Texas Letter Ruling 9210L1205A08: Storage Tank — Above Ground With 500 Barrels Less Or More Capacity — Tpp Vs. Improvement To Realty

Subject

Storage Tank — Above Ground With 500 Barrels Less Or More Capacity — Tpp Vs. Improvement To Realty

Plain-English summary

The Comptroller answered a question about whether sales or use tax applies to roustabout crew labor installing a "tank battery" — two or more tanks connected together to receive oil production on a lease.

The key line the Comptroller drew comes from a 1985 agreement with the oil and gas industry: a tank with a capacity of 500 barrels or less is treated as tangible personal property (TPP) for sales and use tax purposes, not as an improvement to realty. Since October 1, 1987, installation labor for tangible personal property performed by the seller of that property is taxable, whether the labor is billed separately or bundled into the tank's sales price. Labor to assemble a tank battery — hooking two or more tanks together — is taxed the same way, whether the battery is going onto a brand-new lease site or being added to an existing one.

In this specific case, the taxpayer's company representative said the tank battery totaled 1,600 barrels of capacity, and a company employee separately told the Comptroller by phone that each individual tank held 400 barrels. Because 400 barrels is under the 500-barrel line, the Comptroller treated the tanks as TPP, presumed the 1,600-barrel battery was made up of four 400-barrel tanks, and concluded that the labor to install and assemble those tanks into one tank battery should be taxed. The letter also notes that because the tank battery remains tangible personal property even after installation, future labor to repair, remodel, restore, or maintain it is taxable too.

What this means for you

Oil and gas lease operators

If you're installing or adding to a tank battery made up of tanks that are each 500 barrels or less in capacity, expect the installation and assembly labor to be taxable — regardless of whether the tank seller bills that labor separately or folds it into the price of the tanks. This applies to both new lease sites and additions to existing ones.

Roustabout crews and oilfield service contractors

Labor to hook tanks together into a battery is treated as installation labor on tangible personal property, and so is ongoing labor to repair, remodel, restore, or maintain a battery made of sub-500-barrel tanks. Track the per-tank capacity of what you're working on, since that capacity — not the combined battery capacity — is what determines TPP treatment here.

Accountants and tax professionals

Note that the ruling turns on the capacity of each individual tank in the battery (400 barrels each in this case), not the combined capacity of the assembled battery (1,600 barrels). The Comptroller treated the 500-barrel threshold as applying tank-by-tank under the 1985 industry agreement referenced in the letter, and confirmed the resulting battery stays classified as TPP even after it's installed, which keeps ongoing repair and maintenance labor taxable as well.

Common questions

Q: Why does tank capacity matter for taxability?
A: Under the 1985 agreement with the oil and gas industry referenced in this letter, a tank with a capacity of 500 barrels or less is treated as tangible personal property for sales and use tax purposes. That classification is what makes installation labor on it taxable.

Q: Is installation labor always taxed, or only sometimes?
A: The letter states that, beginning October 1, 1987, installation of tangible personal property by the seller of that property is taxed whether the labor charge is separately stated or included in the tank's sales price.

Q: Does it matter whether the tank battery is going on a new lease site or an existing one?
A: No. The letter says the labor to assemble a tank battery is taxed whether it's put in place as part of a new lease site or added to an existing lease site.

Q: Does the tank battery ever stop being taxable once it's installed?
A: Not according to this letter. The Comptroller states that this particular 1,600-barrel tank battery remains tangible personal property after installation, so labor to repair, remodel, restore, or maintain it is also taxed.

Citations and references

This letter does not cite any specific Texas statutes, administrative rules, or code sections. It refers generally to a "1985 agreement with the oil and gas industry" and to "legislative changes" effective October 1, 1987, but does not identify a specific statute or rule number for either.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9210L1205A08

Original ruling text

October 27, 1992

Dear ***:

Thank you for the opportunity to assist your efforts in determining the correct
application of sales or use tax to labor performed by roustabout crews. Your
question dealt specifically with installation of a tank battery.

As you know, a tank battery consists of two or more tanks connected together to
receive oil production on a lease. In order to determine the proper
application of tax it is necessary to know the capacity of each tank in the
battery. Earlier today I called your business in ***, the gentleman
that answered the telephone told me that the capacity of the tanks in question
is 400 barrels.

Based upon the 1985 agreement with the oil and gas industry, a tank having a
capacity of 500 barrels or less is considered tangible personal property for
the application of sales or use tax. Beginning October 1, 1987, due to
legislative changes, the installation of tangible personal property by the
person selling the property is taxed whether separately stated or included as
part of the sales price of the tank. Labor charges to assemble the components of
a tank battery (hooking two or more tanks together) is also taxed. This labor
is taxed whether the tank battery is put in place as part of a new lease site or
being added to an existing lease site.

You stated in our telephone conversation that the capacity of the tank battery
was 1,600 barrels; your company representative later added that each tank has a
capacity of 400 barrels. Based upon this information, I presume the 1,600
barrel tank battery is composed of four, 400 barrel tanks; therefore, the labor
charges in question are for the installation or assembling of the tanks into
one tank battery and should be taxed. I should also point out that this
particular 1,600 barrel tank battery remains tangible personal property after
installation, and the labor to repair, remodel, restore, or maintain this tank
battery should be taxed.

Sincerely,

Tax Administration Division