Is Texas sales tax due on the various oilfield lease-site services a contractor performs for farmers, ranchers, or oil companies — mowing, oil spill clean-up, site clean-off, saltwater disposal land work, dikes, road patching, new well locations, pit digging/filling, flow line repair, and truck pulling?

Plain-English summary

A company that performs jobs for farmers, ranchers, and oil companies at oil and gas lease sites asked the Comptroller's office for a clear ruling on which of its job types are taxable and which are not. The letter walks through each job description one at a time.

Mowing or trimming performed on private or commercial yards or lawns is a taxable service, but mowing or cutting to clear land for buildings or for power line or pipeline rights-of-way is not taxable. Cutting weeds, mowing, or trimming at oil or gas lease sites is not taxed because those sites are not private or commercial yards or lawns — but mowing the farmer's or rancher's own yard or lawn is taxed, regardless of whether the farmer, rancher, or oil company is the one paying for the service.

Cleaning up oil spills is not taxed, regardless of where the spill occurs.

"Clean off location" charges could mean garbage collection/removal or building/grounds cleaning. Since most oil and gas lease sites don't have buildings, this mostly means garbage collection and removal, which is not taxable to the extent it involves collecting and removing waste from oil, gas, geothermal, or other Railroad-Commission-regulated exploration, development, or production activities (citing Natural Resources Code, section 91.101). Charges for cleaning off a location that are unrelated to those activities are taxed.

Land work at saltwater disposal sites depends on exactly what work is performed: land work on existing sites is generally repair and is taxed; land work in preparation for new construction is not taxed; and land work performed after a site is closed, to reclaim the land to its original condition, is not taxed.

Building dikes around tank battery pads is treated as new construction (not taxed) when a dirt dike is built for the first time, but reconfiguring or restoring an existing dike is nonresidential repair or remodeling (taxed). If the "dike" is made of something other than dirt (e.g., a firewall or pad), a different, enclosed letter's rules apply instead (that enclosure is not part of this ruling's text).

Patching roads is taxed in full as repair of nonresidential improvements to realty — except that if a road serves both as a residential driveway and as access to a lease site or agricultural use, the portion up to the residence is residential (labor not taxed) and the portion beyond the residence is nonresidential (taxed). Hauling caliche as part of a taxable nonresidential repair job may be taxed as part of the sales price of that job, but hauling alone, unconnected to a taxable sale, is not taxed.

Building new well locations is treated as new construction, so the labor charge is not taxed, though tax is still due on materials and other taxable items incorporated into the job (with the party responsible for that tax determined by the contract). Similarly, digging a new working pit is new construction and its labor is not taxed, while cleaning out or re-digging an existing pit is restoration of nonresidential realty and is fully taxed. Filling pits (reserve or working) depends on the specific facts, but filling pits as part of reclamation activities is not taxed.

Repairing flow lines (the lines running from a well to a storage tank, which are treated as tangible personal property whether above ground or underground) is fully taxable. Pulling trucks out of the mud, or towing trucks from one location to another, is not taxed.

The letter closes with a bundling rule: these answers assume taxable services are separately stated and identified from nontaxable services on the invoice or contract. If they are not separately stated, and the taxable-service charges exceed five percent of the total combined charge, the entire combined charge becomes taxable.

What this means for you

Oilfield service contractors and vendors

Whether a given job is taxed often turns on fine distinctions the Comptroller draws here: new construction versus repair/restoration, residential versus nonresidential realty, and location (private/commercial yard versus lease site). Structuring invoices to separately state taxable and nontaxable line items matters — if taxable charges aren't broken out and they exceed five percent of an undifferentiated total, the whole charge becomes taxable.

Farmers, ranchers, and oil companies purchasing these services

Taxability of a given job doesn't depend on who pays for it (farmer, rancher, or oil company) — it depends on the nature and location of the work itself. Mowing your own yard is taxed even if an oil company foots the bill; mowing lease-site land is not.

Accountants and tax professionals

This letter is a useful checklist for classifying a range of common oilfield lease-site activities (mowing, spill clean-up, debris removal, saltwater disposal land work, dikes, roads, well locations, pits, flow lines, and towing) under Texas's new-construction-versus-repair and residential-versus-nonresidential-realty frameworks, plus the five-percent bundling threshold for mixed taxable/nontaxable invoices.

Common questions

Q: Is mowing at an oil or gas lease site taxable?
A: No. Mowing, cutting, or trimming weeds or grass at lease sites is not taxed because lease sites are not private or commercial yards or lawns. However, mowing the farmer's or rancher's own yard or lawn is taxed, even if the oil company pays for it.

Q: Is the charge to clean up an oil spill taxable?
A: No. The charge to clean up oil spills is not taxed, regardless of where the spill is located.

Q: Is "clean off location" work taxable?
A: It depends. Garbage collection and removal of waste from oil, gas, geothermal, or other Railroad-Commission-regulated exploration, development, or production activities is not taxed. Clean-off charges unrelated to those activities are taxed.

Q: Is building a dike around a tank battery pad taxable?
A: Building a new dirt dike for the first time is new construction and not taxed. Reconfiguring or restoring an existing dike is nonresidential repair or remodeling and is taxed.

