Which swabbing, wireline, nitrogen, tubing, snubbing, and well-control services were taxable?

Plain-English summary

This letter classified a long list of oilfield services based on the precise work and its context. General maintenance swabbing for sand and water removal was taxable from February 1 until the new rule became effective in July 1985, then nontaxable. Swabbing to start or restart a well was nontaxable, while using bailers or cutters to remove debris or paraffin was taxable.

The letter treated many formation, drilling, workover, completion, testing, and pressure-control operations as nontaxable. Examples included atomized or foamed acid used on the formation, displacement, jetting, packer testing, perforating under pressure, tubing tests, gauge runs, pressure surveys, casing-caliper surveys, acidizing, squeeze cementing, gravel packing, certain drilling or milling, and controlling blowouts and fires.

Many maintenance, cleaning, inhibitor, and equipment operations were taxable. Examples included corrosion-inhibitor applications, foam generation for a coiled-tubing wash, running or pulling several kinds of valves and plugs, bailing sand or shale, cutting paraffin, ice removal, sand washing, sand consolidation, backwashing injection wells, treating fluids, and drilling out an inoperative high-pressure valve. Several entries changed result when performed during drilling, workover, before completion, on the casing string, or on the formation.

For nontaxable services, the provider paid tax on materials used or consumed and did not separately show tax reimbursement. Whether the total service charge was taxed depended on what actually occurred at the well site, so the letter instructed the provider to describe the work clearly on each invoice.

Common questions

Was all swabbing treated alike? No. Maintenance swabbing, well-starting swabbing, and the July 1985 rule change produced different results. Did timing and location matter? Yes; drilling, workover, completion, casing, and formation facts changed multiple classifications. Were materials tax-free when used in a nontaxable service? No; the provider had to pay tax on materials used or consumed.

Citations and references

The reproduced letter cites no numbered statute or rule and does not include the new swabbing rule it says became effective in July 1985.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8506L0650E02

Original ruling text

June 24, 1985

Dear ***:

Thank you for your letter concerning your tax responsibilities as a well
servicing company doing business in Texas.

I have restated your questions with my answers immediately following.

Swabbing

This is a service that we provide which is addressed in the literature
I have received. Our service is in line with your definition; "to
operate a rubber faced cylinder up and down on a wireline to bring
fluids to the surface when the well will not flow naturally''. As noted
earlier, this is a service that I understand will not be taxable after
June 28, 1985. Am I correct in assuming this service was a nontaxable
service between February 1, 1985 and June 28, 1985?

Answer: General maintenance swabbing for sand and water removal is considered a
taxable service between February 1, 1985 and when the new rule becomes effective
in July. After July 1985, it will be a nontaxable service.

Swabbing done to start or restart a well is considered a nontaxable service.
Running bailers or cutters down hole to remove debris or to cut paraffin is
considered a taxable service.

You are required to pay tax on all materials used or consumed in providing
nontaxable services. You should not indicate any tax reimbursement charges on
your invoice. You may wish to increase your price by the amount of tax
reimbursement sought. You will collect tax on your total charge (rubber goods,
truck, mileage, etc.) or not depending on what is actually going on at the well
site. If repairs are performed on the casing string or work on the formation is
done in conjunction with any taxable services no tax will be due on the services.
You should clearly indicate on your invoice what is actually occurring at the
well site. Tax may be shown as a separate line item if your services are taxable
services.

Nitrogen Services

*** performs various applications with nitrogen. Those applications
are as follows:

1. Atomized acid. - Nontaxable, if used to treat the formation.
2. Displacement. - Nontaxable.
3. Jetting. - Nontaxable.
4. Corrosion inhibitor. - Taxable.
5. Packer testing. - Nontaxable.
6. Foamed acid. - Nontaxable.
7. Foamed frac. - Nontaxable.
8. Foam generation for coil tubing wash. - Taxable.
9. Perforating under pressure. - Nontaxable.
10. Pipeline purging and testing. - Nontaxable.
11. Pressure testing of tubular goods and wellhead equipment. - Nontaxable.
12. Fluid loss control. - Nontaxable.

You should pay tax on all chemicals and materials used to provide these
services whether they are taxable or nontaxable services.

