When were Texas oil-spill cleanup charges taxable, and how did the Comptroller treat related oilfield construction work?

Plain-English summary

Oil-spill cleanup at a well site was not taxable when it resulted from oil, gas, or geothermal exploration, development, or production and involved substances regulated by the Railroad Commission under Natural Resources Code § 91.101. Waterway cleanup was also not taxed when subject to Water Code Chapter 26.

Cleanup performed at a plant or elsewhere on land away from the well site was taxable. The letter also said the service was taxable when performed on property other than the company's property.

The response addressed 20 other oilfield-construction situations. Among them, lump-sum new-construction charges to customers were not taxable while contractors paid tax on consumed items; nonresidential repair or remodeling was generally taxable; qualifying oil-and-gas lease-site reclamation was not taxable; and oilfield garbage collection and removal was taxable.

What this means for you

Location, regulatory setting, and the exact work mattered. "Oil-spill cleanup" was not one uniform tax category, and construction contract form also changed who paid tax on materials and equipment.

Common questions

Was well-site oil-spill cleanup taxable? No, under the oil-and-gas facts and Railroad Commission regulatory condition stated in the letter.

Was plant-site cleanup taxable? Yes.

Was waterway cleanup taxable? Not when it was subject to Water Code Chapter 26.

Did the letter cover only spill cleanup? No. It answered 21 oilfield construction, repair, road, tank, waste, reclamation, towing, and materials scenarios.

Citations and references

• Texas Natural Resources Code § 91.101
• Texas Water Code Chapter 26
• 34 Tex. Admin. Code Rules 3.294, 3.356, and 3.357(c)(5)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9203L1167A01

Original ruling text

March 6, 1992

Dear ***:

Thank you for your recent letter asking questions for your clients in the oil
field construction business. For the sake of brevity, I did not restate your
hypothetical transactions; however, each enumerated response correlates to your
enumerated situations.

1. The contractor has entered a lump-sum new construction contract. As the end
   consumer of all taxable items used to build the caliche road and the drill
   site, the contractor must pay tax to the suppliers at the time of purchase,
   lease, or rental. The lump-sum amount paid by the customer is not subject to tax.

2. The information provided in your second situation does not clearly indicate
   whether the contract requires the charges to be separated. The contract is
   considered lump sum unless the contract clearly separates the agreed contract
   price for incorporated materials from the agreed contract price for skill and
   labor. The materials charge must include all costs directly attributable to
   the incorporated materials. The charge for skill and labor includes the
   contractor's cost of factors such as equipment rental, overhead, and labor.
   The fact that these charges are listed as line items on the invoice does not
   change the taxability. The contractor must pay tax on the equipment when
   rented or purchased.

3. The contractor must pay tax on the equipment at the time of purchase, lease,
   or rental. The contractor must also pay tax on the consumables used. The
   charge to the customer is for new construction "labor" and is not taxed.

4. The transportation charge to deliver naturally occurring caliche to the
   customer's location is not taxable. This applies whether the contractor is
   transporting and selling the caliche to the customer or whether the contractor
   has purchased. However, if the caliche is actually crushed limestone or if the
   contractor also spreads or packs, the caliche, etc., the charge is taxed when
   the spreading or packing is the repair or remodeling of the drill site or road.

5. This is taxed as nonresidential repair or remodeling.

6. The total charge is taxed as nonresidential repair or remodeling. The
   service provider may purchase the incorporated materials tax free for resale.

7. This activity is taxed as nonresidential repair or remodeling; however, the
   customer may claim an exemption for the labor portion of the charge when the
   provisions of Rule 3.357(c)(5) apply. A copy of this rule is enclosed.

