Is a remanufactured drilling rig, built exclusively for use by a foreign customer, exempt from Texas sales tax if it's stored in Texas for up to six months after completion while the customer decides on its foreign destination?

Plain-English summary

A Texas company remanufactures land-based oil and mineral drilling rigs, almost always for foreign customers who will use them abroad. Normally, once a rig is complete, it's made available to the purchaser "Ex Works" at the company's Texas facility and shipped promptly for export — and the company doesn't collect sales tax, relying on an exemption certificate plus export documentation.

This letter asked about a different scenario: a customer whose two rigs would be complete before the foreign drilling destination was finalized, requiring the rigs to sit in storage at the Texas facility for up to six months after completion before shipment.

The Comptroller's answer: sales tax is due when title transfers at completion, regardless of the storage plan. The mineral-exploration export exemption in Tax Code § 151.324 requires the equipment to be for exclusive use outside Texas — and a rig sitting in Texas storage because the customer isn't ready to ship it doesn't meet that standard, even if it will eventually be exported. The Comptroller distinguished a prior case the customer had cited (Hearing No. 15,800), where a rig was also stored for a long stretch (18 months) but the customer at the time of ordering had no intention of storing it — it just ended up stored because industry demand fell after it was ordered, and it was removed at the "first opportunity offered." Here, by contrast, the storage was planned and intentional from the outset, which defeats the exemption.

The letter does leave a path to recovering the tax: once the customer can show shipping documentation proving the rig was actually exported, it may request a refund under Rule 3.325(c)'s export-proof procedure.

What this means for you

Manufacturers and remanufacturers of export-bound equipment

The export/mineral-exploration exemption turns on whether the equipment is removed from Texas "forthwith" — planned, intentional storage after completion (even if export is certain to eventually happen) can defeat the exemption at the time of sale, triggering tax on title transfer. Unplanned storage caused by circumstances beyond the customer's control (like the rig in Hearing No. 15,800) is treated differently.

Businesses structuring who bears the sales tax risk in export contracts

If your customer wants a storage buffer before shipment, build that into your contract's tax-allocation terms — the tax will likely be due at completion/title-transfer regardless of the ultimate export, so decide up front whether you or the customer bears that cost, and plan for the customer to supply export documentation afterward to pursue a refund.

Accountants and tax professionals

This is a useful before/after fact pattern: intentional storage from the outset (taxable at completion) vs. unplanned storage due to market conditions with removal at first opportunity (potentially exempt, per Hearing No. 15,800). Getting the customer's storage intent on record at the time of contracting matters.

Common questions

Q: Is our drilling rig sale exempt if we know for certain the customer will export it eventually?
A: Not necessarily. If the rig will be stored in Texas after completion rather than removed forthwith, it isn't for "exclusive use outside the state" at the time of sale, so the § 151.324 export exemption doesn't apply and tax is due at completion/title transfer.

Q: Can we get the tax back later if the rig is in fact exported?
A: Yes — the customer can request a refund by providing shipping documentation proving export, per Rule 3.325(c)'s import/export documentation rules.

Q: How is this different from the rig in Hearing No. 15,800 that was stored for 18 months and still got the exemption?
A: In that case, the customer had no intention of storing the rig when it was ordered — it was stored only because industry demand dropped after ordering, and it was removed at the first real opportunity. Here, the storage is planned from the start, which the Comptroller treats differently.

Q: Can I rely on this letter for my own export/storage arrangement?
A: No. This opinion is based on the facts presented, and other facts, though similar, may produce a different result; it binds the Comptroller only as to the taxpayer it was issued to.

