(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.
Cont'd... |