If I sell petroleum products to out-of-state customers with title transferring inside a Texas pipeline, do I owe Texas sales tax, and what proof do I need that the product left the state?

Plain-English Summary

A wholesale petroleum marketer asked the Comptroller how Texas sales tax applies when it sells petroleum products to out-of-state customers, with title to the product passing while it is still moving through a common-carrier pipeline located in Texas. The marketer buys product from other resellers and producers and resells it, often to out-of-state buyers who claim the product's ultimate destination is outside Texas.

The Comptroller drew a key distinction by product type. Crude oil is not subject to Texas limited sales, excise, and use tax at all, so the pipeline/destination question doesn't even arise for crude. Processed oil, natural gas, and other petroleum products, however, are taxable unless an exemption or exclusion applies.

For those taxable products, two paths avoid tax: (1) if the customer (in Texas or out of state) is buying to resell within the U.S., its territories, or possessions, it can furnish a resale certificate instead of paying tax — but a customer buying for its own use cannot use a resale certificate; or (2) if the sale genuinely qualifies as an exempt interstate shipment, the seller must document that the purchaser never took possession of the product within Texas, under Tax Code § 151.330.

The documentation problem is that pipeline common carriers don't issue bills of lading, which is the usual proof required under § 151.330. Because of that, the Comptroller said it will accept substitute documentation — specifically, copies of contracts or invoices between the purchaser and the pipeline carrier that state the out-of-state delivery point — but only for "pipeline interconnect" transactions. If that documentation isn't obtained at the time of sale, the seller must collect the tax up front; the tax can later be refunded once the proper documentation is obtained.

What This Means For You

If you are a wholesale marketer or producer selling processed oil, natural gas, or other refined petroleum products for delivery via pipeline to out-of-state buyers, do not assume the sale is automatically tax-free just because the customer says the product is headed out of state. You need either a valid resale certificate from a buyer that is reselling the product, or contemporaneous documentation (contracts or invoices between the purchaser and the pipeline carrier showing the out-of-state delivery point) proving the buyer never took possession in Texas. Absent that documentation at the time of sale, collect the tax and seek a refund later once you can produce the paperwork. Crude oil sales are unaffected by any of this, since crude oil falls outside the limited sales, excise, and use tax entirely.

Q&A

Q: Do I owe Texas sales tax on crude oil sold via pipeline to an out-of-state buyer?
A: No. Crude oil is not subject to Texas limited sales, excise, and use tax, regardless of where title transfers or where the buyer is located.

Q: What about processed oil or natural gas sold the same way?
A: Those products are taxable unless the buyer gives a valid resale certificate (if reselling the product) or the seller documents that the buyer took possession outside Texas, per Tax Code § 151.330.

Q: How do I prove the product left Texas when the pipeline doesn't issue a bill of lading?
A: The Comptroller will accept copies of contracts or invoices between the purchaser and the pipeline carrier stating the out-of-state delivery point, but only for pipeline interconnect transactions. Get this documentation at the time of sale, or collect the tax and apply for a refund once you obtain it.

Citations

• Tex. Tax Code § 151.330 (interstate shipments via common carriers, seller's own vehicles, etc.)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9409L1315A07

Original ruling text

September 13, 1994

Dear **:

Thank you for your letter regarding Texas sales tax responsibilities when
selling petroleum products to out-of-state customers with delivery
through common carrier pipelines.

You stated that your company is a wholesale marketer who purchases
petroleum products from other persons who resell and/or producers and, in
turn, resell the product to your customers. Sales are made with the point
of title transfer being within a common carrier pipeline in Texas; often
these sales are to out-of-state companies claiming an ultimate destination
outside Texas. You asked the following questions:

"Would it be subject to Texas sales tax? If so, what would be the minimum
requirement by the state in order to prove ultimate destination outside Texas?"

Crude oil is not subject to limited sales excise and use tax. Processed oil,
natural gas, and other petroleum products are subject to limited sales excise
and use tax.

Of course, customers (both in Texas and out-of-state) that are purchasing the
petroleum products to resell within the geographical limits of the United
States, its territories, or possessions may give properly completed resale
certificates in place of the tax. Customers that are purchasing for their own
use cannot give resale certificates.

The statute (Sec. 151.330 regarding interstate shipments via common carriers,
seller's own vehicles, etc.) addresses the required documentation to show that
the purchaser did not take possession within Texas. Because pipeline common
carriers do not issue documents such as bills of lading, the Comptroller will
allow other documentation to be accepted as proof of an out-of-state shipment
for "pipeline interconnect" transactions only. This documentation can be copies
of contracts or invoices between the purchaser and pipeline carrier stating the
outof-state delivery point. Sales tax must be collected if the documentation is
not obtained at the time of sale, but can be refunded if proper documentation
is subsequently obtained.

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

You may also write to Tax Administration Division, Comptroller of Public
Accounts.

Sincerely,

Tax Administration Division

NOTE: Previous Accession Number 9409575L