Which city's local sales tax rate should an oil well servicing company charge when it takes orders at its equipment yard but performs repairs at customers' well sites elsewhere?

Plain-English summary

The Texas Comptroller sorted out which city's local sales tax an oil well servicing company must charge, given that its salespeople take orders at one location (an equipment storage yard) but the actual work happens at customers' well sites elsewhere.

The company rents equipment, repairs tangible personal property (like well tubing, rods, and pumps), repairs nonresidential real property (like well casing), and performs specialized oil/gas production-stimulation labor (like swabbing and workover services). Its salespeople are physically present at its equipment storage yard each morning and take all orders there or by cellphone (which Texas treats as received at the yard).

Tangible personal property rentals and repairs — sourced to the equipment yard. Because the yard receives at least three orders a year, it counts as the company's Texas "place of business," and under Texas's consummation-of-sale rules, both orders fulfilled at the yard AND orders fulfilled by delivering/repairing equipment at remote well sites are still treated as consummated at the yard (since that's where the order was received). So the company must charge the local sales tax rate in effect at the equipment yard's location for this category of work, even when the actual repair happens miles away at a well site.

Nonresidential real property repairs — sourced to the job site instead. Repairing, remodeling, or restoring real property (like well casing) follows a different sourcing rule: local tax is due at the location of the job site where the work is actually performed, not at the equipment yard.

Production-stimulation labor — not taxable at all. Labor to start or stimulate oil/gas production, or to work on the geological formation itself (completion, swabbing, workover services), isn't subject to sales and use tax in the first place, so no local sourcing question even arises for that category.

The Comptroller also confirmed the company's own purchases of equipment and supplies generally get taxed based on where its vendors' place of business is (under the same consummation rules), with the company itself only on the hook if a vendor fails to collect. And a 2021 update to the sourcing rule (Rule 3.334, effective October 1, 2021) doesn't change any of these answers for this company's specific fact pattern.

What this means for you

Oil field service companies with a central equipment yard but field-based work

Don't assume all your local tax should be sourced to the job site just because the physical work happens there. If your salespeople receive orders at a fixed yard/office location (three or more per year), TPP rental and repair charges are sourced to that yard's local tax rate — but real property repair charges are sourced to the job site. Track these two categories separately.

Businesses with traveling salespeople using cellphones to take orders

Orders received by phone while a salesperson is physically at your established place of business still count as received there, even if the salesperson later travels elsewhere — this affects which city's local tax rate applies.

Accountants and tax professionals for oilfield/well-service clients

Remember the local tax rate cap (2%) and the "excess local use tax" mechanic: if your equipment-yard jurisdiction's local rate is under the cap and you ship/deliver into a higher-local-rate jurisdiction, you may owe additional local use tax based on the delivery destination, separate from the base sourcing rule.

Common questions

Q: If I take orders at my shop but do repairs at a customer's remote site, which local tax rate applies?
A: For tangible personal property rentals/repairs, the local rate at your shop (place of business) applies, as long as it receives three or more orders per year. For nonresidential real property repairs, the job site's local rate applies instead.

Q: Does receiving an order by cellphone while at my equipment yard count as receiving it there?
A: Yes, under Texas's local tax sourcing rules, orders received by salespersons while physically at an established place of business are treated as received there, even by phone.

Q: Is oil and gas well production-stimulation labor subject to sales tax at all?
A: No, per this ruling — labor to start or stimulate production, or to work on the geological formation (completion, swabbing, workover), is not subject to Texas sales and use tax.

Q: Can I rely on this ruling for my own oilfield services business?
A: Only if you're the taxpayer it was issued to. It binds the Comptroller solely as to that taxpayer's specific facts and can't be relied on by others, though it's a clear illustration of the TPP-vs-real-property sourcing distinction for field service businesses.

