Were nipple-up and nipple-down services on blowout preventers taxable?

Plain-English summary

Tightening or loosening the nuts connecting blowout preventers was not independently listed as a taxable service. Its tax treatment followed the overall oilfield job for which it was performed.

Nipple-up or nipple-down work performed with well completion, or with work on the formation to increase production, was nontaxable. The same service became taxable when performed as part of a taxable oilfield servicing job.

The provider had to obtain the customer's exact job purpose and document it on the invoice, keeping records adequate to support whether tax was or was not collected under Rule 3.324.

Common questions

Was nipple-up work always taxable? No.

When was it nontaxable? When connected with well completion or formation work to increase production.

What documentation mattered? The invoice needed to state the exact purpose of the overall job.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8904L0935A06

Original ruling text

April 25, 1989

Dear *****:

I am responding to your letter requesting sales tax clarification on the oil
field service you provide.

You stated in your letter that the service you provide is:

"called nipple-up on blow-out-preventers. We tighten the nuts that connect the
blow-out-preventers together. We also nipple-down these blow-out-preventers by
loosening the nuts. We nipple-up on drilling rigs involved in completion or
re-completion of gas or oil wells. We do not own these blow-out-preventers nor
do we lease or rent them. Our labor is charged for the tightening up or
loosening of the nuts on the blow-out-preventers."

The labor you have described as a service. Services are divided into taxable
services and non-taxable services. The "nipple-up" or "nipple-down" service
you have described is not defined as a taxable service in and of itself.
However, oilfield services are taxed according to the overall job for which
they are performed. In some instances your services may be taxed and in other
instances, they will not be taxed.

As you pointed out, your service will not be taxable when performed in
conjunction with well completion. Jobs that are performed for the purpose of
increasing production by working on the formation are also non-taxable. In
these instances, the customer for whom you are performing the service should
advise you of the exact purpose of the job; you should then document the
invoice with this exact information.

If you perform "nipple-up" or "nipple-down" services in connection with a
taxable oil field servicing job, then your service should be taxed also. It is
very important that you maintain accurate and adequate records to support your
collecting tax or not collecting tax.

Your responsibilities as the provider of taxable and non-taxable services are
explained in Rule 3.324. I have enclosed this rule for your records.

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

You may write Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Tax Policy Division
Tax Correspondence