| (a) Definitions. The following words and terms, when
used in this section, shall have the following meanings, unless the
context clearly indicates otherwise.
(1) Oil, gas, and related well service--An activity
performed for others for a consideration or compensation at any well
site including an oil, gas, water disposal, or injection well.
(2) Taxable services--The total charge to repair, restore,
remodel, or maintain tangible personal property or to repair, remodel,
or restore improvements to real property at a lease site. Taxable
services also include, but are not limited to, real property services
such as surveying and structural pest control at the lease site.
(3) Nontaxable services--The labor to start or stimulate
production or the labor to work on the formation outside the well.
Pumping the product is not considered to be stimulating production.
(b) Responsibilities of those providing a nontaxable
well service.
(1) The labor to perform those services subject to
the 2.42% oil well service tax imposed under Tax Code, Chapter 191,
is not taxable under Tax Code, Chapter 151.
(2) Work performed inside the wellbore for the purpose
of starting initial production or increasing production by working
on the formation is not taxable. The following activities are not
taxable.
(A) Fracturing (frac job)--Work done on a well using
high pressure pumps to stimulate production by increasing the permeability
of the producing formation. Under extremely high hydraulic pressure
a fluid (water, oil, alcohol, hydrochloric acid, liquefied petroleum
gas, foam) is pumped down through the tubing and forced into perforations
in the casing. The fluid enters the producing formation and parts
or fractures it. Sand, aluminum pellets, glass beads, or similar materials
are carried in suspension into the fractures. These are propping agents.
When pressure is released at the surface the frac fluid returns to
the wellbore and the fractures partially close on the proppants leaving
channels for oil or gas to flow through to the wellbore. The well
is then ready to complete or put back on production. (See Tax Code,
Chapter 191, relating to the 2.42% well servicing tax.)
(B) Perforating--A special service done by lowering
into the well a perforating gun that fires electrically detonated
bullets or shaped charges. The gun is controlled from the surface.
The casing and cement wall are pierced to provide holes through which
the contents of the formation may enter.
(C) Squeeze cement--Cementing trucks with high pressure
pumps force cement slurry to a specified point in the well to cause
seals at the points of squeeze. It is a secondary cementing method
that is used to isolate a producing formation or seal off water. (See
subsection (d)(5) of this section for the tax responsibilities to
repair the casing string.)
(D) Workover--To perform one or more remedial operations
when the formation has declined in production or ceased to produce,
with the hope of restoring or increasing production. Workover operations
can include deepening or plugging back.
(E) Acidizing--The treatment of formations by chemical
reaction with acid in order to increase production. Hydrochloric or
other acid is pumped into the formation under pressure causing the
pore space and permeability to increase. The acid may be held under
pressure for a period of time before the well is put back on production.
Chemical inhibitors are combined with the acid to prevent corrosion
of the pipe. (See Tax Code, Chapter 191, relating to 2.42% well servicing
tax.)
(F) Logging--A device which is run into the well to
record certain electrical or radioactive characteristics of the formations.
The purpose of the well log is to locate, identify, and evaluate the
various formations present. (See Tax Code, Chapter 191, relating to
2.42% well servicing tax.)
(G) Drilling deeper--A workover operation where the
well is deepened in either the existing or another producing formation.
(H) Plug back--A workover operation placing cement
in the bottom of a well for the purpose of excluding bottom water,
sidetracking or producing from a formation already drilled through.
A mechanical plug can be set by wireline, tubing, or drill pipe.
(I) Completion--The act of bringing a well to productive
status. Numerous services are used to complete a well, including running
casing, cementing, logging, perforating, fracturing, acidizing, swabbing,
and other special services depending on characteristics of the formation.
(J) Plug and abandon--To set cement plugs into a well
preparatory to abandonment.
(K) Pulling or resetting casing liner--A liner is any
string of casing whose top is located below the surface. Liners are
set for the purpose of admitting production to the bottom of the well.
Pulling or resetting a liner involves moving this casing up or down
the hole or pulling it out of the well.
(L) Installing a casing liner--This service is similar
to that described in subparagraph (K) of this paragraph except that
it involves the initial installation of the casing to the desired
depth for producing the well.
(M) Drilling out a plug--The removal by drilling of
the cement set as a plug in the wellbore.
(N) Putting on artificial lift (new installation)--If
a well will not produce by natural energy, a method is used to lift
the oil to the surface. Artificial lift systems include rod pumping,
gas lifting, hydraulic pumping, and centrifugal pumping.
(O) Running a bottom hole bomb--The pressure in a well
at a point opposite the producing formation is recorded by a bottom
hole pressure bomb, a steel container that houses a precision pressure
gauge. The bomb is lowered on a wireline.
(P) Swabbing--Operating a rubber faced cylinder up
and down on a wireline to bring fluids to the surface when the well
will not flow naturally. In the event an oil well does not flow after
being swabbed it is necessary then to install artificial lift equipment.
(Q) Jetting--Introduction of nitrogen or other inert
gases into the wellbore to enhance production or recovery. The gases
have no beneficial effect on downhole equipment.
(R) Gravel packing--The installation of a screen to
prevent the intrusion of formation sand into the wellbore.
(S) Hot oil treatment of formation--If a hot oil unit
is used for the purpose of treating the formation, it will be considered
a nontaxable service. The invoice must clearly identify the purpose
of the treatment or it will be considered to be a treatment on the
wellbore and taxable.
(3) The provider of a nontaxable service should pay
sales tax on any machinery or equipment purchased or rented to provide
the service and on any materials (except cement) used, consumed, or
expended in the well.
