Is Texas sales tax due on mud logging services performed at oil and gas wells?

Plain-English summary

A taxpayer asked the Comptroller's office whether mud logging services performed at oil and gas wells are subject to Texas sales tax. Mud logging, as defined in A Primer of Oil Well Service and Workover (published by The University of Texas at Austin), is the recording of information derived from examining and analyzing formation cuttings made by the drill bit and mud circulated out of the hole; a portion of the mud is diverted through a gas-detecting device and examined under ultraviolet light to detect the presence of oil or gas, often carried out in a portable laboratory set up at the well.

The Comptroller ruled that mud logging services, as defined above, are not taxable under the limited sales tax. However, the letter notes one important exception: the service becomes taxable if the provider both sold the mud and also performs the engineering services.

What this means for you

Oil and gas service providers

If you perform mud logging services — recording and analyzing formation cuttings and drilling mud to detect oil or gas — those services are not subject to Texas sales tax on their own. But if your company also sells the mud used in the well and performs the engineering services, the combined charge becomes taxable.

Accountants and tax professionals

When reviewing invoices from oilfield service providers, check whether a "mud logging" charge is bundled with mud sales and engineering services from the same vendor. That combination changes the tax treatment from exempt to taxable, even though standalone mud logging services are not taxable.

Common questions

Q: Is mud logging service taxable under Texas sales tax?
A: No. Mud logging services, as defined in A Primer of Oil Well Service and Workover, are not taxable under the limited sales tax.

Q: Are there circumstances where mud logging becomes taxable?
A: Yes. The service is taxable if the same provider sold the mud and also performs the engineering services.

Q: What does "mud logging" mean for purposes of this ruling?
A: The recording of information derived from examination and analysis of formation cuttings made by the bit and mud circulated out of the hole, including diverting a portion of the mud through a gas-detecting device examined under ultraviolet light to detect oil or gas, often performed in a portable laboratory at the well.

Citations and references

No specific statutes or administrative rules are cited in the text of this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9412L1329B13

Original ruling text

December 22, 1994

Dear ***:

Thank you for your recent letter concerning the taxability of mud logging
services.

Mud logging services as defined in A Primer of Oil Well Service and Workover,
published by The University of Texas at Austin, are not taxable under the
limited sales tax. The definition of mud logging is:

"the recording of information derived from examination and analysis of
formation cuttings made by the bit and mud circulated out of the hole. A
portion of the mud is diverted through a gas-detecting device and examined
under ultraviolet light to detect the presence of oil or gas. Mud logging
is often carried out in a portable laboratory set up at the well."

This service is taxable if you sold the mud and also perform the engineering
services.

This opinion is rendered based on the facts you submitted. Other facts,
though similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct
line is 512/463-4680. You may also write to Tax Administration, Comptroller
of Public Accounts.

Sincerely,

Al Van Allen
Tax Administration Division

NOTE: Previous Accession Number 9412796L