Is providing equipment with an operator for oilfield lease-site work -- like restoring a wellsite, cutting a pipeline right-of-way, building or maintaining a road, or setting frac tanks -- taxable under Texas sales tax?
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This page answers the general question as of 1996. Ezel answers yours, under current Texas tax law, with citations.
Subject
Oil/Gas Wellsite/Lease Site — Restoration/Reclamation To Land'S Original Condition
Plain-English summary
A business that provides heavy equipment (dozers, loaders, graders, rollers, haul truck/trailer) with an operator to perform oilfield lease-site work asked the Comptroller to sort ten specific services into taxable and nontaxable buckets. The Comptroller answered each one:
- Restoring/reclaiming a lease site (backfilling the water, reserve, and shale pits): the reserve pit is an improvement to realty, so restoring nonresidential improvements to realty is normally taxed. But when the work is the actual reclamation of an oil and gas lease site back to the land's condition before drilling began, the restoration/reclamation charge is not taxed. That said, the equipment itself (dozers, loaders, graders, rollers) provided with an operator is still subject to sales tax, and haul trucks/trailers are subject to motor vehicle tax instead.
- Setting frac tanks / hauling equipment to the lease: nontaxable service.
- Cutting senderos for a pipeline right-of-way: blading or brushing a right-of-way is not taxed.
- Roustabout labor and vehicle picking up fencing materials from a supplier and delivering to the lease: the charge to the supplier for this pickup/delivery service is not taxed, but the supplier's charge to its customer is taxed as a service related to the sale of a taxable item (the fencing material).
- Constructing a new location (digging water/reserve/shale pits, building a road, blading, hauling caliche for the road and pad): the pits, pad, and road are improvements to realty, and building them qualifies as new construction. Under new-construction contracts, only the materials incorporated into the realty are taxable, not the labor. Under a lump-sum contract the contractor pays tax on the taxable materials; under a separated contract the contractor collects tax from the owner on the incorporated materials. Selling or transporting naturally occurring caliche to the customer's location is not taxable -- but if the "caliche" is actually crushed limestone, that sale (or purchase) is taxable.
- Maintaining an existing lease road (e.g., blading with a grader): maintenance of real property is not taxable, using the definition in Rule 3.357 -- work that is scheduled and periodic (anticipated at set intervals, such as every three, six, or twelve months) to sustain safe, efficient operations. Blading done on an "as needed" basis instead of a set schedule does not qualify as maintenance, so tax must be collected on that charge.
- Maintaining an existing road for an individual (e.g., a ranch road): taxable unless it meets the same scheduled/periodic maintenance definition described above.
- Constructing a new road for an individual (clearing roadway, hauling caliche, blading, watering, compacting): taxed the same way as new construction described above -- materials taxable, labor not, depending on lump-sum vs. separated contract.
- Haul truck/trailer standby while equipment is moved between locations: nontaxable service.
- Equipment-with-operator standby charges generally: taxable if the standby is related to the sale of a taxable service, such as repairing or remodeling a pit or private road.
The Comptroller notes the opinion is based on the facts presented, and different facts could produce a different result.
What this means for you
Oilfield equipment/service contractors
Whether your charge is taxed often turns on a fine distinction: true reclamation of a lease site to its pre-drilling condition is exempt, but restoring other nonresidential real property is taxed. New construction of pits, pads, and roads is taxed only on materials (not labor), while true scheduled maintenance of an existing road is not taxed at all -- but the same blading done "as needed" is taxable. Track whether your road-maintenance work follows a set schedule (e.g., every 3, 6, or 12 months), since that distinction alone can flip the tax result.
Businesses providing equipment with an operator
Providing dozers, loaders, graders, or rollers with an operator is generally subject to sales tax, even when the underlying job (like reclamation or right-of-way clearing) is itself nontaxable. Haul trucks/trailers are instead subject to motor vehicle tax rather than sales tax. Standby time for equipment is taxable only if tied to a taxable service.
Suppliers and roustabout/delivery services
If you pick up materials from a supplier and deliver them to a customer's lease, your delivery/labor charge to the supplier is not taxed, but the supplier's downstream charge to its own customer is taxed as part of the sale of the (taxable) material.
Common questions
Q: Is restoring an oil and gas lease site to its original condition taxable?
A: No, if it is the actual reclamation of the site to the land's condition before drilling began. Restoring other nonresidential improvements to realty is generally taxed, and the equipment-with-operator charges used to do the reclamation work are still separately taxable.
Q: Is cutting a pipeline right-of-way (senderos) taxable?
A: No. Blading or brushing a right-of-way is not taxed.
Q: Is building a new lease road, pad, or pit taxable?
A: The pits, pad, and road are improvements to realty and count as new construction. Only the materials incorporated into the realty are taxed; labor is not. Whether the contractor or the property owner pays/collects that materials tax depends on whether the contract is lump-sum or separated.
Q: Is hauling caliche to a job site taxable?
A: No, if it is naturally occurring caliche -- selling or transporting it to the customer's location is not taxable, whether the contractor sells and transports it or purchases it. But if the material is actually crushed limestone, the sale or purchase is taxable.
Q: When is road maintenance taxable?
A: It is not taxable if it is scheduled and periodic (for example, blading every three, six, or twelve months) under the maintenance definition in Rule 3.357. Blading performed on an "as needed" basis instead is taxable.
