Services to Pump Chemicals Downhole Subject to Well Servicing Tax, Not Sales Tax in Texas

The Texas Comptroller’s tax Policy Division issued Private Letter Ruling No. 20230308101731, providing guidance on whether charges for a modular frac-sand handling and storage system (referred to as the "System") are subject to Texas sales or use tax. The taxpayer, a Texas-based corporation, provides land completion and production services in the oil and gas industry, specifically offering the System for hydraulic fracturing operations. The System is operated by the taxpayer's employees using remote controllers and program logic controllers, and is provided either as a standalone service or in conjunction with fracking operations.

The taxpayer’s service includes setting up and operating the frac-sand handling and storage system, which is controlled by operators via remote devices. The system itself includes equipment like a hydraulic power unit and conveyors for moving proppant, but the taxpayer retains operational control at all times, meaning the customer cannot operate or control the system.

The Comptroller’s ruling determined that the charges for the System with operators are not subject to Texas sales or use tax, as the service is considered a non-taxable service. The key distinction made was that the customer does not have possession or operational control of the system, which prevents the transaction from being classified as a rental. Additionally, the service provided does not fall under any taxable services listed in Texas law.

However, the ruling clarified that the service is subject to the oil well servicing tax under Chapter 191 if it is provided as part of a fracking service. The oil well servicing tax applies to services rendered in connection with drilling, completion, or reworking of oil or gas wells, including fracturing operations, which would include the taxpayer's services if combined with fracking chemicals or related activities.

Overall, the ruling provides that while the charges for the System are not subject to sales or use tax in most circumstances, they are subject to the oil well servicing tax when provided as part of a fracking service. The taxpayer was also reminded that their service does not qualify as a taxable service under Texas law unless connected with fracking operations.