A company picks up used oil field tubing at a customer's wellsite and gives the customer a book credit, then cleans, grades, and repairs the pipe and sells it back to the same customer. Are these transactions taxable, and can resale/direct-pay certificates be used?

Plain-English summary

A company asked the Comptroller whether its oil field pipe-cleaning business is taxable. The company picks up oil field tubing at a customer's wellsite and gives the customer a credit on its books for that pipe. It then cleans and grades the pipe; some pipe is scrapped because it's worn out. The customer can then buy back the pipe that has been inspected, cleaned, and graded.

The Comptroller explained that Section 151.005 of the Texas Tax Code defines a "sale" or "purchase" as any transfer of title or possession of tangible personal property, an exchange/barter/lease/rental of tangible personal property, or the performance of a taxable service, done for consideration.

Applying that definition, the Comptroller found two separate transactions here, each judged independently:

1. The pickup transaction — the company takes possession of the pipe at the customer's location and issues a book credit to the customer (the oil company).
2. The resale transaction — the company sells the cleaned pipe back to the customer.

Because these are two independent sales, the company may issue a resale certificate to its customer for the pipe it purchases and cleans, and it may accept the customer's direct pay exemption certificate instead of collecting tax on the cleaned pipe it resells. Tax is due when the company resells scrapped pipe, unless it accepts a resale certificate in lieu of collecting tax on that scrapped pipe too.

However, the ruling adds an important twist: if the company is not allowed to sell the cleaned pipe to anyone other than the same oil company it came from, then the transaction isn't really two independent sales — it's a barter for cleaning or repairing the pipe. In that case, the total consideration received for the cleaning or repair work is taxable, and where the book credit for the pipe is offset by the value of the pipe returned to the customer, the value of the scrapped pipe becomes the tax basis for the cleaning/repair charge.

What this means for you

Oil field pipe/tubing cleaning and reconditioning companies

How you structure resale rights matters. If your customer is free to have you resell their pipe to anyone (or you're genuinely buying and reselling pipe as separate transactions), you can treat the pickup and the resale as two independent sales — using a resale certificate on the purchase side and a direct pay certificate (or tax collection) on the resale side. But if your arrangement restricts you to selling the cleaned pipe back only to the same customer, the Comptroller will treat the whole thing as a taxable barter for your cleaning/repair service, taxed on the full consideration you receive.

Oil and gas companies sending pipe out for cleaning/reconditioning

If you're only allowed to buy back your own pipe after it's cleaned, expect the vendor's charge to be taxed as a repair/cleaning service rather than as a simple pipe resale — with the value of your scrapped/returned pipe used to set the tax basis for that service charge.

Accountants and tax professionals

This letter is a good illustration of how Texas separates transactions for tax purposes under Tex. Tax Code § 151.005, and of the line between (a) two independent sales eligible for resale/direct-pay certificate treatment and (b) a single barter transaction for a taxable service. The determining fact is whether resale of the reconditioned pipe is restricted to the original customer.

Common questions

Q: Is picking up oil field tubing at a customer's wellsite in exchange for a book credit a taxable sale?
A: Yes — the Comptroller treats it as a separate, independently-taxable transaction: a transfer of possession of tangible personal property for consideration (the book credit) under Tex. Tax Code § 151.005.

Q: Can I use a resale certificate when I buy the pipe, and a direct pay certificate when I sell the cleaned pipe back?
A: Yes, according to this letter — you may issue a resale certificate for the pipe you purchase and clean, and you may accept your customer's direct pay exemption certificate in lieu of collecting tax on the cleaned pipe you resell.

Q: What if some of the pipe is too worn out and gets scrapped instead of resold?
A: Tax is due when you resell the scrapped pipe, unless you accept a resale certificate in lieu of collecting tax on that scrapped pipe.

Q: What changes if I'm only allowed to sell the cleaned pipe back to the same customer I got it from?
A: Then the arrangement is treated as a barter for cleaning or repairing the pipe rather than two separate sales, and the total consideration you receive for the cleaning/repair work is taxable — with the value of the scrapped/returned pipe used as the tax basis when the book credit is offset by the value of the pipe you return.

Q: Can other taxpayers rely on this letter for their own pipe-cleaning arrangements?
A: This opinion is based on the facts presented to the Comptroller; if the facts are different, the opinion may change, and under Texas rules only the taxpayer who requested the letter can rely on it directly.

Citations and references

• Tex. Tax Code § 151.005 (definition of "sale" or "purchase" — transfer of title/possession, exchange/barter/lease/rental of tangible personal property, or performance of a taxable service, done for consideration)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9607L1425A05

Original ruling text

July 8, 1996

Dear **:

Thank you for your letter of June 20, 1996. You asked if the following
transactions are taxable.

You stated that you pickup oil field tubing at your customer's well site. You
give your customer a credit on your books for the pipe. You then clean and
grade the pipe. Some pipe is disposed of because it is worn out. The customer
can purchase the pipe you have inspected, cleaned and graded.

I should begin by defining a sale. Section 151.005 of the Texas Tax Code reads
in pertinent part: "Sale" or "purchase" means any of the following when done
or performed for consideration:

(1) a transfer of title or possession of tangible personal property;
(2) the exchange, barter, lease, or rental of tangible personal property;
(3) the performance of a taxable service.

There are two transactions in this fact situation. The first transaction
occurs when you take possession of the pipe at the customer's location and
issue a credit to the oil company. The second transaction is the sale of the
cleaned pipe back to the oil company. Each transaction is judged
independently.

You may issue a resale certificate to your customer for the pipe you purchase
and clean. You may then accept the customer's direct pay exemption certificate
in lieu of collecting tax on cleaned pipe. Tax is due when you resell the
scrapped pipe or you may accept a resale certificate in lieu of collecting tax
on the scrapped pipe.

If, in the above fact situation, you are not allowed to sell the cleaned pipe
to a person other than the oil company you got the pipe from, then the essence
of the transaction is a barter for cleaning or repairing the pipe. The total
consideration you receive for the cleaning or repair is taxable. In the fact
situation described above the where the credit for the pipe you received is
offset by the value the pipe you return to your customer, the value of the
scrapped pipe would be the tax basis for the cleaning or repair cost.

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