Which charges connected with plugging and abandoning an oil or gas well were taxable?

Plain-English summary

Services that restored an oil or gas lease to its original condition were not taxable. The letter included scraping mud and oil from the location and burying it, removing fencing, and leveling the site.

Brushing and cleaning pipe threads and washing and cleaning a workover tank were taxable. Those charges had to be separately stated from the nontaxable work, with sales tax collected on the taxable portion.

The well-plugging company provided a nontaxable service and therefore owed sales or use tax on the goods and services it bought to perform that work. It could not give its suppliers a resale certificate for those inputs.

Common questions

Was restoring the lease site to its original condition taxable? No.

Were pipe-thread and workover-tank cleaning taxable? Yes.

Could the well-plugging provider buy its inputs for resale? No. The letter treated it as the consumer of those inputs.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8906L0944B08

Original ruling text

June 5, 1989

Dear *****:

Thank you for your letter of May 30, 1989 concerning the taxability of various
charges related to plugging and abandoning a well.

Reclamation services that are done to restore oil and gas lease properties to
their original condition are not taxable. This would include "putting the land
back in its original form, scraping mud and oil off location and burying it,
taking fence down, and leveling location."

The charges for brushing and cleaning pipe threads and washing and cleaning a
workover tank are taxable. The company that plugs the well is providing a
nontaxable service for its customer; it will owe sales or use tax on all items
(including services) that it purchases to provide the service. In other words,
you cannot accept a resale certificate from the provider of a nontaxable
service.

You should separately state taxable and nontaxable charges, and collect the
appropriate sales tax from your customer. Rule 3.324 Oil, Gas and Related Well
Service is enclosed for your review.

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

Please feel free to contact me if you have any additional questions. You may
write me, call toll-free 1-800-531-5441 from anywhere in the United States or
phone 512/463-4685.

Sincerely,

Julie Pesl
Tax Correspondence