Were purchases of oil-and-gas working interests with production equipment and an entire gas-processing plant subject to Texas sales tax?

Plain-English summary

The buyer planned to acquire some of a seller's Texas oil-and-gas leases and related well equipment, plus the seller's entire interest in a Texas natural-gas processing plant with its tanks, pipes, connecting items, and other tangible property.

The Comptroller treated the working interests in the leases and basic production equipment in use at sale as an interest in real property. None of that sale was subject to sales or use tax.

The separate sale of the entire natural-gas processing plant qualified for the occasional-sale exemption.

What this means for you

The letter distinguished in-use basic production equipment transferred with lease working interests from a stand-alone sale of tangible property. It also relied on acquisition of the seller's entire plant interest for occasional-sale treatment.

Common questions

Were the working interests taxable? No, they were treated as real property.

What about the related production equipment? Basic equipment in use at the time of sale received the same real-property treatment.

Was the gas-processing plant taxable? No, its sale qualified as an occasional sale.

Citations and references

The letter did not cite a specific statute or rule.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9104L1104C01

Original ruling text

April 11, 1991

Dear **:

Your March 8, 1991, letter to Mr. Harold Lee was forwarded to me for
response.

The facts in your letter are restated below with response:

FACTS: Our client (The Company) will purchase some, but not all, of a
seller's oil and gas leases. Associated with each lease are certain items of
tangible personal property, such as well equipment. All of the leases and
related tangible personal property are in Texas. The purchase will be made in
a single transaction. Seller may own only a certain percentage of a given
lease; seller may own 100% of its interest. Seller maintains books of account
for each lease. Exhibit I demonstrates an income statement that seller
maintains for each lease.

The Company will also purchase the seller's entire interest in a natural
gas processing plant. Associated with that natural gas processing plant are
certain items of tangible personal property. The natural gas processing plant
and related tangible personal property are located in Texas and the purchase of
such plant and property will be made in a single transaction. Seller maintains
books of account for the natural gas processing plant. Exhibit II demonstrates
an income statement that seller maintains for the natural gas processing plant.

Additional information obtained in a telephone conversation with Glen
Greaney of your office is that the purchase of the interest in the gas
processing plant includes the tanks, pipes, and other items that connect the
system. No other items, including motor vehicles, are purchased.

RESPONSE: The sale of working interests in oil and gas leases and basic
production equipment in use at the time of the sale represents the sale of an
interest in real property. No part of the sale is subject to sales or use
tax. The sale of the natural gas processing plant is exempt as an occasional
sale.

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

If you have any questions or need additional information, you may call me
toll free at 1-800-252-5555, extension 3-4666, or the regular number
512/463-4666. You may write to Tax Administration Division.

Sincerely,

Jo Ann Dieck
Tax Administration Division