If a company pulls the rods, tubing, and other downhole equipment from a well to prepare it for plugging, but a different company plugs the well on a later day, is the equipment-pulling service taxable?

Plain-English summary

The Texas Comptroller's Tax Policy Division responded to a company asking for clarification of paragraph (d)(4) of Rule 3.324, which covers oil, gas, and related well services. The taxpayer's facts: before a well is plugged and abandoned (a nontaxable service), the rods, tubing, and other downhole equipment must be pulled out. That removal work is often done by a different company than the one that later performs the actual plugging, and because of rig availability or other scheduling factors, the equipment removal and the plugging sometimes happen on different days. Even so, the equipment is pulled strictly to make the plugging possible, and once it's out, the well can no longer produce.

One of the taxpayer's service companies had been told informally by the Comptroller's office that this timing gap made the equipment-pulling work taxable. The taxpayer disagreed, pointing out that nothing in Rule 3.324 requires the two services to happen on the same day.

The Comptroller agreed with the taxpayer: Rule 3.324 does not impose tax on labor or services directly related to plugging and abandoning a well, and the fact that pulling the equipment happens on a different day than the plugging itself does not make the equipment-pulling service taxable. The service company should get documentation or a statement from the well operator confirming that the work is related to plugging and abandoning the well. The Comptroller noted this opinion is based on the facts presented, and other facts, though similar, may produce a different result.

What this means for you

Well service companies that pull downhole equipment before plugging

If you remove rods, tubing, or other downhole equipment to prepare a well for plugging and abandonment, that service is treated the same as the plugging itself for Texas sales tax purposes — nontaxable — even if a different company performs the actual plugging and even if the plugging happens on a later date. Keep documentation or a statement from the well operator showing the equipment removal was performed to facilitate plugging and abandoning the well.

Well operators coordinating multiple contractors

Because rig availability and scheduling often mean the equipment-removal contractor and the plugging contractor work on different days, this ruling confirms that gap alone doesn't create a tax liability on the removal service. What matters is that the removal was done to facilitate the plugging, not the calendar timing.

Accountants and tax professionals advising oil and gas service companies

This letter interprets Rule 3.324(d)(4) narrowly around timing: services "directly related to" plugging and abandoning a well stay nontaxable regardless of same-day performance. The key documentation point is getting the well operator's confirmation that the work relates to plugging and abandonment, since this ruling is fact-specific and was issued to a particular taxpayer.

Common questions

Q: Is pulling rods and tubing from a well before it's plugged a taxable service?
A: No, according to this letter. Rule 3.324 does not tax labor or services directly related to plugging and abandoning a well, and pulling the downhole equipment to prepare for plugging falls within that.

Q: Does it matter if a different company does the plugging than the one that pulled the equipment?
A: No. The letter addresses exactly this scenario — different companies performing the two services — and confirms the removal service still stays nontaxable.

Q: Does it matter if the equipment removal and the actual plugging happen on different days?
A: No. The Comptroller specifically stated that the timing difference does not render the equipment-pulling service taxable.

Q: What should a service company do to support treating this work as nontaxable?
A: The letter says the service company should obtain documentation or a statement from the well operator that the service is related to the plugging and abandoning of the well.

Q: Can another company rely on this exact letter?
A: This opinion is based on the specific facts presented; the letter itself states that other facts, though similar, may provide a different result, and STAR letters generally may be relied on only by the taxpayer to whom they were issued.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.324(d)(4) (Oil, Gas, and Related 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/9511671L

Original ruling text

November 10, 1995

Dear ****:

This is in response to your request for a clarification of paragraph (d)(4) of
rule 3.324, concerning oil, gas, and related well services.

YOUR FACTS: In preparation for the plugging and abandoning of a well - a
non-taxable service- rods, tubing, and other downhole equipment must be
removed. This removal service is often done by a different company than will
be performing the actual plugging of the well. Occasionally, because of the
rig availability of both companies, or other factors, pulling the down-hole
equipment and plugging the well may not occur on the same day. However, the
pulling of the equipment is done strictly to facilitate the plugging of the
well; and once the tubing and equipment is pulled, the well is no longer
capable of production.

Your company believes that there is nothing in Rule 3.324 to indicate that
downhole services that facilitate a nontaxable service must be performed at the
same time as the nontaxable service; however, one of your services companies
has been advised informally by our office that the timing difference
invalidates the nontaxable status of the work performed.

RESPONSE: Rule 3.324 does not impose tax on labor or services directly related
to plugging and abandoning a well. The service company should obtain
documentation or a statement from the well operator that the service is related
to plugging and abandoning of the well. The fact that the pulling of the
equipment and tubing is not performed at the same time or on the same day as
the plugging of the well does not render the former taxable.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Gilbert Zamora
Tax Policy Division