For an oil field tool rental company, which of its many charges to customers — tool rental, sub-rentals, sales, repairs, freight, supervisor time, mileage, and inspections — are subject to Utah sales tax?

Plain-English summary

An oil field service company rents and sells "fishing" and drilling tools to oil companies and drilling contractors, sometimes bundled with a supervisor who travels to the job site. Its invoices could combine any of fourteen different charge types, and the company asked the Commission to walk through the taxability of each one so it could bill customers correctly.

The Commission's Auditing Division answered item by item:

1. Tool rentals are taxable.
2. Sub-rented tools (tools the company itself rents from someone else, then re-rents to the customer) are taxable the same way.
3. Tool sales are taxable unless the sale qualifies as an exempt interstate sale or a sale to an exempt entity.
4. In-house repair charges (materials and labor) billed to the customer are taxable.
5. Outside repair charges (materials and labor) billed to the customer are also taxable.
6. Freight via the company's own truck to deliver rented tools is taxable — title/possession doesn't pass to the customer until the company's own driver hands over the tools.
7. Freight via a common carrier: for a sold item, freight is exempt unless the sale terms are F.O.B. destination; for a rented item, freight is usually taxable, because Rule R865-19-32S taxes the total amount received under a rental agreement, and delivery/pickup required by the rental agreement is part of that total.
8. Supervisor charges: taxable, UNLESS the supervisor has actual "hands-on" use of the tool during the operation — citing a 1962 Utah Supreme Court case that sustained tax on a separate charge for factory-trained experts merely checking an installation, contrasted with a separate (unpublished) Commission decision that didn't tax a supervisor who personally guided a fishing-tool cable by hand.
9. Mileage charges for supervisor travel are taxable if the underlying rental or sale is taxable.
10. Independent inspector charges to inspect and/or recommend or make repairs are taxable.
11. Even when a customer arranges its own outside freight or services, if the company bills those through to the customer for convenience, the same taxability rules from the prior answers apply — routing a charge through the invoice doesn't change its tax character.
12. Interstate sales: shipping tangible personal property to another state is an exempt interstate sale. But if the company does real-property service work out of state, any materials/supplies used are still subject to Utah sales tax if the company took possession of those materials in Utah before taking them out of state.

What this means for you

Oil field and industrial equipment rental companies

Track whether your supervisor or technician has literal hands-on contact with the rented equipment during the job — that single fact can flip a taxable service/supervision charge into an exempt one. Also separate your delivery method: company-truck delivery of rented items is always taxable, but common-carrier freight is taxed differently depending on whether the underlying transaction was a sale or a rental.

Businesses that rebill third-party freight or services to customers

Passing a freight or service charge through your own invoice "for the customer's convenience" doesn't change how it's taxed — the charge keeps whatever taxability it would have had directly. Don't assume rebilling makes something exempt.

Accountants and tax professionals

This ruling is a useful multi-item checklist for equipment rental businesses with bundled service charges, and a clean citation for the "hands-on operator" test distinguishing a taxable supervisory/inspection charge from an exempt personal-service charge (Rule R865-19-32S plus the cited 1962 case, Davis and Butler v. Utah State Tax Commission, referenced but not independently verified against a reporter citation in this ruling's text).

Common questions

Q: Is renting oil field tools taxable in Utah?
A: Yes, whether the company owns the tools or is sub-renting them from someone else.

Q: Does a supervisor's travel charge avoid sales tax?
A: Only if the supervisor actually operates the tool hands-on during the job. Merely supervising, checking installation, or making recommendations without hands-on use is taxable.

Q: Is freight for delivering a sold item taxable?
A: Freight by a common carrier for a sold item is exempt unless the sale terms are F.O.B. destination. Freight for a rented item by common carrier is usually taxable, and delivery by the company's own truck is always taxable for rentals.

Q: Can another oil field service company rely on this ruling?
A: No — it binds the Commission only for the taxpayer and facts presented. The letter itself notes the taxpayer could appeal for a formal hearing (a declaratory judgment) if it disagreed, which underscores this determination isn't binding precedent for others.

Citations and references

Rules:

• Utah Admin. Rule R865-19-32S (tax due on total amounts received or charged under rental or lease agreements)

Case law (as referenced in the ruling, not independently verified):

• Davis and Butler v. Utah State Tax Commission (1962) (Utah Supreme Court sustained sales tax on a separate charge for factory-trained experts checking an equipment installation)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/91-003.htm

Original ruling text

March
20, 1991 Response from Tax
Commission

February
19, 1991 Letter from XXXXX of XXXXX

Certified Public Accountants

XXXXX

XXXXX

Re: Advisory Opinion -XXXXX Fishing and Rental Tools

Dear Mr. XXXXX:

This letter is in response to your recent request for a Tax Commission
ruling on whether sales tax is due on the rental or use of oil field tools,
either with or without a supervisor.

The Tax Commission policy is to refer such requests to the division
most qualified to analyze the request and make recommendations concerning it.
As such, your request was referred to the Tax Commission's Auditing Division
for their analysis and recommendation. The division's recommendation is as
follows. Their response will refer to your questions as you have numbered them.

1. Sales tax is due when tools
   are rented to a customer.

2. Sales tax is due when
   sub-rented tools are rented to a customer.

3. Sales tax is due when XXXXX
   tools are sold to a customer unless the sale qualifies as an interstate sale or
   is sold to an exempt entity.

