Tax Executives Institute

Tax Executives Institute

Texas Oil and Gas

Transactions

Circular 230 disclaimer

►

Any US tax advice contained herein was not

intended or written to be used, and cannot be

used, for the purpose of avoiding penalties that

may be imposed under the Internal Revenue

Code or applicable state or local tax law

provisions.

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These slides are for educational purposes only

and are not intended, and should not be relied

upon, as accounting advice.

Tax Overview – Oil and Gas Well Servicing

Companies

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Services may be subject to EITHER Sales Tax, or Oil Well

Services (2.42) Tax

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A single transaction will NEVER be subject to BOTH taxes

Some services may NOT be subject to either sales tax or oil

Tax Overview – Oil and Gas Well Servicing

Companies

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Services performed inside the oil and gas producing

formation

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Services performed inside the casing or on well site

equipment

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Repair, Restoration, Remodeling or Real Property or

General Sales Tax Concepts

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Tangible Personal Property

Texas Oil Well Service Tax or Texas Sales

Tax? A Lone Star State Quandary!!

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What is the Texas Oil Well Service Tax?

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How does this differ from the Texas Sales Tax?

Texas Oil Well Service Tax – 2.42 Tax

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Legally identified as a Miscellaneous Occupation Tax

Chapter 191 subchapter E

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Tex. Admin. Code Sec. 3.143 provides guidance

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Imposed on a company engaged in providing oil well

services for a consideration when the company:

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Owns, controls or furnishes the tools and equipment

used in providing the service

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Uses any chemical, electrical or mechanical process in

providing the service during and in connection with the

drilling and completion or reworking or reconditioning of

the well

Texas Oil Well Service Tax – 2.42 Tax

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This tax does not apply to the business of drilling

or reworking an oil or gas well or to a service

incidental to the business of drilling, reworking or

reconditioning a well when the service is

performed by the person drilling or reworking the

well.

Texas Oil Well Service Tax – 2.42 Tax

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Taxable services include:

► Cementing the casing seat of any oil or gas well ► Shooting fracturing or acidizing the sands or other

formations of the earth

► Surveying or testing oil or gas well formations or the

contents of formations with instruments or equipment partially or wholly located within the well bore

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Common taxable charges include:

► Charges for equipment hooked to a well or to other

equipment hooked to the well while performing a taxable service

► Charges for Mixing, Blending, and Proportioning ► Oil Well Service tax amounts billed to the customer

Texas Oil Well Service Tax – 2.42 Tax

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Cementing the Casing Seat

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Begins with placement of the production string in the

well and ends when the cement is in place. Cementing

the bottom liner used as an extension of a

Texas Oil Well Service Tax – 2.42 Tax

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Taxable services involved in Cementing the

Casing Seat

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Mixing cement slurry

Blending

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Setting packers of placing hangers (if done by the

service company during the cementing operation)

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Pumping slurry from the mixer and/or blender to the

wellhead pump

Texas Oil Well Service Tax – 2.42 Tax

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Shooting Sands/Other Formations is the only

shooting service subject to the well servicing tax

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No well service tax is due on the following

“shooting” services:

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Perforating or cutting casing

Shooting to remove fish

Texas Oil Well Service Tax – 2.42 Tax

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Fracturing Sands/Other Formations involves

forcing a fluid carrying a propping agent into

cracks formed by applying hydraulic pressure into

a formation

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Fracturing operations are taxable if the purpose is

to stimulate production in a new well or to

increase production in an old well

Texas Oil Well Service Tax – 2.42 Tax

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Taxable fracturing operations include:

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Mixing or blending proppant and fluid at the well

Blending additives or inhibitors into the fracturing

medium at the well

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Injecting any other material into the fracturing medium

at the well

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Pumping the fracturing medium at the well

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Sealing perforations in multiple completions during the

Texas Oil Well Service Tax – 2.42 Tax

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Fracturing operations that are not subject to the

well service tax include:

