Texas Sales Tax on Well Services: Practical Considerations

When navigating Texas tax obligations for oilfield operations, one of the most common challenges is determining how the state treats well-servicing activities for tax purposes. Although the standard Texas sales tax rate is 6.25%, local jurisdictions can push the combined rate to 8.25%.¹ Whether a transaction is subject to sales tax—or instead falls under the well-servicing occupation tax—depends on detailed operational facts.

Key Factors That Drive Tax Treatment

Taxability in this area hinges on several crucial elements:

• Nature of the service – Some activities fall under the well-servicing occupation tax rather than sales tax.²
• Where the work occurs – Operations performed inside the wellbore are treated differently than those conducted at the surface.³
• Control of equipment – Who operates the equipment can influence whether the charge is considered taxable.
• Itemization of charges – Clear invoicing is essential to distinguish taxable equipment from exempt labor.

Accurate documentation is vital. Properly separating labor, equipment, and materials helps support exemption claims and minimizes audit exposure.

Permitting Requirements

Businesses engaging in well-servicing activities may need to obtain a Texas Well Servicing Tax Permit from the Comptroller.⁴ This requirement applies even when the labor is exempt from sales tax but still subject to the occupation tax.

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Client Alert: Increased Scrutiny in Oilfield Service Tax Audits

Texas has continued to intensify its audit focus on oilfield service providers, particularly in the areas of equipment rentals, mixed-service invoices, and misclassification of well-servicing labor. Recent audits indicate:

• Improperly bundled invoices have led to reclassification of exempt labor as taxable equipment charges.
• Lack of detail on invoices—such as failing to specify work performed inside the wellbore—has resulted in denied exemptions.
• Unregistered service providers performing well-servicing operations without a Well Servicing Tax Permit have faced penalties for non-compliance.

Recommended Actions for Operators and Service Providers:

1. Review service descriptions to ensure they clearly identify work performed inside the wellbore.
2. Separate labor from equipment charges on all invoices.
3. Confirm possession of a valid Well Servicing Tax Permit, if required.
4. Document operational control of equipment to support tax treatment.
5. Audit historical billing practices to determine risk exposure.

Given the Comptroller’s heightened enforcement posture, now is an opportune time for companies to evaluate their internal tax processes and ensure alignment with current regulations.

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Summary

In short:

• Inside-the-wellbore labor is generally exempt from Texas sales and use tax but subject to the 2.42% well-servicing occupation tax.⁵
• Equipment sales or rentals are typically subject to standard sales and use tax unless an exemption applies.

Proper classification and documentation remain the most effective tools for reducing audit risk and ensuring compliance.

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Footnotes

1. Texas Tax Code §151.051; local rates authorized under §§321.101, 323.101.
2. Texas Comptroller Rule 3.324 (Oil, Gas, and Geothermal – Services).
3. Texas Tax Code §191.082.
4. Texas Comptroller Form AP-114, Texas Well Servicing Tax Permit Application.
5. Texas Tax Code §191.083.

Texas Sales Tax on Well Services: Practical Considerations