Is nitrogen used to nitrify drilling mud, and the cementing of a well's casing seat, subject to Texas sales/use tax and the oil and gas well servicing occupation tax?

Subject

Cementing The Casing Seat

Plain-English summary

A taxpayer who hires a well servicing company to complete a well asked the Comptroller about the tax treatment of nitrogen used to "nitrify" drilling mud. Nitrifying the mud makes it less dense, which reduces hydrostatic pressure on the formation; the nitrified mud is then used on top of cement to force the cement up and around the well casing.

The Comptroller ruled that the sale of nitrogen and the sale of drilling mud are each subject to Texas sales or use tax, and that the combined product (nitrified drilling mud) is also taxable. Separately, the letter addresses cementing the casing seat itself: that activity is subject to the 2.42% Texas occupation tax on oil and gas well services, and the taxable services involved include mixing cement slurry, blending it, pumping the slurry from the mixer/blender to the wellhead pump, and using equipment to pump cement into the well.

What this means for you

Well servicing companies and drilling mud suppliers

Both the raw materials (nitrogen, drilling mud) and the combined nitrified drilling mud are subject to Texas sales/use tax when sold. If your company sells or supplies these products as part of well completion work, sales tax applies to those sales.

Companies performing casing seat cementing

Cementing the casing seat -- including mixing cement slurry, blending, pumping slurry to the wellhead, and pumping cement into the well -- is a taxable oil and gas well service subject to the 2.42% occupation tax, separate from sales/use tax on materials.

Accountants and tax professionals

This letter distinguishes two separate tax obligations on the same well-completion job: (1) sales/use tax on the nitrogen, drilling mud, and nitrified drilling mud as tangible personal property, and (2) the 2.42% oil and gas well servicing occupation tax on the labor/service of cementing the casing seat.

Common questions

Q: Is nitrogen used to nitrify drilling mud taxable?
A: Yes. The sale of nitrogen is subject to Texas sales or use tax, as is the sale of drilling mud and the combined nitrified drilling mud product.

Q: Is the service of cementing the casing seat taxed differently from the materials used?
A: Yes. Cementing the casing seat is subject to the separate 2.42% Texas occupation tax for oil and gas well services, covering activities like mixing, blending, and pumping cement slurry into the well.

Q: What specific activities count as taxable "cementing the casing seat" services?
A: Per the letter: mixing cement slurry, blending, pumping slurry from the mixer and/or blender to the wellhead pump, and using equipment to pump cement into a 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/9605L1413B04

Original ruling text

May 20, 1996

Dear ****:

Thank you for your letter of May 17, 1996. You asked that we address the
taxability of nitrogen used in nitrifying drilling mud.

As I understand it, you hire a well servicing company to complete a well.
Part of the service this company performs is nitrifying drilling mud. This
makes the drilling mud less dense and reduces the hydrostatic pressure on
the formation. The nitrified drilling mud is used on top of the cement to
force cement up and around the casing.

The sale of nitrogen and drilling mud is subject to Texas sales or use tax.
A product resulting from the combination of these two products is also
subject to Texas sales or use tax.

Cementing the casing seat is subject to the 2.42% Texas occupation tax for
oil and gas well services. Taxable services involved in cementing the casing
seat include, mixing cement slurry, blending, pumping slurry from the mixer
and or blender to the wellhead pump, using equipment to pump cement into a
well.

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

You may call me toll free at 1-800-531-5441, ext. 5-0037. The direct line
is 512/475-0037. You also may write to Sales Tax Policy Division,
Comptroller of Public Accounts.

Sincerely,

Lindey Osborne
Sales Tax Policy Division

NOTE: Previous Accession Number 9605272L