| (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 property
would be sandblasting and repainting 1000 barrel tanks. Examples of
nontaxable services performed at well sites include cutting weeds,
covering oil spills and mowing grass.
(3) All welding in the field will be presumed to be
taxable unless billings clearly indicate the labor was performed as
part of new construction as defined in §3.357 of this title or
third-party installation (initial only) of customer-owned equipment.
(f) Lost or damaged items.
(1) Any charges by the service company for items lost
or damaged beyond repair while providing the well service will not
be considered a sale of such items but a reimbursement of cost by
the customer. The transaction should not be labeled as a "sale" on
the invoice. The service company may be reimbursed for the sales or
use tax it paid by including the sales or use tax on the invoice to
the customer as a part of the charge for such item. The reimbursement
of sales or use tax may not be separately stated as tax.
(2) When a service company actually rents items to
a customer, their charges are taxable. This includes any charges for
damage waiver or repair to the items after their return.
(g) All process licenses are intangible items, and
the fees paid by the service company to the holder of the patents
are nontaxable where there is a service only.
(h) Chemicals, brine water, potassium chloride (KCL),
CO2--sales versus service.
(1) Because maintenance to tangible personal property
is taxable, the injection of maintenance-type chemicals such as corrosion
inhibitors, bactericides, etc., into the wellbore is considered a
taxable service. Since certain chemicals are oil soluble and remain
in the product flow after injection, the well operator may purchase
those chemicals separately from the service provider and issue a resale
certificate in lieu of tax on the charge for the chemicals. All charges
associated with the injection would be taxable including mileage,
standby, pump truck, and labor.
(2) The injection of chemicals to stimulate production
or remove impurities from the product being removed such as acid,
emulsifiers, or nitrogen is a nontaxable service. The service company
is the consumer of all chemicals pumped down hole and must pay tax
at the time of purchase.
(3) Excluding that which may be purchased to provide
nontaxable well services identified in subsection (b) of this section,
CO2 used to stimulate production may be purchased, exempt from tax,
by the well operator for injection provided the well operator issues
a properly completed exemption certificate in lieu of paying the tax.
(4) Kill charges will be taxable or nontaxable depending
on the overall purpose. All kill charges will be presumed taxable
until the contrary is established. The service company should bill
tax if it is not known at the time of billing what the overall purpose
was. The operator must then pay the tax or provide either a direct
payment exemption certificate or a statement that the purpose was
to facilitate a nontaxable service. The statement must be definite
in the purpose claimed. Statements such as "to stimulate production"
are insufficient and will be disallowed.
(5) A service company will be considered to be providing
services if they do the actual injection into the well. Delivery into
a frac tank or other storage unit will be considered a sale of tangible
personal property. If it is unclear from the invoice, the presumption
will be that if a high pressure pump truck is used, a service has
occurred; if a vacuum truck is used to deliver the fluids or CO2,
then a sale of tangible personal property has occurred. The service
company may purchase all components of the fluids tax free when making
a sale or providing a taxable service.
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