Texas Occupation Tax for Oil and Gas Well Services
The Well Servicing Tax
An occupation tax is levied on persons who perform certain services associated with oil and gas wells. The tax is 2.42 percent of the gross amount of the charge for service, less the reasonable wellhead value of any material used or consumed in the well. If the tax is collected from a customer, it must be included in the service company's gross receipts reported for tax purposes.
Note: The term person means an individual, partnership, firm, joint stock company, association, or corporation.
The well servicing tax, legally identified as a Miscellaneous Occupation Tax, is often referred to as the "2.42-percent" tax.
The three primary taxable services are:
- Cementing the casing seat of any oil or gas well;
- Shooting, fracturing, or acidizing sands or other formations in any oil or gas well;
- Surveying or testing oil or gas well formations or the contents of formations with instruments or equipment partially or wholly located within the well bore.
The tax does not apply to a service incidental to drilling, completing, reworking, or reconditioning a well when the service is performed by the person drilling or reworking the well.
A service is taxable when performed by a person who offers well servicing for a fee, and who:
- Owns, controls, or furnishes the tools, instruments, and equipment used to provide the oil or gas well service; or
- Uses any chemical, electrical, or mechanical process to provide the service at any oil or gas well.
A well servicing company must hold a valid permit issued by the Comptroller of Public Accounts to transact business in Texas.
Permits issued by the Comptroller's office expire on December 31 of each year. Applications for new permits are automatically mailed to firms with active accounts.
A permit will be issued when the Comptroller determines that any well servicing tax due has been paid by an applicant and the applicant has complied with the applicable tax laws. The permit must be displayed at the principal office of the applicant.
A tax report is due on or before the 20th day of each month reflecting the previous month's activities. A well servicing company is furnished a supply of report forms when its permit is issued. Additional forms may be requested as needed.
Primary Taxable Sevices
Cementing the Casing Seat
Cementing the casing seat is a taxable service. Cementing a casing seat begins with placement of the production string in the well and ends when the cement is in place. Cementing the bottom liner used as an extension of a non-continuous production string is a taxable service.
Taxable services involved in cementing the casing seat include:
Shooting Sands/Other Formations
- Mixing cement slurry;
- Setting packers or placing hangers, if done by the service company during the cementing operation;
- Pumping slurry from the mixer and/or blender to the wellhead pump;
- Using equipment to pump cement into a well.
Shooting the sands or other formations is the only shooting service subject to the well servicing tax.
No tax is due on the following services:
- Perforating or cutting casing;
- Shooting to remove fish;
- Shooting to clean screens or strainers.
Fracturing Sands/Other Formations
Fracturing usually involves forcing a fluid carrying a propping agent into cracks formed by applying hydraulic pressure into a formation.
All oil or gas well fracturing operations are taxable whether the purpose is to stimulate production in a new well or to increase production in an old well.
Fracturing operations include:
- Mixing and/or blending proppant and fluid at the well;
- Blending additives or inhibitors into the fracturing medium at the well;
- Injecting any other material into the fracturing medium at the well;
- Pumping the fracturing medium at the well;
- Sealing perforations in multiple completions during the fracturing process.
Nontaxable services associated with fracturing include:
- Perforating casing;
- Cleaning perforations preparatory to fracturing;
- Surveying prior to fracturing when the survey is not used to locate or determine a production formation;
- Providing frac tank services.
Acidizing an oil or gas well formation to stimulate or improve production, to prevent scaling, or to prepare the formation for a scale-inhibiting chemical treatment is a taxable service.
Taxable acidizing services include:
- Mixing the acidizing medium at the well;
- Blending or injecting additives and/or inhibitors at the well;
- Plugging perforations during the acidizing process;
- Pumping charges incurred at the well.
Nontaxable acidizing services include:
- Recovering fish or stuck pipe;
- Cleaning screens or strainers;
- Dissolving drilling material sheaths;
- Dissolving paraffin deposits in the producing equipment;
- Acidizing soluble materials.
