How were oilfield-pipe cleaning, repair, yard movement, sales, and returns taxed?

Plain-English summary

Cleaning tangible personal property was taxable maintenance under Rule 3.292. The Texas subsidiary's cleaning and repair of pipe owned by its parent and held for resale was nevertheless exempt under Section 151.006(4). Cleaning or repair for customers not holding the pipe for resale was taxable.

When the parent passed an end user's pipe price, cleaning, repair, and yard-movement charges through to the customer, the sale, cleaning, and repair were taxable. Yard movement was taxable unless title had passed before the movement. If the transaction was for resale, the purchaser's resale certificate covered all charges. Charges from the subsidiary to the parent remained exempt under Section 151.006(4).

When the parent absorbed the subsidiary's cleaning, repair, and movement costs rather than passing them through, the pipe sale was taxable unless for resale, but the cleaning and repair were not taxable to the parent. The subsidiary's transportation charge was also not taxable to the parent, regardless of when title passed between parent and customer.

For returned pipe, tax could be refunded if the customer had not used the pipe and the transaction was only a rack transfer back into resale inventory. The cleaning and repair deductions from the customer's credit were classified as maintenance and repair charges, and the movement deduction as a restocking charge. If the customer had used the pipe, no tax refund was allowed.

Common questions

Was pipe cleaning maintenance? Yes. Was work on resale inventory taxable to the parent? No under the cited provision. Were end-user cleaning and repairs taxable? Yes. Could tax be refunded on returned pipe? Only when the pipe had not been used under the stated facts.

Citations and references

• Tex. Tax Code § 151.006(4) — cited for services performed on property held for sale.
• 34 Tex. Admin. Code Rule 3.292 — quoted for the definition of maintenance.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8505L0648B09

Original ruling text

May 15, 1985

Dear ***:

Thank you for your recent letter to ***. I have been asked to
respond. Your facts are restated with response below.

I represent a client, an Oklahoma corporation, which is in the
business of selling oil field supplies, in particular, tubulars
("pipe"). My client has a 100% owned corporate subsidiary which
has a storage yard in Texas where it stores pipe for my client and
also for unrelated customers. In addition to the storage, the
subsidiary corporation will frequently clean, thread, and/or repair
pipe as a part of its service.

For purposes of this letter, I will refer to my client as "Parent"
and its wholly-owned subsidiary as "Subsidiary." Parent has a
Texas resale certificate.

One preliminary question I would ask is whether, under your
construction of the Statutes and Regulations, "maintenance" as
defined in the statute would include the cleaning of tangible
personal property, to-wit the cleaning of oil field pipe.
"Cleaning" is not included as a taxable service under the statutes
unless it is included in "maintenance." "Maintenance" is not
specifically defined in the statute. It is defined in Rule 3.292 as
follows: "To keep in good working order by preventing the
decline, failure, lapse or deterioration of tangible personal
property." It appears to me to be arguable whether or not
"cleaning" would be included within the definition of "maintenance"
for purposes of this sales tax statute. However, I would like your
opinion on this question.

Response: Cleaning is taxable as maintenance.

With regard to the specific situation as far as Subsidiary's
operations are concerned generally, I have two questions. The
first relates to routine cleaning and repair of pipe owned by
Parent (and being held for sale) and being stored by Subsidiary.
it is my interpretation of Sec. 151.006(4) that if Subsidiary cleans
and/or repairs that pipe and charges Parent for those services,
there would be no sales tax since it involves services performed on
property being held for sale. Do you agree with this position?

Response: Yes.

What about cleaning services and repair services performed by
Subsidiary for other customers who are not holding the pipe for
resale? I presume these are taxable services (if cleaning is a
taxable service). Do you agree?

Response: Yes - Taxable.

With regard to other specific situations between Parent and
Subsidiary, I would like to pose three alternative transactions for
your consideration and request your opinion as to what portion of
these transactions are subject to Texas sales tax.