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Cleaning perforations preparatory to fracturing

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Surveying prior to fracturing when the survey is not

used to locate or determine a production formation

Texas Oil Well Service Tax – 2.42 Tax

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Acidizing Sands/Other Formations to stimulate or

improve production, to prevent scaling, or to

prepare the formation for a scale-inhibiting

chemical treatment is a taxable service. This

includes:

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Mixing acidizing medium at the well

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Blending or injecting additives and/or inhibitors at the

well

Texas Oil Well Service Tax – 2.42 Tax

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Acidizing services not subject to well servicing tax

include:

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Recovering fish or stuck pipe

Cleaning screens or strainers

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Dissolving drilling material sheaths

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Dissolving paraffin deposits in the producing equipment

Acidizing soluble materials

Texas Oil Well Service Tax – 2.42 Tax

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Surveying Sands and other formations includes

logging. The two basic types are open hole log

and a cased hole log. Any log or survey run with

an instrument in the well bore to locate, measure,

or determine the depth, character, or contents of

a formation is subject to well servicing this

includes the following logs or surveys:

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Electric, neutron, chlorine, acoustic, temperature, fluid

Texas Oil Well Service Tax – 2.42 Tax

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Surveying services not subject to the well service tax

include:

► Electric logs used only to locate junk or fish in a well bore ► Acoustic logs used to survey results of cementing

► Temperature surveys used to check the results of cementing ► Cement bond surveys

► Tracer logs used only to detect channels behind the casing

or to plot an injection profile

► Temperature surveys used to check mechanical equipment ► Fluid surveys conducted with a sonic instrument from the

surface

Texas Oil Well Service Tax – 2.42 Tax

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Testing Formations or their contents refers to

fluids gases and pressures. The following tests

are subject to the well service tax when

performed by a company other than the driller:

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Drill stem test

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Bottom hole or depth pressure test

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Productivity index test made with an instrument in the

well during drilling, completion, reworking, or

reconditioning of the well

Texas Oil Well Service Tax – 2.42 Tax

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Testing that is not taxable under the well service

tax includes:

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Analysis of fluids, cores or cuttings made outside the

well bore

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Open flow potential test when no instrument is in the

well

Texas Oil Well Service Tax – 2.42 Tax

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Common charges not subject to well servicing tax if

separately stated on invoices:

► Mileage charges

► Waiting or standby time

► Charges for equipment taken to the well but not connected ► Charges associated with services in converting an oil or gas

well into an injection well

► Sales tax reimbursement equal to that actually paid for

sales and use tax on materials and supplies

► Charges for materials used, consumed, expended in or

Texas Oil Well Service Tax – 2.42 Tax

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Service companies often perform several operations

(into and out of a well) on one trip. Therefore, it is

important to distinguish the services performed.

Taxable and nontaxable services should be billed

separately to avoid a tax on the entire charge.

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A miscellaneous charge that applies to the entire

invoice may be allocated for tax purposes between

taxable and non taxable well servicing activities.

Common charges include service charges, license

fees or equipment protection charges.

Texas Oil Well Service Tax – 2.42 Tax

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Billing example:

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$1,000 - Cementing the casing seat

$200 - Materials and supplies

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$310 – Stand-by charges

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$24.20 - 2.42% Well servicing tax on labor

$1534.20 - Total billing

Texas Oil Well Service Tax or Sales and Use

Tax ?

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Oil and gas well servicing companies may be subject

to either the Limited Sales and Use Tax or the Well

Servicing Tax or both. However, a single transaction

will not be subject to both taxes.

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Generally if the well servicing activity is performed on

the oil and gas producing formation itself the activity

is subject to the Well Servicing Tax. If the activity is

performed inside the casing of the well, or on

equipment at the well site the activity is subject to the

Limited Sales and Use Tax

Texas Limited Sales and Use Tax

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Sales and Use Tax applies to the total charge to

repair, restore, remodel or maintain tangible personal

property (TPP) and the total charge to repair,

remodel, or restore nonresidential improvements to

real property. Taxable services also include some

real property services such as surveying and

structural pest control at the lease site.

