An oil and gas services company asked the Comptroller about the sales/use tax treatment of several things: well pressure testing services, flare stack sales and rentals, other rentals/leases of tangible personal property, an environmental/energy-conservation repair exemption, whether Texas has a state income tax, and direct payment permit procedures for contractors.

Plain-English summary

This letter responds to a taxpayer's May 27, 1992 letter asking about the taxability of several distinct items related to oil and gas well services and refinery work. The Comptroller answered each numbered request in turn, without restating the taxpayer's fact situations:

• Well testing services (Request #1): The well testing services described are not subject to Texas Sales or Use tax. Instead, they may be subject to the separate 2.42% oil well service (occupation) tax imposed under Chapter 191 of the Tax Code. The Comptroller enclosed Rule 3.324 (Oil, Gas, and Related Well Service) and two publications to help distinguish taxable from nontaxable testing services.
• Flare stack sales (Request #2): Taxable. Flare stacks qualify as tangible personal property under Section 151.009 and are therefore taxable under Section 151.010.
• Rentals and leases (Request #3): Section 151.007 taxes rentals and leases of tangible personal property the same way it taxes sales. Rule 3.294 covers rentals and leases of tangible personal property.
• Environmental/energy-conservation repair exemption (Request #4): Section 151.338 exempts services (not equipment or materials) involved in repair, remodeling, maintenance, or restoration of tangible personal property when required by statute, ordinance, order, rule, or regulation of a commission, agency, court, or governmental/quasi-governmental entity to protect the environment or conserve energy. This exemption does not apply to improvements to real property or to initial installation charges. Other repairs to tangible personal property are taxable under Rule 3.292, and real property repair and remodeling is taxable under Rule 3.357.
• State income tax (Request #5): Texas has no state income tax. The Comptroller forwarded the relevant part of the taxpayer's letter to the Franchise Tax Section and to the Texas Workers Compensation Commission for their own replies.
• Direct payment procedures (Request #6): Rule 3.288 covers direct payment procedures, which a number of oil and gas related firms in Texas use. Subsection (f) of that rule addresses contractors doing business for direct payment permit holders; Rule 3.291 covers contractors generally. The Comptroller also included Rule 3.346 on use taxes, noting the taxpayer's clients may use materials and equipment acquired from out-of-state vendors on Texas jobs or contracts.

What this means for you

Oil and gas well service providers

Pressure testing and similar well services are exempt from Texas sales/use tax, but that doesn't mean tax-free — the same services may fall under the separate 2.42% oil well service (occupation) tax under Chapter 191 of the Tax Code. Don't assume "not subject to sales tax" means "not taxed at all"; check Rule 3.324 and the Comptroller's oil and gas well services publications to determine which category your specific services fall into.

Sellers and lessors of flare stacks and other oilfield equipment

Flare stacks are tangible personal property, so both outright sales and rentals/leases of them are taxable under Sections 151.009, 151.010, and 151.007. This applies broadly to rentals and leases of tangible personal property, not just flare stacks.

Refinery owners doing environmentally-mandated repairs

If a repair, remodeling, maintenance, or restoration service is required by a governmental or quasi-governmental body specifically to protect the environment or conserve energy, that service can be exempt under Section 151.338 — but the exemption is narrow: it covers services only (not the equipment/materials used), and it never covers real property improvements or initial installation charges. Ordinary repairs fall back to taxable treatment under Rule 3.292 (tangible personal property) or Rule 3.357 (real property).

Contractors and direct payment permit holders

If you or your clients hold a direct payment permit, Rule 3.288 (especially subsection (f)) and Rule 3.291 explain how contractors interact with direct payment permit holders. Also watch for use tax exposure under Rule 3.346 when materials or equipment are bought from out-of-state vendors for use on Texas jobs.

Common questions

Q: Are well pressure testing services subject to Texas sales tax?
A: No. According to this letter, well testing services are not subject to Texas Sales or Use tax, though they may instead be subject to the 2.42% oil well service tax under Chapter 191 of the Tax Code.

Q: Are sales of flare stacks taxable?
A: Yes. Flare stacks qualify as tangible personal property under Section 151.009 and are taxable under Section 151.010.

