in a reply brief.” Id. at *7. As a result, the Fifteenth Court “decline[d] to consider the State’s arguments raised for the first time in a reply brief. Id.

III.            The Comptroller will likely continue denying exemption claims for containers like the ones at issue in ChampionX.

           The Fifteenth Court did not address the Comptroller’s arguments that the containers do not meet the requirements of the manufacturing exemption. Given the strength of those arguments, the Comptroller will likely continue resisting exemption claims that are like the one at issue in ChampionX.

           The trial court held that ChampionX qualified for the manufacturing exemption under Tax Code Section 151.318(a)(5), (a)(8), and (a)(10). Each of those subsections exempt “tangible personal property used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale.”  Id. (emphasis added).

           In ChampionX, the Fifteenth Court found that the containers had three purposes:

1. “ensured the chemicals did not react while being transported”;
2. “preserved the chemical composition of the product”; and
3. “met governmental regulations and standards.”

ChampionX, 2026 WL 392041, at *1.

          A key requirement for a process to constitute “manufacturing” is that it must result in a modification or change to the characteristics of the property being developed. See Sw. Royalties, Inc. v. Hegar, 500 S.W.3d 400, 405-06 (Tex. 2016). If the entire purpose of the containers is to prevent a change to the chemicals, then it is hard to see how the containers are part of a manufacturing process.

IV.            The Fifteenth Court’s statement that it is “not bound by the Third Court’s holding” could spell trouble for the Comptroller’s data processing rule.

           It is unclear exactly what the Fifteenth Court meant when it said “[w]e are not bound by the Third Court’s holding in East Texas Oxygen.” ChampionX, 2026 WL 392041, at *6. If it meant that the Fifteenth Court will only adopt a holding of the Third Court if it is persuaded to do so, which is consistent with the purpose of the Fifteenth Court, then that may spell trouble for recent amendments the Comptroller made to its rule regarding data processing services (34 Tex. Admin. Code 3.330).

           The core of many of those amendments is the Comptroller’s determination that the “essence of the transaction test” does not apply to data processing services. See 49 Tex. Reg. 7308 (Sep. 13, 2024) (notice proposing amendments to Rule 3.330). The essence of the transaction test provides that, in transactions that involve both taxable and non-taxable items, courts will determine “whether a tax is due”, Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632, 637 n. 14 (Tex. 2013), by looking at “the customer’s basic purpose in entering into the transaction.” Sharp v. Direct Res. For Print, Inc., 910 S.W.2d 535, 538 (Tex. App.—Austin 1979, writ re’fd n.r.e).

          According to the Comptroller, the essence of the transaction test should not apply to data processing services because:

The buyer will never want the manipulation of data for its own sake. The buyer will always want the manipulation of data as a means to achieve an end. Therefore, the identification of the “underlying goal” of the buyer, or the essence of the transaction, is not the appropriate test for data processing services.

49 Tex. Reg. 7308, 7308 (Sep. 13, 2024).

          The Comptroller is relying on a line of cases from the Third Court as support for the proposition that application of the essence of the transaction test to data processing services is undecided: Instill Corp. v. Hegar, No. 03-18-00374-CV, 2019 WL 2308592 (Tex. App.—Austin May 31, 2019, pet. denied) (mem. op.); Hegar v. Black, Mann, & Graham, LLP, No. 03-20-00391-CV, 2022 WL 567853 (Tex. App.—Austin Feb. 25, 2022, no pet.) (mem. op.). If those cases held what the Comptroller contends, then many of the data processing services amendments will be at risk if the Fifteenth Court is unpersuaded by those opinions.

V.            Conclusion and Recommended Action Items

          The ChampionX decision represents an important inflection point for Texas taxpayers. Beyond its immediate holding, the opinion signals that the Fifteenth Court may recalibrate how exemption statutes interact, how deference to Comptroller interpretations is evaluated, and how prior Third Court precedent is treated. Businesses should take proactive steps to reassess risk and ensure their tax positions remain defensible under this evolving jurisprudence.

Recommended Action Items

• Evaluate refund opportunities for returnable containers and related services. With the Comptroller’s contrary policy deemed unlawful, businesses that purchase, use, or rely on returnable containers should reassess whether potential refund claims exist.
• Revisit positions under the manufacturing exemption. Although the appellate court did not reach the merits due to waiver, the trial court found the containers qualified under Tax Code Section 151.318(a)(5), (a)(8), and (a)(10). Businesses should analyze whether their own equipment or process-related items may qualify under these or similar subsections.
• Assess exposure and documentation relating to data processing services. Because the Fifteenth Court may not adopt the Third Court precedent on which the Comptroller’s data-processing rule amendments rely, companies that sell or purchase digital, SaaS, data-manipulation, or mixed technology services should reevaluate their taxability positions and ensure robust documentation.
• Strengthen litigation and appeal strategies. The Comptroller forfeited key arguments in this case due by raising them for the first time in its Reply Brief. Taxpayers engaged in audits, hearings, or litigation should carefully preserve issues to protect arguments on appeal.
• Monitor future Fifteenth Court decisions. As this was the court’s first tax opinion, additional rulings will further clarify its approach to statutory construction, exemptions, and deference to agency interpretation. Early monitoring will help businesses anticipate policy shifts and compliance obligations.

[1] The Comptroller first articulated this policy in Hearing Decision Number 36,698, STAR Doc. No. 200007631H (July 18, 2000).