Recent Texas Comptroller Private Letter Rulings of Note

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Texas Private Letter Ruling No. 202005027L

The Texas Comptroller of Public Accounts (“Comptroller”) has determined the sales and use taxability of medical review services provided to the medical insurance industry.  The taxpayer in question provides utilization review, peer review, and an independent medical examination service.

The utilization review involves a medical professional reviewing an insured patient’s medical treatment.  The peer review service involves the examination of medical records and clinical information by a Texas licensed physician. The physician reviews the claim and medical records to determine if a treatment or progression of treatment is appropriate and compares it to evidence-based guidelines in doing so. Taxpayer provides the peer review service when an insurer cannot authorize payment of certain medical treatments as a result of a utilization review or when medical services do not comply with established evidence-based guidelines as required by the Texas Department of Insurance.  The independent medical examination service involves the use of an independent physician with no prior knowledge of a patient’s case performs a comprehensive review of the patient’s records and conducts a physical examination of the patient. The physician determines the appropriateness or necessity of treatments, any deviations from evidence-based guidelines, and the reasons for the deviations, based on information gathered during the independent medical examination process.

The Comptroller determined that the above services meet the definition of insurance claims adjustment or claims processing, as set forth in 34 Tex. Admin. Code §3.355(a)(8).  As such then, the services are taxable per 34 Tex. Admin. Code §3.355(b).  Further, the above services do not qualify as nontaxable medical insurance services, as described in 34 Tex. Admin. Code §3.355(c)(2) as they are not being provided for the patient’s health and benefit.

Texas Private Letter Ruling No. 202005021L

The Comptroller has determined the taxability of water transfer and frac fluid treatment.  The taxpayer in question provides two types of services to the oil and gas exploration industry: water transfer services and “frac fluid” water treatment services.

The taxpayer provides on-site water transfer services for its clients. The water sources are either owned by their clients or others. The taxpayer does not own any of the land where the water is sourced. For a fee the taxpayer transfers fresh water from its source to frac tanks at their client’s oil and gas production site.

The taxpayer also provides on-site treatment services of “recycled water” for its clients after their client has used the fluid for fracking and removed it from the well. The taxpayer’s clients cannot re-use this frac fluid because it contains hydrogen sulfide (H2S) and sulfite reducing bacteria (SRB) that create hydrogen sulfide.

The taxpayer treats the used frac fluid by oxidizing the H2S and the SRB so that the clients can re-inject it into the well. To treat the used frac fluid the taxpayer creates chlorine dioxide by injecting three precursor elements that form chlorine dioxide into frac tanks that are located above ground and outside the client’s well bore. The taxpayer does not remove chemicals their client added to the fresh water to produce the frac fluid, although they do remove other oil- souring impurities and separate the oil and gas that comes up with the frac fluid. All of the taxpayer’s services are performed above ground and outside their client’s wellbore.

As a result of the taxpayer’s water treatment, skim gas and skim oil are separated from the frac fluid. The taxpayer does not use, refine or sell the gas or oil; instead the gas and the oil are given back to the client who removed the gas or oil from the well.

The Comptroller determined that the taxpayer’s water transfer services are not subject to sales and use tax.  The taxpayer provides transportation of tangible personal property to its clients’ frac tanks.  Transportation of tangible personal property is not a listed taxable service under Tex. Tax Code §151.0101(a), and therefore the taxpayer’s water transfer service is not a taxable service.

The Comptroller did find that the taxpayer’s frac fluid treatment services are subject to sales and use tax.  The taxpayer’s clients take water that is tax exempt tangible personal property and creates frac fluid, which is a taxable tangible personal property.  The taxpayer’s treatment of used frac fluid with chlorine dioxide is the restoration of tangible personal property and is subject to Texas sales and use tax per Tex. Tax Code §151.0101(a)(5).

Finally, the Comptroller found that the taxpayer is not subject to the Gas Production Tax, the  Oil Production Tax, or the Oil Well Service Tax.  As the taxpayer does not remove the gas from the earth, and returns skim gas back to the client, it is not a “producer” or a “first purchaser” as defined in Tex. Tax Code §§202.001(a)(4) or (a)(2), and therefore not liable for the Gas Production Tax or the Oil Production Tax. Further, because the taxpayer’s services are performed after the fracking services have been completed then taxpayer’s services are not one of the taxable oil, gas, and related well services found in 34 Tex. Admin. Code §3.143 and therefore is not liable for the Oil Well Service Tax.

Texas Private Letter Ruling No. 202005020L

The Comptroller has provided guidance on the sales and use taxability of property sent to a freight forwarder and then is subsequently sold for resale in Texas.  The taxpayer is a Florida corporation in the business of importing and exporting electrical equipment including mobile power plants, turbines, and related items. The taxpayer does not do business in Texas nor does it have a Texas Sales and Use Tax Permit.

In 2013, the taxpayer entered into a contract with the government of Venezuela (for the purchase and installation of five mobile power plants (power plants) and entered into another contract with a company (vendor) for the purchase of the power plants. The vendor delivered the power plants to a freight forwarder in Texas in 2014. Two power plants remain in the custody and possession of the freight forwarder.

Two power plants were exported in 2015 per the customer contract and export of the remaining three was delayed due to the customer not having built the appropriate infrastructure in time. On Nov. 1, 2018, The President of the United States issued Executive Order 13850 which prohibited certain transactions with Venezuela, preventing the taxpayer from completing its contract and exporting the last three power plants.

Because the power plants become obsolete quickly, Taxpayer was forced to find other buyers, and was able to export one to a foreign buyer in 2018.

The taxpayer has found a buyer for the two remaining power plants in Texas. This buyer intends to use them to generate electricity in Texas. The remaining two power plants have never left storage at the freight forwarder.

The Comptroller determined that the two power plants in Texas held by the freight forwarder could be sold in Texas.  Because the taxpayer has not made use of the power plants, it would be selling them in the normal course of business in the form or condition in which they were acquired and would meet the definition of a sale for resale in 34 Tex. Admin. Code §3.285(b)(1)(A). Taxpayer is responsible for collection of any sales tax due under Tex. Tax Code §151.052 (Collection by Retailer) or obtaining a properly completed resale or exemption certificate. Because the taxpayer is selling items in Texas, it must obtain a Texas sales and use tax permit.


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