Is drilling a rathole or mousehole (holes in the rig floor used to hold drill pipe and hoisting equipment during oil/gas well drilling) subject to Texas sales tax or the separate 2.42% oil well services tax?

Plain-English summary

A company that contracts with oil and gas producers to drill ratholes and mouseholes — small preparatory holes in the rig floor, ahead of drilling the actual well — asked whether this prep work counts as part of taxable "stimulation of production" services.

The letter quotes an industry reference ("A Primer on Oilwell Drilling") to define the terms precisely: a rathole is a casing-lined hole in the rig floor that holds the Kelly and swivel during hoisting operations, and a mousehole is a pipe-lined opening in the rig floor used to temporarily stage a length of drill pipe before it's connected to the drill string. Both are drilling-preparation infrastructure, not production stimulation.

The Comptroller ruled that drilling a rathole or mousehole is not subject to either Texas sales tax or the separate 2.42% tax on oil well services. However, that nontaxable-service status doesn't extend to the company's own equipment: it still owes sales tax on any machinery or equipment it uses to perform the drilling work, the same way any nontaxable-service provider pays tax on the tools it uses to deliver that service.

What this means for you

Oil and gas drilling contractors

Charges for drilling ratholes and mouseholes are outside both the general sales tax and the 2.42% oil well services tax — you don't need to collect either tax on this specific preparatory service. But you still pay tax yourself on the machinery and equipment used to drill these holes; the exemption applies to the service you sell, not to your own equipment purchases.

Oil and gas producers hiring drilling-prep contractors

Expect this specific line item (rathole/mousehole drilling) to come without sales tax or the oil well services tax added — but understand that's a service-level exemption for the contractor's charge, not a signal that all oilfield service charges are similarly untaxed.

Accountants and tax professionals

This letter is useful for classifying narrow, well-defined oilfield prep activities that fall outside both the general sales tax and the industry-specific 2.42% oil well services tax — worth checking against the specific terminology (rathole vs. mousehole vs. actual well-stimulation work) rather than assuming all "drilling-adjacent" services get the same treatment.

Common questions

Q: Is drilling a rathole or mousehole taxed as an oil well "stimulation of production" service?
A: No. It's not subject to sales tax or the 2.42% oil well services tax.

Q: Does the contractor still pay tax on anything related to this work?
A: Yes — the contractor owes sales tax on any machinery or equipment it uses to perform the drilling, even though the service itself is nontaxable.

Q: Can I rely on this letter for other oilfield drilling-prep services?
A: No. This opinion is based on the facts presented, and other facts, though similar, may provide a different result; it binds the Comptroller only as to the taxpayer it was issued to.

Citations and references

• No specific Tax Code section or Comptroller rule number is cited in the body of this letter; it classifies rathole/mousehole drilling against the general sales tax and the separate 2.42% oil well services tax based on industry-standard definitions of the terms.

Subject

Drilling Ratholes Or Mouseholes In The Ground In Preparation For Drilling Oil/Gas Wells

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9801203L

Original ruling text

January 14, 1998

Dear *****:

Your letter to Mr. Karey Barton has been assigned to me for response. You are
asking for a taxability ruling on the drilling of ratholes or mouseholes. Your
company is in the business of contracting with oil and gas producers to drill
these holes in preparation of the drilling of an oil and/or gas well. Your
question is whether this service is considered a part of the stimulation of
production and thus not taxable.

"A Primer on Oilwell Drilling" defines rathole and mousehole as follows:

Rathole - a hole in the rig floor which is lined with casing that projects
above the floor and into which the Kelly and swivel are placed when hoisting
operations are in progress.

Mousehole - an opening through the rig floor, usually lined with pipe, into
which a length of drill pipe is placed temporarily for later connection to the
drill string.

Response: The drilling of a rathole or mousehole into the ground is not
subject to sales tax or the 2.42% tax on oil well services. Your company
owes sales tax on any machinery or equipment it uses to perform this nontaxable
service.

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

cc: Karey Barton