Dino Marcaccio
President
Former Texas Comptroller State Tax Auditor
SERVICES RELATED TO DRILLING A NEW WELL.
It’s been my experience, both as an auditor for the state and as a consultant assisting oil and gas companies under audit by the Comptroller that there exists significant confusion among service providers as to their tax responsibility for work performed at well sites. This confusion can often lead to large tax assessments in an audit by the Comptroller where the service provider failed to collect tax on taxable items.
In some cases, the lack of a proper understanding of the taxability of their services can result in the collecting of tax in error on services that are not taxable. Oftentimes, the service provider will not realize that they are over collecting until they receive a request for a refund from the customer or a tax consultant that discovers the overpayment of sales taxes.
There are a multiple of services needed from the start to the completion of a well. These services vary in taxability depending on the specific service or materials involved. Below I’ve addressed some of the various services involved along with some of the errors that I have encountered in my days as an auditor and as a tax consultant.
- Constructing new location with equipment and operator (digging pits, constructing road, etc.)- Digging work pits and constructing a new road are generally treated as new construction. The materials are taxable and responsibility for the tax depends on the type of contract (lump-sum or separated} that is used. An exception is if the materials for the road are caliche that is pit dug (i.e.., not processed), then sales tax is not due on the purchase price paid for the caliche. if the caliche is actually crushed limestone the sale (under a separated contract) or the purchase (under a lump-sum contract) by your company would be taxable.
- Construction of the drill pad. Treated as new construction. Again if the materials used for the pad are caliche, no tax is due on the purchase of the caliche if it is not processed.
- Drilling the well. Drilling the well is not taxable. Sales taxes are due on the purchase or lease of the drill rig, as well as on the casing and tubing used inside the well.
- Maintaining existing road to lease with equipment and operator – blading an existing road on an “as-needed basis” is taxable. If performed on a scheduled and recurring basis, this would be treated as maintenance of real property and not taxable.
- Hauling of produced water for disposal. Not taxable.
- Frac tank rental. The rental of frac tanks is taxable along with the transportation charge to deliver, move or pick up the frac tanks billed by the frac tank company.
- Washing of frac tanks. This taxable as the maintenance of tangible personal property. I’ll address other aspects of the completion of the well and the sale and installation of lease equipment in a subsequent blog post.
References:
Rule 3.324 – Oil, Gas, and Related Well Service
Rule
3.357 – Nonresidential Real Property Repair, Remodeling, and Restoration; Real Property Maintenance. (Tax Code, §§151.0047, 151.0101, 151.056, 151.058, 151.311, 151.350, 151.429) Policy Letter 9609L1436A03
Best of luck,
Dino