Citations and references

• Tex. Tax Code § 151.324 (equipment used elsewhere for mineral exploration or production)
• 34 Tex. Admin. Code Rule 3.332 (eff. 12-31-75)
• 34 Tex. Admin. Code Rule 3.325(c) (imports and exports — proof of export for refund)
• Comptroller's Hearing No. 15,800 (rig stored 18 months without original intent to store; removed at first opportunity)

Subject

Drilling Rig — Built For Use In Foreign Country — Stored In Texas Until Needed By Customer — Not Exempt — Not Removed Forthwith Upon Completion

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9712138L

Original ruling text

December 23, 1997

Dear **:

This is in response to your request for a ruling remanufacture and sale of a
drilling rig and the storage of drilling rigs before delivery to the customer.
I have restated your facts and questions below followed by my response:

You represent a CITY A Company who is engaged in the remanufacture of land
based rigs used in drilling oil and mineral wells. The Company's customers are
almost exclusively either a foreign entity or a buying agent for such an
entity, who are engaged in drilling land based wells in foreign countries. Many
of the drilling components are provided by the purchaser or its other vendors,
and incorporated into the remanufactured rig. The equipment to be assimilated
is typically in a used condition whether it is provided by the Company, the
purchaser, or other vendors. The Company typically enters into a written
agreement for the remanufacture. Each project usually takes 90 to 120 days for
completion.
Sometimes, but not usually, the Company receives a 10% down payment upon
entering into the contract. After completion, the rig is usually delivered
(made available) to the purchaser or his designated agent or (Freight Forwarder
or Common Carrier) on terms "Ex Works" at the Company's leased CITY A location
for immediate shipment to the Port of CITY A for export to its foreign
destination. Title to the rig is transferred to the purchaser at the time the
completed rig is made available to the purchaser at the Company's CITY A
facility. The Company obtains an exemption certificate from the purchaser
stating that the property is for exclusive use outside the boundaries of the
state, as well as the applicable documents evidencing the exportation to
justify not collecting sales tax. After arrival at its foreign drilling site,
the Company typically provides one or two men to provide technical assistance
to commission the rig at its first drilling location.

One of the Company's customers, a Delaware Corporation, acting as an agent for
a foreign entity, is currently in the final stages of entering into a contract
with the Company for the remanufacture of two drilling rigs. The customer is
unsure at this time as to the foreign destination, however they have assured
the Company that the rigs will not be in any circumstances used in the United
States. Since the customer realizes that a short period (up to six months)
could elapse after completion of the rig before its foreign destination is
determined, they have asked the CITY A Company to enter into a separate storage
agreement to hold the rig at its CITY A facility for up six months to allow
time to determine the rig's destination. After review of Rule 3.332 (Effective
12-31-75) and discussion with your office, I felt it would be a good idea to
request your written response as to the treatment of the anticipated
transaction (both the sale and storage) under the Texas Sales and Use Tax
statutes. Please reference all applicable Rules and Code sections to aid me in
my understanding of your conclusion. If you determine that the sale is taxable,
please advise both as to when, as well as what triggers the tax as the Company
usually agrees to be responsible for any taxes arising prior to Delivery of the
rig. Accordingly, the Company could revise their proposed contract so that the
purchaser would be responsible for the sales tax.

Response: Sales tax will be due upon completion and transfer of title to the
two rigs to your customer. Because the customer intends to store the rigs
until needed rather than remove the rigs forthwith upon completion, the rigs
cannot be said to be for exclusive use outside this state. Therefore an
exemption under Texas Tax Code 151.324, Equipment Used Elsewhere for Mineral
Exploration or Production, is not available.

Your customer had cited Hearing #15,800 to you, which exempted a drilling rig
that was completed and then stored for 18 months at a third party's location in
Texas. We feel that this is distinguishable from the situation at hand in that
when the rig in this hearing was contracted for, the customer had no intention
of storing the rig prior to taking delivery. The rig was ordered at a time of
industry expansion but was received when demand had fallen off. The rig was
stored at a transportation company's location and the Administrative law Judge
concluded that the rig was removed at the "first opportunity offered."

Your customer may later request a refund of sales taxes paid upon providing
your company of shipping documentation reflecting that the rig was exported.
See subsection (c) of Rule 3.325 - Imports and Exports, for acceptable
documentation of proof of export.

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

I hope this information answers your questions. If you need additional
information, please
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. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division