Section 3.324 - Oil, Gas, and Related Well Service(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 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.34 Tex. Admin. Code § 3.324
The provisions of this §3.324 adopted to be effective August 19, 1985, 10 TexReg 2550; amended to be effective November 25, 1988, 13 TexReg 5577; amended to be effective March 28, 2013, 38 TexReg 2019