(4) The provider of a nontaxable service may not collect
sales tax from customers on any portion of the charge for service.
If the provider of the service wishes to be reimbursed for sales tax
paid on the purchase price of provided materials used, the tax must
be included in a single charge for materials. The tax may not be separately
stated.
(5) If the provider of a nontaxable service sells any
materials to a customer that were not used in the well servicing,
sales tax must be collected on the sales price. Any machinery or equipment
transferred to the customer will be taxable to the customer if sold
or rented without an operator. Those items listed on the well service
invoice as "rentals" which are so called merely because of the carry-over
of the term from past industry practice are not rentals as defined
in §3.294 of this title (relating to Rental and Lease of Tangible
Personal Property).
(6) Direct payment permit holders should not issue
direct payment exemption certificates to persons providing nontaxable
services.
(7) When a direct payment permit holder is doing business
with a person who may be selling taxable items as well as nontaxable
services, the direct payment exemption certificate must indicate that
it does not cover any nontaxable services that the servicer may provide.
The issuance of a specific direct payment exemption certificate will
be considered evidence of the direct payment permit holder's intent
to purchase any tangible personal property transferred by the service
provider rather than the purchase of a nontaxable service.
(c) Sale or rental versus service.
(1) If a company merely provides equipment and a supervisor,
the presumption will be that the company is not providing services
but selling or renting equipment. The charge for the supervisor's
time is part of the tax base as an expense connected with the sale
or rental. Mileage charges are also taxable. Equipment being incorporated
into the wellbore, i.e., hanger liners, packers, plugs, etc., may
be purchased tax free by issuing a resale certificate. The invoice
and/or back-up work tickets must clearly indicate what is occurring.
(2) A service company must pay tax on tools and equipment
used to provide a service. If a service company also rents the tools
to others, sales tax must be collected on the rental price. A service
company that issues a resale certificate for tools which it will rent
to others must keep those tools separate from those which it uses
to perform services.
(d) Responsibilities of those providing taxable services.
(1) Persons who provide taxable services must collect
sales tax from their customers on the total charge (materials and
labor) for the service. Charges for mileage, trip charges, standby
charges, etc., connected with taxable services will also be taxable.
The following activities by service companies are taxable.
(A) Pump change--Replacing bottom hole pump.
(B) Rod/tubing job--Pulling sucker rods and/or tubing
out of and running it back in the well. See subsection (e)(1) of this
section.
(C) Fishing for rods or tubing--When sucker rods break
or part, or tubing parts, a fishing tool is run to recover the parted
rods or tubing.
(D) Tubing leak--The small diameter pipe in a well
that serves as conduit for the oil and gas may become worn or develop
a leak. Tubing is pulled and tubing or collar replaced.
(E) Change packer or anchor--A packer is a device used
to block communication through the annular space between two strings
of pipe. Production packers may be retrievable or permanent. An anchor
is a device that secures or fastens downhole equipment. Rods and/or
tubing may be pulled to change a packer or anchor.
(F) Hot oil or water treatment of casing, tubing or
flow lines--The treatment of a producing well with heated oil or water
so as to melt accumulated paraffin in the annulus, tubing or surface
piping (flow line) through which the oil travels from the well to
storage. Special truck-mounted hot oil units heat the oil or water
and pump it down the well or through the flow lines.
(2) The provider of a taxable service should pay sales
tax on any machinery or equipment purchased or rented to provide the
service and on any materials (except cement) used or consumed in providing
the service which do not become a part of the items inside the wellbore.
(3) Those items of equipment which become a component
part of the items inside the wellbore are considered to be sold as
a part of the taxable service and may be purchased tax free by the
provider of the taxable service. The provider of the taxable service
will collect sales tax from the customer on the total charge (materials
and labor) for the taxable service.
(4) On occasion, down hole services described in this
subsection may be performed in order to facilitate a nontaxable service,
e.g., pull tubing to perform workover. This will render the taxable
service nontaxable. Any equipment incorporated into the well, in this
situation, will still be considered as sold to the operator; and the
operator will owe tax on the amount charged for the equipment.
(5) The labor to repair, remodel, or restore an item
of real property is a taxable service. Tax is due on the total amount
charged for the taxable service. The following activities are taxable.
(A) Squeeze cement--Cementing trucks with high pressure
pumps force cement slurry to a specified point in the well to cause
seals at the points of squeeze. It is a secondary cementing method
used to repair casing leaks or damage;
(B) Pulling or resetting casing liner--Pulling or resetting
a liner for the purpose of repairing the casing string.
(e) Work crews.
(1) The labor charge by persons who prepare a well
for servicing will be taxable or not taxable depending on what is
actually done by the provider of the service. For example, a crew
removing rods so that a pump may be repaired would be providing taxable
labor. A crew removing tubing so that a workover could be accomplished
would not be providing taxable labor.
(2) General maintenance around a well site may be either
maintenance on tangible personal property, a real property service
(§3.356 of this title (relating to Real Property Service)), or
a repair of an improvement to real property (§3.357 of this title
(relating to Nonresidential Real Property Repair, Remodeling, and
Restoration; Real Property Maintenance)) depending on the service
provided. Examples of maintenance of tangible personal property include
service to tanks with a capacity of 500 barrels or less, flow lines,
whether above or below ground, pumps, and gauges. Examples of real
property services would include structural pest control by a licensed
exterminator. An example of a repair or restoration of real Cont'd... |
