Tax Type
Retail Sales and Use Tax
Description
Manufacturing, processing, assembling, or refining; Oil and gas well servicing
Topic
Taxability of Persons and Transactions
Date Issued
08-12-1994
August 12, 1994
Re: Request for Ruling: Sales and Use Tax
Dear*************
This is in reply to your letter of August 2, 1993 in which you request a ruling as to the sales and use tax application to various aspects of your oil and gas well servicing company.
FACTS
**********the Taxpayer) is primarily engaged in the business of oil and gas well servicing and also makes retail sales of oil field related products. The Taxpayer issues an itemized billing to customers for services rendered and materials. The services provided by the Taxpayer are as follows:
CEMENT JOBS The process of pumping a cementitious slurry into a well through steel pipes to critical points in the annulus or open hole of the well.
FRACTURING JOBS To part or open fractures in productive formations by using chemicals and/or diesel fuel under high pressure in combination with proppants, i.e., sand, glass beads, etc., to hold open the fractures after pressure is released.
PLUG JOBS To place a plug into a well to seal off the bottom section to prevent the inflow of fluid from that portion of the hole.
WORKOVER JOBS To reopen a previously drilled well for further exploration; remedial work to deepen wells; produce from different formation either above or below existing production to
PERFORATION JOBS The blasting in the well shaft casing to create opening to release oil and gas into the well shaft for production.
The Taxpayer is requesting a ruling as to what materials would be considered used in construction, rendering them taxable, and what materials are used directly in the production process, rendering them exempt.
RULING
Va. Code §58.1-609.3.2(iii) provides a sales and use tax exemption for machinery or tools or repair parts therefor or replacement thereof, fuel, power, energy or supplies "used directly" in processing, refining, mining or converting products for sale or resale. This exemption is further explained by Virginia Regulation (VR) 630-10-65.2, mining and mineral processing (copy enclosed). VR 630-10-65.2 exempts tangible personal property used directly in mining and mineral processing. "Used directly" refers to those activities which are integral to the production of a product, including reclamation activities required by law on land which has previously been mined. Mining includes gas and oil drilling and other industrial removal of natural resources, minerals, or mineral aggregates from the earth.
In addition, Sec. 630-10-65.2.E provides that the mining and mineral processing exemption extends to persons engaged in contracted mining activities provided that such activities qualify for the exemption set forth above and such activities are performed at the mine or mineral processing site.
With the exception of the "workover jobs", all other jobs listed above performed by the Taxpayer would qualify for the mining and mineral processing exemption. "Workover jobs", as provided in your letter, involve the reopening of mines for further exploration. VR 630-10-65.2.A.3.a addresses exploration and states the following:
-
- Exploration is the search for economic deposits of minerals, ore, gas, oil or coal by geological surveys, geophysical processing, boreholes and trial pits, or
underground headings, drifts and tunnels, and includes the mapping and design of the mine site. All tangible personal property used in the exploration function is subject to the tax, including drilling equipment used to test the earth and surveying equipment.
- Exploration is the search for economic deposits of minerals, ore, gas, oil or coal by geological surveys, geophysical processing, boreholes and trial pits, or
Based on the above, exploration activities performed by the Taxpayer would be subject to the tax. However, should the Taxpayer use a single item of tangible personal property in two different activities, one being taxable and the other being exempt, the preponderance of use rule set forth in VR 630-10-65.2.C would apply.
If you should have any further questions, please feel free to contact the department.
Sincerely,
Danny M. Payne
Tax Commissioner
Rulings of the Tax Commissioner