Citations and references

Statutes and rules:

• Tex. Tax Code § 321.002(a)(3)(A) (Definitions — place of business of the retailer)
• 34 Tex. Admin. Code § 3.334(a)(16), (a)(24) (Local Sales and Use Taxes — place of business; local rate cap)
• 34 Tex. Admin. Code § 3.334(b)(1), (b)(4) (Local Sales and Use Taxes — storage yard; orders received by traveling salespersons)
• 34 Tex. Admin. Code § 3.334(c)(1)(B)(i)-(ii) (Local Sales and Use Taxes — consummation of sale)
• 34 Tex. Admin. Code § 3.334(d)(1) (Local Sales and Use Taxes — additional local use tax owed on delivery into higher-rate jurisdictions)
• 34 Tex. Admin. Code § 3.334(f) (Local Sales and Use Taxes — 2% local tax cap)
• 34 Tex. Admin. Code § 3.334(i)(1), (i)(2), (i)(4)(A)-(B) (Local Sales and Use Taxes — collection responsibility)
• 34 Tex. Admin. Code § 3.334(k)(9) (Local Sales and Use Taxes — nonresidential real property repair sourced to job site)
• 34 Tex. Admin. Code § 3.324(a)(3) (Oil, Gas, and Related Well Service — production-stimulation labor not taxable)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202202027L

Original ruling text

February 10, 2023

RE: Private Letter Ruling No. PLR20210909130654

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated Aug. 31, 2021, and additional information received via email on June 23, 2022. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on local sales and use tax sourcing for your client, an oil well servicing company.

Facts Presented

** (Taxpayer) is an oil well servicing company that provides various services around CITY-1 and CITY-2 at oil and gas well sites.

Taxpayer provides rentals of tangible personal property. Taxpayer also repairs, remodels, restores, and maintains tangible personal property such as repairing damage to the rods or tubing within the casing or replacing a bottom hole pump. Taxpayer also fishes for rods or tubing when sucker rods break or part and performs hot oil treatment of casing, tubing, or flow lines.

Taxpayer also repairs, remodels, and restores nonresidential real property, such as repairing damage to the casing around the well.

Taxpayer performs labor to start or stimulate production or labor to work on the formation, such as completion, swabbing, and workover services. For example, Taxpayer removes cement plugs on top of wells and makes repairs to the rods, tubing, casing, or pumps to allow for a plugged well to renew production.

Taxpayer keeps its equipment at ADDRESS, CITY-2 Texas (Equipment Yard). Taxpayer does not currently have any other physical locations.

Taxpayer’s salespersons are located at the Equipment Yard every morning for periods of up to two hours. All of Taxpayer’s orders are received by salespersons on their cellphones. Taxpayer’s fulfills orders for equipment rentals and repairs at the Equipment Yard. Taxpayer also makes deliveries and performs services in the field at well sites.

Taxpayer seeks clarification on the appropriate local sales and use tax rate to collect and remit on its sales of taxable services and purchases.

Questions, Rulings, and Analyses

Our restatement of your questions is shown below, followed by our rulings and analyses.

Question One: Should Taxpayer charge its customers the local sales and use tax rate at the Equipment Yard?

Ruling One: Taxpayer should charge its customers the local sales and use tax rate at the Equipment Yard on its charges for rentals of tangible personal property and charges to repair, remodel, maintain, and restore tangible personal property. On charges to repair, remodel, and restore nonresidential real property, Taxpayer should charge its customers the local sales and use tax rate at the job site location. Charges for labor to start or stimulate production or labor to work on the formation are not subject to sales and use tax.

Analysis: A “place of business of the retailer” (place of business) is an established outlet, office, or location operated by a seller for the purpose of receiving orders for taxable items and includes any location at which three or more orders are received during a calendar year. Section 321.002(a)(3)(A) (Definitions) and Rule 3.334(a)(16) (Local Sales and Use Taxes). A storage yard is not a place of business of the seller unless at least three orders are received by the seller during the calendar year at the storage yard. Section 321.002(a)(3)(A) and Rule 3.334(b)(1)(A).

