Could an oil-and-gas operator use its own direct-payment permit for purchases made for subsidiary-owned leases?

Plain-English summary

The operator managed oil-and-gas leases owned through subsidiaries and other entities under joint operating and agency agreements. It asked whether its own direct-payment permit could cover purchases for leases it operated but did not necessarily own.

If the operator was a general partner with the subsidiary in the relevant partnership, the operator could use its own direct-payment permit for taxable lease purchases.

Otherwise, the subsidiaries had to obtain their own direct-payment permits to buy items tax free and remit tax to the state. If a subsidiary qualified for a permit, the operator could purchase for that subsidiary under its permit only when a legal purchasing-agency agreement existed.

Common questions

Did merely operating a lease allow use of the operator's permit? No. When could the operator use its own permit? In the general-partner arrangement described by the letter. Could it buy under a subsidiary's permit? Yes, if the subsidiary qualified and a legal purchasing-agency agreement existed.

Citations and references

The reproduced letter cites no numbered statute or rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8503L0642B07

Original ruling text

March 29, 1985

Dear ***:

Thank you for your letter of March 13, 1985, regarding direct payment
permits that may be needed for operation of oil and gas leases owned
by other entities.

You explained that the leases acquired over the past several years have
not been owned directly by CORP A but have been owned through various
subsidiaries. CORP A has been designated through joint operating agreements
as the operator of certain of the leases owned by the other entities. CORP A
may be an operator on a lease in which it does not have its own working interest,
but it handles all the operations and bills out costs to the joint owners.

CORP A has been appointed as agent for the acquired entities and handles all
business affairs for them as permitted by the agreement.

Your specific question is whether CORP A can use its direct payment permit for
all business it does or are the subsidiary entities which have legal ownership
of the oil and gas leases required to have their own permits even though CORP A,
as agent and designated operator, makes all purchases for them?

If CORP A (Corp. A in your examples) is a general partner with the subsidiary
(Corp. B or Corp. C) in partnership A or B, CORP A could use its direct payment
permit for taxable purchases for the leases. If not, the subsidiary(s) would have
to obtain their own direct payment permits in order to purchase items tax free
and remit the tax to the state.

If the subsidiary's qualify for direct payment permits, CORP A could make purchases
for the leases under the subsidiaries direct payment permit provided a legal
purchasing agency agreement exists.

This opinion is based on the facts presented. If there are additional or different
facts, the opinion may change.

If you have any questions or need more information, please call us at 1-800-252-5555
toll free from anywhere in Texas. You may write us at the Tax Administration Division.

Sincerely,

Tax Policy Section
Tax Administration Division