Is offshore corrosion-monitoring equipment exempt as drilling equipment in Texas, and when is delivery to a Texas onshore location taxable?

Plain-English summary

A company that makes stray-current corrosion-monitoring equipment for offshore platforms asked whether its products qualify for Texas's offshore oil-and-gas exemption. The exemption covers drilling equipment built for exclusive use outside Texas and tangible personal property used directly in the exploration for or production of oil, gas, sulphur, or other minerals offshore and outside the State's territorial limits.

The products at issue:

• Weld-Alarm and Pola-trak — monitoring systems that detect stray current early so customers can act before corrosion damages a platform's welded zones.
• I-Clip — coated metal clips and thermoplastic rollers that help with storage, keep metal from touching metal, and improve access for painting/inspection (and are also adaptable for onshore, multi-industrial use).

The Comptroller held all three are taxable. They do not fit the definition of drilling equipment in Rule 3.332, and by their purpose and use they do not qualify as items used exclusively and directly in offshore exploration or production of oil, gas, sulphur, or minerals.

The Comptroller then answered specific delivery scenarios:

1. Order destined offshore but delivered onshore? Charge tax. The only ways to avoid it are a valid resale certificate or a Direct Pay exemption certificate from the customer.
2. Delivered to a Texas location but installed on a Gulf of Mexico structure? Charge tax — same as #1.
3. Day-rate equipment operated from a barge or vessel in the Gulf? If you deliver it onshore or the customer takes possession onshore, you charge tax.
4. Build equipment to lease on a day-rate basis? You don't pay tax on the components — issue a resale certificate when buying them — but you charge tax on the entire lease charge to your customers.

What this means for you

Offshore-services equipment vendors

The offshore exemption is narrow. Corrosion-monitoring and storage-support gear — even if it protects an offshore platform — is not "drilling equipment" and is not used "directly" in exploration or production, so it's taxable. Don't assume anything headed for the Gulf is exempt.

Delivery point drives the tax

If the customer takes possession onshore in Texas, you charge tax regardless of the ultimate offshore destination. The exceptions are documentary: a valid resale certificate or Direct Pay permit.

Leasing

When you build equipment to lease, buy the components tax-free for resale, then collect tax on the full lease charge.

Common questions

Q: Is offshore corrosion-monitoring equipment exempt in Texas?
A: No. The Comptroller held the Weld-Alarm, Pola-trak, and I-Clip are taxable — they aren't drilling equipment under Rule 3.332 and aren't used exclusively and directly in offshore mineral exploration or production.

Q: If it ships to the Gulf but I deliver it onshore, do I charge tax?
A: Yes. Delivery or possession onshore in Texas means you charge tax, unless the customer gives a valid resale or Direct Pay exemption certificate.

Q: How is a day-rate lease taxed?
A: Buy the components tax-free with a resale certificate, and charge tax on the entire lease charge to your customer.

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 3.332 — the definition of drilling equipment and the offshore oil-and-gas exemption the Comptroller found the products did not meet.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8807L0916C01

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller July 8, 1988

Dear **:

Thank you for your recent letter regarding the taxability of your stray
current monitoring equipment.

Drilling equipment built for exclusive use outside Texas and tangible
personal property which is to be used directly in the exploration for
or production of oil, gas sulphur or other minerals offshore and out-
side the territorial limits of the State are exempt.

Both the Weld-Alarm and the Pola-trak are monitoring systems to identify
stray current at an early stage so that customers can take corrective ac-
tion before the stray current causes serious corrosion damage to the
welded and heat effected zone of the platform. The I-Clip is comprised
of coated metal clips and supportive thermoplastic rollers. The corro-
sion related problems solved appear to be in the form of storage innova-
tion, avoiding metal touching metal, better access for painting and in-
spection. You also mention that this system will also be adaptable for
onshore use in multi-industrial scenarios.

Based on the above descriptions, your systems do not fall within the
definition of drilling equipment as stated in Rule 3.332. Furthermore, in
examining the systems' purpose and use, they also fail to qualify as
items
used exclusively and directly in the exploration for or production of
oil,
gas, sulphur or other minerals offshore, thereby making all three items
taxable equipment.

Below are the answers to your questions:

1. If we take an order for equipment that is destined for use
   offshore, but is delivered to an onshore location, do we charge
   sales tax? If so, which rule applies, if not, what documentation
   do we need to substantiate exemption?

Yes, you should charge tax. The only instances where you would not
charge tax are where your customer will resell your product issuing
you a valid resale certificate or your customer issues you a Direct
Pay exemption certificate.

2. If we deliver said equipment to a Texas location, but the goods are
   to be installed on a structure in the Gulf of Mexico, do we charge
   sales tax? If so, which rule applies, if not, what documentation
   do we need to substantiate exemption?

Yes, same as number 1.

3. If we provide equipment on a day rate charge, and that equipment is
   operated from a barge or vessel in the Gulf of Mexico, do we charge
   sales tax?

If you deliver equipment onshore or customer takes possession
onshore, you would charge sales tax.

4. If we build equipment for lease on a day rate basis, do we have to
   pay sales tax on the components purchased to build the equipment?

No, you may issue a resale certificate when purchasing your
components since you will resell/rent the equipment. But you
should charge tax on the entire lease charge to your customers.

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 our
toll-free
number 1-800-531-5441. The regular number is 512/463-4600. You may
write me
at Tax Correspondence, Comptroller of Public Accounts.

Sincerely,
Eddie C. Washington
Tax Correspondence