Is a torque turning and computerized torque measurement service (joining/tightening drill pipe and measuring joint torque) for oil and gas wells taxable in Texas, and does it matter whether it's a new well or a producing/workover well?

Plain-English summary

A company considering offering torque turning and computerized torque measurement services to oilfield drilling and servicing companies asked whether the service is taxable, and whether the answer changes between new wells being drilled versus producing wells or wells being worked over. The service itself involves labor and equipment to join and tighten drill pipe, plus measuring the torque applied at each joint (customers sometimes also pay for incidental parts like dies and pads). The Comptroller explained that torque turning/measurement isn't a defined taxable service on its own -- Texas taxes oilfield services based on the OVERALL JOB the service supports. The service is nontaxable when it's part of well completion, or part of a job aimed at increasing production by working on the formation; in those cases the customer should tell the provider the job's purpose so it gets documented on the invoice. But if the torquing work supports a job that IS taxable (a fishing job, for example), the torquing charge is taxed right along with it. Regardless of whether the labor charge itself ends up taxed, the provider always owes tax on the supplies, materials, and equipment used to perform the service -- and needs accurate, adequate records to back up whichever treatment (taxed or not) it applies to each job. Rule 3.324 covers a provider's responsibilities when it offers both taxable and nontaxable services.

What this means for you

Oilfield service companies offering torque turning/measurement services

There's no blanket answer -- whether to charge tax depends entirely on the overall job the torquing service supports. Get the customer to specify the job's exact purpose (well completion, formation work to increase production, or a taxable servicing job like fishing) and document it on every invoice, since that's what determines taxability.

Oil and gas well operators and drilling contractors hiring these services

Be prepared to tell your torque-turning vendor the specific purpose of the job so they can apply the correct tax treatment -- your answer directly determines whether you're charged sales tax on the service.

Accountants and tax professionals

This is a useful general illustration of how Texas taxes ancillary oilfield labor by reference to the PRIMARY job it's performed for, rather than by the nature of the labor itself -- and a reminder that providers offering a mix of taxable/nontaxable services need invoice-level documentation under Rule 3.324.

Common questions

Q: Is torque turning/measurement service taxable by itself?
A: No, per this letter -- it isn't defined as a taxable service on its own; taxability follows the overall job it's performed for.

Q: Is the service taxable when done for well completion or to increase production?
A: No, per this letter -- both are nontaxable purposes.

Q: Is it taxable when performed as part of a taxable job like fishing?
A: Yes, per this letter -- the torquing service is taxed along with the taxable job it supports.

Q: Does the provider owe tax on its own supplies and equipment regardless of the labor charge's tax treatment?
A: Yes, per this letter -- tax is owed on all supplies, materials, and equipment used to provide the service either way.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.324 (oilfield services; provider responsibilities)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9703288L

Original ruling text

March 19, 1997

Dear **:

Thank you for your letter dated February 27, 1997, concerning sales tax.

Facts: One of your subsidiaries is considering to offer the service of torque
turning and computerized torque measurement to oil field service and drilling
companies in Texas.

This service entails the use of labor and equipment to join and tighten pipe
for wells being drilled and wells being serviced. The employees will also
measure the torque applied to each one of the joints. In some instances, the
customers pay for incidental parts used for the process such as dies and pads
for your equipment.

In most cases, this service is provided to contractors drilling new wells. In
many cases, this service may be provided to a producing well or a well being
worked over.

In addition to addressing the taxability of the service and parts above, please
indicate any differences for new wells and workover/producing wells.

Response: The labor you have described is a service. Services are divided into
taxable services and non-taxable services. The torque turning and torque
measurement services you have described is not defined as a taxable service in
and of itself. However, oilfield services are taxed according to the overall
job for which they are performed. In some instances your services may be taxed
and in other instances, they will not be taxed.

Your service will not be taxable when performed in conjunction with well
completion. Jobs that are performed for the purpose of increasing production
by working on the formation are also non-taxable. In these instances, the
customer for whom you are performing the service should advise you of the exact
purpose of the job; you should then document the invoice with this exact
information.

If you perform the torquing services in connection with a taxable oil field
servicing job (such as a fishing job), then your service should be taxed also.
It is very important that you maintain accurate and adequate records to support
your collecting tax or not collecting tax.

You owe tax on all supplies, materials, and equipment used to provide these
service.

Your responsibilities as the provider of taxable and non-taxable services are
explained in Rule 3.324. I have enclosed this rule for your records.

This opinion is based on the facts presented in your letter. Different facts
though similar, may result in different answers.

If you have any questions or need more information, you may call me toll free
at 1-800-531-5441, ext. 50330. 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