We're restructuring ownership of several producing oil and gas leases (with production equipment already installed and in use) through a series of contributions between related companies, ending with a limited partnership selling the leases — always bundled with their production equipment, never separately — to outside purchasers for a lump sum. Are these sales subject to Texas sales/use tax?

Plain-English summary

A taxpayer described a multi-step corporate restructuring involving producing Texas oil and gas leases that already had production equipment installed and running on them. Company A would contribute its interest in the leases (with the equipment) to newly formed Company B as initial capitalization; Company B would then contribute the same leases and equipment to a newly formed Limited Partnership in exchange for a partnership interest; and the Limited Partnership would sell the leases — always together with their production equipment, never the equipment sold separately — to various outside Purchasers for a lump-sum price. All the intermediate transfers (Company A to B, Company B to the Partnership) would happen essentially simultaneously with each final sale closing.

The taxpayer argued the true object of each sale from the Limited Partnership to a Purchaser was the sale of a mineral lease — a nontaxable real property interest — with the production equipment being merely incidental, pointing to two prior Comptroller letters addressing the same kind of transaction (an April 1991 letter and an April 1989 letter).

The Comptroller agreed: those prior letters still correctly represent the Comptroller's policy on sales of mineral interests with production equipment located on them, and none of the transactions in this restructuring will be subject to Texas sales tax.

What this means for you

Oil and gas companies structuring lease sales that include production equipment

Selling a mineral lease together with its already-installed, in-use production equipment — without ever carving the equipment out as a separate sale — supports treating the whole transaction as a nontaxable sale of a real property interest, with the equipment as incidental. Keep the bundling intact; separately pricing or selling the equipment apart from the lease would likely change the analysis.

Companies restructuring mineral asset ownership through multiple related-entity transfers

This letter shows a multi-step contribution/transfer structure (individual owner → new subsidiary → new limited partnership → outside sale) doesn't itself change the sales tax analysis of the final sale to a third party — the key fact is how the FINAL sale to the purchaser is bundled, not the intervening corporate mechanics.

Accountants and tax professionals advising oil and gas transactions

The controlling concept is the "true object" test: when equipment is never sold apart from the mineral lease it sits on, the whole transaction is characterized as a sale of the (nontaxable) real property interest, with the equipment treated as incidental rather than as its own taxable sale of tangible personal property.

Common questions

Q: Is selling a producing oil and gas lease along with its production equipment subject to Texas sales tax?
A: No, according to this letter, as long as the equipment is always sold together with the lease and never separately — the true object of the sale is the nontaxable mineral lease interest.

Q: Does it matter that the leases pass through several related companies before the final sale?
A: No — the letter confirms this kind of restructuring (individual owner to new company to new limited partnership to outside purchaser) doesn't change the analysis of the final sale's taxability.

Q: Would the answer change if the production equipment were sold separately from the lease?
A: The letter doesn't address that scenario directly, but its reasoning depends specifically on the equipment never being sold apart from the lease — a separate equipment sale would likely need its own analysis.

Q: Can I rely on this letter for my own oil and gas lease sale?
A: No. This opinion is based on the facts presented, and if there are any additional or different facts, the opinion may change; it can be relied on only by the taxpayer it was issued to.

Citations and references

No specific Tax Code section or Comptroller rule number is cited in this letter; the Comptroller instead confirms consistency with two prior Comptroller letters on mineral leases sold with production equipment (an April 11, 1991 letter, STAR No. 9104L1104C01, and an April 25, 1989 letter, STAR No. 8904L0934G11), without quoting a statute or rule number in this response.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9811021L

Original ruling text

November 24, 1998

Dear Mr. **:

Thank you for your inquiry regarding the taxability of the sale of a mineral
lease, including the production equipment located thereon.

You provide the following facts:

Company A is the owner of all or a portion of several oil and gas leases, some
of which are located in Texas. These mineral leases are producing properties
and have production equipment located thereon that is currently in use.

Company A intends to contribute its interest in the mineral leases, including
the production equipment located thereon, to Company B. This transfer will
represent the initial capitalization of Company B that was formed a month
earlier.

Company B intends to transfer the same mineral leases, including the production
equipment located thereon to a Limited Partnership, that was also formed a
month earlier, in exchange for an interest therein. The Limited Partnership
intends to sell the mineral leases, including the production equipment located
thereon, to different Purchasers.

The Purchasers will pay a lump sum amount to the Partnership for the mineral
lease(s) and the production equipment located thereon. No production equipment
will be sold separate and apart from the mineral lease on which it is located.

Each mineral lease, including the production equipment located thereon, that is
sold by the Limited Partnership will be transferred from Company A to Company B
and from Company B to the Limited Partnership at the time the sale to each
Purchaser is closed. These transfers will occur more or less simultaneously.

You believe that the true object of each sale between the Limited Partnership
and the different Purchases is the sale of a mineral lease, which is a
non-taxable real property interest, and that the production equipment is
incidental to the sale. Support for this belief is found in an April 11, 1991
letter from JoAnn Dieck (STAR No. 9104L1104C01) and an April 25, 1989 letter
from Al Van Allen (STAR No. 8904L0934G11).

You ask whether the sales that are going to be made by the Limited Partnership
to the various Purchasers will be subject to Texas Sales/Use Tax? As I
indicated to you over the telephone, the above-cited letters still correctly
represent the Comptrollers policy and interpretation concerning sales of
mineral interests with production equipment located thereon. None of the
transactions will be subject to sales tax.

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. 3-4675. The direct line is
(512) 463-4675. You also may write to Tax Policy Division, Comptroller of
Public Accounts. You may also e-mail our tax help section at:
[email protected]>

Sincerely,

Tom Soto
Tax Policy Division