Are well services taxable in Texas when performed to complete a well into a new, deeper formation rather than to restore existing production?

Plain-English summary

An oil-and-gas operator provided additional facts about services a contractor had performed on its well, and the Comptroller revised an earlier answer in light of them. The key new fact: the services were performed to facilitate completion of the well into a deeper formation — not to restore existing production.

• The Comptroller's first response (from Mr. McDonald) had been correct on the information then available.
• But because the services were performed solely to facilitate completion of the well-bore into the deeper zone — not to restore production in the existing zone (the Olmos) — these services are not taxable in this instance.

On the mechanics: the contractor was correct to add tax to its invoices, since it didn't know the work was for well completion. To fix it, the operator may issue the contractor a properly completed exemption certificate in lieu of the tax, stating that the exemption is claimed because the services were performed solely to facilitate completion of the well into the new zone, and attach a copy of this letter to the certificate to prevent confusion. The Comptroller enclosed the current versions of Rule 3.324 (Oil, Gas and Related Well Service) and Rule 3.287 (Exemption Certificates).

What this means for you

Oil-and-gas operators and well-service contractors

The taxability of well services can hinge on why the work was done. Services to complete a well into a new, deeper zone are treated as nontaxable here, while work to restore existing production would be taxable. Document the purpose of the job — it drives the tax result.

Fixing tax charged in error

If a contractor taxed the work without knowing it was for well completion, the operator can cure it by giving a properly completed exemption certificate that states the completion-into-a-new-zone reason — and attaching this ruling helps avoid confusion. See Rule 3.287 for exemption-certificate requirements and Rule 3.324 for well-service treatment.

Common questions

Q: Are well-completion services taxable in Texas?
A: Not when they are performed solely to facilitate completing the well-bore into a new, deeper formation. Services to restore existing production would be taxable.

Q: The contractor already charged me tax — what now?
A: You may issue the contractor a properly completed exemption certificate in lieu of the tax, stating the services were for completing the well into the new zone, and attach a copy of the ruling.

Q: What was the deciding fact?
A: That the services were performed solely to complete the well into a deeper zone, not to restore production in the existing (Olmos) zone — a fact not evident in the contractor's earlier letter.

Q: Can I rely on this 1988 letter today?
A: Treat it as guidance only. It is based on the facts presented and can change with different facts; on the STAR system it binds the Comptroller only as to the taxpayer it was issued to and may no longer reflect current policy.

Citations and references

• 34 Tex. Admin. Code Rule 3.324 — oil, gas, and related well service; enclosed as the governing rule.
• 34 Tex. Admin. Code Rule 3.287 — exemption certificates; enclosed for the certificate the operator may issue to claim the exemption.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8806L0890B10

Original ruling text

June 17, 1988

Dear ***:

Your letter detailing additional information concerning the services that
were provided to your company by *** has been forwarded to me
for response.

The first response provided by Mr. McDonald was correct, based on the
information available. However, you stated these services were performed
to facilitate completion of the well into the *** formation. This
fact was not evident in *****'s letter dated March 31, 1988, to Mr.
McDonald. These services are not taxable in this instance because they
were performed solely to facilitate completion of the well-bore into the
deeper zone and not to restore the production with the Olmos.

*** was correct in adding the tax to the invoices, without the
knowledge that these services were for well completion. However, you may
issue ***** a properly completed exemption certificate in lieu of
the tax. You must state the reason you are claiming the exemption is that
these services were performed solely to facilitate the completion of the
well into the new zone. You should attach a copy of this letter to the
exemption certificate, in order to prevent confusion.

The most recent version of Rules 3.324; Oil, Gas and Related Well Service
and 3.287, Exemption Certificates are enclosed for your review.

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

You may write at Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Tax Policy Division
Tax Correspondence