In certain circumstances, services performed on oil and gas wells or related equipment may be subject to Texas sales or use tax. The taxability of these services is fraught with complexity, but is discussed briefly below.
General Taxability
At a high level, services performed on oil and gas wells are generally subject to tax as either (i) commercial repair and remodeling services (i.e., services performed on real property) or (ii) repair, remodeling, or maintenance of tangible personal property (i.e., services performed on portions of the well or related equipment). [1]
Nontaxable Services
Comptroller Rule § 3.324 carves out certain services as specifically nontaxable. This Rule lays out two general categories of nontaxable services.
First, no Texas sales or use tax is due on “[t]he labor to perform those services subject to the 2.42% oil well service tax imposed under Tax Code, Chapter 191”. [2] In this context, Chapter 191 applies “oil well services” which are defined to include:
- Cementing the casing seat of an oil or gas well;
- Shooting, fracturing, or acidizing the sands or other formations of the earth in an oil or gas well; or
- Surveying or testing the sands or other formations or their contents in an oil or gas well by using instruments or equipment at least a part of which are located in the well bore when the survey or test is made. [3]
The 2.42% tax is imposed (and thus no Texas sales or use tax is imposed) on any person who engages in one of the “oil well services” above, and who:
- Owns, controls, or furnishes the tools, instruments, and equipment used in providing the oil well service; or
- Uses any chemical, electrical, or mechanical process in providing the service at any oil or gas well during and in connection with the drilling and completion, or reworking or reconditioning, of the well. [4]
Second, no Texas sales or use tax is due on “[w]ork performed inside the wellbore for the purpose of starting initial production or increasing production by working on the formation”. [5] The above language leaves itself open to a wide variety of interpretations, and unsurprisingly has been the subject of significant litigation. Subsection (b)(2) provides minor help in the form of a “laundry list” of nontaxable services:
- Fracturing
- Perforating
- Squeeze cement
- Workover
- Acidizing
- Logging
- Drilling deeper
- Plug back
- Completion
- Plug and abandon
- Pulling or resetting casing liner
- Installing a casing liner
- Drilling out a plug
- Putting on artificial lift (new installation)
- Running a bottom hole bomb
- Swabbing
- Jetting
- Gravel packing
- Hot oil treatment of formation
However, an effort to interpret or apply this list may create more questions than it resolves. The Comptroller’s website includes an “audit manual” that provides some additional detailed information on the taxability of certain oil well services. The audit manual can be found here.
The above discussion is of course a very general overview. Whether a specific oil and gas well-related service may be subject to tax more in-depth review of the service performed and the circumstances surrounding it. Our team at Freeman Law has experience representing taxpayers at all levels of state tax litigation, including with respect to the issues described above.
State and Local Tax Services
Freeman Law works with tax clients across all industries, including manufacturing, services, technology, oil and gas, financial services, and real estate. State and local tax laws and rules are complex and vary from state to state. As states confront budgetary deficits due to declining tax revenues and increased government spending, tax authorities aggressively enforce state tax laws to recapture lost revenues.
[1] See 34 Tex. Admin. Code § 3.324(a)(2).
[2] See 34 Tex. Admin. Code § 3.324(b)(1).
[3] See Tax Code §§ 191.081, 083.
[4] See Tax Code § 191.082.
[5] See 34 Tex. Admin. Code § 3.324(b)(2).
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