Do sales/use tax and the oil well service tax apply to well tagging, inter-well tracing, and naturally occurring radioactive material (NORM) testing services performed on oil field equipment?

Plain-English summary

This 1993 Texas Comptroller letter answers a taxpayer's questions about two different services performed on oil and gas wells: well tagging and inter-well tracing services, and a test for naturally occurring radioactive material (NORM) on oil field equipment.

For well tagging and inter-well tracing, the services themselves are not subject to limited sales or use tax. However, the taxpayer performing the services still owes sales tax on the materials and equipment used to perform them, including the radioactive isotopes mentioned in the taxpayer's letter.

Some of these testing services can instead fall under the 2.42% oil well service tax imposed by Tax Code, Chapter 191, but only if three conditions are all met: (1) the test happens during drilling and completion, or reworking/reconditioning, of a well — with a well considered "completed" once completion documents are filed with the Texas Railroad Commission and an allowable is assigned; (2) the test is of the formation or its contents (fluids and gases in the well bore count as contents of the formation); and (3) the test instrument, or part of it, is actually placed in the well bore during the test. The letter points the taxpayer to Comptroller Publication 96-199 and Rule 3.324 for further guidance on this tax.

Separately, the NORM test on oil field equipment is not subject to either the oil well service gross receipts tax or the limited sales tax.

The Comptroller notes this opinion is based on the facts presented, and could change if the facts are different.

What this means for you

Oil and gas service providers

If you perform well tagging, inter-well tracing, or similar downhole testing services, you generally do not charge sales or use tax on the service itself, but you must pay sales tax when you buy the materials, equipment, and isotopes you use to perform the work. Separately, check whether your testing meets all three conditions for the 2.42% oil well service tax under Tax Code Chapter 191 — the test must occur during drilling/completion/reworking/reconditioning, test the formation or its contents, and involve a test instrument placed in the well bore.

Accountants and tax professionals

This letter distinguishes between the limited sales/use tax (which applies to the provider's material and equipment purchases, not the service itself) and the separate 2.42% oil well service tax under Chapter 191, which only attaches when a specific three-part test is satisfied. NORM testing on oil field equipment falls under neither tax, per this letter.

Common questions

Q: Do I need to charge my customer sales tax for performing well tagging or inter-well tracing services?
A: No. According to this letter, those services are not subject to limited sales or use tax. But you, as the service provider, owe sales tax on the materials and equipment (including radioactive isotopes) you use to perform the services.

Q: When does the 2.42% oil well service tax apply instead?
A: Only when all three conditions in the letter are met: the test occurs during drilling/completion or reworking/reconditioning of a well; the test is of the formation or its contents (including fluids and gases in the well bore); and the test instrument, or a portion of it, is in the well bore during the test.

Q: Is testing for naturally occurring radioactive material (NORM) on oil field equipment taxable?
A: No. The letter states this test is not subject to either the oil well service gross receipts tax or the limited sales tax.

Q: Where can I find more guidance on the oil well service tax?
A: The letter refers to Comptroller Publication 96-199, Texas Occupation Tax for Oil and Gas Well Services, and 34 Tex. Admin. Code Rule 3.324, Oil, Gas, and Related Well Service.

Citations and references

Statutes, rules, and publications cited in this letter:

• Tax Code, Chapter 191 (2.42% oil well service tax)
• 34 Tex. Admin. Code Rule 3.324, Oil, Gas, and Related Well Service
• Comptroller Publication 96-199, Texas Occupation Tax for Oil and Gas Well Services

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9302L1223G09

Original ruling text

February 19, 1993

Dear **:

Thank you for your letter of January 14, 1993, regarding the taxability
of well tagging and inter-well tracing services. You also question the
taxability of a test to detect naturally occurring radioactive material
in oil field operation equipment.

The services described in the enclosed brochures are not subject to
limited sales or use tax. You are required to pay sales tax on all
materials and equipment used to perform these services, including the
radioactive isotopes referred to in your letter.

Some of the services may be subject to the 2.42% oil well service tax
imposed under the Tax Code, Chapter 191. In order for a testing service
to be subject to the 2.42% tax the following conditions must be met:

(1) The test must be conducted during the drilling and completion, or
the reworking or reconditioning of a well. The well has been completed
when completion documents are filed with the Texas Railroad Commission
and an allowable has been assigned.

(2) The test must be of the formations, or contents of the formations.
Fluids and gases in the well bore are contents of the formation.

(3) The test instrument, or a portion of it, must be in the well bore
during the test.

Please refer Publication 96-199, Texas Occupation Tax for Oil and Gas
Well Services and Rule 3.324, Oil, Gas, and Related Well Service for
further guidance.

The test for naturally occurring radioactive material on oil field
equipment is not subject to either the oil well service gross receipts
tax nor the limited sales tax.

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

If you have any questions or need additional information, you may call
toll free 1-800-531-5441, ext. 50037 or the regular Austin number is
512-475-0037. You also may write to Tax Administration Division.

Sincerely,

Lindey Osborne
Tax Administration Division