Is the sale of two land drilling rigs, along with their associated equipment, an exempt occasional sale when the rigs are only part of the seller's business but each rig is separately tracked as its own identifiable segment?

Subject

Drilling Rig — Identifiable Segment — Qualification As Occasional Sale

Plain-English summary

Company A sold two land drilling rigs, along with "all drilling and other equipment associated with such rigs," to Company B. The rigs were not Company A's entire operating business — Company A kept doing other things — so the sale was not a clean case of someone selling their whole business at once.

The Comptroller still ruled the sale was an exempt occasional sale, because Texas law extends that exemption to the sale of an "identifiable segment" of a business, not just a sale of the whole thing. Company A backed this up with excerpted pages from its general ledger showing that it kept separate income and expense records for each individual drilling rig. That separate accounting was enough to establish each rig as its own identifiable segment of the business under 34 Tex. Admin. Code § 3.316(d), so selling both rigs together (with their associated equipment) to one buyer qualified for the occasional-sale exemption from Texas limited sales and use tax.

What this means for you

Businesses selling part of their operations

If you're selling less than your whole business — a single rig, a single location, a single product line, or any other discrete piece — you may still be able to claim the occasional-sale exemption. The key is documentation: this ruling turned on the seller being able to show, from its own books, that the asset being sold was tracked separately from the rest of the business (its own income and expenses). Without that kind of separate accounting, a partial-business sale is less likely to qualify.

Buyers negotiating asset purchases

If you're buying equipment or a business unit and the seller is treating the sale as tax-exempt, it's worth confirming the seller can actually document the segment's separate financial history. The Comptroller relied specifically on general ledger excerpts, not just a description of how the equipment was used.

Oil and gas / drilling equipment transactions

This ruling is specific to land drilling rigs sold as identifiable segments, but the same reasoning applies broadly across industries: any asset or group of assets that a business can show was operated and accounted for as its own segment may qualify for the occasional-sale exemption when sold, even if it's only a slice of the seller's overall operations.

Common questions

Q: Does a business have to sell everything it owns for a sale to be tax-exempt as an "occasional sale"?
A: No. This ruling confirms that selling an "identifiable segment" of a business — something less than the whole business — can also qualify as an exempt occasional sale under Rule 3.316(d), as long as that segment is distinguishable from the rest of the business.

Q: What made these two drilling rigs "identifiable segments" instead of just equipment?
A: Company A maintained a separate accounting of the income and expenses attributable to the operation of each individual rig, and it documented this with excerpts from its general ledger. That separate financial tracking is what established each rig as its own identifiable segment.

Q: Did the ruling cover just the rigs, or the equipment too?
A: Both. The ruling addressed the sale of the two land rigs and "all drilling and other equipment associated with such rigs," and found the whole transaction exempt.

Q: Can other taxpayers rely on this ruling for their own sales?
A: Not directly. Texas letter rulings on STAR generally can only be relied on by the taxpayer who received them, and this letter explicitly notes that different facts, even if similar, might lead to a different answer. Businesses in a similar situation should request their own ruling or consult a tax professional.

Q: Who issued this ruling and when?
A: It was issued August 17, 1992, by John Christian, an attorney in the Comptroller's Tax Administration Division.

Citations and references

• 34 Tex. Admin. Code § 3.316(d) (occasional sales)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9208303L

Original ruling text

August 17, 1992

Dear ** and **:

Thank you for your recent letter regarding the sale of two land drilling rigs
from Company A to Company B. According to your facts, the rigs do not
constitute the entire operating assets of Company A. However, Company A
maintains a separate accounting of the income and expenses attributable to the
operation of each drilling rig. You submitted from Company A's general ledger
excerpted pages that substantiate the fact that each rig is an identifiable
segment of Company A's business.

Question: Is the sale of the two land rigs and "all drilling and other
equipment associated with such rigs" from Company A to Company B an occasional
sale, exempt from limited sales and use tax?

Response: Yes, the sale meets the definition of an exempt occasional sale of
identifiable segments of Company A's business, according to Rule 3.316 (d).

This opinion is based on the facts presented. Different facts, though similar
might lead to different answers. If you have further questions, please feel
free to write or call me at 1-800-252-5555, extension 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration Division