An oil & gas well servicing company asked how Texas sales/use tax and the separate 2.42% well servicing tax apply to a specific list of services: gauging (pumping) services, fluid level service, wireline (slickline) services, gas lift equipment service, and production packer equipment service.

Plain-English summary

An oil & gas well servicing company asked the Comptroller to review current sales tax policy for a specific list of well services, submitting descriptions and sample invoices for each. The Comptroller's overarching framework: well servicing jobs can be subject to either the limited sales and use tax OR the separate 2.42% well servicing tax (never both on the same job), and a few services may not be subject to either — but the SAME named service (like pulling rods) can be taxable on one job and nontaxable on another, because taxability turns entirely on the purpose of the job, not the service's label. Good documentation of that purpose is essential for audits, though the Comptroller noted this shouldn't be a hardship since other industry recordkeeping requirements already produce the needed documentation.

Applying that framework to the specific services submitted:

• Gauging (pumping) services: Separately stated charges for reading production information and reporting results to the well operator are NOT taxable. But pumping services making adjustments to well instruments that affect production ARE taxable, and maintaining or repairing equipment at the well site — even minor repairs — is always a taxable service.
• Pumping (jetting) fluids downhole: Taxability depends on the PRIMARY purpose, regardless of what fluid is used (acid, chemical, water, mud-water, nitrogen, etc.). Pumping nitrogen to wash out corrosion/debris from tubulars or casing is taxable (cleaning tangible personal property is the primary purpose, even though increased production is a secondary benefit). But pumping nitrogen into the formation primarily to move product to the surface more efficiently is NOT taxable, even if tubulars/casing get incidentally cleaned in the process.
• Fluid level service (determining annulus fluid level and reporting) is nontaxable, but treating a well with heated oil/water to melt accumulated paraffin in the annulus/tubing/flow lines IS taxable under Rule 3.324(d)(1)(E).
• Wireline (slickline) services are fully taxable UNLESS directly related to starting or stimulating production, per Rule 3.324.
• Gas lift equipment service (cleaning/testing valves in the shop) and production packer equipment service (cleaning/inspecting/repairing packers in the shop) are both fully taxable under Rule 3.324(a)(2).

What this means for you

Oil & gas well servicing companies

Don't assume a service is uniformly taxable or nontaxable based on its name alone — document the PURPOSE of each specific job (production-stimulation vs. equipment repair/maintenance vs. formation work) since that's what actually determines whether limited sales/use tax, the well servicing tax, or neither applies. Keep the kind of job-purpose documentation your industry already generates; it doubles as your audit support.

Businesses billing gauging, wireline, or downhole pumping services

Break down invoices by the primary purpose of the work (reading/reporting vs. adjusting production-affecting instruments; formation work vs. cleaning tangible equipment) since that distinction — not the fluid or method used — decides taxability under Rule 3.324.

Accountants and tax professionals in the oil & gas services sector

This letter is a dense, useful primary-purpose framework across five specific service categories under Rule 3.324 — note especially that no single service is ever taxed under BOTH the limited sales/use tax and the 2.42% well servicing tax on the same job.

Common questions

Q: Are gauging (pumping) services taxable in Texas?
A: Reading gauges and providing a written production report is nontaxable, but pumping services that adjust well instruments affecting production, or any equipment maintenance/repair at the well site, are taxable.

Q: Does the type of fluid pumped downhole (acid, water, nitrogen, etc.) affect taxability?
A: No — taxability turns on the PRIMARY purpose of the job (working on the formation vs. cleaning tangible personal property), not the fluid type.

Q: Is fluid level service taxable?
A: No, but a related paraffin-melting treatment service is taxable under Rule 3.324(d)(1)(E).

Q: Are wireline (slickline) services always taxable?
A: They're taxable unless directly related to starting or stimulating production.

Q: Can the same service be taxed under both the limited sales/use tax and the well servicing tax on one job?
A: No — any given service is subject to only one of the two taxes on the same job, never both.

Q: Can I rely on this letter for my own well servicing business?
A: No. It's based on the facts presented, and the letter notes other facts, though similar, may provide a different result.

