Were two-way-radio equipment, installation, and delivery charges taxable when the system served offshore rigs in federal waters?

Plain-English summary

A company rented and installed two-way-radio systems for offshore rigs. The network also required radio equipment installed onshore.

The onshore equipment and related installation charges were taxable. Although Rule 3.332 exempted property used exclusively in offshore mineral exploration or production outside Texas territory, the letter said the radios did not themselves perform exploration or production.

Rental and installation of equipment on a rig in federal waters were exempt when the equipment was shipped directly outside Texas or into federal waters. If the customer accepted delivery in Texas, the sale or rental was taxable even when the customer later took the equipment offshore.

The letter separately stated that transportation or delivery charges related to an equipment sale, rental, or lease were taxable in any case.

Common questions

Was onshore radio equipment exempt merely because it served offshore rigs? No.

Was equipment delivered and installed on a federal-waters rig exempt? Yes, under the direct-delivery facts stated.

What if the customer accepted delivery in Texas? The equipment sale or rental was taxable.

How did the letter treat related delivery charges? As taxable.

Citations and references

• 34 Tex. Admin. Code Rule 3.332

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8909L0959B06

Original ruling text

September 7, 1989

Dear ***:

Thank you for your inquiry regarding the taxability of the installation of
two-way radio communication equipment on rigs.

You state that you install and rent two-way radio communication equipment. A
significant part of the equipment is installed on offshore rigs in federal
waters. The completion of the communications network requires that a radio and
other equipment be installed on-shore to serve the equipment on the offshore
rig. Some of your customers (primarily oil companies) contend that the charges
for the equipment and the installation on-shore aren't taxable because the
equipment is used to serve the offshore rigs.

The charges for the rental, lease, or sale of the on-shore equipment and any
related installation charges are taxable. Although the sale, lease, or rental
of tangible personal property is exempt if the property is used exclusively in
the exploration for or production of oil, gas, sulphur, or other minerals
offshore and outside the territorial limits of Texas, the two-way radio
equipment isn't used in either exploration or production. I have enclosed
Comptroller's Rule 3.332 (Drilling Equipment) which addresses the exemption for
tangible personal property used offshore.

Your charges for the rental and installation of the equipment is exempt if you
install the equipment on a rig located in federal waters. Specifically, sales
or rentals of tangible personal property such as two-way radios that are
shipped outside Texas the items directly to the purchaser in another state or
into federal waters.

On the other hand, sales or rentals of the equipment are taxable if the
customer accepts delivery in Texas even if the customer takes the equipment
into federal waters.

In any case, you should note that, in addition to installation charges, any
transportation or delivery charges related to the sale, rental, or lease of
your equipment is taxable.

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

If you have any questions, please contact Tax Correspondence. You may call
toll free 1-800-252-5555, or our regular number is 512/463-4600. My extension
is 3-4662.

Sincerely,

Bob Jeffcoat
Tax Correspondence