Is the removal and disposal of drilling mud by a vacuum truck company taxable in Texas?

Subject

Drilling Mud — Removal And Disposal By Vacuum Truck Companies

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9307148L

Plain-English Summary

A pipeline construction contractor asked the Comptroller whether it owes sales tax when it hires vacuum truck companies to remove and dispose of drilling mud used in horizontal drilling or boring operations. The taxpayer explained that its situation involved building a new pipeline — not a repair or remodeling project — and pointed to a prior Comptroller letter (dated April 21, 1992) stating that vacuum services performed as collection and removal of garbage/waste materials resulting from the exploration, development, or production of oil, gas, or geothermal resources are not taxable.

The Comptroller's response draws a line based on the source of the drilling mud, not on the fact that a vacuum truck is used:

• Not taxable: Removal and disposal of drilling mud that is a waste product resulting from the exploration, development, or production of oil, gas, or geothermal resources. The taxpayer should give the vacuum truck company documentation establishing that the services were performed to remove this kind of waste.
• Taxable: Removal and disposal of drilling mud used in other activities — specifically, drilling mud generated in connection with constructing a new improvement to realty, such as a new pipeline. This is taxable even though it is performed by a vacuum truck, because the collection and removal of garbage/waste materials is otherwise a taxable service.

Applying that rule to the facts presented, the letter concludes: if the drilling mud being removed is a waste product from constructing a new pipeline, the charge is taxed; if it is a waste product resulting from oil, gas, or geothermal exploration, development, or production, the charge is not taxed. As always, the letter notes this opinion is based on the facts presented and may change if the facts are different.

What This Means For You

The taxability turns on the source of the waste, not the method of removal

Using a vacuum truck to remove and dispose of drilling mud does not, by itself, make the charge taxable or exempt. What matters is whether the drilling mud came from oil, gas, or geothermal exploration/development/production activity (not taxable) or from some other activity, such as constructing a new pipeline (taxable).

Pipeline and other new-construction projects should expect tax on drilling mud removal

If your drilling mud is a waste product of building a new improvement to realty — the letter's example is a new pipeline built using horizontal drilling/boring — the vacuum truck company's collection and removal charge is taxable, the same as other waste/garbage removal services.

Keep documentation if you're claiming the oil/gas exploration exemption

The letter tells the taxpayer that documentation should be given to the vacuum service company establishing that the services were performed to remove garbage/waste materials resulting from the exploration, development, or production of oil, gas, or geothermal resources — that paperwork is what supports treating the charge as not taxable.

Q&A

Q: Is hiring a vacuum truck company to remove drilling mud always taxable?
A: No. It depends on why the drilling mud was generated. The letter distinguishes drilling mud that is waste from oil, gas, or geothermal exploration/development/production (not taxable) from drilling mud from other activities, like new pipeline construction (taxable).

Q: My drilling mud came from building a new pipeline. Is the vacuum truck company's removal charge taxable?
A: Yes. The letter states that the collection and removal of drilling mud used in connection with the construction of a new improvement to realty, like a pipeline, is taxed.

Q: My drilling mud is waste from oil or gas exploration. Is the removal charge taxable?
A: No. The letter states that the collection and removal of waste materials resulting from the exploration, development, or production of oil, gas, or geothermal resources is not taxed.

Q: Does using a vacuum truck change the tax treatment?
A: No. The letter says the collection and removal of drilling mud that is garbage/waste material is a taxable service "even when performed by a vacuum truck" — the method doesn't change the outcome; the source of the waste does.

Q: What documentation should I get if I believe my drilling mud removal is exempt?
A: The letter says documentation should be given to the company performing the vacuum services establishing that the services were performed to remove garbage/waste materials resulting from the exploration, development, or production of oil, gas, or geothermal resources.

Q: Can I rely on this letter for my own situation?
A: Only if you are the taxpayer it was issued to. The letter itself states the opinion is based upon the facts presented, and that additional or different facts may change the opinion.

Original ruling text

July 12, 1993

Dear **:

I am responding to your letter requesting this office to evaluate the
taxability of the removal and disposal of drilling mud that is utilized in
horizontal drilling/boring operations.

You stated that your company is a pipeline construction contractor. Frequently
you hire vacuum trucks to remove and dispose of drilling mud that is utilized
in horizontal drilling or boring operations. The situation is in conjunction
with a new pipeline and not a repair or remodeling project. You enclosed a
copy of a letter that had been written to a vacuum truck business. The
previous response dated April 21, 1992, states that vacuum services that are
performed as collection and removal of garbage/waste materials resulting from
the exploration, development, or production, of oil, gas, or geothermal
resources is not taxable.

The collection and removal of drilling mud that is garbage/waste materials is a
taxable service even when performed by a vacuum truck. However, the collection
and removal of waste materials resulting from the exploration, development, or
production, of oil, gas, or geothermal resources is not taxed. Documentation
should be given to the company performing the vacuum services establishing that
these services were performed to remove garbage/waste materials resulting from
the exploration, development, or production, of oil, gas, or geothermal
resources.

The collection and removal of drilling mud that is used in other activities
that are not exploration, development, or production of oil, gas, or geothermal
resources is taxed. Specifically, the collection and removal of drilling mud
used in connection with the construction of a new improvement to realty
(pipeline) is taxed.

Therefore, if the drilling mud being removed was a waste product from the
construction of a new pipeline, the charge is taxed. If the drilling mud being
removed is a waste product resulting from the exploration, development, or
production of oil, gas, or geothermal resources the charge is not taxed.

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

You may also write to Tax Administration Division.

Sincerely,

Tax Administration Division