Does Texas sales tax apply to frac tank rentals and the set-up, transportation, and related charges billed with them?

Plain-English summary

A company that rents out frac tanks — large (about 500-barrel) enclosed steel tanks trucked to oil and gas well sites to hold fluids — asked the Comptroller how to tax the rentals and the many charges billed alongside them.

The Comptroller held that the frac tank rental itself is taxable, and so are the set-up charges — mobilizing, transporting to the well site, testing for readiness, the three-day minimum, and disconnecting the tanks. Those are services connected with the rental and are taxed even though the set-up charge can run several times the daily rental.

The key point is about labels. A separate charge for an "operator" is nontaxable only when there really is an operator running the equipment (that makes the deal a nontaxable service rather than a rental). A frac tank needs no operator, so calling part of the charge an operator fee does not reduce the tax. Likewise, a charge labeled "water" that is really cleaning out the tank is taxable no matter how it is stated.

Genuinely nontaxable items — fresh water, hauling of fresh water, and disposal of fluids — remain nontaxable only if they are separately stated on the invoice or contract and the labels are accurate. A properly separated invoice is adequate audit back-up. Finally, both the buyer and the seller are liable for the tax; the seller escapes liability only by accepting a properly completed resale or exemption certificate in good faith at the time of sale.

What this means for you

Oilfield equipment rental companies

Treat the frac tank rental and all the set-up/mobilization work as one taxable charge. Do not assume a "turnkey" or lump-sum bid lets you carve the taxable rental down by relabeling pieces of it. Buying tanks tax-free for rental is fine (a resale), but that does not change the taxability of what you charge your customer.

Separating taxable from nontaxable charges

You may separately state truly nontaxable items — fresh water (not used to perform a taxable service), hauling that water, and disposal of fluids — and avoid tax on them, but only if the labels reflect what the charge actually is. If a "water" or "hauling" line is really cleaning the tank, it is taxable even when separated.

Both parties are on the hook

If tax is not collected, the state can pursue either the seller or the buyer. A seller is protected only by a valid resale or exemption certificate taken in good faith at the time of sale.

Common questions

Q: Is a frac tank rental taxable in Texas?
A: Yes. Renting a frac tank is a taxable rental of tangible personal property.

Q: Are the set-up and mobilization charges taxable?
A: Yes. Set-up charges — transporting, positioning, connecting, testing, the minimum-day charge, and disconnecting — are services connected with the rental and are taxable, even when they exceed the daily rental.

Q: Can I lower the tax by calling part of the charge an "operator" fee?
A: No. The operator exemption applies only when an operator actually runs the equipment. A frac tank needs no operator, so the label does not reduce the tax.

Q: Which charges can I keep nontaxable?
A: Fresh water (not used for a taxable service), hauling of that water, and disposal of fluids — but only if they are separately stated and accurately labeled. A charge that is really for cleaning the tank is taxable however it is labeled.

Q: Who owes the tax if it isn't collected?
A: Both the buyer and the seller are liable. The seller avoids liability only by accepting a properly completed resale or exemption certificate in good faith at the time of sale.

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

Prior letter distinguished: A February 7, 1977 letter (Eddie C. Washington, Sales Tax Division) stating that a separately charged operator is not taxable — correct only where an operator actually exists, which is not the case for a frac tank. The letter cites no specific Tax Code section or rule by number.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8809L1028A01

Original ruling text

September 21, 1988

Dear ***:

Thank you for writing regarding the proper taxing of frac tank rentals and
associated charges. I apologize for the long delay in replying to your
letter.

The February 7, 1977, letter to the CPA in Louisiana from Eddie Washington,
that states that a separate charge for an operator is not taxable,
although correct, does not apply in the case of frac tank rentals. The
separate charge for an operator is not taxable when there is, in fact,
"an operator." However, a frac tank does not require an operator.
Labeling some part of the rental charge for an "operator" does not reduce
the amount of tax due.

Your letter presented the following situation and questions to which I am
responding.

Situation:

A frac tank is a large (approximately 500 barrel capacity) steel, fully
enclosed shell. Valves with gauges and hose nozzle connections are a
part of the tank. Depending on the customer's needs, as few as one, or
as many as fifty or sixty frac tanks will be mobilized (i.e., trucked,
positioned, connected with hoses, etc.) to the customer's well site.
Once transported, the tanks may be left empty to collect fluids (other
than the petroleum products) pumped from the well for further disposal.

A frac tank set up charge is to cover all direct/indirect, variable/fixed
costs associated with preparation of the tank for delivery,
transportation to the well site, testing for readiness, three-day
minimum rental charge, disconnecting the hoses from the tanks and
well site, etc.

