Is a vacuum-truck company's charge for hauling and disposing of drilling mud and saltwater from oil and gas production wells subject to Texas sales tax?

Plain-English summary

A company that operates a vacuum truck asked the Comptroller whether its charges for collecting and disposing of drilling mud and saltwater from oil and gas production wells are taxable. The company vacuums saltwater out of existing production wells and vacuums up drilling mud at well sites, then disposes of both, charging customers an hourly rate. It doesn't sell the mud and doesn't charge separately for the use of its storage tanks.

Normally, charges for hauling and disposing of "garbage" or "waste" are a taxable real property service in Texas. But the Comptroller's real property services rule (Rule 3.356) specifically excludes from the definition of garbage or waste any materials that result from oil, gas, or geothermal exploration, development, or production — the kind of material regulated by the Railroad Commission of Texas. Since drilling mud and saltwater from producing wells fall squarely within that exclusion, the hauling and disposal charges are not taxable.

There's one wrinkle: the company still owes sales tax when it buys the storage tanks it sometimes leaves at a customer's location to collect the waste, since that's a taxable purchase of tangible personal property by the company itself (not a resale).

What this means for you

Oilfield waste-hauling and vacuum-truck companies

If your hauling/disposal work is limited to materials generated by oil, gas, or geothermal exploration, development, or production — drilling mud, produced/saltwater, and similar oilfield waste — you don't need to charge your customers sales tax on those hauling and disposal charges. But remember you still pay tax on your own equipment purchases, including storage tanks, since the exemption applies to the service you sell, not to what you buy to perform it.

Accountants and tax professionals

This is a narrow rule-based carve-out (Rule 3.356(a)(3)(B)) from the otherwise-broad taxable "real property services" category for waste hauling. It only covers materials tied to oil, gas, geothermal, or Railroad-Commission-regulated production — general garbage or non-oilfield waste hauling remains taxable.

Common questions

Q: Is hauling drilling mud and saltwater away from an oil well taxable in Texas?
A: No, per this letter, as long as the waste results from oil, gas, or geothermal exploration, development, or production under Rule 3.356(a)(3)(B).

Q: Does the hauling company still pay tax on anything?
A: Yes — the company must pay sales tax when it purchases the storage tanks it leaves at customer sites to collect waste, since that's a taxable equipment purchase.

Q: Does this exemption cover all waste hauling?
A: No. It's specific to oilfield-related waste covered by Railroad Commission jurisdiction. General garbage/waste hauling is a taxable real property service.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.356(a)(3)(B) (Real Property Services — excludes oil/gas/geothermal production materials from "garbage" or "waste")
• Tex. Nat. Res. Code § 91.101 (Railroad Commission regulation of oil and gas waste materials)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9810858L

Original ruling text

October 9, 1998

Dear Ms. **:

This is in response to your request for information on behalf of your client
regarding whether or not the services that your client is providing is taxable.
The following is a description of the type of service that your client, COMPANY
A, engages in:

COMPANY A owns a vacuum truck which they use to collect and dispose of drilling
mud and of disposal saltwater. The disposal saltwater is vacuumed out of
existing production wells. The same with the disposal of the mud, they travel
to the existing location and vacuum and dispose of this mud. The company does
not charge rental for the usage of its storage tank facilities for which the
company uses to store mud for their customers on occasion. The business does
not engage in the sale of mud. It is basically removing and disposing of the
mud. The corporation uses their own equipment and truck.

These services are charged on an hourly rate of fifty-six dollars
($**) per hour. This rate is charged regardless of the distance
traveled to provide these services to the customers.

You are asking how to handle sales tax on the above services.

Response: Generally, a charge for hauling and disposal of waste is taxable.
However, subsection (A)(3)(B) of Rule 3.356- Real Property Services, excludes
from the definition of garbage or waste "... materials which result from
activities associated with the exploration, development, or production of oil,
gas, geothermal resources, or any other substance or material regulated by the
Railroad Commission of Texas pursuant to Natural Resources Code, sec. 91.101."

Therefore, your clients' charge for hauling and disposing of drilling mud and
saltwater resulting from the exploration, development, or production of oil or
gas is not taxable. Your client must pay tax on his purchase of storage tanks
left at the customer's location for the collection of the waste materials.

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