Gilbert Zamora, CPA Retired
Director of Tax Policy
Former Texas Comptroller Auditor & Tax Policy Expert, 31 Years


SUBJECT:      Taxability of flowback and water transfer services

This memo supersedes the following hearings, and Policy Letter related to equipment provided to control flowback after the fracking of oil and gas wells.

STAR Accession Nos. 202302014H – Comptroller Decision No. 118,208


202110021H – Comptroller Decision No. 115,760 (2021),

202008019H – Comptroller Decision No. 115,376 (2020) and 0

STAR Accession No. 202009002L (Sept. 21, 2020)

On Sept. 21, 2020, Tax Policy issued a memo to Audit providing guidance (clarification) on the taxability of flowback services. That memo clarified that charges for flowback were taxable as the rental of equipment without an operator and that sales or use tax was due on the total charge for the rental of equipment, including charges for transportation, installation, removal, and accompanying personnel, regardless of whether the charges were separate or lump sum. 

The memo issued on December 13, 2023, reverses the policy clarification set out in the September 21, 2020, memo.

Background: Flowback Service

Flowback and water transfer services are provided at oil and gas well sites to support hydraulic fracturing operations. Hydraulic fracturing, commonly called “fracking,” produces fractures in the rock formation that stimulate the flow of natural gas or oil, increasing the volumes that can be recovered. Fractures are created by pumping large quantities of fluids at high pressure down a wellbore and into the target rock formation. Hydraulic fracturing fluid commonly consists of water, proppant and chemical additives that open and enlarge fractures within the rock formation. The proppants – sand, ceramic pellets, or other small incompressible particles – hold open the newly created fractures. 


The flowback operation begins when the high pressure created during the fracking job is released and can last anywhere from a week to several months until the flowback provider removes the flowback equipment. During this time, flowback personnel operate and adjust the equipment.

Flowback providers design an equipment package based on various factors. They transport the equipment to the well site and may receive direction from the well operator to determine the temporary location of the equipment.

The flowback personnel are responsible for the set up and installation of the equipment (rig up)., Flowback personnel are onsite during the flowback operation and are trained to operate and regulate each piece of equipment.

The well operator at no time controls or operates the equipment. Flowback providers also use metering equipment. The metering equipment allows the flowback service provider to send the well operator measurements of live well conditions such as flow rate, fluid properties and composition, pressure, and temperature.

At the conclusion of flowback operations, the flowback provider removes the flowback equipment (rig down) and the well operator’s separation equipment is put into place.

Water Transfer

Well operators hire a water transfer service provider to move the water needed for the fracking operation to the wellsite. During the water transfer, the water transfer service provider’s personnel are on site, monitoring and adjusting the flow rate of their equipment under direction of the well operator. Water transfer equipment can include water transfer pumps, lay flat hose, water tanks, filters, and manifolds. 

The service provider’s personnel manage the water transfer operations and control and operate the water transfer equipment  At no time does the well operator or other service provider control or operate the equipment.

Taxability Determination:

Charges for flowback and water transfer services, as described in this memo, are not: subject to sales or use tax are also not included among the services subject to the 2.42 percent oil well servicing tax flowback services provided by a fracking service provider as a part of the fracking service continue to be subject to the 2.42 percent oil well servicing tax.

Reasoning behind decision:

Sales tax is imposed on each taxable sale of a taxable item in Texas A “lease” or “rental” is defined as, “[a] transaction, by whatever named called, in which possession but not title to tangible personal property is transferred for a consideration.”

“A key element of ‘possession’ is ‘operational control’ over the tangible personal property…A lessee must exercise operational control of the leased property in order to take possession thereof.

The flowback and water transfer services described above have personnel continuously onsite to regulate or control the operation of (not just monitor, maintain, repair, or activate and deactivate) the equipment as needed. Therefore, the service providers maintain operational control over the equipment and the service provider does not transfer possession of the equipment to its customer. These transactions do not meet the definition of a lease or rental.

Flowback and water transfer services, as described in this memo, are not included in the taxable services listed in Section 151.0101. Therefore, these services will be treated as nontaxable services, regardless of whether the service is billed as a lump sum charge or separate charges for labor and equipment.

A provider of a nontaxable service owes sales tax on all equipment and materials used to provide the nontaxable service 

For open audit and hearing assignments (audits or refunds) with these issues, the Comptroller’s auditors have been instructed to examine the transactions for the entirety of the audit period and as long as taxpayers were consistently handling the transactions the same way, i.e. paying tax on the purchases and not charging tax on the sales or not paying tax on the purchases and collecting tax on the sales (either equipment, labor, or both) there should not be any adjustments for the flowback/water transfer related transactions. 

The Comptroller’s office will still consider it consistent treatment even if a taxpayer did it one way for the time period prior to the original memo in 2020 and then switched to comply with the memo for the remainder of the audit period. 

For taxpayers that have been treating these transactions consistently as described above, the Comptroller does not plan to issue refunds for tax that had been collected from customers and will not make any assessments on purchases either.

5If your company provides stand-alone flowback or water transfer services you will want to determine if you have overpaid sales taxes on purchases of equipment if you consistently collected sales taxes or the equipment used to perform these services. Feel free to contact Texas Tax Group to perform, at no cost to you, a review of your business services and determine if you’ve possibly overpaid sales taxes. We work on a contingency basis for refunds/credits, meaning There is no cost unless we are able to generate refunds and/or credits making our Sales and use tax credit/refund study pay for itself.


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