Does Texas sales tax apply to charges for staking (surveying) an oil or gas well before it is drilled?

Subject

Oil/Gas Well — Staking And Surveying Services

Plain-English summary

A surveying company asked the Comptroller to confirm how Texas sales tax applies to "staking" an oil or gas well -- the surveying work needed before a well can be drilled. One of the company's customers had asked for a refund of tax paid on these services, after learning that competitors weren't collecting tax on similar work.

The Comptroller broke the job into three steps and taxed them differently:

1. Boundary surveying -- surveying the real property boundaries to establish where a well may be placed. This uses "relevant elements of law, research, measurement, analysis and computations."
2. Acreage/unit-designation calculation -- calculating the acreage of each tract in the well unit, to prorate royalty payments among mineral owners.
3. Actual well placement -- the final, and according to the letter the smallest, step: pinpointing the actual spot where the well will be drilled.

Steps 1 and 2 are "unit designation" or "proration unit survey work," which the Comptroller had already held taxable as surveying services in Administrative Hearing No. 28,875. Step 3 -- the charge for well placement surveying -- can be nontaxable if separately stated on the bill. But if it's billed as one lump sum together with the taxable steps, the entire charge becomes taxable unless the taxable portion is less than 5% of the total.

The letter adds a wrinkle: if the well is already in operation when the survey work is done, the company isn't really doing a "placement" survey (finding where the well will go) -- it's doing an "as-built" or "boundary recovery/confirmation" survey (confirming where the well already is). As-built surveys are taxable surveying services too.

Finally, on the refund question: if the services turn out to be nontaxable, the company can refund the tax to the customer and then recover it from the Comptroller, either by amending the original returns or taking a credit on a current return (as long as the current tax due is at least as much as the credit). Local tax refunds must match what was actually collected. The letter notes that invoices dated December 27, 1993 through February 23, 1996 fall within the four-year statute of limitations.

What this means for you

Surveying companies serving the oil and gas industry

Break your billing into the taxable pieces (boundary/unit-designation surveying, as-built surveys) and the potentially nontaxable piece (well placement itself), and state the well-placement charge separately on the invoice if you want it treated as nontaxable. If you lump everything into one price, the whole charge is taxable unless the taxable work is under 5% of the total -- which, given that boundary/unit-designation work is described here as the bulk of the job, will rarely be the case.

Oil and gas operators and mineral owners who purchase these services

If you paid tax on well placement charges that were separately stated (or should have been), you may be entitled to a refund from the surveyor, who can then seek reimbursement from the Comptroller by amending returns or taking a credit. The four-year statute of limitations governs how far back those claims can reach.

Accountants and tax professionals

Watch for the as-built distinction: the same "well placement survey" language can describe two different things depending on timing. If the well isn't drilled yet, it may be a nontaxable placement survey (if separately stated); if the well is already in operation, the same-sounding survey is really an as-built/boundary-confirmation survey, which is taxable.

Common questions

Q: Is staking an oil or gas well subject to Texas sales tax?
A: The boundary surveying and acreage/unit-designation work involved are taxable surveying services. The narrower step of determining the actual well placement can be nontaxable, but only if it is separately stated on the bill.

Q: What happens if the well-placement charge isn't separately stated?
A: If it's billed as a lump sum along with the taxable surveying steps, the entire charge is taxed -- unless the taxable portion is less than 5% of the total charge.

Q: Is there a difference between a "well placement survey" and an "as-built survey"?
A: Yes, and it depends on timing. If the well hasn't been drilled yet, the survey to determine where it will go is a placement survey (potentially nontaxable if separately stated). If the well is already in operation, a survey confirming where it actually is counts as an "as-built" or boundary recovery/confirmation survey, which is taxable.

Q: How far back can a customer claim a refund of tax paid on nontaxable surveying charges?
A: The letter states that invoices dated December 27, 1993 through February 23, 1996 fell within the four-year statute of limitations at the time it was written. The surveyor refunds the tax to the customer, then recovers it from the Comptroller by amending returns or taking a credit on a current return.

Q: Could this answer change under different facts?
A: Yes -- the letter says the opinion is based on the facts presented, and it may change if there are different or additional facts.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9608628L

Original ruling text

August 8, 1996

Dear **:

I am responding to your letter asking about the application of Texas sales
tax on the staking of oil and gas wells. One of your customers has requested
a refund of sales taxes paid on these surveying services.

You explained that you have never understood why the staking of oil and gas
wells were set apart as something that could be done without confirming boundaries
and heretofore the Comptroller's office has always agreed with your position
when you explained that it is impossible to stake an oil or gas well without
"confirming a boundary" in order to comply with the Railroad Commission
requirements for obtaining a permit to drill a well. Now, you have received
information that reflects other companies are not collecting tax on these
same services.

It sounds like the staking of oil and gas wells is the same as well placement
surveying. The method used to provide this service generally follows the
steps below: (1) The boundaries of real property are surveyed to establish the
proper location of any well. This process requires the use of relevant elements
of law, research, measurement, analysis and computations to establish placement
of any oil well. (2) The acreage of each tract in the well unit is calculated
to prorate the percentage of royalty earnings to be received by each mineral
owner. (3) The final step is to determine the actual placement of the oil well.
This is a very small portion of the work.

The surveying services described in steps 1 and 2 above are also called unit
designation or proration unit survey work, and are included as taxable surveying
services. In Administrative Hearing No. 28,875, the comptroller determined
that services called "boundary surveying work", "unit designation", or "proration
unit work" fall within taxable surveying services.

The service described in step 3 is the charge for well placement surveying services.
The charge for this portion of the job may be separately stated by your company and
not taxed. However, if this service is billed (under a lump-sum billing) along with
the taxable services, the total amount must be taxed unless the taxable services are
less than 5% of the total charge.

In reviewing the previous responses made regarding surveying services, it appeared
to me that these services discussed above may also be "as-built" or "boundary
recovery or confirmation" surveying services. If the oil or gas well is already
in operation when the "well placement survey" is performed, then your company is
not providing surveys to determine where the well will go (placement survey),
but is, in fact, determining where the well is built (as-built). As-built title
surveying services are included as taxable surveying services.

If the services in question are nontaxable services, you may refund the tax to
the customer. Once the tax is refunded, you may request a refund from this
agency by amending the returns on which the tax was remitted or by taking credit
on a current return if the tax due on the current return is equal to or greater
than the amount refunded. Local taxes refunded must be the same as those used
as credits. Taxes due on the invoices dated 12-27-93 through 02-23-96 are within
the four year statute of limitations.

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

Sincerely,

Tax Administration Division