IPT 2013 Sales & Use Tax Symposium Monterey, CA. Oil & Gas: Sales and Use Tax Issues for Upstream & Midstream Operations and Oil Field Services

Transcription

1 IPT 2013 Sales & Use Tax Symposium Monterey, CA Oil & Gas: Sales and Use Tax Issues for Upstream & Midstream Operations and Oil Field Services

2 Presenters Douglas Esmond, CPA, CMI EOG Resources, Inc. Cris Crixell, CPA Enbridge 2

3 Upstream Issues Shale States Oil/Gas exploration & production in tight shale rock different than conventional rock. Horizontal Drilling since early 1980 s 3

4 Upstream Issues Shale States (2) Fracturing since late 1940 s 4

5 Upstream Issues Shale States (3) TEXAS: Fracturing: Largest cost of a well! 5-9 million lbs. sand per well 4-5 million gallons of water per well stage fracs Flowback of frac/produced water 5

6 Upstream Issues Shale States (4) TEXAS: Sand Unprocessed sand = NON-TAXABLE Unprocessed = sorting, sized, screened, washed and/or dried Frac sand is generally washed To remove impurities that could destroy the frac Hearing 27,940 muddies the washing taxability 6

7 Upstream Issues Shale States (5) TEXAS: 7 Sand Processed sand = TAXABLE Crushing, blasting or mixing is processing Uncoagulating sand grains, not changing size of the individual grains is crushing Royalties paid from leased mines = NON-TAXABLE (?) Profit A Prendre = A right that may be granted to an individual to enter another s land and take some natural produce. (Not a sale of TPP, but an intangible right.) Mine owner cannot perform the mining, otherwise potentially TAXABLE

8 Upstream Issues Shale States (6) TEXAS: Fracturing Services Frac service = NON-TAXABLE Wireline service (may look like rental, but no transfer of possession) = NON-TAXABLE Perforating service (may look like rental, but no transfer of possession) = NON-TAXABLE Milling/drilling of plugs service (may look like rental, but no transfer of possession) = NON-TAXABLE 8

9 Upstream Issues Shale States (7) TEXAS: Water Water = NON-TAXABLE Water Recycling Equipment = NON-TAXABLE Statute (&): TPP specifically used to process, reuse, or recycle wastewater that will be used in fracturing work performed at an oil or gas well Water Recycling Services = NON-TAXABLE (?) Can a service on an exempt item be taxable? 9

10 Upstream Issues Shale States (8) TEXAS: Water Water = NON-TAXABLE Water Transfer Services = NON-TAXABLE NOT a rental as no transfer of possession Installation, operation, repair and take down all performed by owner of equipment Property is almost exclusively not situated on operator s leased well site Operator is paying for water to be transported from point A to point B 10

11 Upstream Issues Shale States (9) TEXAS: Water Water = NON-TAXABLE Flowback of frac/produced water = NON-TAXABLE Getting the 4-8 million gallons of water out of the well! Often a fully founded service Often invoiced as a rental Not a rental, as no transfer of possession Operator paying to have service provider remove frac water from the well 11

12 Upstream Issues Shale States (10) TEXAS: 12 Rentals vs. Service Industry over-uses the word rental Determine if there is a transfer of possession (substance over form) Already mentioned: Wireline, perforating, milling/drilling of plugs, water transfer service, flowback service Also watch for: Fully founded closed loop fluid (mud) system services Horizontal drilling services Fishing must use the word operator

13 Upstream Issues Shale States (11) TEXAS: 13 Compressors Compressors at well Pressures gas to enter sales line = NON-TAXABLE Where is sales point? (at well or further down the line) Pressures gas to transport to a distant sales point = TAXABLE (?) Gas lift compressor = TAXABLE (?) Why different than exempt CO2 pump? Vapor Recovery Unit (VRU is actually a small compressor that takes gas off of oil or water tanks) = TAXABLE (?)

14 Upstream Issues Shale States (12) TEXAS: Compressors Compressors at stations Pressures gas to enter sales line = NON-TAXABLE Where is sales point? (at well, or further down the line) Does a gas molecule flow through all compressors, or just through an individual compressor? Does the compressor push gas through a separator? How much water content is removed via the compressor? (See Hearing # 101,773) 14

15 Upstream Issues Shale States (13) TEXAS: Compressors Leased Compressors If eqpt. qualifies as an exempt compressor (prior slides): NON-TAXABLE if lease terms are at least 12 months, and invoice is within the lease terms period TAXABLE if lease terms are less than 12 months TAXABLE if no lease terms TAXABLE if on month-to-month basis, as lease terms have expired HOW STRICT ARE AUDITORS? 15

