(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.
Cont'd...