How did Texas tax repairs and damage charges for oilfield tools rented with or without operators and used offshore?

Plain-English summary

The Texas Comptroller separated tools supplied with an operator from tools rented bare.

For tools used with an operator, repair costs and repair inputs were taxable to the service company. Charges to the customer for tools lost or damaged while the company provided a well service were reimbursements of cost, not taxable sales, and tax paid by the company was not to be separately shown as customer tax.

For tools rented without an operator, repair charges to the customer were taxable unless the customer took the tool back offshore and issued an exemption certificate stating that it would be used outside Texas territorial limits. The same rule applied whether a third party or the lessor performed the repair. Damage charges on equipment rented and used without an operator were taxable.

The letter also said the total charge for a taxable repair was subject to tax, whether a third party collected it from the lessor or the lessor collected it from the customer.

What this means for you

Operator involvement determined who consumed the repair service and materials. Offshore destination could exempt a bare-rental repair only with the stated use and certificate, while customer damage payments received different treatment depending on whether the company was providing a service or merely renting the tool.

Common questions

Who paid tax on repairs to tools supplied with an operator? The service company.

Were damage reimbursements during an operated well service taxable to the customer? No.

Were repairs to bare-rental tools taxable? Yes, unless the qualifying offshore-use certificate applied.

Were damage charges on bare-rental equipment taxable? Yes.

Citations and references

• The letter cited no numbered statute or Comptroller 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/8702L0799A11

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller February 26, 1987

Dear ****:

Thank you for your letter of February 18, 1987, concerning the taxa-
bility of repair work associated with oil well services and tools
rented without an operator for use offshore.

The taxability of the repairs in the various situations that you
describe is as follows:

1. Repairs to tools rented with operator - taxable to service company.
   Any charge by the service company to customer for items lost or damaged
   while providing a well service is a reimbursement of cost; tax is not
   collected from the customer.

2. Repairs to tools rented without an operator - taxable to customer
   unless customer takes tool back offshore and issues an exemption certi-
   ficate stating that tool is for use offshore outside the territorial
   limits of this state.

3. Repairs made by third party to tools rented with operator same as #1.

4. Repairs made by third party to tools rented without operator
   - same as #2.

5. Repairs made by CORP A at the local rental facility or by CORP A's
   Pearland plant to tools rented with operator - parts and materials are
   taxable to CORP A.

6. Repairs made by CORP A to tools rented without operator - total
   charge to customer is taxable unless customer issues exemption
   certificate stating that tool is for use offshore outside the
   territorial limits of this state.

The total charge for a taxable repair is subject to the tax whether the
tax is collected from CORP A by a third party or collected by CORP A from
its customers. A charge for damages to equipment rented and used by a
customer without an operator is subject to Texas tax.

If CORP A performs the work on equipment which it uses to provide a
service, no tax is to be collected from the customer. Any charges by
CORP A for items lost or damaged while providing a well service is not
considered a taxable sale of the items but a reimbursement of cost. Tax
paid on the item by the company should not be listed separately as tax
on the invoice to the customer.

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 me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512/463-4600. You may write me at the Tax Administration Division.

Sincerely,
Julie Pesl
Tax Policy Section
Tax Administration Division