Oilfield Services and Texas Sales Tax Exposure

Oilfield services present unique compliance challenges regarding Texas sales tax. While many oilfield services are exempt from sales tax, some are not, and those that are exempt may be subject to Texas’ miscellaneous gross receipts tax or other state taxes.

However, the Texas Comptroller’s Office makes clear that this complexity is not an excuse for noncompliance. Oilfield services companies and other businesses are expected to strictly comply with all applicable state tax requirements, and those that do not may incur liability for interest and penalties (in addition to the tax owed). With this in mind, the following is an introduction to some of the key requirements and the risks of compliance failures:

Texas State Sales Tax, Alternative Taxes and Oilfield Services

As a general rule, goods and services sold in Texas are subject to the state’s 6.25 percent sales tax. Since Texas does not have a state income tax, sales tax plays a much larger role in the state’s revenue collection and budget management than it does in most other states.

But, while this is the case, there are several exceptions to Texas’ sales tax requirements. In some cases, goods and services are exempt from transaction-related taxes altogether. In others, alternative taxes apply.

This is particularly relevant within the oil and gas industry.

For example, oilfield services may be subject to various tax requirements and exceptions. As a baseline, the following services are generally subject to sales tax under Texas law:

• Pump charges
• Rod/tubing jobs
• Repairing tubing leaks
• Changing packers or anchors
• Hot oil or water treatment of casing, tubing or flow lines
• Injecting maintenance-type chemicals into wellbores
• Paraffin removal from casing or tubing
• Squeezing cement to repair casing
• Pulling or resetting casing liners to repair casing string
• Swabbing to clean casing
• Temporarily plugging wells to stop corrosion
• Changeovers and conversions to different artificial lift methods

As the Texas Comptroller’s Office explains in its Audit Procedures for Oil and Gas Well Servicing, companies that provide taxable oilfield services, “must collect sales tax from their customers on the total charge (materials and labor) for the service,” and, “[c]harges for mileage, trip charges, [and] standby charges . . . connected with taxable services will also be taxable.”

In contrast, the following oilfield services are not subject to Texas sales tax. However, as the Texas Comptroller’s Office also explains in its Audit Procedures for Oil and Gas Well Servicing, these services may be subject to the state’s miscellaneous gross receipts tax. This list is not exhaustive, but compared with the list above, it highlights just how careful companies need to be when assessing whether a particular service is (or is not) subject to a particular tax under Texas law:

• Fracturing
• Perforating a well
• Squeezing cement (if not to repair casing)
• Acidizing formations
• Plug backs
• Permanent well plugging
• Pulling and resetting casing liner (if not to repair casing string)
• Installation of casing liner in well completion or workover
• Drilling out plugs
• Initial installations of artificial lifts
• Swabbing to stimulate production
• Injection of chemicals to stimulate production or remove impurities

Texas’ miscellaneous gross receipts tax is also referred to as a miscellaneous occupation tax and the state’s well-servicing tax. This is not a matter of common parlance—the Texas Comptroller’s Office uses all three of these terms as well.

Additionally, several types of equipment and related supplies are exempt from Texas sales tax (and not subject to the miscellaneous gross receipts tax or any other tax) when sold for use on oilfields. These include treaters, scrubbers, and separators (among others), but they do not include casing, tubing, downhole pumps, or other equipment and supplies that Texas does not consider used in the processing of crude oil or natural gas. Again, state tax compliance in this area is particularly complex, and all companies involved in Texas’ oil and gas industry need to ensure that they have a clear and comprehensive understanding of their compliance obligations.

The Risks of Texas State Tax Non-Compliance in the Oilfield Services Industry

This just scratches the surface of what oilfield service companies and other businesses need to know about Texas state tax compliance. For those that do not devote the necessary resources to compliance, compliance failures can have serious consequences. Some of the risks of Texas state tax non-compliance in the oilfield services industry include:

Texas Comptroller Audits

The Texas Comptroller’s Office routinely audits companies involved in the oilfield services industry. Texas sales tax audits can be invasive, time-consuming, and high-risk inquiries, and companies facing audits must promptly devote the necessary resources to avoid unnecessary liability.

Back Tax Liability

Companies that are behind on their Texas state tax liability remain liable for the amounts they owe. This is true for sellers that have collected sales tax, sellers that have not collected sales tax, and purchasers that did not pay sales tax at the time of sale.

Liability for Interest and Penalties

In addition to back tax liability, Texas sales tax audits can also result in liability for interest and penalties. These can add substantially to the costs of noncompliance.

Liens, Levies and Other Collection Mechanisms

In addition to conducting audits to assess compliance, the Texas Comptroller’s Office aggressively pursues enforcement. Oil and gas companies that fail to timely pay taxes, interest and penalties owed to the Comptroller’s Office can face tax liens, levies, asset seizures and various other means of collection.

License Revocation and Other Consequences

Nonpayment of Texas state taxes can lead to license revocation and other consequences. These additional consequences can have serious financial ramifications, and avoiding them can be a sufficient incentive to prioritize compliance on its own.  

Request an Appointment with a Texas State Tax Lawyer at Brown PC

If you have questions about your company’s state tax obligations in Texas, we invite you to get in touch. To request an appointment with a Texas state tax lawyer at Brown PC, please call 888-870-0025 or contact us confidentially online today.