16 Upstream Issues Shale States (14) TEXAS: 16 Compressors Compression Agreements = NON-TAXABLE (?) Compressors used to increase gas pressure for gas to enter a pipeline Service provider: supplies compressor installs compressor repairs compressor maintains compressor Starts and stops compressor as needed

17 Upstream Issues Shale States (15) TEXAS: 17 Compressors Compression Agreements = NON-TAXABLE (?) Make sure that the compression agreement explicitly states that the producer has NO rights of: Physical possession Duty or control Operation Maintenance Repair Other exercise of possessory rights

18 Upstream Issues Shale States (16) TEXAS: Compressors State is picking on the industry State winning hearings on facts, not the taxability issues Try to prove your point with: As many facts as possible Multi-prong arguments Prayer 18

19 Upstream Issues Shale States (17) TEXAS: Above/Below Ground Issue (Southwest Royalties Case) Defense basically is: manufacturing occurs downhole due to the equipment, as the equipment causes a change in hydrocarbon molecules, mainly pressure SW Royalties lost on initial ruling in District Court Appeals Court ruling on case September 25, 2013 File a refund request, protect your rights! Stay tuned 19

20 Upstream Issues Shale States (18) NORTH DAKOTA: Natural Gas gathering incentives (Statute ) Materials to construct or expand a system used to: Compress gas from a gas or oil well Process gas from a gas or oil well Gather gas from a gas or oil well (gathering = moving nonmarketable gas). Collect gas from a gas or oil well Refine gas from a gas or oil well 20

21 Upstream Issues Shale States (19) NORTH DAKOTA: Natural Gas gathering incentives (Statute ) Must apply for exemption up-front But if tax paid on prior purchases, can request refund from the State after the exemption is granted Note: the State is generally VERY picky on giving money back if tax originally paid to vendor. A midstream issue. Good luck getting an exemption on separators at the well. 21

22 Upstream Issues Shale States (20) NORTH DAKOTA: 22 Sand: Is TAXABLE Royalties on a per unit price basis are treated as a sale of TPP = TAXABLE Sand sold unsevered via a real estate lease and severed for the purchasers own use: TAXABLE: Use Tax due, with the value calculated at the rate of 8 cents per ton. See Guideline, Sand Gravel and Scoria, North Dakota Office of State Tax Commissioner, January 2012

23 Upstream Issues Shale States (21) NORTH DAKOTA: Local Tax Generally capped at $XX per invoice Vendor has option of billing full or capped amount If vendor bills full amount, difference between capped and full can be recouped by: Request via Claim for Refund, Local Sales and Use Tax Paid Beyond Maximum Tax form Direct credit on Use Tax Return. Debit your ND Use Tax liability account on a transactional basis 23

24 Upstream Issues Shale States (22) NORTH DAKOTA: Local Tax If vendor erroneously bills an incorrect local tax (eg. On wrong jurisdiction or on origin), tax can ONLY be recouped from the vendor 24

25 Upstream Issues Shale States (23) NORTH DAKOTA: Crew Camp Lodging (Man Camps) Policy prior to October 1, 2012, was separately stated lodging was NON-TAXABLE Catering portion of the invoice has always been TAXABLE Per Taxability of Lodging Services Crew Camps letter, dated September 7,

26 Upstream Issues Shale States (24) NEW MEXICO: What s NOT taxable (gross receipts State)? Services performed outside NM, the product which is initially used in New Mexico Lab fees would be NON-TAXABLE if the sample is taken by the producer and sent to the lab outside of NM If ANY part of the service is performed in NM, then the receipts are TAXABLE Surveys are thus TAXABLE Seismic data, sent to Texas?? Per Ruling No , dated January 31,

27 Upstream Issues Shale States (25) NEW MEXICO: What s NOT taxable (gross receipts State)? Interstate freight Rig moves could qualify 27

28 Upstream Issues Shale States (26) NEW MEXICO: Non-permitted border-state service providers what do I do? They perform services in New Mexico, but don t want to get permitted. Use Tax rate lower than Sales Tax rate Easier and cheaper just to accrue the Use Tax But what happens when service provider gets audited? 28

29 Upstream Issues Shale States (27) LOUISIANA: Well Service Provider Consumer or Retailer of materials? Clyde Juneau Company Inc. v. Caddo-Shreveport Sales and Use Tax Commission June 26, 1996: ruled that a contractor improving an immovable is the consumer of materials incorporated into the project Revenue Ruling March 1, 2005: the materials incorporated into realty can be deemed to be a retail sale by the service provider/contractor 29

30 Upstream Issues Shale States (28) LOUISIANA: Well Service Provider Consumer or Retailer of materials? So the Well Service Provider s generally purchased their materials tax-free for resale, and collected sales tax on the invoiced materials Producers then would take their case to the Louisiana Board of Tax Appeals claiming the Clyde Juneau Case precludes the Service Provider from being a retailer, and would obtain a refund from the State. 30

