When were free-point, pipe-recovery, cutting, and other down-hole oil-well services taxable in Texas?

Plain-English summary

The company performed free-point indicator, string-shot back-off, jet-cutting, chemical-cutting, pipe-recovery, profile-caliper, and related services at well sites. The Comptroller said taxability required looking at the overall job rather than an invoice line in isolation.

Services defined as taxable under Rule 3.324 could become nontaxable when they were necessary to complete acidizing, fracturing, workover, drilling, completion, or casing-string repair. When the provider could not tell what was happening at the lease and was pulling tubing, it should collect tax unless the operator supplied a signed statement showing the work supported a nontaxable operation.

Fishing for drill pipe or casing was always nontaxable under the letter. Profile-caliper service was nontaxable if separately stated. Work performed outside Texas was not subject to Texas tax; taxable work performed in Texas by an out-of-state crew used the lease or service location's tax base.

Unsuccessful tool runs were presumed part of an overall taxable service unless records established a nontaxable purpose or showed the well was plugged and abandoned after the ineffective attempts.

What this means for you

Documentation connected the service provider's invoice to the operator's larger well operation. Without that proof, the Tax Code's presumption that gross receipts were taxable controlled.

Common questions

Was a free-point indicator charge taxable? The letter initially answers yes, but then makes the treatment depend on the overall work the service supported.

When could ordinarily taxable pipe-recovery work become nontaxable? When it was necessary to perform one of the specified nontaxable mineral-bearing-formation, workover, drilling, completion, or casing-repair operations.

How should the provider document a completion or workover connection? On work tickets or invoices, or with an operator statement attached to the invoice.

Was fishing for drill pipe or casing taxable? No.

How was profile-caliper service treated? Nontaxable when separately stated.

Were services performed in another state subject to Texas tax? No.

Citations and references

• Comptroller Rule 3.324 — cited for taxable and nontaxable oilfield services.
• Tex. Tax Code § 151.054(a) — gross receipts presumed taxable until the contrary is established.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8706L0818F05

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller June 5, 1987

Dear ****:

Thank you for submitting your questions and invoices for review to
determine your tax responsibilities when performing certain services at the
well-site.

1. If we perform a Free Point Indicator service in a string of tubing,
   which does not after the pipe in any way, but only determines information, is
   the charge for that service taxable since it is performed in conjunction with
   pipe recovery services, i.e., a String Shot Back-off, Jet Cut or Chemical Cut?
   If so, would the Free Point Indicator service be taxable if it is the only
   service rendered?

Answer: Yes, to both questions. The taxability of services is dependent
on the whole picture. That is to say, what was being accomplished? Was the
tubing being removed for routine maintenance of the well bore? Or was it
pulled to facilitate a work-over operation? The answer to these questions will
determine the taxability of the charges.

Basically, the premise behind the rule (3.324) is that certain services
defined as taxable in the rule are a necessary evil in order to perform
nontaxable services. For instance, you are not going to be able to drill
deeper or sidetrack or pull casing with the tubing in the way so it must be
pulled. If the tubing becomes stuck, then a company such as yours must be
called out before they can continue. So, the rule of thumb is, if services
defined as taxable in rule 3.324 are a necessary part in the performance and
completion of services on the mineral bearing formation; acid, fracture work
over, drilling, completion, or repair to the casing string; the charge will be
nontaxable. Many times you will not know what is actually occurring at the
lease site. When this occurs and you are pulling tubing you should charge tax
on the entire amount. The operator may issue you a signed statement that your
efforts were necessary to perform a work over on the well and, therefore, not
taxable. This should be kept with the invoice in question in case of audit to
show why you did not collect tax.

2. When we perform taxable and nontaxable services during the same job,
   does the entire invoice become taxable or is the tax applied on only those
   services which are normally taxable?

There are many variations to this type of situation. We may perform pipe
recovery services in drill pipe and tubing in the same string of pipe during
the same job; or we may perform a Profile Caliper service and then Pipe
Recovery services in the same string of tubing; or we may perform Completion
services and Pipe Recovery services during the same job.

Answer: As I discussed in the previous answer we must determine what the
overall purpose of the services is, when fishing tubing, packers, or other
equipment. Fishing for drill pipe or casing will always be nontaxable. The
Profile Caliper service is also nontaxable as long as it is separately stated
on the invoice, regardless of the type of job.

3. Assume a well is being completed and another company is doing the
   completion services. During the completion job, the tubing becomes stuck and
   * is called to perform pipe recovery services. Since the work being done
   on the well falls under the category of completion operations (nontaxable) at
   the time * is called, does that have any, effect on the pipe recovery
   services performed by * becoming nontaxable? Of course, a tax auditor at
   some point in the future would be looking at *'s invoice which would
   reflect only the pipe recovery services.

Answer: Services performed down hole prior to or during the completion of
a well is nontaxable. Your work order tickets or the invoice should indicate
that this is what is occurring. Otherwise, a statement from the operator
should be obtained and attached to the invoice.

4. After some discussion among the auditors on the panel at the sales tax
   seminar, it was decided that the local tax of the location of the service point
   is to be made rather than the well location. What tax is applicable if a crew
   from our service point in Odessa performs services on a well in New Mexico, or
   if a crew from Liberal, Kansas works on a well in Texas?

Answer: Services performed in other states are not subject to Texas tax.
If a crew from an out-of-state location enters and performs taxable services in
Texas the tax base will be that of the lease location or where the service is
performed.

5. We frequently make runs in a string of tubing with a String Shot, Jet
   Cutter or Chemical Cutter (pipe recovery services) which do not reach the
   desired depth due to an obstruction in the pipe. These tools are then pulled
   from the well without being detonated. Does the tax apply to the charges for
   these runs?

Also, we frequently make runs with these same tools and actually detonate
the string shot or cutter, but do not accomplish a back-off or cut due to some
well condition. Would the tax apply in these cases?

Answer: This situation poses an administrative problem. Because of the
wide differences in billing procedures by service companies one invoice may be
insufficient to really make a determination. The charges may occur during one
billing cycle and then subsequently during another, the recovery may actually
occur. Obviously, unless it is a depleted well or because of economics, the
operator must take or continue some action on the well. Sec. 151.054(a) of the
Tax Code provides that "all gross receipts of a seller are presumed" to be
subject to sales tax until the contrary is established. We will presume that
your services were part of an overall taxable service unless the contrary is
established. You must obtain a written statement from the operator of the
overall intent to accomplish a nontaxable service as I described previously or
that as a result of the ineffectiveness of your attempts the well was plugged
and abandoned or collect the tax.

*, I appreciate your efforts on behalf of the * Company to
comply with an extremely complex and perplexing tax situation. I regret the
delays you have encountered in obtaining this information, but assure you and
your company my full cooperation to resolve any inequities which may develop.

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

Please feel free to contact me if you have additional questions. You may
write me, call toll free 1-800-252-5555 from anywhere in Texas or phone
512/463-4600.

Sincerely,
F. Wayne McDonald
Tax Policy Section
Tax Administration Division