Disclaimer: This document is designed only to provide general information regarding the subject matter discussed. The standards, statutes, authorities, and other laws cited are subject to change. This document is not intended to provide tax, accounting, legal, or other professional advice to any specific person or entity. Any advice or opinion regarding the application of the subject matter for a specific person or entity should be provided by a competent professional advisor based on an application of the appropriate law and authorities to the facts and circumstances applicable to that person or entity.

February 20, 2024 – The Texas Comptroller of Public Accounts (“Texas Comptroller”) has reversed policy on the taxability of flowback services and water transfer services. The Texas Comptroller now considers these services as non-taxable services, per Memorandum Number 202312010 issued by the Texas Comptroller on December 13, 2023. The Memorandum supersedes Policy Letter 202009002L issued in 2020 and hearing decisions issued by the Texas Comptroller which treated flowback and water transfer services as a rental of equipment without an operator, which is a taxable transaction.

The Texas Comptroller provided guidance for both purchasers and sellers in the new Memorandum. The policy update will be effective on the later of the date the rule amendment is adopted or March 1, 2024.

For open audits and hearing assignments, auditors are instructed to examine transactions and verify if service providers consistently charged sales tax on their sales and provided valid resale certificates on their equipment purchases, or if they consistently did not charge tax on their sales but did pay sales tax on their equipment purchases. Any taxpayers in Administrative Hearings based on the Comptroller’s previous policy, who paid tax on purchases but did not collect tax from customers, should have their cases dismissed and the audits finalized with no assessment on the flowback/water transfer services. In addition, the Audit Settlement Group should reach out to certain taxpayers and notify them of the new determination.

Whitley Penn Observations

The Texas Comptroller has aggressively audited oil & gas service companies in the last 3-4 years claiming flowback services and water transfer services were taxable rentals of equipment. Based on the 2020 policy letter, many oil and gas service companies started charging sales taxes on flowback and water transfer services. The 2020 policy letter also indicated that oil and gas service companies could purchase their flowback equipment tax free with a valid resale certificate.

Impact on Texas Oil and Gas Producers

If Texas sales taxes were charged on flowback services and/or water transfer services, there may be an opportunity for a refund of sales taxes paid to the service provider. Texas has a 4-year statute of limitations on sales tax refunds.

Impact on Texas Oil & Gas Service Providers

Based on the 2020 policy letter, oil and gas service providers were instructed to issue valid resale certifications to vendors for equipment purchases used in flowback services. The new Memorandum instructs taxpayers to pay sales taxes on the purchase of equipment used in flowback/water transfer services. It is recommended that oil and gas service providers communicate with their equipment providers and verify that Texas sales taxes are charged prospectively on applicable equipment, in accordance with the new policy.

If the Texas Comptroller recently issued a deficiency determination on flowback/water transfer services, oil and gas service providers may instruct auditors to remove these transactions. Taxpayers may also want to review any historical Texas sales tax assessments for refund or petition for redetermination opportunities.

If you have any questions regarding the impact of the Texas Comptroller’s new position on the taxability or flowback or water transfer services, please reach out to a member of the Whitley Penn State and Local Tax team.