Ezel / Tax Rulings / TX
TX 9105L1110C10 Sales and/or Use Tax (State,Local,MTA) 1991-05-22

Was installing or changing an artificial-lift system on a Texas oil well taxable?

Short answer: The first installation was nontaxable, but changing or converting an existing well from one artificial-lift method to another was taxable remodeling.

Apply this to your situation

This page answers the general question as of 1991. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1991
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

The Comptroller clarified its earlier guidance on artificial-lift methods used to bring oil to the surface, including rod pumping, gas lifting, hydraulic pumping, and centrifugal pumping.

Under Rule 3.324(b)(2)(N), the initial installation of an artificial-lift system was nontaxable. The letter said that first installation could occur when a free-flowing well's production declined.

Once a well already had an artificial lift, changing from one method to another was taxable remodeling. The letter used conversion from a bottom-hole pump to gas lift as its example.

What this means for you

The line was between first installation and later conversion. Installing the well's initial lift was exempt; changing an existing lift method was taxable.

Common questions

What counts as artificial lift? The letter listed rod, gas, hydraulic, and centrifugal pumping methods.

Was the first installation taxable? No.

Could initial installation happen after a well began producing? Yes, when a free-flowing well's production decreased.

Was switching lift methods taxable? Yes, as remodeling.

Citations and references

  • 34 Tex. Admin. Code Rule 3.324(b)(2)(N) — initial installation of artificial lift

Source

Original ruling text

May 22, 1991

Dear ***:

I am writing to clarify a portion of the May 2, 1991, response regarding
oil well services, specifically artificial lifts.

"Putting on artificial lift" is a phrase denoting the various methods
used to lift oil to the surface. These methods include activities such as rod
pumping, gas lifting, hydraulic pumping, centrifugal pumping, etc. The rule
regarding oil and gas well servicing specifically states the initial
installation of an artificial lift is nontaxable. Please see Rule
3.324(b)(2)(N). The initial installation of an artificial lift may occur when a
free flowing well decreases production. Once an artificial lift system has
been installed on a specific well, it may be necessary to change from one
artificial lift method to another. This changeover/conversion is taxed as
remodeling. For example, converting a well from a bottom hole pump to a gas
lift operation is taxed.

Please change the fifth page of the May 2, 1991, list to read as follows:

Putting on artificial lift - a method used to lift the oil to the surface,
including rod pumping, gas lifting, hydraulic pumping, and centrifugal pumping.
Exempt: New Installation. Taxable: Changeover, conversion of an existing well.

I apologize for this oversight.

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

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