Responses
July 14, 1995 and July 26, 1995
Request
April 12, 1995
Mr. W. Val Oveson
Chairman
Utah State Tax Commission
210 North 1950 West
Salt Lake City, UT 84134
Dear Val:
XXXXX has been using XXXXX as a contractor to provide directional
drilling services on XXXXX leases in Utah.
Horizontal drilling, reduced to its basics, is an oil/gas well that
starts out with a vertical bore. The
bore is then turned and runs horizontally through the production zone. As you might imagine, making the turn to
horizontal requires specialized skills and equipment so XXXXX uses contractors
for this service.
The drilling contractor provides XXXXX a service only under the
contract; no tangible personal property is sold by the drilling contractor to
XXXXX.
XXXXX has been charging XXXXX Utah sales tax on its drilling
services. XXXXX maintains these
services are not subject to Utah sales tax, and in spite of our attempts to
correct this situation with our contractor, the tax is still being billed each
month.
Would you please provide me a letter that explains drilling services
are not taxable in Utah? XXXXX won’t
believe me, but maybe they will believe the State Tax Commission -- but maybe
not.
Yours truly,
XXXXX
Mr. W. Val Oveson
Chairman
Utah State Tax Commission
210 North 1950 West
Salt Lake City, UT 84134
Dear Val:
On April 12 I wrote a letter to you requesting an explanation of the Utah
policy on whether sales tax applied to specialized drilling services. I have not received a response to that
letter. Would you please check with
auditing to see if a reply can be expected.
Best regards,
XXXXX
RE: Advisory Opinion - Applicability of Sales
Tax to Drilling Services.
Dear
XXXXX,
You
requested an advisory opinion as to whether directional drilling services
associated with oil and gas wells are subject to sales tax. Your letter indicated that the drilling
contractor provides drilling services only, and does not sell XXXXX drilling
equipment or other tangible personal property.
Our
research indicates that drilling contractors such as XXXXX have been instructed
by our Auditing Division that certain types of drilling contracts amount to
taxable equipment rentals. The
distinction is as follows:
1. If the contract calls for XXXXX to provide
drilling equipment, but UPRC provides the equipment operator, the transaction
is deemed as taxable equipment rental.
Even if XXXXX provides an employee to observe or supervise the drilling
operation, the entire contract price is taxable.
2.
If the contract calls for XXXXX to provide drilling equipment and an operator,
the contract is viewed as a tax exempt contract for services.
Your
letter does not detail which type of arrangement XXXXX has with XXXXX, so we
cannot determine whether your contracts are taxable. If you would like to provide us with more detailed information,
we will be happy to issue you a more specific opinion.
For
the Commission,
Alice
Shearer
Commissioner