Is a gas well foamer product ('soapsticks' or 'acidsticks') purchased by a well operator and injected downhole to stimulate gas flow subject to Texas sales tax?

Plain-English summary

A well operator asked about the taxability of a gas well foamer product, also known as "soapsticks" or "acidsticks." In a low-pressure gas well, water or condensate in the well bore can build up enough pressure to block the flow of gas — for example, 1500 psi of water pressure against only 1000 psi of gas pressure. The product is injected into the well to turn that water into suds or bubbles, lightening the effective water pressure enough (say, below 1000 psi) to let gas flow again. The product is water-soluble, and the well operator purchases it directly.

The Comptroller applied Rule 3.324(h) (Oil, Gas, and Related Well Service), which sorts downhole chemical injection into two categories:

1. Maintenance-type chemicals (corrosion inhibitors, bactericides, etc.) injected into the wellbore are a taxable service. If some of those chemicals are oil-soluble and remain in the product flow after injection, the well operator can buy them separately from the service provider under a resale certificate instead of paying tax on the chemical charge — but everything else associated with the injection (mileage, standby, pump truck, labor) stays taxable.
2. Production-stimulating or impurity-removing chemicals (acid, emulsifiers, nitrogen) injected downhole are a nontaxable service — but in that case, the service company is treated as the consumer of the chemicals and must pay tax when it buys them.

Here, the well operator itself is purchasing the soapsticks/acidsticks directly (not going through a service company) for injection to stimulate/enhance gas production. That opens the door to a possible exemption certificate — but only for chemicals that actually become part of the product being sold. Soapsticks and acidsticks, while water-soluble, are not soluble in the oil or gas actually produced — they don't become part of the finished product. So they don't qualify for that exemption and are taxable to the well operator when purchased.

What this means for you

Oil and gas well operators buying downhole chemicals directly

Whether a downhole chemical purchase is taxable often turns on solubility with the actual product (oil or gas) being produced, not just whether the chemical is water-soluble or whether it's used to stimulate production. A chemical that dissolves in water but not in the produced oil/gas doesn't "become part of the product sold," so it won't qualify for a resale/production exemption certificate even if injected for a stimulation purpose.

Well service companies

Rule 3.324(h)'s two-track framework (taxable maintenance-type chemical injection service vs. nontaxable stimulation/impurity-removal service) determines who ultimately bears the tax — the well operator via a taxable service charge, or the service company itself as the consumer of the chemicals it uses. Which track applies depends on the chemical's purpose and how the transaction is structured (operator buying direct vs. service company providing an injection service).

Accountants and tax professionals

This letter is a good illustration of how a "does it become part of the product sold" solubility test can defeat an otherwise-plausible production-exemption claim — useful for any client purchasing specialty oilfield chemicals directly.

Common questions

Q: Are gas well foamers (soapsticks/acidsticks) exempt from sales tax when purchased by a well operator to stimulate gas production?
A: No, per this letter — even though injected for a production-stimulation purpose, they're taxable because they're not soluble in the oil or gas actually produced, so they don't become part of the product sold.

Q: When would a downhole chemical purchase by the well operator qualify for an exemption certificate?
A: Per this letter, only when the chemical actually becomes part of the product being sold (oil-soluble chemicals that remain in the product flow, for example).

Q: Who pays tax when a service company injects stimulation chemicals downhole as a nontaxable service?
A: Per Rule 3.324(h)(2) as cited in this letter, the service company itself is the consumer of those chemicals and must pay tax when it purchases them.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.324(h) (Oil, Gas, and Related Well Service — chemicals injected downhole, sales versus service)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9809836L

Original ruling text

September 15, 1998

Dear Mr. **:

This is in response to your request for a taxability concerning the gas well
foamers otherwise known as soapsticks or acidsticks called "product" for this
example. The product is purchased by the well operator.

QUESTION: In the well bore, water or condensate stops the flow of gas on low pressure gas
wells. The formation pressure is not enough to push the water out of the hole
to allow the gas to flow freely. For an example: In the well the water pressure
could be 1500 psi and the gas pressure could be 1000 psi. The product is injected into
the well to lighten the water pressure by reducing the water to suds or bubbles. This
lowers the water pressure to less than 1000 psi for this example and stimulating the flow
of gas. The product is water soluble. Is the product subject to sales tax?

RESPONSE: Subsection (h) of Rule 3.324 - Oil, Gas, and Related Well Service,
addresses chemicals injected downhole, as follows:

Chemicals, brine water, KCL-sales versus service.
(1) Because maintenance to tangible personal property is taxable, the injection
of maintenance-type chemicals such as corrosion inhibitors, bactericides, etc.,
into the wellbore is considered a taxable service. Since certain chemicals are
oil soluble and remain in the product flow after injection, the well operator
may purchase those chemicals separately from the service provider and issue a
resale certificate in lieu of tax on the charge for the chemicals. All charges
associated with the injection would be taxable including mileage, standby, pump
truck, and labor.

(2) The injection of chemicals to stimulate production or remove impurities
from the product being removed such as acid, emulsifiers, or nitrogen is a
nontaxable service. The service company is the consumer of all chemicals
pumped down hole and must pay tax at the time of purchase.

(3)...

In your situation, it is the well operator who is purchasing the product for injection
downhole to stimulate or enhance production of the gas. The well operator may
issue an exemption certificate for chemicals that become part of the product
that is sold. However, the soapstick and acidsticks, while water soluble, are not
soluble with the oil or gas produced and are therefore taxable to the well
operator when purchased.

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