Is oilfield 'swabbing' — running cable and rubber cups down a well to remove hydrostatic water and start/restart production — a taxable service in Texas?

Plain-English summary

An oilfield servicing company asked about the taxability of its swabbing operations. Swabbing works by sending a cable with rubber cups attached down a well and back up; the cups force hydrostatic water (and sometimes small amounts of sand or paraffin) out of the hole. The extracted water becomes the customer's responsibility, typically held in a tank and later removed by a transport service. The company billed customers for on-location time, travel time, and the rubber goods used at the well site.

The Comptroller ruled that swabbing done to start or restart a well is a nontaxable service, and the presence of small amounts of sand or paraffin coming out along with the fluids doesn't change that — it's still fundamentally a nontaxable well-start/restart operation. However, the Comptroller drew a line at a different downhole task: running bailers or cutters downhole to remove debris or cut paraffin is a taxable service, even though it happens in the same general oilfield setting.

Because swabbing itself is nontaxable, the servicer doesn't collect sales tax from the customer on its swabbing charges — but it still owes use tax on the materials it uses or consumes performing that nontaxable service (here, the rubber cups/goods). The letter specifically advises against listing "tax reimbursement" as a separate line item on invoices for a nontaxable service; if the company wants to recoup that use tax cost, it should build it into its price instead.

What this means for you

Oilfield servicing companies

Classify each downhole task by what it's actually doing, not by industry jargon: swabbing to start/restart a well is nontaxable, while bailing or cutting to remove debris/paraffin is taxable — the same well visit could involve both. Also remember that "nontaxable service" doesn't mean tax-free operations altogether — you owe use tax on your own consumable supplies (rubber goods, etc.) even when the service you're providing isn't itself taxed.

Accountants and tax professionals

Watch invoicing language: this ruling specifically flags that a company performing a nontaxable service should not show a separate "tax reimbursement" charge to the customer, since no sales tax is due on that service — the cost recovery, if any, should be folded into price rather than itemized as tax.

Common questions

Q: Is all oilfield swabbing nontaxable in Texas?
A: Swabbing to start or restart a well is nontaxable per this ruling. A related but distinct task — running bailers or cutters to remove debris or cut paraffin — is taxable, so the specific downhole activity matters.

Q: Does removing some sand or paraffin during swabbing make the whole service taxable?
A: No — the ruling specifically says incidental sand or paraffin coming out with the fluids doesn't convert the nontaxable swabbing service into a taxable one.

Q: Since swabbing is nontaxable, does the servicer owe no tax at all?
A: No — the servicer still owes tax on materials used or consumed providing the nontaxable service (e.g., the rubber cups), and should not separately itemize "tax reimbursement" for the nontaxable service on the invoice.

Q: Can another oilfield company rely on this letter?
A: No. It answers the specific facts presented and, like other STAR letters, generally supports detrimental reliance only for the taxpayer who received it.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200107379L

Original ruling text

July 17, 2001

Via fax **

Dear **:

Thank you for your letter concerning the taxability your oilfield services.

You operate an oilfield servicing company that focuses on swabbing. This
consists of sending cable down the hole and back up to remove hydrostatic
water. There may also be small amounts of sand and or paraffin accumulated in
the well. You send cable down the hole that has rubber cups attached. When we
come out of the hole, the cups force the water out of the hole. The water that
is brought out of the hole then becomes the responsibility of your customer.
This is normally held in a tank and then removed by a transport service.
You charge our customers for the time that you spend on location, travel tune,
and also for the rubber goods that you use on their well site.

Response. Swabbing done to start or restart a well is considered a nontaxable
service. The fact that small amounts of sand or paraffin will be removed with
the fluids, will not cause the service to become taxable. Running bailers or
cutters down hole to remove debris or to cut paraffin is considered a taxable
service.

You are required to pay tax on all materials used or consumed in providing
nontaxable services. You should not indicate any tax reimbursement charges on
your invoice. You may wish to increase your price by the amount of tax
reimbursement sought.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change. You may call me toll free at
1-800-531-5441, ext. 5-0613. The direct line is 512/475-0613. You may also
write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division