Surveying Sands and Other Formations or Their Contents
The most common survey of an oil or gas well formation is the log. There are two basic types of logs-an open hole log and a cased hole log. Any log or survey run with an instrument in the well bore to locate, measure, or determine the depth, character, or contents of a formation is a taxable service.
They include the following logs or surveys:
- Fluid Ingress and/or Egress Surveys;
- Gamma Ray;
- Compensated Neutron;
- Dip Surveys.
The following services are not taxable:
- Electric logs used only to locate junk or fish in a well bore;
- Acoustic logs used to survey results of cementing;
- Temperature surveys used to check the results of cementing;
- Cement bond surveys;
- Tracer logs used only to detect channels behind the casing or to plot an injection profile;
- Temperature surveys used to check mechanical equipment in the well bore;
- Fluid surveys conducted with a sonic instrument located only at the surface and not in the well bore;
- Deflection or deviation surveys;
- Surveys to locate free point of stuck pipe;
- Caliper logs used to determine condition of the well bore or cementing requirements;
- Collar logs;
- Corrosion surveys;
- Dip meter surveys to locate a subsequent well.
Some correlation logs are taxable services. Some are not. A log run to correlate a service company's equipment with an existing log is not a taxable service since its purpose is to position equipment. A cased hole log used to correlate an open hole log is a taxable service.
Testing Formations or Their Contents
The phrase contents of a formation refers to fluids, gases, and pressures. The following tests are taxable services when performed by a person other than the driller:
- A drill stem test;
- A bottom hole or depth pressure test;
- Productivity index tests made with an instrument in the well and during drilling, completion, reworking, or reconditioning of the well.
The following tests are not taxable services:
- Any analysis of fluids, cores, or cuttings made outside the well bore;
- Open flow potential tests when no instrument is in the well;
- Gas-oil ratio tests.
Servicing companies often perform several operations on one trip into and out of a well-some taxable, some nontaxable.
Taxable and nontaxable services may be billed separately to avoid a tax on the entire service charge. It is important for a well servicing company to distinguish multiple services from services performed in direct connection and simultaneously with a primary taxable service.
Example: A service company runs a cased hole log and perforates in one trip into the well. The charge for perforating will not be taxable since the log is run first and then the perforating is performed.
Additional Charges Associated with a Primary Taxable Service
Many service companies make separate charges for various miscellaneous functions associated with fracturing or acidizing.
Example: During a fracturing job, it may be necessary to apply pressure in the casing to keep packers positioned properly. The casing pump operates simultaneously during the fracturing activity. The charge for the casing pump is taxable. The fact that it may be invoiced separately does not change the taxability status.
Some common taxable charges associated with services performed in direct connection and simultaneously with a primary taxable service include:
- Charges for ball injectors;
- Charges for injecting materials to enhance the recovery of the frac fluid;
- Mixing, blending, and proportioning charges.
Most service companies have a variety of miscellaneous charges, the most prevalent being the basic service charge. If the service charge is invoiced as a basic one-time charge (per day, per trip, etc.) it may be allocated for tax purposes, provided the allocation can be supported by pricing literature. The allocation will be based upon the ratio of taxable services performed to total services performed.
Example: A service company has a $500-per-day basic service charge and two services are performed-a taxable log and a nontaxable perforating job. The $500 basic service charge may be allocated one-half to logging and one-half to perforating, provided the service charge would have applied to either job if done individually.
Other miscellaneous charges for a multiple service situation may be handled in the same manner. Some of the more common ones include:
- Running in pressure;
- Running in acid;
- Equipment protection charge;
- Mast unit charges;
- Lubricator charges;
- Rental items-flanges, adapters, swages;
- License fees
Mileage charges are not taxable since no service is being performed at the well.
Waiting or standby time is not taxable for the same reason.
However, any charge referred to or billed in any manner for equipment hooked to a well or to other equipment hooked to the well while performing a primary taxable service is subject to tax.