Was a turnkey drilling-mud provider selling taxable mud or providing a nontaxable well service, and could charges for consumed mud be treated as loss reimbursement?

Plain-English summary

In the April 1987 letter, the Texas Comptroller said the company was a retailer of drilling mud, not a provider of a nontaxable well service. It could buy the chemicals used to produce the mud tax-free with a resale certificate, but it had to collect sales tax on the mud's total selling price under its turnkey contracts.

The attached March 1986 letter denied a refund for tax charged on oil-based drilling mud described as lost while rented. Rule 3.324(e)'s reimbursement treatment for items lost or damaged while a service company performed well services did not apply because neither the mud retailer nor its customer was the well-service company; a separate drilling contractor used the mud.

The Comptroller treated mud as a consumable supply expected to be used in the well, not machinery or equipment that had been lost. The transaction was a sale with deferred compensation, and sales tax was properly billed on the consumed mud.

What this means for you

Contract labels such as “turnkey” or “rental” did not control. The agency looked at the seller's role and the mud's expected consumption, treating the retailer as selling taxable material rather than furnishing the well service.

Common questions

Could the retailer buy mud chemicals with a resale certificate? Yes.

Did it have to tax the customer? Yes, on the total selling price of the mud.

Did Rule 3.324(e)'s lost-item reimbursement apply? No, because the relevant parties were not the well-service company performing the work.

Was consumed drilling mud treated as rented property that was lost? No. It was a consumable supply sold with deferred compensation.

Was the refund granted? No.

Citations and references

• Comptroller Rule 3.286 — Sellers' Responsibilities.
• Comptroller Rule 3.285 — Resale Certificates.
• Comptroller Rule 3.324(e) — lost or damaged items charged by a well-service company.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8704L0813E04

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller April 28, 1987

Dear ***:

Thank you for your letter of April 10, 1987 concerning the taxability of
"turn key drilling mud contracts."

CORP A is at retailer of drilling mud, not the provider of a non-taxable
well service. CORP A may purchase the chemicals used to produce the
drilling mud tax free by issuing a resale certificate to its supplier.
CORP A must then collect sales tax from its customer on the total selling
price of the mud.

Rule 3.286 Sellers Responsibilities and Rule 3.285 Resale Certificates
are
enclosed for your reference.

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

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller March 25, 1986

Dear ***:

We have reviewed your request for a sales tax refund on lost oil based
drilling mud rented to CORP X.

Section (e) of Rule 3.324 states that "any charges by the service company
for items lost or damaged while providing the well service will not be
considered a sale of such items, but a reimbursement of cost by the
customer. " (Emphasis added.) CORP ABC is a retailer, not a well ser-
vice company. ***, a staff accountant for X, stated that a
drilling contractor (a well service company) used the mud, not X.
Neither
ABC nor X is a well service company thus, section (e) of Rule 3.324 does
not apply.

Drilling mud is a consumable supply, not machinery or equipment, which is
consumed or expended in or incorporated into the well. It is not lose.
The
realistic expectation is that some of the mud will be consumed. The norm
in
the well service industry is to purchase only the amount of drilling mud
used or consumed.

We find that ABC sold and did not rent drilling mud to X. The transac-
tion was a sale with deferred compensation. A part of the consideration
(payment) was received at the time the mud was delivered and the balance
of the consideration was received when drilling was completed. Sales tax
was properly billed on the mud consumed.

Your request for sales tax refund is denied.

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,
Eddie C. Washington
Tax Policy Section
Tax Administration Division