A company plugs holes drilled to record seismic data for an oilfield service company. Is this service taxable, and does it matter whether the bill separates the materials (bentonite) charge from the labor charge?

Plain-English summary

A taxpayer's company plugs holes drilled for an oilfield service company; the holes are used to record seismic data for oil companies. The taxpayer asked whether this service is subject to Texas sales tax.

The Comptroller confirmed the service is not subject to sales tax if the charge to the customer is lump-sum — labor and materials (such as bentonite, the plugging material) not separately stated. The company must still pay sales tax on its own materials and equipment used to perform the (nontaxable) service, since it's the end consumer of those items. But if the company separately states the charge for bentonite from the labor charge, it must then collect sales tax on that materials charge. The labor portion stays nontaxable in either case, unless the work amounts to repairing or remodeling a nonresidential improvement to realty — the letter gives a road as an example of what would flip the labor itself into a taxable repair service.

What this means for you

Oilfield and seismic-survey service providers

Whether your hole-plugging or similar field service is taxable can turn entirely on how you bill it. A single lump-sum charge for labor and materials keeps the whole charge nontaxable (though you'll pay tax yourself on the materials/equipment you use). Breaking out a separate materials line item makes that specific line taxable to your customer.

Accountants and tax professionals

This is a clean example of the "you're the taxable consumer of your own materials in a nontaxable service, unless you separately bill for them" pattern that recurs across several nontaxable field/environmental services in this corpus — the billing format itself determines who owes tax and on what.

Common questions

Q: Is a hole-plugging service performed to support seismic data recording taxable in Texas?
A: Not if billed lump-sum (labor and materials together, not separately stated) — the service itself isn't a listed taxable service.

Q: Who pays tax on the materials (like bentonite) used in a nontaxable lump-sum service?
A: The service provider pays sales tax on its own materials and equipment, as the consumer of those items — it does not collect tax from the customer on a lump-sum charge.

Q: What happens if the materials charge is separately stated on the invoice?
A: The provider must then collect sales tax on that separately stated materials charge.

Q: Is the labor for this kind of service ever taxable?
A: Only if it amounts to repairing or remodeling a nonresidential improvement to realty (the letter cites a road as an example) — otherwise the labor itself stays nontaxable.

Q: Can I rely on this letter for my own oilfield service business?
A: No. This opinion is based on the facts presented, and additional or different facts may yield different results; it can be relied on only by the taxpayer it was issued to.

Citations and references

No specific statutes or rule numbers were cited in this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/200001999L

Original ruling text

January 25, 2000

Dear **:

Thank you for your recent letter regarding your company's services and Texas
sales tax.

You stated that your company plugs holes for an oilfield service company. The
holes are used to record seismic data for oil companies.

Your services are not subject to Texas sales tax if the charge to your customer
is "lump-sum" (labor and materials not separately stated). You correctly stated
in your letter that you must pay sales tax on your materials and equipment to
perform the non-taxable service. If you separately state the charge for
bentonite from the charge for labor, you must collect sales tax on the charge
for the materials. The labor is not taxable unless you are repairing or
remodeling a nonresidential improvement to realty such as a road.

This opinion is based on the facts presented. Additional or different facts may
yield different results.

You may call me toll free 1-800-531-5441, extension 5-9787, if you have any
questions or need more information. The direct line is 512/305-9787. You may
also write to Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Philip Knisely
Tax Policy Division