Were Texas oilfield vacuum, fluid, pumping, and well-maintenance services always subject to the same sales-tax treatment?

Plain-English summary

An oilfield-services company asked the Comptroller to update an older list of Texas sales-and-use-tax treatments for well services.

The Comptroller's central rule was that the primary purpose of each job controlled. The same physical activity could be subject to limited sales tax in one job and not in another. Documentation of purpose was essential, and a service was not subject to both limited sales-and-use tax and the 2.42% well-servicing tax on the same job. The response itself addressed only limited sales-and-use-tax responsibilities.

The attached list classified vacuum service—pulling fluids from a pit, tank, or well for transport or disposal—as exempt from limited sales tax under Rules 3.356 and 3.324. Fluid hauling more broadly could be exempt or taxable depending on purpose and circumstances.

Other examples show the purpose test. Pumping nitrogen to clean corrosion, sand, or debris from tubulars or casing was taxable, even if production later increased. Pumping nitrogen into the formation to move product more efficiently was not taxed under the letter's sales-tax analysis, even if equipment was incidentally cleaned. Formation-oriented work such as acidizing and completion was listed as exempt from limited sales tax, while equipment work such as changing a pump, rod jobs, and general maintenance was listed as taxable.

What this means for you

An oilfield invoice label or industry buzzword was not enough. The letter required records showing what the crew was primarily hired to accomplish and cautioned that a separate well-servicing tax could still be relevant.

Common questions

Was oilfield vacuum service subject to limited sales tax? The list treated pulling fluids from a pit, tank, or well for transport or disposal as exempt from limited sales tax.

Was all fluid hauling exempt? No. The letter said treatment depended on purpose and circumstances.

Could the same technique receive different treatment? Yes. Pumping fluids to clean equipment was treated differently from pumping into a formation for recovery.

Could both limited sales tax and well-servicing tax apply to the same service on one job? The letter said no.

What records mattered? Documentation showing the job's primary purpose.

Citations and references

• 34 Tex. Admin. Code Rule 3.324 — oil, gas, and related well-service classifications repeatedly applied in the list
• 34 Tex. Admin. Code Rule 3.356 — vacuum service and fluid-transport reference
• 34 Tex. Admin. Code Rule 3.303 — additional fluid-hauling reference
• 34 Tex. Admin. Code Rule 3.357 — repair and remodeling references for equipment-related work
• 34 Tex. Admin. Code Rule 3.292 — tangible-personal-property repair and steam-cleaning references

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9105L1107F02

Original ruling text

May 2, 1991

Dear ***:

This letter is in response to your request for an updated taxability list
regarding oil well services based upon a list you received from this office
several years ago. I appreciate your patience and apologize for the delay.

Well servicing jobs are subject to two types of state taxes: limited sales and
use tax or the 2.42% well servicing tax. A few services may not be subject to
either tax. The purpose of the job determines taxability. Documentation of the
purpose is essential for audit purposes. Documenting jobs should not pose a
hardship for your business, because other industry requirements produce
documentation necessary to determine the application of the taxes.

The fact that the purpose for the job makes a difference in taxability is
clearly evident when reviewing taxable and nontaxable services discussed in
Rule 3.324, copy enclosed. A specific service (such as pulling rods, etc.) may
be the same on Job A and Job B; it is subject to sale tax on Job A, but it is
not subject to sales tax on Job B. Please note that any given service is not
subject to both taxes (limited sales and use tax versus well servicing tax) on
the same job.

This response is intended to address only limited sales and use tax
responsibilities. I have typed in the current tax status and rule reference
when possible on the list which you provided, and have enclosed other rules
relating to these services.

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 Administration
Division, Comptroller of Public Accounts.

Sincerely,

Tax Administration Division

NOTES

The following explanations are offered to clarify the differences in taxability
of certain services. Terminology and activities may be very similar from
service to service, but the primary purpose of the service will determine the
application of sales or use tax. Determining whether to access sales or use tax
should not be based on phrases such as "increased production" or buzz words
such as "jetting" or "acidizing."

