Can an oilfield well-servicing company issue a resale certificate for the liquid micro-organisms (bacteria) it pumps downhole to remove paraffin and scale build-up, or uses in oil-spill clean-up?

Subject

Resale Certificates Not Allowed For Micro-Organisms Used In Well Treatment Or Oil-Spill Clean-Up

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9308L1249G09

Plain-English Summary

A well-servicing company asked the Comptroller about the tax treatment of liquid micro-organisms (bacteria) used in two different operations. In the first, the company's client sends an employee to pump micro-organisms into the well bore to remove paraffin, scale build-up, and corrosion from the formation, allowing hydrocarbons to flow more freely; the client charges sales tax on the total cost of this service. In the second, the same company performs non-taxable environmental clean-up of oil spills, purchasing liquid bacteria to use in the clean-up, and charges its customers sales tax on materials and labor for that service, keeping care, custody, and control of the bacteria it uses.

The letter answers two questions. First, can the company issue a resale certificate for the micro-organisms used in the well bore, on which sales tax is charged to the ultimate consumer? The Comptroller says no: under Rule 3.324 (Oil, Gas, and Related Well Service), the provider of a taxable service must pay sales tax on materials (except cement) used or consumed in providing the service that do not become part of the items inside the wellbore. Because the micro-organisms used to treat the tubing, rods, and flow lines — and to remove paraffin from the formation — do not become part of the items inside the well bore, and do not cause a chemical or physical change to the oil in the formation, no resale certificate may be issued for their purchase.

Second, can the company pay sales tax on the liquid micro-organisms used in the non-taxable environmental clean-up? The Comptroller explains that fees for restoring an oil or gas lease to its original condition, and charges for restoring or remediating lost or damaged natural environments, are not taxable — so the company should not charge its clients sales tax on those services. But because those services are non-taxable, the company itself must pay sales or use tax on all taxable items it uses or consumes in providing them, including the liquid bacteria. The letter separately notes that a clean-up operation performed at a plant or elsewhere away from the well site — or on property other than the company's own — is a taxable service, and a company performing taxable clean-up services may issue a resale certificate only for chemicals and supplies actually transferred to the customer's care, custody, and control. Chemicals or bacteria used as part of a clean-up service are not considered resold or transferred by the provider, so they may not be purchased tax-free on a resale certificate.

The letter closes with the standard caveat that the opinion is based on the facts presented, and that other facts, though similar, may provide a different result.

What This Means For You

Whether a resale certificate is available turns on "care, custody, and control," not on who ultimately pays sales tax. Even though the client charges its own customer sales tax on the well-treatment service, that alone does not let the servicing company buy the micro-organisms tax-free — because the micro-organisms don't become part of the items inside the well bore, they are treated as consumed by the service provider, not resold.

Taxable-service status flips the tax-payment obligation. For the taxable well-treatment work, sales tax is charged to the ultimate consumer on the service, and the provider cannot issue a resale certificate for the bacteria it consumes performing that service. For the non-taxable environmental clean-up (restoring or remediating a natural environment), the provider cannot charge its customer sales tax on the service — but must instead pay sales or use tax itself on the bacteria and other taxable items it uses or consumes.

Location and ownership of the property matter for clean-up work. A clean-up performed away from the well site, or on property that isn't the company's own, is treated as a taxable service. In that scenario, a resale certificate is available only for chemicals and supplies that are actually transferred into the customer's care, custody, and control — not for bacteria or chemicals that the servicing company itself uses up while performing the service.

This is fact-specific guidance. The letter is explicit that its conclusion rests on the facts presented, and other, similar-looking facts could produce a different result — so businesses in oilfield or environmental services with different operational details shouldn't assume this letter's answer automatically applies to them.

Q&A

Q: Can a well-servicing company issue a resale certificate for micro-organisms pumped into a well bore to remove paraffin and scale build-up?
A: No. Rule 3.324 requires the provider of a taxable service to pay sales tax on materials (except cement) used or consumed in providing the service that do not become part of the items inside the wellbore, and the micro-organisms here do not become part of those items.

Q: Do the micro-organisms cause a chemical or physical change to the oil in the formation?
A: No — the letter states the micro-organisms do not cause a chemical or physical change to the oil in the formation, which is part of why no resale certificate is available.

Q: Is the environmental clean-up of oil spills taxable?
A: The letter describes it as a non-taxable service when it involves restoring an oil or gas lease to its original condition or remediating a lost or damaged natural environment — the company should not charge its clients sales tax on those services.

Q: If the clean-up service itself is non-taxable, does the company still owe tax on the bacteria it uses?
A: Yes. The letter states that when providing non-taxable services, the company must pay sales or use tax on all taxable items, including the liquid bacteria, that it uses or consumes in providing those services.

Q: When is a clean-up operation for an oil spill taxable?
A: When it's performed at a plant or elsewhere on land away from the well site, or on property other than the company's own property.

Q: Can a company performing a taxable clean-up service ever use a resale certificate for the bacteria or chemicals it uses?
A: Only for chemicals and supplies that are transferred to the customer's care, custody, and control. The letter states that chemicals or bacteria used as part of a clean-up service are not considered resold or transferred by the provider and may not be purchased tax-free on a resale certificate.

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.

August 10, 1993

Dear *****:

This is in response to your letter requesting a taxability ruling on
microorganisms pumped into the well bore to remove paraffin, scale
build-up and corrosion from the formation. This allows the hydrocarbons
to flow freer. Your client, **** sends an employee to perform the
actual pumping of the micro-organisms downhole and oversee the entire
process. Sales tax is charged on the total cost of this service.

* performs non-taxable environmental clean-up operations of oil
spills. They purchase liquid bacteria (micro-organisms) to use in the
clean-up operations. * charges sales tax to their customers for
this service on materials and labor. They have care, custody and control
of the liquid bacterial that they use in this clean-up operation.

The questions that you have concerning these operations are restated
below, followed by response:

1. Can **** issue a resale certificate for the micro-organisms
   that are used in the well bore and on which sales tax is charged to the
   ultimate consumer?

RESPONSE: Subsection (d)(2) of Rule 3.324 - Oil, Gas, and Related Well
Service, states that "(t)he provider of a taxable service should pay
sales tax on anymachinery or equipment purchased or rented to provide
the service and on any materials (except cement) used or consumed in
providing the service which do not become a part of the items inside
the wellbore". Emphasis added.

Micro-organisms used to treat the tubing, rods, and flow lines located
in thecasing and to remove paraffin from the formation do not become a
part of the items inside the well bore, nor do not they cause a chemical
or physical changeto the oil in the formulation. Your client may not
issue a resale certificate for the purchase of the mic-organisms.

2. Can **** pay the sales tax on the purchase of the liquid
   micro-organismsthat are used in non-taxable environmental clean-up?

RESPONSE: Fees for restoring an oil or gas lease to its original
condition arenot taxable. Charges for restoring or remediation lost
or damaged natural environments are not taxable. * should not
charge its clients sales tax on these services. When providing nontaxable
services, * must pay sales or use tax on all taxable items,
including the liquid bacteria, that it uses or consumes in providing
its 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 that 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
customers. Chemicals or the bacteria used as part of a clean-up service
are not considered resold or transferred by the services provider and
may not be purchased tax-free on a resale certificate by **** .

This opinion is based on the facts presented. Other facts though similar
mayprovide a different result.

If you have other questions or need more information, you may call me at
1-800-531- 5441, extension 3-4502. The regular number is 512/463-4502. You
may also write to Tax Administration Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division

NOTE: Previous Accession Number 9308049L.3 and/or 9308049L