Is repair work on oil-and-gas-field compressors taxable, and does it matter whether the compressor is used for gas processing versus moving gas through a pipeline to the plant?

Plain-English summary

An accountant wrote in on behalf of a client that repairs compressors for oil field companies. The client believed its repair services were taxable, but the company being billed disagreed, so the accountant asked for a ruling — and a citable code section — to resolve the dispute.

The Comptroller confirmed that compressors qualify for the manufacturing exemption under Tax Code § 151.318 when used in processing oil or gas that will be resold, and that replacement parts and labor to repair qualifying machinery also qualify. But the exemption depends heavily on exactly what the compressor is doing:

• Compressors necessary for the operation of field dehydrators, heater treaters, separators, and scrubbers are processing equipment — compressors used in connection with that equipment qualify for the exemption.
• Compressors used to compress already-processed gas up to the required pressure before it enters a sales line also qualify.
• But compressors in the field used only to increase the gas stream's pressure to get it to the plant are transportation equipment, not processing equipment — these do not qualify, regardless of who owns the gas.

Two further limits apply regardless of function: once a compressor is installed as a permanent improvement to realty, it's no longer tangible personal property (it's real property), and the repair/remodeling/restoration exemption doesn't extend to services performed on realty. And equipment that's rented or leased doesn't qualify for the manufacturing exemption at all, unless it's a financing lease or a fixed-term lease of at least one year entered into after September 30, 1995.

Procedurally, the client's customer (not the client) is responsible for issuing the exemption certificate claiming the manufacturing exemption; a sale is exempt if the certificate is accepted in good faith at the time of the transaction and the seller doesn't actually know the claimed exemption is invalid, per Rule 3.287(d)(2).

What this means for you

Oil and gas equipment repair companies

Don't treat "compressor repair" as a single taxability category — the same repair service can be exempt or taxable purely based on what the specific compressor does (gas processing vs. moving gas to the plant), whether it's permanently installed as realty, and whether it's owned or leased under a short-term arrangement. Get the customer's exemption certificate and document the compressor's actual function before treating a repair as exempt.

Accountants and tax professionals

This letter is a useful, statute-anchored resource for resolving exactly the kind of taxable-vs-nontaxable billing dispute described here — cite § 151.318 for the processing-equipment qualification and Rule 3.287(d)(2) for the good-faith exemption-certificate defense on the seller's side.

Common questions

Q: Is repairing a compressor used to process oil or gas exempt from sales tax?
A: Yes, if the compressor is processing equipment (used with field dehydrators, heater treaters, separators, scrubbers, or to bring processed gas to sales-line pressure) — repair parts and labor both qualify under § 151.318.

Q: What about a compressor that just moves gas from the field to the plant?
A: That's transportation equipment, not processing equipment, and does not qualify for the manufacturing exemption, regardless of who owns the gas.

Q: Does it matter if the compressor is leased rather than owned?
A: Yes — leased/rented equipment generally doesn't qualify for the manufacturing exemption unless it's a financing lease or a fixed-term lease of at least one year entered into after September 30, 1995.

Q: Who is responsible for providing the exemption certificate?
A: The customer (the client's customer in this scenario) must issue the exemption certificate claiming the manufacturing exemption; the seller can rely on it in good faith under Rule 3.287(d)(2).

Citations and references

Statute and rule:

• Tex. Tax Code § 151.318 (manufacturing exemption, generally)
• 34 Tex. Admin. Code § 3.287(d)(2) (exemption certificates — good-faith acceptance)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9910770L

Original ruling text

October 13, 1999

Dear **:

This is in response to your request for a ruling on the following fact
situation and questions:

We have a client that does repair work on compressors for oil field companies.
The client believes that the service is taxable, but the company being billed
does not. We would like a ruling on this problem along with a code section we
could reproduce and send to the company to prove or disprove our position.

Response: Compressors qualify for the manufacturing exemption, under Texas Tax
Code section 151.318, if used in processing oil or gas that will be resold.
Replacement parts and labor to repair qualifying machinery or equipment also
qualify for exemption. Following guidelines regarding compressors used in the
oil and gas industry:

Compression equipment necessary for the operation of field dehydrators, heater
treaters, separators and scrubbers are considered processing equipment.
Therefore, compressors used in connection with this equipment qualify for the
manufacturing exemption. Also, compressors used to compress processed gas to
a required pressure prior to entering a sales line qualify for the exemption.
However, compressors in the field that are used to increase the pressure of the
gas stream to get it to the plant are considered transportation equipment, not
processing equipment, and therefore they do not qualify regardless of ownership
of the gas.

Once installed as a permanent improvement to realty, machinery or equipment,
such a compressor, is no longer tangible personal property; it is real
property. The exemption for repair, remodeling or restoration services does
not extend to services performed on realty. Also, equipment that is rented or
leased does not qualify for the manufacturing exemption, unless the lease is a
financing lease or was entered into after September 30, 1995 for a fixed-term
of at least one year.

Your client's customer is responsible for issuing your client an exemption
certificate claiming the manufacturing exemption. A sale is exempt if the
exemption certificate is accepted in good faith at the time of the transaction
and the seller lacks actual knowledge that the claimed exemption is invalid.
Rule 3.287 (d)(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:

Gilbert Zamora

Tax Policy