• Shooting air or foam through the drill stream, causing cuttings to flow to
  the surface is typically performed during completion or recompletion (enhanced
  recovery) and is not subject to limited sales and use tax. However, this should
  not be confused with pumping foam or other fluids downhole for the primary
  purpose of cleaning/maintaining casing, tubulars, etc.

** Pumping (jetting) fluids downhole has two distinct purposes; to work on the
formation or to effect downhole equipment (tangible personal property). It does
not matter whether the fluid is an acid, chemical, water, mud-water, nitrogen,
etc. the taxability of the service is determined by the primary purpose for the
service. Of course, after each service is performed a secondary benefit may
result. For example, pumping nitrogen downhole to wash out the well is taxable.
The primary purpose is to clean the corrosion, bottom sand, or other debris out
of the tubulars or casing; increased production is a secondary benefit because
these items are cleaned and allow more product to flow out of the well.
Likewise, pumping nitrogen downhole and forcing it into the formation in an
effort to move the product to the surface in a more efficient is not taxed even
though the tubulars, casing, etc. may be cleaned in the process.

*** Drilling mud is taxable at the time of purchase. Mud drilling appears to be
a term used to describe the drilling process using drilling mud as the drilling
fluid to cool the rotating bit, lubricate the drillpipe, and carry cuttings
from the drilling process to the surface. Mud drilling is not subject to sales
and use tax. This should not be confused with mud-water or similar fluids
pumped downhole to wash out the well.

January 23, 1991

Comptroller of Public Accounts
Tax Correspondence
P.O. Box 13528
Austin, Texas 78711

Dear Sir:

The enclosed is a listing of Texas sales and use tax treatments on oil well
services prepared by your office some years ago.

In a telephone communication with Teresa Bostick of your office today, I was
told that you no longer provide such a listing, but might be willing to either
update the one in our possession, or to provide us with the rulings pertaining
to the services mentioned therein.

As this information would be most useful to us in our endeavors to comply with
Texas sales and use taxes, your assistance in this matter would be sincerely
appreciated.

Please send any correspondence to my attention.

Your truly,

Junior Tax Accountant - Excise

ACIDIZING: The treatment of oil bearing limestone or other formations by
chemical reaction with acid in order to increase production. Exempt - Rule
3.324(b)(2)(E).

COMPLETION: The act of brining a well to productive status, usually including
the services of running casing cement, logging, perforating, fracturing,
acidizing, swabbing. Exempt - Rule 3.324(b)(2)(I).

CORING: The ace to taking a core; a column of rock cut from the formation being
penetrated to be tested for evidences of oil or gas, and its characteristics
(porosity, permeability, etc.) determined. Exempt.

DRILLING DEEPER: A workover operation where the well is deepened to another,
production formation. Exempt - Rule 3.324(b)(2)(G).

ENHANCED RECOVERY: A method to increase production by: +mechanically forcing
the oil from the reservoir rock into well-bores. +shooting air or foam through
the drill stream, causing cuttings to flow to the surface. Exempt - Rule
3.3.24. Please see Note on attached page *.

FLUID HAULING: Hauling and dumping fluids, brine water, usually for disposal.
Exempt and Taxable dependent upon purpose and circumstances; See Rules 3.303,
3.356, and 3.324.

GRAVEL PACKING: Creating a cavity around the well-bore where it passes through
reservoir rock and surrounding the perforated liner of the well with a body of
gravel or cause sand, helping to prevent sand excursion and to reduce
resistance offered to the follow of fluid into the well. Exempt - Rule
3.324(b)(2)(R).

INSTALLING A LINER: Running casing back in the hold to the desired depth within
the well. Exempt - Rule 3.324(b)(2)(K) Taxable - Rules 3.357 and 3.324
(d)(5)(B).

JETTING: Pumping nitrogen or other gases into the well-bore to enhance
production or recover; the gases have no beneficial effect on downhole
equipment. Exempt - Rule 3.324 (b)(2)(Q).

KILL SERVICE: Pumping water of KCL down a well at high pressure with the intent
of stopping the flow coming out of the hole. Taxable - Rule 3.324 (h)(3) unless
to facilitate a nontaxable service.

