How did Texas tax bare fishing-tool rentals, operated fishing services, and drill-pipe inspections at oil and gas wells?

Plain-English summary

The Texas Comptroller said a bare rental of fishing tools without an operator was taxable. Providing the tools with an operator was a well service rather than an equipment rental.

An operated fishing service to remove tubing, rods, or pumps from downhole was taxable. The service company owed tax on its materials, tools, and equipment and collected tax from the customer on the total service charge. Fishing to remove drill pipe or casing was nontaxable to the customer, although the service company still owed tax on its inputs.

If the otherwise taxable service was performed together with work on the mineral-bearing formation, such as acidizing or fracturing, or with casing repair, the whole job was treated as nontaxable. Invoices had to clearly describe the work performed at the well site.

Inspection of drill pipe and collars was nontaxable unless connected with taxable repair or maintenance. The inspection provider owed tax on its materials rather than collecting it from the customer.

What this means for you

The same fishing tools could produce a taxable rental, taxable well service, or nontaxable well service depending on operator involvement and what was being removed. Combined work and invoice detail could also change or document the result.

Common questions

Was a bare fishing-tool rental taxable? Yes.

Was operated removal of tubing, rods, or pumps taxable? Yes.

Was operated removal of drill pipe or casing taxable? No, under the letter.

What if the service was combined with formation work or casing repair? The whole job was treated as nontaxable.

Was drill-pipe inspection taxable? Not unless performed with taxable repair or maintenance.

Citations and references

• Comptroller Rule 3.324(c)(1) — cited for oil, gas, and related well services.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8702L0798G09

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

BOB BULLOCK
Comptroller February 26, 1987

Dear *****:

Thank you for your letter of February 2, 1987, concerning the taxability
of
your client's oilfield fishing tool business.

Bare rental of fishing tools (without an operator) to a customer is
subject to
sales tax. Providing fishing tools with an operator is a well service,
not a
rental of equipment. When the fishing service is performed to remove
tubing,
rods or pumps from down hole it is considered a taxable service. Please
refer to section (c)(1) of Rule 3.324 on Oil, Gas and Related Well
Service.
The service company owes tax on all materials, tools and equipment used
to
perform the service and tax must be collected from the customer on the
total
charge for the service.

When the fishing is done to remove drill pipe or casing it is considered
a
nontaxable service. The fishing tool company owes sales or use tax on
all
materials and equipment or tools used to provide the service; however,
tax is
not collected from the customer.

If a taxable service, as defined previously, is done in conjunction with
work
on the mineral bearing formation, such as acidizing and fracturing, for
example, or to repair the casing, the whole job is treated as nontaxable
service. Invoices should clearly indicate what is actually being done at
the
well site.

Inspection of drill pipe and collars is not taxable unless the inspection
is
done in connection with a taxable repair or maintenance of the items.
All
materials used to perform the inspection are taxable to the provider of
the
service, not the 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 me if you have additional questions. You may
write me, call toll free 1-800-252-5555 from anywhere in Texas or phone
512/463-4600.

Sincerely,
Julie Pesl
Tax Policy Section
Tax Administration Division