Q: Are rentals or leases of oilfield equipment like flare stacks taxable the same way sales are?
A: Yes. Section 151.007 provides that rentals and leases of tangible personal property are taxed the same way as sales.

Q: Is there an exemption for repairs required to protect the environment or conserve energy?
A: Yes, but only for the service itself, not the equipment or materials, and only when required by a statute, ordinance, order, or rule of a governmental or quasi-governmental entity. Section 151.338 does not exempt improvements to real property or initial installation charges.

Q: Does Texas have a state income tax that would apply to a refinery or well services business?
A: No. The letter states plainly that Texas does not have a state income tax; other questions about franchise tax and workers' compensation were forwarded to those respective divisions.

Q: Can this taxpayer's clients rely on this letter for their own well testing or refinery contracts?
A: No. This opinion is based on the facts presented to the Comptroller, and if there are additional or different facts, the opinion may change. Only the taxpayer to whom this letter was issued may rely on it.

Citations and references

• Rule 3.324 (Oil, Gas, and Related Well Service)
• Chapter 191, Tax Code (oil well service/occupation tax)
• Section 151.009 (tangible personal property)
• Section 151.010 (taxability of tangible personal property)
• Section 151.007 (taxation of rentals and leases)
• Rule 3.294 (rentals and leases of tangible personal property)
• Section 151.338 (exemption for certain environmentally/energy-required repair services)
• Rule 3.292 (repairs to tangible personal property)
• Rule 3.357 (real property repair and remodeling)
• Rule 3.288 (direct payment procedures)
• Rule 3.291 (contractors)
• Rule 3.346 (use taxes)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9207L1191G05

Original ruling text

July 21, 1992

Dear ***:

Thank you for your letter of May 27, 1992, concerning the taxability of well
pressure testing, flare stack sales and rentals, and improvements to and new
construction of refineries.

I have addressed all of your questions below without restating the fact
situations in each case.

Request #1. The well testing services performed by *** are not
subject to the Texas Sales or Use tax. I have enclosed Rule 3.324 Oil, Gas,
and Related Well Service. The testing service may be subject to the 2.42% oil
well service tax imposed under Chapter 191 of the Tax Code. I have enclosed
two publications to help you discern between taxable and nontaxable testing
services, Texas Occupation Tax for Oil and Gas Well Services and Texas Taxes
for Oil and Gas Well Services.

Request #2. Flare stack sales are taxable. I have enclosed the Texas Sales
and Use Tax Statutes. Any "Section" references will be to this publication.
Flare stacks would qualify as tangible personal property under Section 151.009
and as such would be taxable under Section 151.010.

Request #3. Section 151.007 provides for the taxation of rentals and leases as
well as sales. I have enclosed Rule 3.294 concerning rentals and leases of
tangible personal property.

Request #4. Section 151.338 provides an exemption for services, not equipment
or materials, involved in the repair, remodeling, maintenance, or restoration
of tangible personal property when required by statute, ordinance, order, rule,
or regulation of any commission, agency, court, or political, governmental, or
quasi-governmental entity in order to protect the environment or to conserve
energy. Please note that this exemption does not apply to improvements to real
property or to the initial installation charges for tangible personal property.
Repairs to tangible personal property other than those noted are taxable per
enclosed Rule 3.292. Real property repair and remodeling is taxable per
enclosed Rule 3.357.

Request #5. Texas does not have a state income tax, however I have forwarded a
copy of your letter to our Franchise Tax Section and to the Texas Workers
Compensation Commission for their reply.

Request #6. I have enclosed Rule 3.288 concerning direct payment procedures.
A number of oil and gas related firms in Texas pay taxes in this manner.
Section (f) of this rule discusses contractors doing business for direct
payment permit holders. I have also enclosed Rule 3.291 concerning
contractors.

Although not requested, I enclosed Rule 3.346 concerning use taxes as your
clients may be using materials and equipment acquired from out-of-state vendors
in the performance of Texas jobs or contracts.

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

You may call me toll free at 1-800-252-5555, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Administration Division, Comptroller
of Public Accounts.

Sincerely,

Kevin Holler
Tax Administration Division