Does an oilfield waste bioremediation company owe sales tax on the treating agents, chemicals, and equipment it uses, and does it need to charge its clients sales tax?

Plain-English summary

A company sought a ruling on a facility that receives, stores, handles, treats, and disposes of nonhazardous, noninjectable, nonreclaimable oil and gas wastes from oil/gas/geothermal exploration, development, and production — things like drilling fluids and cuttings, tank bottoms, waste from produced-water collection pits, produced formation sand, and contaminated soil. Everything stays on site (its Railroad Commission of Texas permit doesn't authorize discharge), and the company uses bioremediation — adding treating agents, chemicals, and other products, plus extensive farm/implement and other heavy equipment — to treat the waste, charging generators, transporters, or other responsible parties for the service.

The Comptroller answered four questions: (1) the company must pay sales or use tax on the treating agents, chemicals, fertilizers, and other products it purchases to perform the treatment; (2) it may NOT claim an agricultural exemption for its farm or heavy equipment, because that exemption only covers equipment used exclusively on a farm or ranch to produce food, grass, animal feed, or other agricultural products for sale — nor does the manufacturing exemption apply, since that requires manufacturing, processing, fabricating, or repairing tangible personal property for sale, which this waste-treatment service isn't doing; (3) the company does NOT need to charge its clients sales tax for the service; and (4) as a provider of a nontaxable service, it doesn't need a sales tax permit, though it must still pay tax on all taxable items it uses to provide the service.

Currency note: STAR's general ALERT flags that Tax Code was later amended by H.B. 268 (82nd Legislature, 2011), effective January 1, 2012, requiring a Comptroller-issued registration number for anyone claiming the agricultural/timber exemption. That amendment doesn't actually change anything in this ruling, since the letter already holds the agricultural exemption doesn't apply to this taxpayer's equipment in the first place — the ALERT appears to be boilerplate attached to any document discussing the agricultural exemption topic, not a substantive currency concern here.

What this means for you

Oilfield waste treatment and bioremediation companies

Your treatment service itself isn't taxable to clients, and you don't need a sales tax permit for it — but you're the end consumer of the chemicals/treating agents you use, so you owe sales/use tax on those. Don't assume farm-style or heavy equipment used in an industrial waste process qualifies for the agricultural exemption just because it resembles farm equipment; the exemption is about the equipment's actual use (producing agricultural products for sale), not its type.

Accountants and tax professionals

When a client's waste-treatment or remediation business uses farm-type equipment, check whether the equipment is actually used to produce agricultural products for sale — if not (as here), neither the agricultural nor manufacturing exemption applies, even though the equipment resembles farm machinery.

Common questions

Q: Does the bioremediation company charge its clients sales tax?
A: No — it's a nontaxable service, and the provider doesn't need a sales tax permit for it.

Q: Does the company owe any sales tax itself?
A: Yes — on the treating agents, chemicals, fertilizers, and other products it buys to perform the treatment.

Q: Can the company claim the agricultural or manufacturing exemption for its equipment?
A: No to both — the agricultural exemption requires exclusive farm/ranch use producing agricultural products for sale, and the manufacturing exemption requires manufacturing/processing/fabricating/repairing tangible personal property for sale; neither applies to this waste-treatment equipment.

Q: Can another company rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9710971L

Original ruling text

ALERT: This document may be affected by changes to the Tax Code which was amended by H.B. 268, 82nd Reg. Legislative Session, 2011. The amendment required persons claiming a sales tax exemption for certain agricultural and timber products to apply for and provide a registration number issued by the Comptroller, effective 01/01/2012.

October 1, 1997

Dear ****:

Thank you for your letter of September 16, 1997. You asked that we address the
taxability of items you purchase to provide your service.

As I understand it, your company will receive, store, handle, treat, and
dispose of nonhazardous, noninjectable, nonreclaimable oil and gas wastes
involved in activities associated with the exploration, development, and
production of oil or gas or geothermal resources. The items to be treated
include oil base drilling fluids and associated cuttings, water base drilling
fluids and associated cuttings, tank bottoms from gas plants, crude oil
reclamation plants and crude oil production/separation facilities, waste
material from produced water collecting pits, produced formation sand, and soil
contaminated with produced fluids, crude oil, or condensate.

Your permit to process these items granted by the Railroad Commission of Texas
does not authorize the discharge of any oil and gas waste from this facility.
All materials received will remain on site at all times. You will use a
technique known as bioremediation to treat the materials described above. This
involves the addition of various treating agents, chemicals, and other products
during the treatment process. Extensive use of farm and implement equipment
and other heavy equipment will be used during the treatment process.

You will charge all generators, transporters, or responsible parties for
handling of waste materials received at this facility and other services
performed by your company.

Questions:

1. Are we required to pay sales tax or any other appropriate taxes on the
   purchase of various treating agents, chemicals, fertilizers, or other products
   used for treatment?

Response: You are required to pay sales or use tax on the taxable items used
to perform your service.

2. Are we required to pay sales tax or any other appropriate taxes on the
   purchase or rental of farm and implement equipment or other heavy equipment
   used during the treatment process?

Response: You may not claim an agricultural exemption for farm equipment or
heavy equipment used during the treatment process. This exemption is only
available for machinery and equipment used exclusively on a farm or ranch for
the production of food for human consumption, production of grass, production
of feed for any form of animal life, or other agricultural products to be sold
in the regular course of business.

The manufacturing exemption is not available either. To qualify for this
exemption you would have to manufacture, process, fabricate, or repair tangible
personal property to be sold, and the items must be necessary and essential to
the manufacturing, processing, fabrication, or repair operation or a pollution
control process resulting from the manufacturing operation.

3. Are we required to charge sales tax or any other appropriate taxes to
   clients for services we perform?

Response: No.

4. What tax/non-tax laws or regulations pertaining to this type of facility
   should we comply with?

Response: As the provider of a nontaxable service, you are not required to
hold a sales tax permit. You are required to pay tax on all taxable items used
to provide your service.

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

You may call me toll free at 1-800-531-5441, ext. 5-0037. The direct line is
512/475-0037. You also may write to Sales Tax Policy Division, Comptroller of
Public Accounts.

Sincerely,

Lindey Osborne
Sales Tax Policy Division