8. In your example, the contractor is selling, assembling, and installing the
   components of the tank batteries. (a) Above-ground tank batteries with each
   tank having a capacity of 500 barrels or less are treated as tangible personal
   property. The total, lump-sum or separated, charge to build these batteries is
   taxed. (b) Tanks buried below ground and above-ground tank batteries have a
   capacity of more than 500 barrels are improvements to realty unless a contract
   or agreement specifies that they remain tangible personal property. (This occurs
   in some lease transactions.) Building new tank batteries that are improvements to
   realty is new construction; the lump-sum charge to the customer is not taxed.

The fire wall and pad is treated the same as the tank battery unless the pad
and/or fire wall is clearly an improvement to realty in and of itself. If the
fire wall and/or pad is an improvement to realty in and of itself this charge is
taxed as new construction or nonresidential repair or remodeling.

9. Charging the work on an hourly basis does not change the taxability as described
   in number 8 above.

10. This is repair or restoration of a nonresidential improvement to realty.
    The total charge is taxed. If the service provider provides incorporated materials,
    they may be purchased for resale and taxed as part of the total price to the customer.

11. Enlarging an existing yard made of compacted caliche from
    200' X 400' to 300' X 500' is adding additional square footage to an existing
    improvement of realty. The blading is new construction. Compacting caliche
    over the entire 300' X 500' yard is a combination of new construction and
    nonresidential repair or remodeling. When compacting the caliche over the
    original 200' X 400' yard (nonresidential repair or remodeling) is more than 5%
    of the total project, the charge for the repair or remodeling must be separated
    from the charge for the new construction (blading and compacting over addition)
    and taxed accordingly.

12. Blading the additional area and compacting caliche over the additional area is
    new construction. The contractor must follow the tax responsibilities based upon
    the type of contract: lump sum or separated.

13. The total charge is taxed as garbage collection and removal. See the response
    to #19 below and Rule 3.356, copy enclosed.

14. The reserve pit is an improvement to realty. The total charge for restoration
    of nonresidential improvements to realty is taxed. However, when the restoration is
    the actual reclamation of an oil and gas lease site to the land's condition before
    the drilling activity was begun, the charge for the restoration/reclamation is not taxed.

15. Generally speaking, workover pits are also improvements to realty. The total
    charge to restore (repair) the pit to functioning order is taxed.

16. The upgrading of the existing road is a taxable service. If the road upgrade is
    more than 5% of the total contract, either the charge for the upgrade must be
    separated from the charge for the new construction and taxed or the lump-sum charge
    for the entire job is taxed.

17. Blading or brushing an existing fence line is similar to lawn mowing or maintenance.
    However, when it is performed on acreage that is not a yard or lawn, the charge is not
    taxed. The service provider is providing a nontaxable service and owes tax on the
    equipment at the time of purchase.

18. Blading or brushing a right of way is not taxed. See #17 above.

19. A clean-up operation for an oil spill which results from activities associated with
    the exploration, development, or production of oil, gas, or geothermal resources, and
    any substance or materials regulated by the Railroad Commission of Texas pursuant to
    Section 91.101, Natural Resources Code, is not taxable. Oil spill clean-ups at the well
    site are not taxable.

A clean-up of an oil spill performed in a plant or elsewhere on land away from the well
site is a taxable service. This service is also taxable if performed on property other
than the company's property. The clean-up of oil spills in waterways are not taxed when
the clean-up is subject to the requirements of Chapter 26 of the Water Code.

20. The combined hourly charge to pull trucks that are stuck due to wet conditions out of
    the mire is not taxable. If the charge is separated, your client must follow the guidelines
    found in the enclosed copy of Rule 3.294 regarding rentals and leases of equipment.

21. The total charge by the contractor to the customer for the reimbursement of the
    amounts paid to the third party for the processed taxable material and the transportation
    of the processed taxable material is taxed. The contractor may issue a resale certificate
    to the third party when purchasing the processed taxable material or the contractor may
    take credit on his return for tax paid to the supplier because the material was taxed
    when sold to the customer.

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

You may also write to Tax Administration Division, Comptroller of Public Accounts.

Sincerely,

Tax Administration Division