4. Sales tax is due on both
   materials and labor repair charges billed to a customer.

5. Sales tax is due on outside
   repair charges, both materials and labor, billed to a customer.

6. Sales tax is due on freight
   charges for XXXXX's truck to deliver tools to customer's site. Title to goods
   does not pass until XXXXX's driver places the tools in the hands of the
   customer.

7. Freight charges for a common
   carrier to deliver tools sold to a customer are not taxable unless the
   terms are F.O.B. destination. Freight charges for a common carrier to deliver rented
   tools will usually be taxable. Sales Tax Rule R865-19-32S says tax is due on
   (total) amounts received or charged pursuant to rental or lease agreements. If
   the rental agreement requires XXXXX to deliver and/or pick up tools, the
   freight charge is taxable.

8. The charge for a XXXXX
   supervisor or employee to travel to a job site to supervise tool use or to make
   additional tool recommendations is taxable unless the supervisor has actual
   "hands on" use of the tool. In 1962, the Utah Supreme Court sustained
   sales tax assessed on a separate charge for three factory trained experts to
   check the installation of equipment to insure that the equipment was properly
   installed and operational. See Davis and Butler v.s. Utah State Tax Commission.
   In a separate case the Tax Commission denied the assessment of tax on the
   rental and separate charge for a supervisor who was on site and actually
   guided, by hand, the cable in a fishing tool operation.

9. Mileage charges for
   supervisor travel billed to a customer are taxable if the sale or rental is
   taxable.

10. Inspection charges for an
    independent inspector to inspect and/or make repairs or recommend repairs are
    taxable.

11. Number 11 does not ask for
    a response.

12. Number 12 does not ask for
    a response.

13. Even though a customer
    arranges for freight services or other outside services, where they are billed by
    XXXXX to its customer for their convenience, the freight or service is taxable
    to the extent determined in previous paragraphs.

14. When tangible personal
    property is sold and shipped or delivered by the seller into another state, it
    is an exempt interstate sale. If real property service work is performed out of
    state, any materials or supplies used are subject to Utah sales tax if
    possession took place in Utah.

If you do not agree with this determination, you may appeal to the Tax
Commission for a formal hearing. The results of that hearing would constitute a
declaratory judgment and be appealable to the Utah State Supreme Court. A
Notice of Appeal Rights is attached.

For The Commission,

Joe Pacheco

Commissioner

Mr. XXXXX

Utah State Tax Commission

160 East 300 South

Salt Lake City, UT 84134

Dear Sirs:

This letter is being sent to request a written determination as to
whether various transactions are subject to Utah Sales or Use Tax. After consulting both the Utah Code and
auditors with the tax commission, it was felt that a written determination was
advisable.

Background:

My client, XXXXX, is an oil field service company with offices in
XXXXX, Utah. XXXXX rents various tools and equipment used in drilling and/or
repairing oil and gas wells to oil companies and drilling contractors. These tools are rented by themselves, or
with a "supervisor," depending on what the customer orders. XXXXX has
always purchased tools for their rental inventory, tax free, as they have
determined that these tools are used predominantly for rental without a
supervisor. A normal XXXXX invoice to
its customer may include any combination or all of the following items or
situations, and we would like to determine the taxability or non-taxability of
each under Utah law.

1. XXXXX tools rented to customer.

2. Sub-rental tools rented to
   customer.

3. XXXXX tools sold to customer.

4. XXXXX repair charges for materials and/or labor billed to customer.

5. Outside repair charges for
   materials and/or labor billed to customer.

6. Freight charges for XXXXX
   truck to deliver tools to customer.

7. Freight charges for
   commercial trucker to deliver tools to customer.

8. Supervisor charge for XXXXX
   employee to travel to job site and supervise tool use and make additional tool
   recommendations are billed to customer.

9. Mileage charge for
   supervisor travel billed to customer.

10. Inspection charges for
    independent inspector to inspect tools upon return and make minor repairs or
    recommend more extensive repairs are billed to customer.

11. The rental term on a normal
    invoice is not predetermined except that a 1 to 5 day minimum rental charge may
    apply. Other than that, charges are
    based on actual time used, which may vary from 1 day to a period of weeks or
    even a couple of months.

12. Supervisor charges are not
    always consistent in that, given 2 similar jobs, the first may request a
    supervisor while the second will not.

13. Some customers will arrange
    their own outside services for freight and other goods and services and have
    them billed through XXXXX for their own convenience. Other customers may simply indicate everything they need and
    leave it up to XXXXX to make arrangements for all goods and services which are
    then rebilled to the customer on XXXXX's invoice.

14. XXXXX is located in Utah.
    Some jobs are in Utah, some are in Colorado, and a few are in other
    western states.

I have enclosed a copy of XXXXX's current price list which may help you
further understand and terms and conditions of their charges to their
customers.

It is XXXXX's desire to be in full compliance with Utah's sales tax
laws and, given the complexity of the situation, we are asking for a written
response to the situations noted above.
However, as some items may be non-taxable under Utah law, we want a
complete understanding of these situations in order to avoid taxing customers
where they should not be taxed. I would
appreciate your written response as soon as possible.

If you have any questions, please feel free to call me at XXXXX.

Sincerely,

XXXXX

C.P.A.