Which oilfield heating, cleaning, water, brine, KCL, hauling, testing, and well-killing charges were taxable?

Plain-English summary

The letter classified 16 oilfield operations. Heating oil in an oil-company storage tank to remove impurities before sale and doing the same in a public disposal company's tank were not taxable. Steam-cleaning tubing and pumping hot oil down a well to melt paraffin were taxable.

Testing tubing for leaks by pumping produced water or brine water was not taxable because testing personal property was not one of the taxed services. Pumping produced water or KCL through the well to clean sand from the bottom was taxable.

Hauling and disposing of an oil company's produced water, transporting it to the customer's disposal system, and selling and delivering fresh water were not taxable. Brine hauled from a public station to an oil-company pit was taxable, including both brine and hauling; brine could be bought for resale with a resale certificate.

Killing a well with brine followed the purpose of the underlying work. It was taxable when done to repair or maintain personal property such as tubing, pumps, or rods, but not taxable when done so casing could be repaired or the formation fractured or acidized.

Brine pumped into an oil tank before nontaxable impurity-removal work did not make the pumping service taxable, but the brine itself was taxable. The letter likewise required tax on brine and KCL bought for use in the listed operations, while allowing resale-certificate treatment and a supplier-tax credit in the specified resale transactions.

For a taxable service under Section 151.0101(5), the total charge was taxable, including separately stated equipment and supplies.

Common questions

Was tubing-leak testing taxable? No. Was sand cleanout taxable? Yes. Was every well-killing charge taxable? No; the result depended on the work the kill enabled. Were brine and KCL inputs automatically exempt when the service was not taxable? No; the letter separately taxed inputs in specified uses.

Citations and references

• Texas Tax Code § 151.0101(5), cited for taxable services.
• Texas Sales Tax Rule 3.338(a), cited for the credit mechanism on tax paid to a supplier.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8502L0638E03

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

February 15, 1985

Dear ****

Thank you for your January 30, 1985, letter concerning the effect of the
October 2, 1984, changes in the sales tax law on your business.

1. Heating oil in an oil company's oil storage tank to remove impurities so the
   oil can be sold, is not taxable regardless of the storage tank's capacity.

2. Steam cleaning tubing is taxable.

3. Pumping hot oil down the casing of a well to melt paraffin in the tubing is
   taxable.

4. Heating oil in a public disposal company's disposal tank to remove produced
   water so the oil can be sold is not taxable.

5. Pumping produced water down tubing to test for tubing leaks is not taxable.
   The sales tax law taxes the repair, restoration, maintenance or remodeling of
   personal property. Testing personal property is not taxed under the sales tax
   law.

6. Pumping produced water down the tubing and circulating it back out the
   casing to clean out sand in the bottom of the well is taxable.

7. Fees for hauling and disposal of the oil company's produced water are not
   taxable.

8. Transporting the oil company's produced water to the oil company's
   (customer's) disposal systems is not taxable.

9. The sale and delivery of fresh water is not taxable.

10. The charge for hauling brine from a public brine station and putting in an
    oil company's pit is taxable. The charge for the brine and the charge for
    hauling are taxable. The brine may be purchased tax-free under a resale
    certificate.

11. The charges for the brine and for hauling are taxable as in #10.

12. Pumping brine down the tubing or casing, or both, to kill a well is taxable
    if the work on the well is taxable. If a well is killed to repair or maintain
    personal property (tubing, pump, rods, etc.), the charge for killing the well
    is taxable. If a well is killed so that the casing can be repaired or the
    formation fractured or acidized, the charge for killing the well is not
    taxable.

13. Pumping brine water down tubing to test for tubing leaks is not taxable.

14. Pumping brine water into an oil tank before heating the oil in the tank to
    remove impurities so the oil can be sold is not taxable. The brine used is
    taxable.

15. Pumping potassium chloride (KCL) down the tubing and circulating it back
    out the casing to clean out sand in the bottom of the well is taxable.

16. The charges for the KCL and delivery are taxable as in #10.

If an operation is a taxable service as defined ion Section 151.0101(5) of the
tax code, the total amount charged will be taxable. This would include
separately stated charges for equipment and supplies.

Brine and KCL are taxable when used in the operations described in #'s 12,13,14
and 15. You are required to pay sales tax on the brine and KCL when it is
brought for use in these operations.

Brine and KCL may be bought tax free for resale by issuing a properly completed
resale certificate to your supplier. The hauling charges will also be taxable.

's 10,11, or 16, you may take credit for the tax paid to your supplier as

outlined in Rule 3.338(a).

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, please call me at
1-800-252-5555 toll free from anywhere in Texas. The regular number is
512-475-1931. You may write me at the Tax Administration Division.

Sincerely,

Eddie C. Washington
Tax Policy Section
Tax Administration Division