The set up charge is roughly six (6) times greater per day than the
rental charge.

Questions:

(1) Are the set up charges associated with frac tank rentals subject
to sales taxes?

Answer: The set up charges are services connected with the sale and
are taxable.

(2) Would your answer to (1) change if sales tax was paid on the
frac tanks at the time of purchase? (*** currently buys
frac tanks tax-free as we only use them for rental.)

Answer: The answer would remain the same. No sales tax is due on the
purchase of the frac tanks unless some use was to be made other than
holding them for rental, resale, storage, or display. If sales tax
was due and paid, the charges for rental and set up are still taxable.

(3) Various non-taxable services/charges are connected with the frac
tank rental, such as, charge for fresh water, charge for hauling of
fresh water, charge for disposal of fluids. In a turnkey bid
situation, the invoice to our customer lists only a lump sum amount.
However, our bid documents break out the charges into setting of frac
tanks, frac tank rental, KCL, fresh water, hauling of fresh water,
disposal, transport. May we correctly assess sales tax only on the
taxable amount with our bid documents being adequate back-up in case
of an audit?

Answer: As in the case of a charge for an "operator" when there
actually isn't one, the label given a service, doesn't determine its
taxability. If (for example) the charge for "water" and "hauling of
fresh water" is actually a charge for cleaning or washing out of the
frac tank, it is taxable even if separately stated. If the water is
not to be used to perform a taxable service, then the charge must be
separately stated to avoid taxing it. The charge for disposal of
fluids must be separately identified on an invoice or contract to the
customer in order to be nontaxable.

(4) on a single invoice would the following style be sufficient for
audit purposes:

Setting of frac tank 3 day min. - $***
Frac tank rental - 18 days - $**
140 bbl. water truck - $*
2% KCL - $*
Taxable Sub-total amount - $****

140 bbl. water Truck - $***
Haul fresh water - $**
Fresh water - $*
Salt water disposal - $*
Total Invoice - $****

Answer: Yes, this style of invoice would adequately separate taxable
from non-taxable charges for audit purposes. I am assuming that the
labels for charges are accurate.

(5) If the answer to (3) & (4) is no, could the State please suggest
an invoicing style to eliminate the taxation of the nontaxable
portions listed above.

Answer: The answer to (4) is yes.

(6) In case of audit, can the State of Texas look to the vendor
and/or the purchaser for satisfaction of any tax liability on these
charges?

Answer: Yes, both the buyer and the seller are liable for the sales
and use tax. The seller avoids liability only when a properly
completed resale/exemption certificate is accepted in good faith at
the time of the sale.

As indicated in the first part of this letter, Mr. Washington's
letter, does not contain wrong information. Mr. Washington says in
his letter that sales tax is due on the rental charge for the frac
tank without an operator or supervisor. He then goes on the say when
a rental occurs and explains why rental with an operator is not
taxable as a service. These facts do not fit the situationin a frac
tank rental. Neither the seller nor the buyer can use the letter as
support for having neither collected nor paid tax on any frac tank
"rentals" where an operator was not actually present and operating
the frac tank. An assessment for uncollected or unpaid taxes would
include penalties and interest. Our audit section would be very
interested in knowing which of your competitors are not collecting
tax on the proper amount. Their customers may find that they didn't
save money by not paying the tax. A ten percent penalty plus ten
percent interest per year can be a costly saving.

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, you may call our
toll free number 1- 800- 252-5555 our regular number is (512)
463-4600, my extension is 3-4675. You may write me at Tax
Correspondence, Comptroller of Public Accounts.

Sincerely yours,

Tom Soto
Tax Correspondence

February 7, 1977

Dear ***:

In reply to your letter dated January 12, 1977, this office is of the
opinion that Sales Tax is due on the rental of Frac tanks if rented
without an operator or supervisor. The tax would be charged on the
rentals exceeding four days and on the period of time that the tanks
are used in gathering condensation or product.

A rental occurs when the title of a piece of equipment is transferred
and the rentee (customer) exercises control over the equipment.
Rental of equipment with an operator is not taxable since the
customer does not exercise control; thus, the transaction is a
service. The billing is a lump sum charge (operator and equipment
charges); however, tax must be paid by the owner (renter) on the
full purchase price of the equipment.

The equipment furnished with an operator for which the customer is
charged separately for the equipment and the operator, the charge for
the equipment is taxable.

If this office can be of further assistance, please advise.

Correspondence concerning this subject should be directed to Sales
Tax Division, File Reference Finish.

Very truly yours,

Eddie C. Washington
Sales Tax Division