How did Texas tax an oilfield company's hauling of water, brine, plugging mud, and KCL, its frac-tank rentals, testing, and waste disposal?

Plain-English summary

The letter separated third-party hauling from transportation billed by the seller of a product. Hauling property the company did not sell was generally nontaxable unless it was taxable garbage or waste removal or taxable well servicing. A separately stated charge to dispose of waste from oil or gas exploration was not taxable.

When the company sold the product and billed delivery, the transport charge followed the product's taxability. Fresh water and naturally occurring salt or brine water were nontaxable. Processed brine, plugging mud, and potassium chloride (KCL) were taxable, and selling and hauling KCL mixed with water made the total charge taxable. Splitting a taxable product and its delivery onto separate invoices did not change that result and could be treated as evasion.

Selling, leasing, or renting frac tanks was taxable, including transport before and after the transaction. Separately stated testing of tubing, casing, or pipelines was not taxable; combining testing with taxable repair made the total taxable unless the testing charge was separately stated. Other well services depended on their purpose under Rule 3.324.

Common questions

Was third-party hauling taxable? Generally no, subject to the waste-removal and well-service exceptions.

Was delivery of fresh water taxable? No. Delivery of taxable KCL or plugging mud was taxable when billed by the seller.

Were frac-tank rentals taxable? Yes, including related transportation.

Was separately stated testing taxable? No.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9003L0994C01

Original ruling text

March 22, 1990

Dear **:

I am responding to your February letter which was sent to Mary Hawkins. She
forwarded the letter to this section for response. I apologize to you for the
delayed response.

You stated that your company is an oilfield service company. Your business
activities include hauling oilfield fluids, high pressure pump truck, frac tank
rentals, KCL sales, and plugging mud sales. Based upon this information you are
providing services and selling tangible personal property. You included a list
of the "services" you provide. Some of these are actually sales of tangible
personal property; some are taxable services; some are nontaxable services.

Hauling

Items 1 through 5, 7, 9 and 10, (from your list) refer to hauling fresh water,
hauling salt water, hauling plugging mud, and hauling KCL for various reasons.
Item 17 refers to hauling someone else's chemicals to a location. With the
exception of item 17 and item 11 you do not indicate whether you are selling
and hauling or just hauling the various products.

The charge to haul and standby time to deliver an item that you did not sell is
considered third party transportation. Third party transportation billed by the
"hauler" to the end consumer is not taxable, unless the hauling is classified
as garbage and waste removal or as a taxable service under Rule 3.324 regarding
well servicing. The total charge for garbage and waste removal is subject to
tax under the provisions of Rule 3.356, Real Property Services, enclosed.
However, a separately stated charge for the disposal of waste materials
associated with oil or gas exploration is not taxable.

If you are the seller of tangible personal property, are not performing a
taxable service, and are billing the purchaser for the hauling, then the
taxability of the transportation charge depends upon the taxability of the item
being sold. For example, the transportation charges connected with the sale of
only fresh water are not taxable because the sales price of fresh water is not
taxable. The transportation charges connected with the sale of plugging mud and
KCL are taxable, because these are taxable items. Transportation charges are
taxable when billed by the seller to the purchaser of taxable items, even
though the actual transportation is provided by a third party.

Naturally occurring salt or brine water is not taxable; therefore, the charge
to transport these items is not taxable. The charge for processed brine and its
transportation is taxable. The charge for KCL is taxable; if you are selling
and hauling KCL and water to be mixed together, your total charge is taxable.
Again, the separately stated charge for disposal of waste materials (including
dirty water) associated with oil or gas exploration is not taxable.

Selling, hauling, and pumping these various products are taxable or not taxable
dependent upon the actual work performed. For example, pumping brine down
tubing to test for tubing leaks is not taxable; pumping brine down the tubing
or casing or both to kill a well may or may not be taxable; pumping KCL down
the tubing and circulating it back out the casing to clean out sand in the
bottom of the well is taxable. Again, please refer to Rule 3.324.

Separately stating the sale of a taxable item (KCL) on one invoice from the
transportation or hauling of that item does not change the fact that you sold
and delivered a taxable item. Listing this type of transaction on separate
invoices may be deemed a direct evasion of the tax that is due, which may
result in an assessment of fraud penalty against your company.

The total charge for selling, leasing, or renting frac tanks is taxable.
Therefore, items 12 through 14 are taxable. Transportation charges before and
after the sale/rental are taxable.

The separately stated charge to test tubing, casing, or pipelines is not
taxable. Testing performed on tangible personal property or improvements to
real property is not taxable. However, if you test and repair tangible personal
property or test and repair nonresidential improvements to real property, the
total charge is taxable unless you separately state the charge for the testing.

Other specific items under #15 such as chemical washout of vessels and pump out
of tubing plugs are taxable as the repair or cleaning, etc. of tangible
personal property. Charges for killing a well and other such oil field services
are taxed according to the purpose of the job. Please refer to Rule 3.324.

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

You may also write to Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Tax Policy Division
Tax Correspondence

cc: Mary Hawkins