Wireline Services

The wireline applications *** performs are as follows:

1. Running and pulling chokes - plug and production. - Taxable.
2. Running and pulling plugs (wireline). - Taxable.
3. Opening and closing sliding doors. - unfamiliar with this service
4. Bailing sand and shale. - Taxable.
5. Fishing. - Taxable, unless done during drilling.
6. Running and pulling gas lift valves. - Taxable.
7. Running and pulling tubing safety valves. - Taxable.
8. Testing tubing. - Nontaxable.
9. Packing off tubing leaks. - Taxable.
10. Perforating tubing. - Nontaxable.
11. Cutting paraffin. - Taxable.
12. Ice removal from tubing. - Taxable.
13. Gauge runs. - Nontaxable.
14. Swabbing. - Nontaxable.
15. Bottom hole pressure surveys - static and build up. - Nontaxable.
16. Temperature surveys. - Nontaxable.
17. Run and pull plunger lift equipment. - Taxable.
18. Tubing and casing caliper surveys - Nontaxable.
19. Kinley sand line cutter. - Taxable.

If any of these services are performed during drilling or workover or
prior to completion or work is done on the casing string or formation, the service
will be considered nontaxable.

Coiled Tubing Services

The coiled tubing applications *** performs are as follows:

1. Sand washing with N2 and foam. - Taxable.
2. Acidizing - Nontaxable.
3. Unloading with N2 natural gas, foam, and light fluids. - More information is needed.
4. Mud displacement. - Nontaxable.
5. Spotting acid. - To formation, nontaxable.
6. Squeeze cementing. - Nontaxable.
7. Sand consolidation. - Taxable.
8. Injection of corrosion inhibitors. - Taxable.
9. Setting cement bridge plugs. - Nontaxable, if preparatory to abandonment.
10. Gravel packs. - Nontaxable.
11. Setting sand plugs. - initial setting considered sale & installation; replacement
    considered taxable repair.
12. Backwashing injection wells. - Taxable.
13. Drilling or milling with * (* is a ** franchise). - Nontaxable.

Hydraulic Snubbing Service

The hydraulic snubbing applications *** performs are as follows:

1. Cleaning out sand and/or shale in tubing, liners, and casing. - Taxable,
2. Drilling out cement and bridge plugs. - Nontaxable.
3. Acidizing and washing. - Nontaxable if done to formation. Taxable if other.
4. Removal of mud and heavy fluids from the well bore. - Nontaxable if during drilling,
   workover or prior to completion.
5. Fishing or milling in casing or tubing. - Nontaxable if during drilling, workover
   or prior to completion.
6. Running and pulling production strings. - Nontaxable if during drilling, workover
   or prior to completion.
7. Running and pulling retrievable bridge plugs and packers under pressure for selective
   treatment of wells that are difficult to keep dead. - Taxable.
8. Using macaroni tubing for pumping nitrogen in wells where depth and pressure make
   use of coiled tubing impractical. - Nontaxable.
9. Squeeze cementing or plugging back. - Nontaxable.
10. Pressure control. - Nontaxable.
11. Ice removal from the tree and tubing. - Taxable.
12. Sand consolidation. - Taxable.
13. Drilling completion under pressure. - Nontaxable.

Conventional Snubbing Services

The conventional snubbing applications *** perform are as follows:

1. Running casing or tubing under pressure. - Nontaxable, if part of completion
   or repair to casing
2. Running kill packer should an underground blowout occur. - Nontaxable.
3. Pulling pipe when you have a hole in pipe and cannot kill well. - Taxable.
4. Drilling under pressure. - Nontaxable.
5. Drilling cement, bridge plugs, and sand bridges. - Nontaxable.
6. Fishing and milling. - Taxable.
7. Acidizing and washing. - Nontaxable if done to formation.
8. Squeeze cementing and plugging back. - Nontaxable.
9. Running production or kill string. - Nontaxable if initial installation of
   production string. Taxable if kill string.
10. Resetting weight on packers. - Taxable.
11. Replacing damaged pipe. - Taxable unless casing string.

Fluid Pump Services

The fluid pump applications *** perform were as follows:

1. Treating fluids. - Taxable.
2. Corrosion inhibitors. - Taxable.
3. Scale inhibitors. - Taxable.
4. Paraffin inhibitors. - Taxable.
5. Foaming agents. - Taxable.
6. Bactericides. - Taxable.

Special Services

The special services *** perform are as follows:

1. Tap or drill into bridged or plugged tubing to relieve pressure. - Taxable.
   Nontaxable service if done during drilling operation or prior to completion.
2. Tap or drill into tubing to spot liquids for freezing plug,removing kelly,
   installing valve, adding or removing tubing, circulating, or killing the well. - Taxable.
   - Nontaxable service if done during drilling operation or prior to completion.
3. Drill out and replace inoperative high-pressure valve. - Taxable.
4. Freezing a plug of static liquid in tubing by wrapping with dry ice. - Taxable.

Well Control Services

Well control services provided by *** include controlling well
blowouts and fires.- Nontaxable service.

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 us at
1-800-252-5555 toll free from anywhere in Texas. You may write us at the
Tax Administration Division.

Sincerely,

Tax Policy
Tax Administration Division