Indirect Tax Issues for Upstream Operations & Oilfield Services

Indirect Tax Issues for Upstream Operations & Oilfield Services

Introductions TODAY S PRESENTERS Shane Stewart, CPA Director-in-Charge, Indirect Tax State and Local Tax Services Mayur Naik, CMI Manager, Indirect Tax State and Local Tax Services 2

Overview LEARNING OBJECTIVES Understand the indirect tax impact of customer and vendor requests and other unique challenges Review tax compliance issues as well as tax opportunities and exemptions

SALT Topics INDIRECT TAX IMPACT ON OIL & GAS CHANGES Customer/Vendor Refund Requests Compliance Issues Tax Opportunities & Exemptions

SALT Topics CUSTOMER REFUND REQUESTS? How do you handle a customer s request for a refund of taxes paid-in-error before you get the refund back from the state?» Look at open AR to offset» Can you provide a future credit for services?» Assign the Right to Refund to the Customer? What about gray issues or if a customer doesn t want to pay? 5

SALT Topics CUSTOMER REFUND REQUESTS Refund Assignment Forms» Increase in requests / Aggressive positions» Does customer/consultant have correct facts?» Review errors to minimize future similar errors 6

SALT Topics VENDOR TAX REIMBURSEMENT REQUESTS Why does this happen?» Vendor internal audit determined tax should have been collected» State Audit determined tax due and State allows vendor to seek reimbursement from its customer (TX, OK, Not NM) Should you pay?» Was the assessed tax due incorrectly determined by State?» Check to see if within Statute of Limitations Period» Consider the business relationship 7

SALT Topics CHANGES IN THE BUSINESS DUE TO DOWNTURN Idle Equipment Sales to Unrelated Third Party» Are the sales processed through normal billing system or treated as Gain/Loss on Sale of Asset?» Is there a standard Bill of Sale Agreement?» System set up to collect sales tax on these types of transactions?» Ability to collect tax in the jurisdiction sold?» Who s collecting resale/exemption certificates? 8

SALT Topics REORGANIZATION/REDUCTIONS Closing locations & consolidating operations: What are the indirect tax considerations?» Who will retain the records?» Who will be responsible for closing permits, filing last tax returns?» Casual/occasional sale exemption apply to consolidation?» Are Use taxes due on equipment no longer for resale or exempt? 9

TAX OPPORTUNITIES

Overpayments occur because Failure to understand the taxability of the transaction. Purchaser did not issue the required exemption certificate. Invoice was not reviewed. This covers overpayment of tax paid on purchases. This does not cover tax that was charged to a customer. 11

TEXAS Basic definition of certain downhole services (Tex. Admin. Code 3.324)» (a)(3) Nontaxable services to start or stimulate production or the labor to work on the formation outside of the well» (a)(2) Taxable services to repair, restore, remodel, or maintain TPP or RP at a lease site 12

TEXAS What to look out for» Certain services that are both taxable and non-taxable like Roustabout Services» Sales tax charged when the Well Services Tax is due» Support documentation found in field tickets or externally such as through the RRC website 13

TEXAS Non-taxable Services Fracturing Perforating Squeeze Cement Workover Acidizing Logging Drilling deeper Plug back Completion Plug and Abandon Pulling or resetting casing liner Installing a casing liner Drilling out a plug Swabbing Jetting Gravel Packing Hot oil treatment of formation Injection to stimulate production 14

TEXAS Exempt Chemicals» Oil-soluble chemicals are exempt because they become part of the finished product and are resold to the customer.» Chemicals that cause a change to the product such as a demulsifier are exempt under the manufacturing exemption. 15

TEXAS Manufacturing Exemptions (Tex. Admin. Code 3.330)» Chemicals used to heat oil to remove impurities» Separators used to separate oil and water Drilling equipment for exclusive use outside of Texas and for offshore exploration and production (Tex. Admin. Code 3.332)» Qualifies as exempt even if shipped into the state for further assembly before removal from the state Water-related Exemptions (Tex. Tax Code 151.355(7))» TPP specifically used to process, reuse, or recycle wastewater that will be used in fracturing work performed at an oil or gas well 16

TEXAS Compressors Manufacturing Exempt if» Used to operate field dehydrators, heat treators, separators and scrubbers» Used to boost the sales line and located immediately before the sales meter Compressors Taxable if..» Used at the well head to extract oil and gas from below the ground or found after the sales line in transport Key to winning this exemption in a claim or audit depends on» Documentation, documentation, documentation 17

TEXAS Not Taxable: Unprocessed sand (can be sorted, sized, screened, washed, and/or dried) Taxable: Processed sand crushed or mixed dried) with other material (resin coated) 18

TEXAS Motor Vehicle vs Movable Specialized Equip (Hearing No. 106,629)» Trailer mounted fracturing fluid pumpers deemed motor vehicles Must start as a road ready trailer Have equipment mounted on the trailer Capable of hauling other property» What other equipment might qualify?» What other opportunities labor to repair» Motor Vehicle Taxes Due? 19

TEXAS WELL SERVICING TAX Well Servicing Tax 2.42% imposed on service provider but may be passed through to the customer Only applies to» Cementing a casing seat of an oil and gas well» Shooting, fracturing, or acidizing the sands or other formations of the earth in any such well or» Surveying or testing such formations or the contents thereof in any such well 20

TEXAS WELL SERVICING TAX Service must be performed during drilling and completion, or reworking or reconditioning of the well And in the case of surveying or testing, by means of equipment inside the well bore when the test or survey is performed Opportunities for overbillings? Be careful, WST may have been charged in error and sales tax may be due instead 21

TEXAS WELL SERVICING TAX Example Cementing Job (WST or Sales Tax?)» Cementing the casing seat of the producing string» Cementing intermediate casing string (assumes new completion or workover)» Cementing a plug for well abandonment» Cementing to repair defective casing» WST due» WST Not Due» WST Not Due» Sales Tax Due 22

Let s Connect @weavercpas facebook.com/weavercpas linkedin.com/company/weavercpas youtube.com/weavercpas Questions? weaver.com