Is cleaning up an oil spill or remediating contaminated soil at an oil and gas site taxable in Texas?

Subject

Taxability of oil spill clean-up and contaminated soil remediation services

Plain-English summary

The Comptroller answered a bacteria-product seller's question about whether cleaning up oil spills and remediating contaminated soil at oil and gas sites is a taxable service in Texas. The answer turns on where the clean-up happens and what caused it, not on what product is used.

Not taxable:

• Restoring an oil or gas lease to its original condition.
• Restoring or remediating a natural environment.
• An oil spill clean-up caused by exploration, development, or production of oil, gas, or geothermal resources (or a substance regulated by the Texas Railroad Commission), when done at the well site.
• A waterway oil spill clean-up subject to Chapter 26 of the Water Code.

Taxable:

• A clean-up performed at a plant or elsewhere on land away from the well site.
• A clean-up performed on property other than the company's own property.
• Real property services like garbage collection and disposal, landscaping, janitorial, and custodial services, when they aren't part of a natural environment remediation or lease reclamation job (see Rule 3.356).

The letter also addresses resale certificates: a service provider performing a nontaxable clean-up must pay tax on the taxable items and services it uses to do the job, and its customer cannot give it a resale certificate for those purchases. A provider performing a taxable clean-up may only accept a resale certificate for chemicals and supplies actually transferred to the customer's care, custody, and control — chemicals the provider uses up in performing the service (not transferred to the customer) don't qualify, so the bacteria-product seller itself should not accept resale certificates from these service-provider customers.

What this means for you

Sellers of remediation products or chemicals

If you sell a product (like the bacteria/nutrient product here) to companies performing clean-up or remediation work, you generally must collect tax on that sale unless your customer gives you a valid resale certificate. Per this letter, that resale certificate is only valid if your product is later transferred to the ultimate customer's care, custody, and control — not if your customer simply consumes/uses it up while performing the clean-up service itself.

Clean-up and remediation service providers

Whether you charge your customer sales tax depends on where and why the clean-up is happening. Restoring a lease or a natural environment, or cleaning up a well-site spill tied to oil/gas/geothermal operations, is not taxable. But if you're cleaning up a spill at a plant, elsewhere away from the well site, or on someone else's property, that's a taxable real property service, and you must collect tax from your customer (or your customer must give you a valid exemption/resale certificate, as applicable).

Accountants and tax professionals

This letter draws several fact-specific lines (well site vs. plant/other land; the taxpayer's own property vs. someone else's; Railroad-Commission-regulated E&P spills vs. other real-property clean-up services), so the same "oil spill clean-up" label can be taxable or not depending on these facts. It's a good illustration of how the Comptroller distinguishes environmental remediation/reclamation from ordinary taxable real property services under Rule 3.356.

Common questions

Q: Is remediating contaminated soil at an oil and gas site taxable?
A: Restoring a lease to its original condition, or restoring/remediating a natural environment, is not taxable. A clean-up caused by oil, gas, or geothermal exploration/development/production activity (or a Railroad-Commission-regulated substance) performed at the well site is also not taxable.

Q: What about cleaning up an oil spill somewhere other than the well site?
A: A clean-up performed at a plant or elsewhere on land away from the well site is a taxable service. It's also taxable if performed on property other than the service company's own property.

Q: Are oil spills in waterways treated the same way?
A: No special treatment beyond this: clean-up of oil spills in waterways is not taxed when the clean-up is subject to the requirements of Chapter 26 of the Water Code.

Q: Can my customer give me a resale certificate for the bacteria product they buy from me?
A: Only if the product is transferred to the ultimate customer's care, custody, and control as part of a taxable clean-up service. If your customer instead uses/consumes the product itself to perform a nontaxable clean-up, they cannot issue a valid resale certificate, and you should not accept one.

Q: Does this letter apply to my company's situation?
A: Not automatically. It was issued to one taxpayer based on the facts they described, and under STAR's rules it can only be relied on by that taxpayer. If your facts differ (for example, where the spill occurred or who caused it), the answer could differ too.

Citations and references

Rules and statutes cited in the letter:

• 34 Tex. Admin. Code Rule 3.356 (taxable real property services, such as garbage collection/disposal, landscaping, janitorial, and custodial services)
• Texas Water Code, Chapter 26 (basis for the waterway oil-spill clean-up exception)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9305008L

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017.

May 14,1993

Dear **:

Thank you for your letter of May 10,1993, concerning the taxability of the
remediation of contaminated soil at oil and gas sites.

Your firm manufactures and sells a live liquid bacteria product and nutrient to
clean or remediate contaminated soil at oil and gas sites. Your customers have
received conflicting taxability opinions from our office and you are writing to
"clear up the confusion." Your responsibilities as a seller of the liquid
bacteria product are to either collect tax or obtain a valid resale or
exemption certificate in lieu of tax. Your customer's responsibilities for
collecting tax on their services will be determined by the type of service
performed and the location of performance. The conflicting answers may have
been the product of different scenarios presented by your customers.

Fees for restoring an oil or gas lease to its original condition are not
taxable. Charges for restoring or remediating lost or damaged natural
environments are not taxable. When providing nontaxable services, the service
provider must pay sales or use tax on all taxable items, including taxable
services, that it uses or consumes in providing its services. Your customer
cannot issue a valid resale certificate for these purchases in lieu of tax.

Texas does impose sales or use tax on certain real property services, such as
garbage collection and disposal, landscaping, janitorial and custodial
services, etc., when not performed as part of a natural environment remediation
service or reclamation of an oil or gas lease. If your customer requested
information concerning oil spills, the respondent would have cited Rule 3.356
concerning the above stated real property services. Your customers may be using
your product for both site reclamation and spill clean ups.

A clean-up operation for an oil spill which results from activities associated
with the exploration, development, or production of oil, gas, or geothermal
resources and any substance regulated by the Texas Railroad Commission is not
taxable. Oil spill clean-ups at the well site are not taxable. The clean up of
oil spills in waterways are not taxed when the clean up is subject to the
requirements of Chapter 26 of the Water Code. Your customer cannot issue a
valid resale certificate in lieu of tax for purchases to perform these
nontaxable services.

A clean-up operation for an oil spill performed at a plant or elsewhere on land
away from the well site is a taxable service. This service is also taxable if
performed on property other than the company's property. A company performing
taxable clean-up services may only issue a resale certificate in lieu of tax
for chemicals and supplies that are transferred to the care, custody, and
control of the customer. Chemicals used as part of a clean-up service are not
considered resold or transferred by the service provider, you should not accept
a resale certificate in lieu of tax for purchases of your product from service
providers.

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 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Administration Division, Comptroller of
Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division