Q: Is patching a road taxable?
A: Generally yes, as repair of nonresidential realty. But if the road also serves as a driveway to a residence, the portion up to the residence is residential (not taxed) and the portion beyond it to the lease site or agricultural use is nonresidential (taxed).

Q: Is building a new well location or digging a new pit taxable?
A: No — both are treated as new construction, so the labor is not taxed (though tax applies to materials incorporated into the job). Re-digging or cleaning out an existing pit, by contrast, is taxable restoration of nonresidential realty.

Q: Is repairing flow lines taxable?
A: Yes. Flow lines are tangible personal property, and the total charge to repair them is taxable.

Q: Is pulling a truck out of the mud taxable?
A: No. Charges for pulling trucks out of the mud or towing them between locations are not taxed.

Q: What happens if taxable and nontaxable services are billed as one lump sum?
A: If taxable and nontaxable services aren't separately stated on the invoice or contract, and the taxable portion is more than five percent of the total charge, the entire combined charge becomes taxable.

Citations and references

• Natural Resources Code, section 91.101 — referenced in defining waste materials from oil, gas, geothermal, or other Railroad Commission-regulated exploration, development, or production activities, which are excluded from taxable garbage collection/removal charges.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9410808L

Original ruling text

October 6, 1994

Dear **:

I am responding to your letter regarding the application of sales tax to the
various types of jobs your company may be performing for farmers or oil
companies. You asked for a clear ruling on which job description is taxable and
nontaxable.

MOWING AT LEASE SITES

Mowing or trimming that is performed on private or commercial yards or lawns is
a taxable service. However, mowing or cutting to clear land for buildings,
power line rights-of-way, pipeline rights-of-way is not taxable. The charge for
cutting weeds, mowing, or trimming weeds or grass at lease sites (oil or gas)
is not taxed because the activities are not performed on private or commercial
yards or lawns. However, mowing or trimming, etc., that is performed on the
farmer's or rancher's yard or lawn is taxed. These answers apply whether the
farmer, rancher, or oil company pays for the service.

CLEAN UP OIL SPILLS AT LEASE SITES

The charge to clean up oil spills regardless of the location is not taxed.

CLEAN OFF LOCATION

The charge to "clean off location" could refer to garbage collection and/or
removal as well as building or grounds cleaning. Presumably most oil and gas
lease sites do not have buildings; therefore, building or grounds cleaning does
not apply leaving garbage collection and/or removal. Also, garbage collection
and removal does not include the collection and removal of waste materials
resulting from activities associated with the exploration, development or
production of oil, gas, geothermal resources, or any other substance or
material regulated by the Railroad Commission of Texas pursuant to Natural
Resources Code, section 91.101. Again, this applies to the farmer, rancher, and
oil company. The charge to "clean off location" not related to these activities
is taxed.

LAND WORK AT SALTWATER DISPOSAL

An exact description of the work performed is necessary to determine the
taxability of the work. Land work performed on existing sites is generally
considered repair and is taxed. Land work performed in preparation for new
construction is not taxed, and land work that occurs after the site is closed
to reclaim the land to its original condition is not taxed.

BUILD DIKES AROUND TANK BATTERY PADS

Presumably, the dike around the tank battery is a mound of dirt. Positioning
the dirt for the first time into a new dike is new construction. Reconfiguring
or restoring the dike is nonresidential repair or remodeling. If the "dike" is
not of dirt, but some other form of firewall or pad, then the information in
the enclosed letter applies.

PATCH ROADS AND HAUL CALICHE

The total charge to patch roads is taxed as the repair of nonresidential
improvements to realty. However, if a road serves both as a driveway to a
residence and to a lease site or for agricultural use, then the portion up to
the residence is residential realty, past the residence to the lease site or
for agricultural use is nonresidential realty. The labor to repair residential
realty is not taxed.

The charge for hauling caliche may be part of the sales price of the
nonresidential repair service and taxed. The charge for hauling alone (not
connected with a taxable sale) is not taxed.

BUILDING NEW LOCATIONS

Generally speaking drilling a new well (building a new location) is new
construction. The labor charge for new construction is not taxed. Of course,
tax is due on the materials and other taxable items used to perform the work.
The person responsible for paying the tax on the incorporated materials is
determined by the contract.

DIGGING WORKING PITS

Digging a new pit is classified as new construction; the labor charge is not
taxed. Cleaning out or re-digging an existing pit is restoration of
nonresidential realty; this is a taxable service and the total amount is taxed.

FILL PITS (RESERVE & WORKING)

An exact description of the work performed is necessary to determine the
taxability of the work. Filling pits as part of reclamation activities is not
taxed.

REPAIR FLOW LINES

Flow lines are the lines from a well to a storage tank. Above-ground and
underground flow lines are tangible personal property. The total charge to
repair flow lines is taxable.

PULLING TRUCKS

The charge for pulling trucks out of the mud or for pulling trucks from one
location to another is not taxed.

These responses are limited to the presumption that all taxable services are
separately stated and identified from nontaxable services on an invoice or
contract. If not, the total charge becomes taxable when the charges for taxable
services and nontaxable services are billed as one amount and the sum of the
charges for taxable services is greater than five percent of the total charge.

I am enclosing a copy of a letter written to another taxpayer that gives more
detailed responses. The situations described in this taxpayer's letter were
more detailed. Hopefully, this will help your understanding of the general
responses to your general statements.

This opinion is based upon the facts 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