Ezel / Tax Rulings / TX
TX 8706L0819C07 Sales and/or Use Tax (State,Local,MTA) 1987-06-19

Was drilling mud lost or consumed during a drilling operation taxable when part of the price was paid as a rental charge?

Short answer: Yes. The mud was a consumable supply sold with deferred compensation, and sales tax was properly billed on the amount consumed rather than returned.

Apply this to your situation

This page answers the general question as of 1987. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1987
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This 1987 Texas Comptroller letter addresses an oil-industry arrangement in which part of drilling-mud consideration was paid on delivery as a rental payment and the balance after drilling based on mud not returned. Different mud contracts may be classified differently. Verify current oilfield and consumable-supply rules. STAR documents may no longer represent current policy even when not marked superseded. Identities are redacted. This summary is informational only and is not legal or tax advice.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

The Comptroller classified drilling mud as a consumable supply rather than machinery or equipment. The industry arrangement purchased the amount needed to “make hole,” with part of the price paid at delivery as a rental payment and the rest paid after drilling.

The final balance represented the difference between mud delivered and mud returned. The Comptroller treated the arrangement as a sale with deferred compensation and said sales tax was properly billed on the consumed mud.

What this means for you

The “rental” label on the initial payment did not determine the transaction. The full arrangement showed a sale whose final price depended on the quantity consumed.

Common questions

Was drilling mud machinery or equipment? No. It was a consumable supply.

Why was part of the payment called rent? It was the delivery-stage portion of the consideration under the described arrangement.

What did the final balance represent? The difference between mud delivered and mud returned.

Was tax properly charged? Yes, on the mud consumed.

Citations and references

  • No statute or rule number is cited in the ruling text.

Source

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller June 19, 1987

Dear ***:

Thank you for your letter concerning the taxability of drilling mud lost
or expended during a drilling operation.

Drilling mud is a consumable supply, not machinery or equipment. The
norm in the oil industry is to purchase only the amount of drilling mud
necessary to "make hole". The transaction is a sale with deferred
compensation. A part of the consideration is paid at the time of
delivery (rental payment) and the balance is paid when the drilling is
completed. The balance represents the difference between the amount
delivered and the amount returned. Sales tax was properly billed on
the mud consumed.

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,
F. Wayne McDonald
Tax Policy Section
Tax Administration Division

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