Taxpayer’s salespersons receive orders on their cellphones while they are at the Equipment Yard. The Equipment Yard is a place of business for Taxpayer as salespersons receive three or more orders there during a calendar year. Rule 3.334(a)(16), (b)(1), and (b)(4). Orders received by sales personnel while not at the Equipment Yard are also considered to be received at the Equipment Yard as provided in Rule 3.334(b)(4).

Taxpayer fulfills some orders for equipment rentals and repairs at its place of business, the Equipment Yard. These sales are consummated at that location. Rule 3.334(c)(1)(B)(i). For these sales, Taxpayer is required to collect and remit each local sales tax in effect at the location of the Equipment Yard. Rule 3.334(i)(1).

Taxpayer may also fulfill orders by delivering equipment or repairing tangible personal property at well sites. These sales are also consummated at the Equipment Yard because that is the place of business where the order is received. 3.334(c)(1)(B)(ii). Taxpayer is required to collect and remit each local sales tax in effect at the location of the Equipment Yard for these types of sales. Rule 3.334(i)(1).

Local sales and use taxes are capped at a maximum rate of two percent. Rule 3.334(a)(24); (f). If the local sales and use tax rate at the Equipment Yard does not reach the two percent cap, and Taxpayer ships or delivers items into another local taxing jurisdiction with a higher local tax rate, Taxpayer must collect additional local use taxes due, if any. The local use tax due is based on the location to which the item is shipped or delivered or at which the purchaser of the item takes possession, regardless of the location of the seller in Texas. Rule 3.334(d)(1) and (i)(1).

For Taxpayer’s services to repair, remodel, or restore nonresidential real property, local sales and use taxes are due at the location of the job site where the repair, remodeling, or restoration is performed. Rule 3.334(k)(9).

Taxpayer’s services to start or stimulate production or to work on the formation are not subject to sales and use tax. Rule 3.324(a)(3) (Oil, Gas, and Related Well Service).

Question Two: Should Taxpayer pay the local sales and use tax rate at the CITY-2 location on its purchase of taxable items for its own use?

Ruling Two: No. Generally, Taxpayer’s vendors should collect local sales and use tax on Taxpayer’s purchases based on the consummation of sale rules in Rule 3.334(c). Taxpayer is responsible for the appropriate local sales and use tax if its vendors do not collect the tax.

Question Three: What local sales and use tax rate will apply to Taxpayer’s payments for equipment it rents to perform its work?

Ruling Three: Taxpayer should pay local sales and use tax on its purchases as provided in Rule 3.334(c); (d); and (i).

Analysis for Ruling Two and Three: Taxpayer’s vendors are responsible for collecting local sales tax on Taxpayer’s purchases based on the consummation of sale rules provided in Rule 3.334(c). Rule 3.334(i)(1). Under these rules, local sales tax is often due based on the location of a vendor’s place of business in Texas where orders are received or fulfilled as described in the analysis for Ruling One. Taxpayer is responsible for the local sales tax due as provided in Rule 3.334(c) if the seller does not collect. Rule 3.334(i)(4)(A).

Orders that are not received at or fulfilled from a place of business in Texas, such as orders placed with an out of state vendor, are subject to local use tax. Rule 3.334(c)(2)(B)(ii). Generally, vendors are responsible for collecting the local use tax. Rule 3.334(i)(2). Taxpayer is responsible for the local use due based on the location where the items is first used or stored if the seller does not collect the tax. Rule 3.334(i)(4)(B).

Question Four: Will any of the answers change after Oct. 1, 2021?

Ruling Four: No, the changes to Rule 3.334 effective Oct. 1, 2021, do not affect this response.

Analysis: When three or more orders are received during the calendar year by salespersons while at the Equipment Yard, the answer is the same under Rule 3.334(b)(4) before and after Oct. 1, 2021.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Request No. PLR20210909130654.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.