Is overhauling a compressor used to lift oil and maintain well pressure a taxable service in Texas, or is it exempt as manufacturing equipment repair?

Subject

Compressor — Refinery/Gas Plant And Oil/Gas Field Location — Processing Vs. Transportation Equipment

Plain-English summary

A taxpayer asked the Comptroller about the taxability of services to overhaul a compressor. The compressor was used to compress gas for lifting oil from wells, maintaining pressure to recover additional oil, and some gas sales.

The Comptroller explained the general dividing line for compressors: compressors located at refineries that increase the pressure of crude oil or natural gas for processing activities qualify for exemption as manufacturing equipment. But compressors used in extracting crude oil from the ground and to increase pressure for transportation purposes do not qualify for exemption.

Services to repair, remodel, restore, or maintain tangible personal property are generally taxable, unless performed on property that was itself exempt at the time of purchase because of its nature or use. Texas sales tax law does not exempt drilling or production equipment. Because the compressor at issue was used in production (lifting oil from wells and maintaining well pressure), it did not qualify for exemption, and the services to overhaul it were taxable.

What this means for you

Oil and gas producers

If your compressor is used in production activities -- lifting oil from wells, maintaining reservoir pressure to recover more oil, or similar field-location functions -- it is treated as production equipment. Under this ruling, that means repair and overhaul services on it are taxable, because production equipment itself does not qualify for a manufacturing exemption.

Refinery and gas plant operators

Compressors located at a refinery or gas plant that increase pressure so that processing can take place are treated differently: they can qualify for exemption as manufacturing equipment. The location and function of the compressor -- refinery processing versus field production or transportation -- is what determines whether repair services on it are taxable.

Accountants and tax professionals

When advising on repair/overhaul services to compressors, first classify the equipment's use: (1) refinery/gas plant processing equipment (potentially exempt), (2) field production or extraction equipment (taxable, not exempt), or (3) transportation-pressure equipment (taxable, not exempt). Only the processing-use category supports the manufacturing exemption argument under this letter.

Common questions

Q: Are all compressors used in the oil and gas industry exempt from sales tax as manufacturing equipment?
A: No. Only compressors located at refineries or gas plants that increase pressure for processing activities qualify for exemption. Compressors used to extract crude oil from the ground or to increase pressure for transportation do not qualify.

Q: Is overhauling a compressor used to lift oil from wells taxable?
A: Yes. The letter states the compressor was used in production, and services to overhaul it were taxable.

Q: Why were the overhaul services taxable here?
A: Because services to repair, remodel, restore, or maintain tangible personal property are taxable unless the property itself was exempt at the time of purchase due to its nature or use. Since drilling and production equipment is not exempt, services on it are taxable.

Q: Could the answer change under different facts?
A: Yes -- the letter states the opinion is based on the facts presented, and the opinion may change if there are additional or different 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/9609L1436A07

Original ruling text

September 10, 1996

Dear *****:

Thank you for your letter of August 28, 1996, asking about the taxation of
services to overhaul a compressor used to compress gas for use in lift oil
from wells, maintaining pressure for recovering additional oil, and some
gas sales.

You state that you have read conflicting information on the taxability of
compressors. Compressors located at refineries that increase the pressure
of crude oil or natural gas for processing activities to take place qualify
for exemption as manufacturing equipment. Compressors used in extracting
crude oil from the ground and to increase the pressure of crude oil and
natural gas for transportation purposes do not qualify for exemption.

The services to repair, remodel, restore, or maintain tangible personal
property are taxable. These services are not taxable when performed on
tangible personal property that at the time of purchase is exempt because
of its nature or use or a combination of its nature or use.

The sales tax law does not exempt drilling or production equipment used
in Texas. The compressor is used in production and is taxable. Thus, the
services to overhaul the compressor are taxable.

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 1-800-531-5441, extension 3-4683. The direct
line is 512/463-4683. You may also write to Tax Policy Division,
Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division

NOTE: Previous Accession Number 9609678L