The first transaction is this: Assume pipe which is owned by Parent
and is being stored by Subsidiary is sold by Parent to an unrelated
third party. When the pipe is ready to be shipped it needs
cleaning and some minor repair work. The third party purchaser
has agreed to pay the cleaning and repair costs. Thus, the total
costs incurred by the third party purchaser are as follows:

Sales Price of Pipe $***
Charge by Subsidiary for cleaning $**
Charge by Subsidiary for Repairs $*
Charge by Subsidiary for Movement of Pipe Within Storage Yard from
Parent's Rack to Rack of Purchaser $****

Total Amount Billed to Customer $***

Assume further that the $***, $** and $****
are billed by Subsidiary to Parent and paid by Parent to Subsidiary, and
Parent then bills those specific amounts to the customer and is reimbursed by
customer.

Please advise as to which parts of this transaction are subject to
Texas sales tax. It would appear to us that the $*** purchase
price is subject to sales tax unless it is a qualifying sale for
resale. Are the $** and $**** exempt from tax under
Sec. 151.006(4) as services performed on property held for sale? Does it make a
difference as to whether the in-yard movement takes place before or after
transfer of title as to whether this is subject to sales tax?

Response: If the sale were for resale, all of the charges would be
covered by the purchaser's resale certificate and not taxed. Assuming
the sale were to the end user, the sales, cleaning and repair charge
would be taxable. The charge for moving the pipe would be taxable unless
title has passed prior to movement.

The charges from subsidiary to parent are exempt under Section 151.006(4).

The second transaction is as follows: Assume that the same services are
performed as in the first transaction, however, Parent pays subsidiary
for the $***, $** and $* charges, but
does not pass on these costs to customer and only charges customer
$* for the pipe. Presumably, again, the $* is subject
to collection of sales tax unless it is a sale for resale. Is Parent liable for
payment of any sales tax on the $*, $* and/or $*
payment to Subsidiary? Are the $* and $**** payments exempt
under Sec. 151.006(4)? Does it make a difference whether the transportation takes
place before or after title passes?

Response: The $*** is taxable unless it is a sale for resale.
The charges for cleaning and repairs would be not taxable to
Parent. The point that title transfers between Parent and customer
is not relevant to Subsidiary's charge for transportation. Their charge is
not taxable to Parent.

The third transaction is as follows: Parent has pipe returned to it for credit
by customer. It is delivered to Subsidiary for storage. Subsidiary cleans the
pipe as a part of the return and does some repair work on the threads and charges
Parent for the service. Parent then puts the pipe into inventory and holds for
resale. The respective charges are as follows:

Credit given to Customer on return of Pipe $***
Charge made by Subsidiary to Parent for cleaning $**
Charge made by Subsidiary to Parent for Repair of Threads $*
Charge made by Subsidiary to Parent for Movement of Pipe in Yard from
Rack of Customer to Rack of Parent $****

Net Credit to Customer $***

In this case Parent has paid Subsidiary for the cleaning, the repair
and the in-yard movement and has charged the cost of those services
against the customer's account, thus giving the customer a net credit
of $***. Parent has also given the customer a refund of the sales
tax collected on the original $***** sales price of the pipe.

I would assume that the credit of $*** for return of the pipe is
clearly not subject to sales tax since it is a return and refund of a
previous sale (even though it may have been several months since
the original sale also the pipe being received by Parent is being
held for resale. I would also assume that the cleaning and repair
of the threads would be exempt under Sec. 151.006(4). What about the
charge for transportation within the yard? Again, does it make a
difference whether it is done before or after title passes?

Response: Assuming no use has been made of the pipe and this is
just a "Rack Transfer" within Subsidiary's yard, tax may be
refunded on $***. The cleaning and repair deductions to
customer's credit are in fact charges for maintenance and repair.
The charge for movement is simply a restocking charge.

If customer did in fact use the pipe, no tax should be refunded to
customer.

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

Please feel free to contact us if you have additional questions. You may
write us, call toll free 1-800-252-5555 from anywhere in Texas.

Sincerely,

Tax Policy Section
Tax Administration Division