Which stuck-pipe recovery, gamma-ray, cement-bond, and casing-inspection services were subject to sales tax or Texas's 2.42% well-service tax?

Plain-English summary

The provider performed stuck-pipe recovery, casing inspection, and related oil-field services. A gamma-ray/cement-bond log run before perforating was not subject to sales tax. The letter said the 2.42% Chapter 121 tax could apply to a gamma-ray log used to locate a formation or its contents, but not to the described pre-perforation use for locating casing collars and deciding where to perforate. A cement-bond log was not subject to that tax. A single charge combining taxable and nontaxable logs was fully subject to the 2.42% tax.

A casing-inspection log used to measure corrosion or metal loss was subject to neither sales tax nor the 2.42% tax.

Locating where tubing was stuck and then cutting or backing it off was subject to sales tax but not the 2.42% tax. Work on water injection or water disposal wells was outside the 2.42% tax, but the same freepoint-and-cutting service there remained subject to sales tax.

What this means for you

Well-service companies should separately identify each log's purpose and avoid combining differently taxed logs into one amount. The same physical tool could receive different treatment based on what it was used to locate or test.

Common questions

Was the pre-perforation gamma-ray/cement-bond work subject to sales tax? No. Was the described log subject to the 2.42% tax? No. Was casing inspection taxable? No under either tax. Was locating and cutting stuck tubing taxable? Yes for sales tax, but not for the 2.42% tax.

Citations and references

• Texas Tax Code Chapter 121, Subchapter E

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9112L1146D01

Original ruling text

December 19, 1991

Dear **:

Thank you for your letter to Sandy Skaggs which is restated in
part with responses below. I have been asked to respond.

Facts: Our main line of work involves stuck pipe recovery
on drilling rigs through the use of freepoint tool and backoff
services. I am in the process of expanding into the
cased hole end of stuck pipe recovery along with services
such as casing inspection and cutting of tubing and casing.

Question: Please explain if the following are subject to
either sales tax or the tax imposed by Chapter 121, Subchapter E.
(2.42% tax).

1. A gamma ray/cement bond log is run on a well prior to a
   perforating run.

Response 1. Charges for a gamma ray/cement bond log are not
subject to sales tax. Charges for a gamma ray bond log are
subject to the 2.42% tax if the log is run to locate the
formation or the contents of the formation. However, a gamma ray
log run prior to a perforating job is run to locate the casing
collars and to determine where to perforate. This is not subject
to the 2.42% tax because it does survey or test the formation.
Charges for a cement bond log are not subject to the 2.42% tax.
When taxable and nontaxable logs are billed for a single amount,
the total charge is subject to the 2.42% tax.

2. A casing inspection log is run on casing to determine
   corrosion factors or metal loss.

Response 2. Charges for running a casing inspection log are not
subject to either sales tax or the 2.42% tax.

3. A freepoint survey is run to determine the stuck point
   on a string of tubing. A short is run to cut or "back-off"
   the pipe in order to remove the "fish". Note: In our
   follow-up conversation, you said that your firm locates the
   point where the tubing is stuck and cuts it off. You then
   remove your tools from the hole and a fishing company pulls
   the tubing.

Response 3. Your charge for locating the point the tubing is
stuck and cutting it off is subject to sales tax. The 2.42% tax
is not due.

4. Does work on water injection or a water disposal well
   come under the same guidelines as oil and gas well services?

Response 4. Work done on water injection and water disposal
wells is not subject to the 2.42% tax. If a freepoint survey is
run to determine the stuck point on a string of tubing and you
then cut or "back off" the pipe, the charge is subject to sales
tax.

This opinion is based on the facts provided. Other facts,
though similar, may yield different results.

If you have any questions or need more information, please call or
write. You may reach me by calling toll free, (800) 531-5441.
My direct line number is (512) 463-4680. The number for FAX
transmissions is (512) 475-0900. You may write to me in care of
Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division