Which well-site services performed by a hot oiler are subject to Kansas sales tax, and which are exempt?

Plain-English summary

A hot oiler operator asked how Kansas sales tax applies to services done at a well site. (A hot oiler is a truck- or skid-mounted unit that heats oil or treatment fluid, used to remove wax/paraffin deposits from the well bore and feeder lines.) The Department answered using Revenue Ruling 19-2002-2 and the Question-and-Answer issued with it (Questions 35 and 36).

The dividing line is what is being serviced:

• Exempt: maintenance services performed on processing equipment located at a well site — including services to the lines that connect pieces of processing equipment to each other.
• Taxable: services to feeder lines, gathering systems, and pipelines, which are not part of the processing equipment. This also covers the lines from the wellhead to the processing equipment and from the processing equipment to a gathering (or similar) system.

Applying that to the hot oiler:

• Down-hole maintenance services performed by the hot oiler are taxable.
• Hot oil services to feeder lines and gathering/pipelines are taxable.
• Cleaning of tanks, tubing, flow lines, and other processing equipment (Q35) is generally exempt maintenance — but the same job becomes taxable to the extent it services feeder lines, gathering systems, or pipelines.
• Pumping scraper pigs and rubber balls (Q36) is exempt when maintaining lines connecting processing equipment, but taxable when done to feeder lines or other lines delivering gas or oil from the well site.

What this means for you

Well-site service providers (hot oilers, cleaning, pigging)

Bill sales tax based on what you service, not just where you are. Maintenance of the processing equipment (and the lines linking its components) is exempt; work on feeder lines, gathering systems, and pipelines — and the lines to and from the processing equipment — is taxable.

Mixed jobs

A single job can be partly exempt and partly taxable. Down-hole work and line work delivering oil/gas are taxable even when performed alongside exempt processing-equipment maintenance.

Documentation

Keep records that identify which components each charge covers, so you can support the exempt vs. taxable split if audited. The Department's Revenue Ruling 19-2002-2 and its Q&A are the reference points.

Common questions

Q: Is a hot oiler's down-hole maintenance taxable?
A: Yes. Down-hole maintenance services performed by a hot oiler are subject to Kansas sales tax.

Q: What about maintenance of the processing equipment at the well site?
A: Maintenance of processing equipment is exempt, including services to the lines that connect pieces of processing equipment to each other.

Q: Are services to feeder lines and pipelines taxable?
A: Yes. Feeder lines, gathering systems, and pipelines aren't part of the processing equipment, so services to them are taxable — as are the lines from the wellhead to the processing equipment and from it to a gathering system.

Q: Where can I read the underlying rules?
A: The Department relied on Revenue Ruling 19-2002-2 and the Q&A issued with it (Questions 35 and 36).

Q: Does this ruling apply to my business?
A: A Kansas private letter ruling addresses only the requesting taxpayer's facts and cannot be relied on as precedent by others, though it shows how the Department taxes well-site services.

Citations and references

• Revenue Ruling 19-2002-2 and its Question-and-Answer (Questions 35-36) — the Department's guidance distinguishing exempt maintenance of well-site processing equipment from taxable services to feeder lines, gathering systems, and pipelines (and the lines to and from the processing equipment). The Department enclosed both and applied them to the hot oiler's services.
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2003-023

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

April 21, 2003

XXXX
XXXX
XXXX

RE: Your letter dated February 14, 2003

Dear XXXX:

Thank you for your recent letter. In it you ask to receive copies of the department's publications on sales taxation of the services done at a well site. I have enclosed a copy of Revenue Ruling 19-2002-2 and a copy of a Question and Answer that the department prepared at the same time that the Revenue Ruling was issued.

You operate a hot oiler. A hot oiler is a truck or skid-mounted unit used to heat oil or treatment fluid. Hot oilers are routinely used in the removal of wax deposits from the upper well bore section of wells in cold climates where low wellhead temperatures increases the susceptibility of heavy crude oil to wax precipitation. You use the unit to remove paraffin from the well bore and from feeder lines. Down hole maintenance services performed by a hot oiler are subject to sales tax. Hot oil services performed to feeder lines and gather and pipelines are also subject to sales tax. This is explained in Questions 35 and 36 of the Q & A:

35. Q. Is the service of cleaning tanks, tubing, flow lines, and other processing equipment by use of portable steam units or other kinds of cleaning equipment subject to sales tax?

A. These appear to be maintenance services performed on processing equipment located at a well site. Maintenance services are exempt from sales tax when done to processing equipment. Services to feeder lines, gathering systems, and pipelines are taxable. Services to lines from the well head to the processing equipment are taxable, as are services to lines from the processing equipment to a gathering systems or similar system.

36. Q. Is the service of pumping scraper pigs and rubber balls through lines to clean out scale deposits subject to sales tax?

A. As has been discussed, maintenance of processing equipment located at a well site is exempt from tax. When these services are done to maintain lines that connect pieces of processing equipment to each other, the services are exempt. If the scraper pigs and rubber balls are pumped through feeder lines or other lines that deliver gas or oil from the well site, this is a taxable maintenance service. Feeder lines, gather systems, and pipelines are not part of the processing equipment and services to them are taxable. Similarly, the lines from the well head to the processing equipment and from the processing equipment to a gathering system or similar system are not part of the processing equipment and services to them are taxable.

I hope my letter and the enclosed documents answer all of your questions. If you have any more, please call me at 785-296-3081 and we will discuss them. This is private letter ruling. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this ruling.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Enclosures

Date Composed: 04/22/2003 Date Modified: 04/22/2003

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