Is the labor to cut and bevel the production casing on a newly completed oil well taxable under Texas sales and use tax?

Subject

Casing — Cutting And Beveling By Welder — Upon Completion Of New Well

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9306L1247D03

Plain-English Summary

A company that explores for oil and gas, and operates oil and gas wells, asked the Comptroller whether two invoices for welding work on a new well were taxable. The work was done by a welder who was not an employee of the company.

The first invoice covered the "rough cut": after the 5 1/2" production casing was placed in the well, the welder cut off the extra casing sticking out of the ground so it would not be in the way when the drilling rig was moved off the well. The second invoice, from the same well and the same welder, covered the "final cut" — cutting the casing to the exact length needed — followed by beveling the cut end with a grinder to prepare it for the parts that fit on top of the casing.

The Comptroller's response: because the completion of the new well is considered new construction, the labor to cut and later bevel the casing is not taxable. However, since the welder billed a single amount covering both labor and materials, the welder — not the well operator — is responsible for tax on the materials used to perform the cutting and beveling. The letter also instructs that invoices should clearly indicate the work was performed during construction of a new well, and was not part of repair or remodeling of an existing well.

What This Means For You

New-well completion labor is treated as new construction, not repair. Cutting and beveling the casing as part of finishing a brand-new well falls under Texas's general rule that labor to perform new construction is not taxable, distinguishing it from labor to repair or remodel an existing well, which can be taxed differently.

Who owes tax on materials depends on how the invoice is structured. Because the welder in this case charged one lump-sum price rather than separately stating labor and materials, the welder was treated as the party responsible for tax on the materials consumed in the job — not the operator who hired the welder.

Document the job as new-well construction. The letter specifically tells the taxpayer that invoices should clearly show the work was done during construction of a new well, and was not repair or remodeling of an existing well — since that distinction is what determines the tax treatment.

This is a facts-specific opinion. The Comptroller notes the ruling is based on the facts presented, and that other facts, even if similar, may lead to a different result.

Q&A

Q: Is the labor to cut off extra well casing during completion of a new well taxable?
A: No. The letter states the completion of a new well is considered new construction, and the labor to cut and later bevel the casing is not taxable.

Q: Who pays tax on the materials the welder used?
A: The welder does. Because the welder billed a single amount for the job, the welder is responsible for tax on the materials used to perform the cutting and beveling of the casing.

Q: What two invoices were at issue in this ruling?
A: One invoice was for the "rough cut" — cutting off the extra 5 1/2" production casing sticking out of the ground after it was placed in the well. The other was for the "final cut" to the exact length needed, plus beveling the cut end with a grinder to prepare it for the parts installed on top of the casing.

Q: Why does it matter whether this was a new well versus an existing well?
A: The letter directs that invoices should clearly indicate the work was performed during construction of a new well, and was not part of repair or remodeling of an existing well, since that distinction affects the tax treatment.

Q: Does this ruling apply to casing work on wells generally, regardless of the facts?
A: No. The letter states the opinion is based on the facts presented, and other facts, though similar, may provide a different result.

Original ruling text

June 29,1993

Dear ****:

This is in response to your inquiry concerning the taxability of two
invoices for work at a new oil well.

**** explores for oil & gas, and operates oil and gas wells.

The invoice that you provided was for work by a welder on a well that was
in the process of being completed. After the 5 1/2" casing was placed in
the well, the extra casing sticking out of the ground was cut off by the
welder. The 5 1/2" casing is the production casing in this well. This cut
is called the rough cut. The casing is cut off so that it will not be in
the way when the drilling rig is moved from over the well. the welder is
not an employee. The second invoice was for the same well and by the same
welder. The welder is charging for the final cut on the 5 1/2" casing to
cut it for the exact length needed. Then the casing was beveled with a
grinder to prepare it for installation of the parts that fit on top of the
casing. Are these invoices taxable under the Texas sales and use tax law?

RESPONSE: No, the completion of the new well is considered new
construction. The labor to cut and later bevel the casing is not taxable.
Since the welder billed a single amount, the welder is responsible for tax
on the materials used to perform the cutting and beveling of the casing.
Invoices should clearly indicate that the work was performed during
construction of a new well and was not part of repair or remodeling of an
existing well.

This opinion is based on the facts presented. Other facts though similar
may provide a different result. If you have other questions or need more
information, you may call me at 1-800-531-5441, extension 3-4502. The
regular number is 512/463-4502. You may also write to Tax Administration
Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division

NOTE: Previous Accession Number 9308020L.2 and/or 9308020L