Sales and Use Tax Overview for Oil and Gas Clients in Top Producing States

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If you have oil and gas company-related clients, you should know that sales and use taxes can have a significant financial impact on drilling and completion cost centers. 

In times of falling prices, monitoring sales tax expenditures and vendor tax collection is especially important. Because laws are complex, and large outlays of sales tax can easily be incurred during drilling, completion and daily operations, opportunities to both avoid exposure and more often, to reduce overpayments of tax, abound.

This article is intended to provide a high level overview of how these taxes typically affect producers in states with substantial oil and gas activity. Note that the states listed below are included in order of their rankings for production of oil and gas.

TEXAS

Oil and gas producers doing business in Texas must understand sales and use tax laws which are particularly complex. Specifically: pertaining to oil and gas producers is complex because of the following issues:

Texas’ manufacturing exemption applies to certain equipment at lease sites, Texas imposes taxes on a wide range of services, Texas’ construction and contractor sales tax rules are uniquely intricate, and other special tax provisions are often applicable.

While Texas does not provide a general exemption for mining or drilling equipment, the manufacturing exemption provided in Tex. Tax Code Ann. § 151.318 is deemed to apply to equipment that makes or causes a chemical or physical change to the product. The exemption typically applies to scrubbers, separators, heater treaters, chilling units (for gas), amine units, dehydrators and similar equipment used at well sites, as well as much of the equipment used in in gas processing plants.

Likewise, repairs and consumables used in these processes are exempt from tax. A separate exemption applies to equipment used to prevent pollution, including the re-use of water in hydraulic fracturing.

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About Brent Watson CPA

Brent Watson

Brent Watson, CPA, is a state and local tax manager & Principal for State and Local Tax Advocates, PLLC in Tulsa, Okla.

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