When did Texas exempt vessels, vessel components, or equipment used in offshore mineral exploration?

Plain-English summary

The company leased fully crewed vessels to oil companies for offshore use, but it was not an exempt entity. It had to determine exemption purchase by purchase and give suppliers properly completed certificates when the conditions were met.

A vessel exceeding eight tons displacement qualified only when purchased from the vessel's builder and used exclusively for commercial purposes. Property actually attached to and becoming a component part of the vessel, such as an engine, could qualify. Loose furnishings and consumables—including bedding, linens, kitchenware, tables, chairs, cooling ice, refrigerants, fuels, and lubricants—did not qualify under that component rule.

Equipment claimed under the mineral-exploration provision had to be used exclusively and directly to explore for or produce oil, gas, sulphur, or other minerals offshore and outside Texas territorial waters. The letter gave qualifying sonar exploration equipment as a possible example. Offshore use alone was insufficient without the exclusive direct mineral use.

Common questions

Was the vessel operator itself tax-exempt? No.

Did every vessel over eight tons qualify? No. The purchase had to be from the builder and the vessel had to be used exclusively for commercial purposes.

Did loose supplies become exempt vessel components? No.

Was use outside Texas waters by itself enough for the mineral exemption? No. The equipment also had to be used exclusively and directly for mineral exploration or production.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8908L0951C11

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

August 18, 1989

Dear ***:

Thank you for your letter of July 28, 1989, regarding sales and use tax
exemptions applying to your company's purchases.

Per your August 4, 1989, phone conversation with ***, CORP A
leases vessels, with a full crew provided, to oil companies, etc., for
use offshore.

You requested us to issue CORP A a Texas Sales Tax Exemption Certificate
or a letter indicating the tax exempt status of that entity. ****
explained that your company is not an exempt entity, per se, and that it
is the purchaser's responsibility to issue a properly completed exemption
certificate to its suppliers for purchases if they qualify for exemption.

You completed an exemption certificate and enclosed it with your letter.
This certificate lists three reasons for claiming exemption. We are
addressing each reason listed separately.

Reason 1: Vessel is an excess of 8 tons.

Comment: Please refer to the enclosed Rule 3.297, subsection (b)(1).
Specifically please note the purchase of a vessel in excess of 8 tons
displacement only qualifies as tax exempt when it is purchased from
the builder of the vessel and the vessel is used exclusively for com-
mercial purposes.

In addition, tangible personal property which actually is attached to
and becomes a component part of the vessel qualifies for exemption un-
der subsection (b)(2). An example of this would be an engine. Examples
of items which would not qualify are furnishings of any kind which are
not attached to the vessel, consumable supplies, bedding, linen, kit-
chenware, tables, chairs, ice for cooling, refrigerants for cooling
systems, fuels, or lubricants.

Reason 2: The tangible personal property will be used in the
explor-
ation for, or production of, oil, gas, sulphur or other minerals.

Comment: Please see subsection (b) of the enclosed Rule 3.332 for an
explanation of this exemption. In order to qualify for this, the tan-
gible personal property must exclusively used directly in the explora-
tion for or production of oil, gas, sulphur, or other minerals offshore
and outside the territorial limits of Texas. An example of an item
which may qualify is sonar equipment which is used for the exploration
of oil.

Reason 3: The tangible personal property will be used exclusively out-
side the territorial limits of Texas.

Comment: Again, please refer to Rule 3.332 (b). In order to claim
exemption from tax for the type of equipment mentioned in comment 2,
this equipment must not only be used exclusively offshore outside
Texas waters, but also exclusively used directly in the exploration
for or production of oil, gas, sulphur, or other minerals.

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 our toll-
free number 1-800-252-5555. The regular number is 512/463-4600. You may
write me at Tax Correspondence, Comptroller of Public Accounts.

Sincerely,
Sandi Skaggs
Tax Correspondence