Did exclusion from Texas's 2.42% miscellaneous occupation tax make services for converting a production well to a saltwater-disposal well exempt from sales tax?

Plain-English summary

Services converting a production well into a saltwater- or waste-disposal injection well were excluded from the miscellaneous occupation tax described as the “2.42 tax.” That exclusion did not make the work automatically exempt from sales tax or place it among Rule 3.324's nontaxable well services.

Different conversion activities could have different sales-tax results. Replacing a production wellhead with equipment allowing saltwater disposal was a taxable sale and installation of tangible personal property.

Repair or remodeling of tangible personal property, and repair or remodeling of improvements to realty, was also taxable. The letter did not classify every possible conversion activity and invited questions about specific jobs.

Common questions

Did the 2.42-tax exclusion settle the sales-tax question? No.

Was sale and installation of a replacement disposal wellhead taxable? Yes.

Were repair and remodeling activities taxable? Yes for the tangible-personal-property and realty work described.

Did the letter say every conversion charge was taxable? No; it said some activities could be taxable and others not.

Citations and references

• Comptroller Rule 3.324.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9005L1020B10

Original ruling text

May 11, 1990

Dear ***:

I am responding to your letter on behalf of *** regarding
taxable services when converting a well to a salt water disposal
well.

You stated that you have several applications before the Railroad
Commission to convert wells to injection wells for salt water disposal.
You have reviewed Rule 3.324, "Oil, Gas, and Related Well
Service," and cannot clearly define any tax relief in the services
required to convert a well to salt water disposal.

The services required to convert a well from a production well
(producing crude, etc.) to a disposal well for salt water or other
wastes as allowed by the Texas Water Commission are specifically
excluded from tax under the Miscellaneous Occupation Tax (2.42
tax). Because of this exclusion these services do not fall within
the non-taxable services of Rule 3.324 and are not necessarily
non-taxable for the application of sales tax. For example, these
services are not taxed under "2.42 tax" as the services performed
during a workover; therefore, the services to convert a well to a
salt water disposal well may be subject to sales tax while those
performed during a workover are not.

Many types of activities occur during this conversion. Some may
be subject to sales tax and some may not.

It is possible that the only change necessary to complete the
conversion is to remove the wellhead used during the production of
the crude and replace it with one that will allow salt water
disposal. The purchase of the wellhead equipment and its
installation is the sale and installation of tangible personal
property and is a taxable transaction. It is excluded from tax
under "2.42 tax", and because it is a taxable transaction for
sales tax, it is also taxable in this circumstance.

Other activities may involve repair of tangible personal property
or remodeling of tangible personal property. Others may include
repair or remodeling of improvements to realty. The charges for
these services are also subject to sales tax.

I am enclosing rules relating to these various topics. After
reviewing this information, you may call or write with questions
regarding specific jobs or activities.

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 write
to Tax Correspondence, Comptroller of Public Accounts.

Sincerely,

Tax Policy Division