LOGGING: Running a wireline into the wall to record certain electrical
characteristics of the formation traversed by the well-bare for the purpose of
identifying the formation and gathering information about the nature and amount
of fluids at specific depths. Exempt Rule 3.324(b)(2)(F).

MUD DRILLING: Drilling mud pumped down a well hole with he intent of causing
fillings to rise to surface, used to start a well, or increase the bore of a
well. Please see note on attached page ***.

PERFORATING: Using a perforating gun that fires electrically detonated bullets
or shaped charges to pierce their casing and cement wall to provide holes
through which the formation fluids may enter. Exempt - Rule 3.324(b)(2)(B).

PLUG AND ABANDONMENT: To pump cement plugs into a well and discontinue
producing the well or abandon it. Exempt Rule 3.324 (b)(2)(J).

PLUG BACK: A workover operation placing cement in the bottom of a well for the
purpose of excluding bottom water. Exempt - Rule 3.324(b)(2)(H).

PULLING/RESETTING LINER: Pulling /resetting a liner by moving the casing up or
down the hole, or pulling it out of the well for the purpose of: 1) repairing
the casing string (Taxable - Rule 3.357); or 2) admitting production to the
bottom of the well (Exempt - Rule 3.324 (b)(2)(L).

CHANGING PACKER OR ANCHOR: Pulling rods and/or tubing to change a packer or
anchor. Taxable - Rule 3.324(d)(1)(e).

FISHING FOR RODS OR TUBING: Use of fishing tools to recover broken or parted
sucker rods for tubing. Taxable - Rule 3.324(d)(1)(C).

GENERAL MAINTENANCE CHARGES - Work conducted around well site, such as
repairing flow lines and replacing pumps (labor performed on tangible personal
property). Taxable Rule 2.292 and 3.324 (e) (2).

HOT OIL OR WATER TREATMENT OF CASING TUBING, OR BLOW LINES: The treatment of a
producing well with heated oil or water so as to melt accumulated paraffin in
the annulus, tubing or flow lines through which the oil travels from the oil or
water and pump it down the well or through the flow lines. Taxable - rule
3.324(d)(1)(E) and see note on attached page **.

PUMP CHARGE: Replacing bottom hole pump. Taxable 3.324(d)(1)(A).

ROD JOB: To pull, examine, and replace as needed rods. Taxable 3.324(d)(1)(B).

PUTTING ON ARTIFICIAL LIFT: A method used to lift the oil to the surface,
including rod pumping, gas lifting, hydraulic pumping, and centrifugal pumping.

RE-ENTRY: Redrilling in an abandoned well to clean out bore hole with the
intent to restore well to production status; in all probability, re-entry will
be to a deeper formation. Exempt - Rule 3.342(b)(2)(G)

RUNNING A BOTTOM HOLE BOMB: Recording pressure in a well at a point opposite
the producing formation by a precision pressure gauge in a steal housing.
Exempt - Rule 3.324 (b)(2)(O)

SQUEEZE CEMENT: Using high pressure pumps to force cement slurry to a specified
point in the well to cause seals at the points of squeeze in order to 1) repair
casing leaks or damage; or 2) isolate a producing formation. 1) Taxable - Rule
3.324(d) (5) 2) Exempt - Rule 3.324(b)(2)(C)

VACUUM SERVICE - Pulling fluids out of a pit, tank, or well for transport or
disposal. Exempt -Rule 3.356 and rule 3.324

ROD AND TUBING JOB: Pulling sucker rods and/or tubing out and running it back
in the well. Taxable - Rule 3.324 (D)(1)(B)

STEAM CLEANING - Producing steam by artificial means to reduce/remove paraffin
deposits, thereby increasing or improving production. Taxable - Rule 3.292.

SWABBING: For the purpose of removing sand/liquids: cleaning inside the
well-bore (Sand control or cleaning the well bore). Taxable - Rule 3.292

TUBING LEAK: Pulling tubing to test for leaks. Testing - nontaxable