When were oilfield free-point, back-off, and cutting services taxable?

Plain-English summary

The provider used a free-point indicator to locate where stuck pipe was free, then used jarring, explosive string shots, or chemical cutting so an obstruction could be removed. Services removing tubing, rods, or pumps from downhole were taxable on the total charge. Services removing drill pipe or casing were nontaxable, with the provider paying tax on materials, equipment, and tools used.

If work on the mineral-bearing formation, such as acidizing or fracturing, or a casing repair was performed together with an otherwise taxable service, the entire job was treated as nontaxable. The invoice had to clearly describe what actually happened at the well site.

Common questions

Was tubing removal taxable? Yes. What about drill pipe or casing? Nontaxable under the stated classification. Could combined formation or casing work change the result? Yes; it made the whole described job nontaxable.

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/8505L0664E03

Original ruling text

May 15, 1985

Dear ***:

Thank you for submitting a brochure on the services you provide. I have
examined the material and the following represents our view on your tax
responsibilities as they relate to these services.

Free Point Indicator and/or Cutting Service.

As I understand this, the free point indicator is a tool designed to
measure the amount of stretch in a string of stuck pipe and to indicate the
deepest point at which the pipe is free. Once this point is determined the
pipe must be jarred or cut off at the joint immediately above the stuck point.
A string shot may be run down hole and detonated to create an explosive jar
inside the stuck pipe or tubing to back off the pipe or tubing. In some cases
you may just lower an acid charge within the well bore to chemically cut the
free portion of pipe or tubing. After either one of these operations a fishing
tool company will be called out to remove the obstruction.

When you perform these services to remove tubing, rods, or pumps from down hole
it is considered a taxable service. You would collect tax from your customer on
the total charge.

When you perform these services to remove drill pipe or casing it is considered
a non-taxable service to your customer. You should pay tax on all materials and
equipment or tools used in providing these services.

In the event work on the mineral bearing formation (acidize, fracture) or a repair
to the casing is accomplished in conjunction with the taxable service, defined
previously, the whole job will be treated as a non-taxable service. You should
clearly indicate on your invoice what is actually being done at the well site.

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 Administration Division