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Tax Base when performing a service subject to sales

tax includes the total charge – materials, labor,

charges for mileage, trip charges, standby charges

etc.

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While charged by the vendor it is the responsibility of

Texas Limited Sales and Use Tax

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For oil, gas, and related well services for the

purposes of Texas sales tax guidance can be

found in Tex Admin. Code Sec 3.324. This

administrative code is known, or commonly

referred to as Rule 3.324.

Texas Limited Sales and Use Tax

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Activities outlined in sales tax Rule 3.324 which are

subject to sales tax include:

► Pump change – replace bottom hole pump

► Rodtubing job – pulling sucker rods and/or tubing out of and

running it back in the well.

► Fishing for rods or tubing – when sucker rods or tubing

break a fishing tool is run to recover the parted rods or tubing

► Tubing leak – tube may become worn tubing is pulled and

replaced

► Change packer or anchor

► Hot oil or water treatment of casing, tubing or flow lines ► Squeeze cement

Texas Limited Sales and Use Tax

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Providers of a service subject to sales tax should pay

sales tax on any machinery or equipment to provide

the service and any materials (except cement) used

or consumed in providing the service which do not

become part of the items inside the wellbore.

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Items that become a component part of the items

inside the wellbore are considered to be sold as part

of the taxable service and may be purchased free

Texas Limited Sales and Use Tax

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Work Crews

► Labor charges to prepare a well for servicing will be taxable

or not depending on what is actually done by the provider:

► A crew removing rods so a pump can be repaired is providing taxable

labor

► A crew removing tubing so that a workover could be accomplished is not

providing taxable labor

► General maintenance around a well site may be

maintenance on TPP, real property service or repair to real property

► All welding in the field will be presumed taxable unless

billings clearly indicate the labor was performed as part a non taxable activity such as new construction or third-party installation

Texas Limited Sales and Use Tax

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Items treated as TPP in an oil or natural gas field

► Christmas tree, wellhead and well components

► Storage facilities – tanks with a storage capacity of 500

barrels or less

► Separation and dehydration equipment

► Gathering lines that are totally above the ground

► Flow lines that are above ground, below ground or partially

above and below

► Board roads and board turnaround areas

► Everything inside the casing of a well such as tubing, pipe,

Texas Limited Sales and Use Tax

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Items treated as real property in an oil or natural gas

field

► Pump stations, booster stations ► Casing in place

► Enhanced production-injection and recovery systems (which

cannot be moved intact)

► Storage facilities – tanks with a storage capacity of more

than 500 barrels

► Compressors at compressor stations other than leased

compressors

► Gathering lines that are totally underground ► Meters located on transmission lines

Texas Limited Sales and Use Tax

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Examples of Real Property Services performed at the

well site:

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Taxable

► Patching holes in road

► Lease road blading that doesn’t qualify as maintenance ► Structural pest control services

► Certain surveying associated with drill site preparation

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Nontaxable

► Covering oil spills at the lease site

Texas Limited Sales and Use Tax

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Exempt Manufacturing Equipment

► Production Separators, Dehydrators, Gas Scrubbers ► Exempt Compressors vs. Taxable Compressors

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Non-Taxable Well Services

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Non-Taxable Services at the Lease Site

► Lease Site Waste Removal Services ► Lease Site Reclamation Services ► Cutting Weeds at Lease Site

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Rentals vs. Service

Electricity

Texas – Audit Environment



There appears to be a general increase in the

audit activity as it pertains to the oil and gas

industry.

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In addition to the traditional sales tax audits, an

increase in oil well service tax audits are being

observed.

Texas – Audit Environment

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Common Assessment Areas

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2.42 Reimbursements

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Compressors

Texas

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Audit Activity

► Appears to be increasing ► Form over substance

► Operator vs. Supervisor

► Compressors – level of documentation

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