Q: Are haul trucks and trailers taxed the same way as other equipment?
A: No. Dozers, loaders, graders, and rollers provided with an operator are subject to sales tax, but haul trucks/trailers are instead subject to motor vehicle tax.
Q: Are equipment standby charges taxable?
A: Standby charges for a haul truck/trailer while equipment is moved between locations are nontaxable. General equipment-with-operator standby charges are taxable if related to a taxable service, such as repairing or remodeling a pit or private road.
Citations and references
Rules cited:
- 34 Tex. Admin. Code § 3.357 (defines "maintenance" for nonresidential real property, requiring scheduled, periodic work)
- 34 Tex. Admin. Code § 3.356 (Real Property Service, referenced as the standard that maintenance work must not otherwise meet)
Source
- STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
- Opinion: https://star.comptroller.texas.gov/view/9609L1436A03
Original ruling text
September 3, 1996
Dear ***:
This is in response to your request for a ruling asking for clarification to
several tax questions relating to your business operations. You provide
equipment (dozers, loaders, graders, rollers, haul truck/trailer, etc.) with
operator to perform various services. Your questions are restated below
followed by my response:
- Provide equipment with operator to clean up and restore location area
(backfilling water pit, reserve and shale pits). Is this service considered
taxable or nontaxable?
Response: The reserve pit is an improvement to realty. The total charge for
restoration of nonresidential improvements to realty is taxed. However, when
the restoration is the actual reclamation of an oil and gas lease site to the
land's condition before the drilling activity was begun, the charge for the
restoration/reclamation is not taxed. [Note: This statement applies in all the
situations stated in your letter: You should pay sales tax on all equipment
that you provide with an operator (dozers, loaders, graders, rollers). The
haul trucks/trailer are subject to motor vehicle tax.]
- Provide equipment with operator to set frac tanks, haul truck to move
equipment to lease. Is this service considered taxable or nontaxable?
Response: Nontaxable service.
Provide equipment with operator to cut senderos for pipeline right-of-way. Is
this service taxable or nontaxable?
Response: Blading or brushing a right of way is not taxed
- Provide roustabout labor and vehicle to pick up fencing materials from
supplier and deliver to lease. Material would be taxable, but would labor and
vehicle be considered taxable or nontaxable?
Response: Your charge to the supplier for this service is not taxed. The
charge to the customer by the supplier would be taxed as a service related to
the sale of a taxable item.
- Provide equipment with operator to construct new location: dig pits (water,
reserve, shale pits), construct road, blade, haul caliche material for road and
pad area. This service is sometimes a lump sum price and/or by hourly rates. Is
this service taxable or nontaxable?
Response: The pits, pad, and road are improvements to realty. The
construction of these improvements qualify as new construction. Under a
contract to improve realty that qualifies as new construction, only the
materials incorporated into the realty are taxable (the labor is not taxed).
Under a lump-sum contract, the contractor is responsible for paying tax on
taxable materials. Under a separated contract the contractor will collect tax
from the owner on incorporated materials. The sale of or the transportation
charge to deliver naturally occurring caliche to the customer's location is not
taxable. This applies whether the contractor is transporting and selling the
caliche to the customer or whether the contractor has purchased the caliche.
However, if the caliche is actually crushed limestone the sale (under a
separated contract) or the purchase (under a lump-sum contract) by your
company would be taxable.
- Provide equipment with operator to maintain existing road to lease (such as
blade with grader). Is this service taxable or nontaxable?
Response: Maintenance of real property is not taxable and is defined in Rule
3.357 as follows:
For operational and functioning improvements to realty, maintenance means
scheduled, periodic work necessary to sustain or support safe, efficient,
continuous operations, or to prevent the decline, failure, lapse, or
deterioration of the improvement. Taxable real property services covered by
sec. 3.356 of this title (relating to Real Property Service) do not qualify as
maintenance.
(A) As it relates to maintenance, the term "scheduled" means anticipated and
designated to occur within a given time period or production level.
(B) As it relates to maintenance, the term "periodic" means ongoing or
continual or at least occurring at intervals of time or production which are
generally predictable.
If you have a contract to blade the road every three months, six months, twelve
months, etc., as opposed to blading the road on an "as needed" basis, this will
qualify as maintenance. Other wise you must collect tax on your charge for
blading the road.
- Provide equipment with operator to maintain existing road for an individual
such as ranch road. Is this service taxable or nontaxable?
Response: This will be taxable if it does not meet the definition of
maintenance as defined in my response to #6 above.
- Provide equipment with operator to construct new road for an individual,
such as ranch road (clear roadway, haul caliche material, blade, water, and
compact road). Is this service taxable or nontaxable?
Response: See response to #5 above.
- Provide a haul truck/trailer with operator to stand-by if equipment needs to
be moved from one location to another. Is this taxable or nontaxable?
Response: This is a nontaxable service.
- Stand-by charges for equipment with operator. Is this taxable or
nontaxable?
Response: Stand-by charges for equipment with an operator will be taxable if
related to the sale of a taxable service, such as the repair or remodeling of a
pit, private road, etc.
This opinion is based on the facts presented. Other facts though similar may
provide a different result.
You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts. My Internet address is: [email protected].
Sincerely,
Gilbert Zamora
Tax Policy Division
NOTE: Previous Accession Number 9609676L
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