Citations and references

• 34 Tex. Admin. Code Rule 3.324 (oil, gas, and related well services — general taxable/nontaxable framework)
• 34 Tex. Admin. Code Rule 3.324(d)(1)(E) (paraffin treatment classified as taxable)
• 34 Tex. Admin. Code Rule 3.324(a)(2) (shop-based cleaning/inspection/repair of gas lift and packer equipment classified as taxable)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9803236L

Original ruling text

March 30, 1998

Dear **:

This is in response to your request for a ruling regarding current sales tax
polices pertaining to the following specific oil & gas well services. You
included a description of the specific service, type of charges for the
services and a sample of invoices.

Response: Well servicing jobs are subject to two types of state taxes: limited
sales and use tax or the 2.42% well servicing tax. A few services may not be
subject to either tax. The purpose of the job determines taxability.
Documentation of the purpose is essential for audit purposes. Documenting jobs
should not pose a hardship for your business, because other industry
requirements produce documentation necessary to determine the application of
the taxes.

The fact that the purpose for the job makes a difference in taxability is
clearly evident when reviewing taxable and nontaxable services discussed in
Rule 3.324, copy enclosed. A specific service (such as pulling rods, etc.) may
be the same on Job A and Job B; it is subject to sale tax on Job A, but it is
not subject to sales tax on Job B. Please note that any given service is not
subject to both taxes (limited sales and use tax versus well servicing tax) on
the same job.

This response is intended to address only limited sales and use tax
responsibilities. I have typed in the current tax status and rule reference
when possible on the services which you provided, and have enclosed Rule 3.324,
relating to Oil, Gas, and Related Well Services.

The services in question and their taxability are dependent on whether the
service is to start or stimulate production or the labor to work on the
formation outside the well or to repair, restore, remodel, or maintain tangible
personal property or to repair, remodel, or restore improvement to real
property at a lease site.

1. Gauging (pumping) Services - Separately stated charges for providing
   gauging services (i.e., reading production information on an oil or gas well
   location and reporting the results to the operator of such well) are not
   taxable. Reading gauges and providing written reports is a nontaxable service.
   Pumping services to make adjustments to oil and gas well instruments that
   affect well production are taxable. Maintaining equipment or providing repairs,
   even minor repairs, of equipment at a well site is classified as a taxable
   service.

Pumping (jetting) fluids downhole has two distinct purposes; to work on the
formation or to effect downhole equipment (tangible personal property). It does
not matter whether the fluid is an acid, chemical, water, mud-water, nitrogen,
etc. the taxability of the service is determined by the primary purpose for the
service. Of course, after each service is performed a secondary benefit may
result. For example, pumping nitrogen downhole to wash out the well is taxable.
The primary purpose is to clean the corrosion, bottom sand, or other debris out
of the tubulars or casing; increased production is a secondary benefit because
these items are cleaned and allow more product to flow out of the well.
Likewise, pumping nitrogen downhole and forcing it into the formation in an
effort to move the product to the surface in a more efficient is not taxed even
though the tubulars, casing, etc. may be cleaned in the process.

2. Fluid Level Service ( to determine the annulus fluid level in various wells
   and provide report) - nontaxable. The treatment of a producing well with heated
   oil or water so as to melt accumulated paraffin in the annulus, tubing or flow
   lines through which the oil travels from the oil or water and pump it down the
   well or through the flow lines is taxable . See Rule 3.324(d)(1)(E).

3. Wireline (Slickline ) Services - If the wireline service is not directly
   related to starting or stimulating production, as discussed in Rule 3.324, then
   the service is the performance of a taxable service and the total job is taxed.

4. Gas Lift Equipment Service (clean and test gas lift valves in your shop) -
   Total charge is taxable. Rule 3.324 (a)(2).

5. Production Packer Equipment Service (clean, inspect and repair used packers
   at your shop) - Total charge is taxable. Rule 3.324 (a)(2).

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

I hope this information answers your questions. If you need additional
information, please 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. You may also e-mail our tax help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division