Is electricity used to power the pumps at a saltwater disposal well exempt from Texas sales tax as electricity used to transport a material extracted from the earth?

Subject

Brine/Saltwater — Artificially Produced — Pump Back Into Ground From Disposal Wells — Electricity Used

Plain-English summary

This letter answers a question about the sales tax exemption for electricity used to transport a "material extracted from the earth" -- specifically, electricity used at a saltwater disposal well.

The taxpayer explained how a saltwater disposal well works: naturally occurring produced saltwater is delivered from producing leases by truck or pipeline, temporarily stored in tanks, and then injected under pressure back into underground formations as permitted by the Railroad Commission of Texas. Disposal at these wells is not limited to saltwater -- it may also include other non-hazardous oilfield waste. Most of the electricity used at the well powers the pump(s) that inject the saltwater or other waste back into the ground.

The Comptroller's answer draws a sharp line:

• Electricity used to transport the saltwater is exempt, but only if the saltwater qualifies as a "material extracted from the earth" -- meaning it must be naturally occurring.
• If the naturally occurring saltwater is mixed with other non-hazardous oilfield waste before being transported and injected back into the ground, the exemption is lost. Once that mixture happens, the Comptroller reasoned, a naturally occurring material extracted from the earth no longer exists -- and it does not matter that saltwater was still the predominant material in the mix.

As with other letters of this kind, the Comptroller notes the answer is based on the facts presented and that different facts could produce a different result.

What this means for you

Oil and gas operators running saltwater disposal wells

If your disposal well handles only naturally occurring produced saltwater -- with no other oilfield waste mixed in -- the electricity used to power the injection pumps can qualify for the "material extracted from the earth" exemption. If you also inject other non-hazardous oilfield waste and it gets combined with the saltwater before injection, the exemption no longer applies to that electricity, even though saltwater may still make up most of what's being disposed of.

Accountants and tax professionals

The key fact question for clients in this situation is whether the disposal stream is pure naturally occurring saltwater or a mixture with other waste. This letter treats any mixing with non-hazardous oilfield waste as disqualifying, regardless of proportion, so it's worth documenting exactly what is combined and where in the process the electricity is used.

Businesses evaluating similar "material extracted from the earth" exemption claims

This letter is a useful illustration of how narrowly the Comptroller reads the "naturally occurring" requirement: mixing an exempt material with something else, even in small amounts, can eliminate the exemption for the electricity used to move it.

Common questions

Q: Is electricity used at a saltwater disposal well exempt from Texas sales tax?
A: Only in part. It's exempt if it's used to transport naturally occurring saltwater that qualifies as a "material extracted from the earth."

Q: What happens if the saltwater is mixed with other oilfield waste before injection?
A: The exemption is lost. Once naturally occurring saltwater is mixed with other non-hazardous oilfield waste, it no longer qualifies as a material extracted from the earth, even if saltwater is still the majority of what's being transported and disposed of.

Q: Does it matter that saltwater is the predominant material in the mixture?
A: No. The letter explicitly states that the fact the predominant material was naturally occurring is "not acceptable" as a basis for keeping the exemption.

Q: Could this answer change under different facts?
A: Yes -- the letter states the opinion is based on the facts presented and that different, although similar, facts may result in different answers.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9607L1429A11

Original ruling text

July 31, 1996

Dear ****:

Thank you for your letter dated July 18, 1996,
concerning the taxability of electricity used at a saltwater disposal well.

Facts: Below is your brief explanation of the
operations of a saltwater disposal well:

The purpose of a saltwater disposal well is to inject
naturally occurring produced saltwater into porous underground formations as
permitted by the Railroad Commission of Texas. Disposal is not limited to
saltwater but may include any non-hazardous oilfield waste.

Saltwater is delivered to the injection well from
producing leases in the area by way of trucks or pipelines. The saltwater is
temporarily stored in tanks until it is injected under pressure back into the
ground. The majority of electricity consumed at a disposal well is used to
power the pump(s) that injects the saltwater or other non-hazardous oilfield
waste.

Comptroller Response: The electricity to transport salt
water is exempt only if the salt water qualifies as a "material extracted from
the earth." The salt water must be naturally occurring to qualify as a
"material extracted from the earth."

When naturally occurring salt water mixed with other
non-hazardous oilfield waste is transported and then injected under pressure
back into the ground, the exemption is lost. After this mixture occurs, a
naturally occurring material extracted from the earth does not exist. The fact
that the predominant material being transported and disposed of was naturally
occurring is not acceptable.

This opinion is based on the facts you presented and
current law. Different facts although similar, may result in different
answers.

Please call me if you have any questions or need more
information. Our toll free number is 1-800-531-5441, and my extension is
5-0330. The direct line is 512/475-0330. You may also write to Tax Policy
Division, Comptroller of Public Accounts.

Sincerely,

Bettie Peterson
Tax Policy Division

NOTE: Previous Accession Number 9607534L