Was a directional-drilling equipment provider leasing property rather than performing a nontaxable drilling service?

Plain-English summary

An April 23, 1968 letter responded to an absent April 3 letter that allegedly called D--- D---'s and E---'s operations identical. Tax Counsel Rigby clarified that E--- did not supply all drilling equipment; the Board was taxing only equipment it considered E--- leased. He asked whether E--- employees physically did directional drilling or merely supervised customer employees. The referenced March 13 letter and D--- D--- letter are also absent.

The final response reaffirmed that E--- leased tangible personal property rather than performed nontaxable service. Its first page repeats an April 23 header, while its continuation is dated July 10 and the live annotation uses July 10. It says earlier letter detailed the reasons but does not reproduce it.

The response lists four facts: E---'s supervisor directed the driller as to weight and pressure; actual drilling was done by the employees on customer rigs; E--- bore no drilling-damage responsibility; customer bore lost/damaged-tool responsibility; and E--- bore no responsibility for results. Because the employees has no possessive, the preserved PDF does not clearly answer April's personnel question.

The live annotation changes those facts to customer employees operating lessor rigs. That is not a harmless shortening: it reverses PDF's rig ownership and supplies employee identity PDF omits. This page preserves both without choosing. The final response again requested missing March 13 information and offered informal hearing within 30 days; no response or hearing record appears.

Common questions

Did an onsite provider supervisor make the arrangement a service?

No. The opinion still classified the equipment as rented under the stated supervision and risk-allocation facts.

Who bore the risk of lost or damaged tools?

The customer.

Was the provider responsible for drilling damage or results?

No on both points.

Does the PDF identify whose employees actually drilled?

No. It says the employees without identifying employer. The earlier letter had expressly asked that unresolved question.

Whose rigs does each official source identify?

The PDF says customer rigs. Live Annotation 330.2450 says lessor rigs. The conflict is unresolved.

Does the PDF contain the underlying contract or detailed earlier reasoning?

No. It omits the request, referenced letters, reviewed materials, requested follow-up information, contract and operational records.

Was an informal hearing held?

The final response offered one if requested within 30 days, but this source contains no request or hearing record.

May another drilling-equipment provider rely on this result?

No. It is historical taxpayer-specific correspondence with missing facts, a source conflict and no cited statute; complete terms and current law must be checked.

Citations and references

• No statute, regulation, ruling or case — cited in preserved correspondence
• April 3 requester letter; March 13 Rigby letter — referenced but absent
• D--- D--- letter to J. T. Q---; other reviewed material — referenced but absent
• April 23 clarification — provider-equipment scope and unresolved personnel question
• Final response — four control/risk facts, renewed information request and hearing offer
• Contract, personnel/rig, risk-allocation, follow-up and hearing records — absent
• Official Annotation 330.2450 — customer-employees/lessor-rigs version conflicting with PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2450
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2450.pdf

Original ruling text

330.2450

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

April 23, 1968
A--- Company
XXX South --- Drive
---, IL XXXXX
Attention:

Mr. G--- E. G--Counsel – Secretary

SY -- XX XXXXXX
E--- O--- W--Survey Company

Gentlemen:
Thank you for your letter of April 3, 1968.
I talked to Mr. J. T. Q--- prior to the time of writing my letter of March 13, 1968, regarding D--- D---’s operation. He informed me that the facts related in his letter were the ones presented to him by D--- D---. In view of the statement in your letter that the operations of D--- D--- and E--- are identical, I will request Mr. Quick to check into the matter with D--- D---. In my letter, I did not mean to infer that Eastman supplies all the drilling equipment. We are only taxing the equipment that we consider Eastman is leasing to its customers. You state that the employees of Eastman come to the job of the customer with the deflecting tools and take charge of the particular task. On one hand, they supervise many of the manual tasks which the field hands of the customers are directed to perform. On the other hand, they perform the actual directional drilling operations. From this latter statement, do you mean that your employees physically perform the directional drilling operations, or do they merely supervise the customer’s employees and the customer’s employees do the actual drilling? Very truly yours,

Glenn L. Rigby
Tax Counsel

GLR:kc
cc:
Out-of-State – District Administrator

330.2450

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

April 23, 1968

A--- Company
XXX South --- Drive
---, IL XXXXX
Attention:

Mr. G--- E. G--Counsel – Secretary

SY -- XX XXXXXX
E--- O--- W--Survey Company

Gentlemen:
After carefully reviewing all the material and correspondence, it is still our opinion that E--is leasing tangible personal property and not performing a nontaxable service. Our conclusion for considering E---’s operation as a lease of tangible personal property has been spelled out in some detail in my earlier letter, and it is felt that it would be redundant to again set them forth. Basically, we consider that a rental has occurred for the following reasons: 1. Although E--- has a supervisor at the jobsite who directs the driller as to how much weight and pressure to apply, the actual drilling operations are done by the employees and on the rigs of E---’s customer; 2. E--- is not responsible for any damage that may result in the drilling operation; 3. If any tools are lost or damaged in the well, the customer is responsible for them; and 4.

E--- is not responsible for the results of the drilling operations.

In view of this conclusion, we would appreciate receiving the information requested in the second to the last paragraph of my letter of March 13, 1968.

A--- Company
SY -- XX XXXXXX

-2-

July 10, 1968
330.2450

If an informal hearing at our Sacramento headquarters office is still desired, please let us know within the next 30 days as to the time or times it would be convenient for you to meet with us. Very truly yours,

Glenn L. Rigby
Tax Counsel

GLR:kc
cc:

Out-of-State – District Administrator