Is a charge to inspect used oil-well casing pipe (checking threads and drift) taxable if it isn't tied to a sale of the pipe?

Subject

Inspection Charge For Oil-Well Casing Pipe Not Related To A Sale Is Not Taxable

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9306L1247D07

Plain-English Summary

A taxpayer that explores for oil and gas, and operates oil and gas wells, asked the Comptroller about the taxability of an invoice for work done at a new oil well. The invoice covered the inspection of used 5 1/2" casing to be used as production casing downhole in the new well. The inspection itself consisted of a visual check of the pipe and its threads, and passing a bar through the inside of the pipe to determine the pipe's "drift."

The Comptroller's response: a charge for inspection of tangible personal property that is not related to the sale of the property is not taxable. The letter goes on to say that even if the invoice had instead been for inspecting surface casing rather than production casing, the charge still would not be taxable, as long as the inspection is not related to a sale of the surface casing. The letter draws a clear line, though — inspection performed in connection with the sale of casing or pipe is taxable, and that is true whether or not the inspection charge is separately stated on the invoice.

As with other letters of this type, the Comptroller notes the opinion is based on the facts presented, and that other facts, though similar, may produce a different result.

What This Means For You

The key question is whether the inspection is tied to a sale. This letter turns entirely on whether the inspection charge is related to a sale of the pipe or casing being inspected. If a customer simply pays to have their own existing pipe inspected — with no sale of that pipe involved — the charge is not taxable.

It doesn't matter whether it's production casing or surface casing. The letter is explicit that the non-taxable treatment applies the same way to surface casing as it does to the production casing actually at issue in the invoice, so long as the sale connection is absent either way.

Separate statement doesn't change the result when a sale is involved. If the inspection is performed in connection with a sale of the casing or pipe, the inspection charge is taxable — and billing it as a separate line item on the invoice does not make it exempt.

Q&A

Q: Is a charge to inspect used casing pipe for a new oil well taxable?
A: No, according to the letter, a charge for inspection of tangible personal property that is not related to the sale of the property is not taxable.

Q: What did the inspection in this letter actually involve?
A: A visual inspection of the pipe and its threads, plus passing a bar through the inside of the pipe to determine the pipe's "drift."

Q: Would the answer be different if it were surface casing instead of production casing being inspected?
A: No. The letter states that had the invoice been for inspection of surface casing, the charge would still not have been taxable, as long as it is not related to the sale of the surface casing.

Q: When does an inspection charge on casing or pipe become taxable?
A: When the inspection is performed in connection with the sale of the casing or pipe — that charge is taxable.

Q: Does separately stating the inspection charge on the invoice avoid tax when it's tied to a sale?
A: No. The letter says inspection in connection with a sale of casing or pipe is taxable whether or not the charge is separately stated.

Q: Does this letter guarantee the same result for every similar invoice?
A: No. The letter notes 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 an
invoice for work at a new oil well.

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

The invoice that you enclosed is for the inspection of used 5 1/2" casing
to be used as production casing downhole in a new oil well. The
inspection consisted of visual inspection of the pipe and threads on the
pipe and passing of a bar through the inside of the pipe to determine the
"drift" of the pipe.

RESPONSE: A charge for inspection of tangible personal property that is
not related to the sale of the property is not taxable. Therefore, had the
invoice been for the inspection of surface casing the charge would still
not have been taxable as long as it is not related to the sale of the
surface casing. Inspection in connection with the sale of casing or pipe
is taxable whether or not the charge is separately stated.

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 9308022L.4 and/or 9308022L