Is cleaning, inspecting, and applying a protective monel coating to oilfield equipment like submersible pumps and tank batteries a taxable repair or remodeling service in Texas?

Subject

Coating Services — Applying Protective Coating To Equipment/Tangible Personal Property

Plain-English summary

An oilfield service company asked the Comptroller whether its business -- cleaning, inspecting, and coating submersible pumps, pump jacks, tank batteries, and other oilfield equipment with a protective layer of monel to prevent deterioration in hostile environments -- is a taxable service. The company had started in 1983 under a different name, was told at that time the work was not taxable, and had not collected tax since, though it had paid tax on its own purchases and billed customers based solely on labor hours with no separate charge for materials.

The Comptroller found this work IS taxable, for two overlapping reasons:

• The 1983 exemption no longer applies. Labor to repair, maintain, or restore tangible personal property became taxable starting October 2, 1984 -- after the company's original 1983 start date and its original "not taxable" answer from the Department. That earlier guidance was overtaken by the 1984 law change.
• The work fits the taxable categories in Rule 3.292. Cleaning, inspecting, and coating equipment falls under the rule's definitions of maintenance, remodeling, and repair. When performed on new equipment owned by the customer, it looks like remodeling. (If the same kind of work were performed on real property instead of equipment, it would be taxable in full under Rule 3.357 unless it qualified as scheduled, periodic maintenance.)

The company must collect tax on the entire labor charge for this work going forward, unless it separately states (and doesn't charge for) inspecting a piece of equipment that wasn't actually worked on. It may accept Direct Payment Certificates, resale certificates from equipment manufacturers/dealers, or applicable exemption certificates in lieu of collecting tax. Under Tax Code § 151.052, the company is also permitted to bill customers for back sales tax not previously collected, since unpaid sales tax becomes a debt the customer owes the seller. The company may issue its own resale certificates to its material vendors for the actual weld and plating materials that get transferred to customers' equipment, and can claim audit credit for tax it already paid on those materials.

What this means for you

Oilfield equipment maintenance and coating businesses

If your business cleans, inspects, or applies protective coatings to customer-owned equipment, that labor is a taxable repair/remodeling/maintenance service under Rule 3.292 -- you should be collecting sales tax on the full labor charge, even if a much older, pre-1984 informal answer from the Department said otherwise. Guidance given before October 2, 1984 predates the law making this type of labor taxable at all.

Businesses that discover they've been under-collecting tax

You can bill customers retroactively for back sales tax you should have collected but didn't, under Tax Code § 151.052 -- once billed, the unpaid tax becomes a debt owed by the customer to you, collectible the same way as the original sale price. You may also be entitled to audit credit for tax you already paid on materials that you can show were transferred to a customer's care, custody, and control (using a resale certificate with your own material vendors going forward).

Accountants and tax professionals

The relevant test is whether the work is repair, remodeling, or maintenance of tangible personal property (Rule 3.292, taxable since October 2, 1984) versus the same kind of work performed on real property (Rule 3.357, taxable in full unless it's scheduled/periodic maintenance). A company's own decades-old informal guidance from the Department is not a safe basis to continue treating labor as exempt; check whether it predates a relevant law change.

Common questions

Q: Is applying a protective coating to a customer's oilfield equipment a taxable service in Texas?
A: Yes -- it's treated as taxable maintenance, remodeling, or repair of tangible personal property under Rule 3.292, so tax applies to the full labor charge.

Q: What if the Comptroller's office told a business years ago that this kind of work wasn't taxable?
A: That guidance may have predated the October 2, 1984 law change that made repair/restoration labor on tangible personal property taxable. Older informal advice doesn't override a later law change.

Q: Can a business bill customers for sales tax it should have collected in the past but didn't?
A: Yes. Under Tax Code § 151.052, a seller may add the tax to the sales price after the fact; it becomes part of the price and a debt the customer owes the seller, collectible like the original sale price.

Q: Can the business avoid paying tax on the coating materials it buys?
A: Yes, by issuing a resale certificate to its material vendors for materials (like weld and plating material) that are transferred to the care, custody, and control of its customers -- and it can claim audit credit for tax already paid on those purchases.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.052 (seller may add tax to sales price; becomes a debt of the purchaser)
• 34 Tex. Admin. Code Rule 3.292 (maintenance, remodeling, and repair of tangible personal property)
• 34 Tex. Admin. Code Rule 3.357 (nonresidential real property repair and remodeling)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1435G11

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.

September 9, 1996

Dear **:

Your taxability request of August 22, 1996, concerning
the taxability of equipment coating services, has been forwarded to me by
Debbie Maha, Manager of our * Audit office. She included a request from
** that I will also address in my response.

Your firm cleans, inspects, and coats submersible
pumps, pump jacks, tank batteries and other oilfield equipment. This maintains
equipment and prevents future deterioration of equipment in hostile
environments. This protection is obtained by welding a layer of monel to the
sub-strat. The sub-strat is recleaned and reinspected and the equipment is
painted and dried.

A ** of your firm contacted our office
when the business was started in 1983 under the name ***. He was
told your services were not taxable. Your firm has not collected taxes since
and has paid taxes on all associated purchases. Charges to customers are based
solely on labor hours and no charges are added for materials.

I have attempted to research incidences of past contact
with your firm, ***, or ** with no success. However, the
labor to repair, maintain, or restore tangible personal property was not
taxable until October 2, 1984, after your initial start of business and
contact.

This work appears to be covered under the definitions
of maintenance, remodeling, and repair per Subsections (a)(3),(5), and (6) of
Rule 3.292. When performed on new equipment owned by your customer, it appears
to be a remodeling of the property (Subsection (a)(5)). If the process is
performed on real property, the charges would be taxable in full per Rule 3.357
unless qualifying as scheduled and periodic maintenance.

You should collect tax on the entire charge for your
work, unless there is a separately-stated charge for inspection of a piece of
equipment that was not worked on. You may accept valid Direct Payment
Certificates, resale certificates (from equipment manufacturers or dealers),
and exemption certificates (when applicable) in lieu of tax from your
customers. You are able to bill your customers for back sales taxes per
Section 151.052 of the Tax Code which states that a seller may add the tax to
the sales price, it becomes a part of the sales price, it is a debt of the
purchaser to the seller until paid, and, if unpaid, it is recoverable at law in
the same manner as the original sales price.

You may issue a resale certificate in lieu of tax to
your vendors when purchasing items that are transferred to the care custody and
control of your customers (actual weld and plating materials). You will be
allowed credit for these purchases on which you paid taxes in your audit.

I have enclosed an application for obtaining a sales
and use tax permit for your convenience. AP-157 is for use if you are
registering a sole owner. AP-100-4 is to be used if you are a corporation or
partnership.

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

You may call me toll free at 1-800-531-5441, ext.
5-0613. The direct line is 512/475-0613. You may also write to Tax Policy
Division, Comptroller of Public Accounts.

Sincerely,

Kevin Koller
Tax Policy Division

NOTE: Previous Accession Number 9609652L