31 Upstream Issues Shale States (29) LOUISIANA: Well Service Provider Consumer or Retailer of materials? In the end, the State was getting NO tax on the materials! Revenue Information Bulletin No , dated August 20, 2012, rescinded Revenue Ruling , only prospectively. But appeals at the BTA or even the Department of Revenue for past refunds could/will pay off. 31

32 Upstream Issues Shale States (30) 32 LOUISIANA: Pollution Control Exemptions/Refunds. What type of equipment qualifies? What is process for exemption/refund? Section 4302: Pollution Control Devices and Systems Excluded from the Definition of Sale at Retail: TPP intended for the purpose of eliminating, preventing, treating or reducing the volume or toxicity of potential hazards of industrial pollution which have been approved by the Dept. of Environmental and the Dept. of Revenue & Taxation for tax relief.

33 Upstream Issues Shale States (31) LOUISIANA: Pollution Control Exemptions/Refunds. What type of equipment qualifies? What is process for exemption/refund? Pollution Control Equipment Sales/Use Tax Exemption/Refund Application form R-1349 Form will be forwarded to the list to the Louisiana Department of Environmental Quality for review or approval 33

34 Upstream Issues Shale States (32) LOUISIANA: Pollution Control Exemptions/Refunds. What type of equipment qualifies? What is process for exemption/refund? Casing NON-TAXABLE? VRU NON-TAXABLE? Blow Out Preventor NON-TAXABLE? Flares NON-TAXABLE? 34

35 Upstream Issues Shale States (33) COLORADO: Well Service Provider Consumer or Retailer of materials? Per the following court case, Service Provider is the consumer of materials. (Noble Energy Inc. v. Colorado DOR, Colorado Court of Appeals, April 15, 2010). 35

36 Upstream Issues Shale States (34) COLORADO: Enterprise Zones Generally in the DJ basin counties, such as Weld. The zones are scattered within the county, and precertification is needed with Enterprise Zone administrator 36

37 Upstream Issues Shale States (35) COLORADO: 37 Enterprise Zones What types of items are exempt? Per the Colorado Enterprise Zone brochure Sales 69, To qualify for the exemption, the machine, tool or part must be used directly in the mining process. Per the Colorado Enterprise Zone brochure Sales 69, Downhole pumps, sucker rods, etc. used to extract oil or gas would be exempt. The pipeline used to the carry the oil or gas would be taxable, as would the compressors used to move gas through a pipeline.

38 Upstream Issues Shale States (36) COLORADO: Local Tax Some counties such as Jackson, have a Sales Tax, but NO Use Tax! Even a service provider is not considered to have substantial nexus, unless they own a brick and mortar building 38

39 Upstream Issues Shale States (37) COLORADO: City & County of Denver Aggressive audit staff! Be careful of seismic issues See Denver Tax Guide, Topic No. 42 (the Information Services Guide ). The Information Services Guide goes on to provide that taxable information services do not include producing custom research for a specific client that creates information that was previously not in existence. 39

40 Upstream Issues Shale States (38) 40 WYOMING: Taxability based on what, where and when in the life of the well! For example, beginning with the setting of production casing (when), services (what) are TAXABLE if performed within 250 of the well bore (where) Practical purchase issues: Eg.: A saltwater hauling company must charge tax based on the amount of time at the well site. A reasonable amount of tax should be billed, but precision is difficult to obtain

41 Upstream Issues Shale States (39) OKLAHOMA: Sale of producing properties or pipeline assets = TPP! Sales tax to be collected at fair market value, or safe harbor amount using 21% of the sales price as the taxable value Tax collected is to be reported on the Oklahoma Oil and Gas Operators Casual Sales Tax Report. 41

42 Upstream Issues Shale States (40) PENNSYLVANIA: Liberal mining exemptions, for items directly and prominently used in the mining of gas Be careful of pre and post mining operations Eg. Much discussion on drill pad, is only the rock directly beneath the rig exempt? May perform Sales Tax audit of wholesale gas sales, wanting all resale certificates! 42

43 Midstream Issues Shale States (1) NEW MEXICO Intra-State Trades Creating Nexus Flash Nexus 43

44 Midstream Issues Shale States (2) NEW MEXICO Intra-State Trades Creating Nexus Flash Nexus 44

45 Midstream Issues - Non-Shale States (1) MINNESOTA New Warehousing Legislation Taxing Oil & Gas Storage 45

46 Midstream Issues - Non-Shale States (2) WISCONSIN Pollution Control Property Tax Approval? 46

47 Midstream Issues - Non-Shale States (3) MICHIGAN Compressor Fuel Usage Reports Customer Lists 47