Due to the drop in demand for oil and gas attributable to the COVID-19 pandemic and the decline in oil prices, cash flow generation is crucial to energy companies. To enhance cash flow, energy companies should review their sales and use tax procedures to determine if sales and use taxes for certain purchases of services or assets were paid in error. If sales or use taxes were paid in error, there may be an opportunity to obtain a cash refund of such taxes.
States have granted certain sales tax exemptions that are applicable to oil and gas exploration and production companies for certain purchases of assets, equipment or services (i.e., production equipment, chemicals and utilities). Such exemptions can be complicated, vary from state to state and are subject to change over time. Further, record keeping for oil and gas companies with numerous vendors can be challenging.
Often vendors unilaterally decide when sales tax is applied to purchases by the energy companies. Energy companies, however, must not fall into a trap and assume that vendors are aware of all the potential exemptions or are correctly applying the exemptions. Accordingly, energy companies must be proactive with their vendors and confirm that their vendors are not charging sales and use taxes in error.
Examples of services or purchases not subject to sales and use taxes, in most states, include, but not limited to:
- Downhole services that start or stimulate production (e.g., completions, fracing jobs and recompletions) generally are not subject to sales and use taxes;
- Production equipment that causes a chemical or physical change to the product such as separators, heater treaters and dehydrators, which are used to refine the oil and gas stream;
- Repair services or parts to such equipment;
- Roustabout services such as cleaning up oil spills, repair and maintenance on exempt production equipment and digging pits;
- Chemicals that are either oil soluble or cause a change to the product; and
- Electricity used to produce or transport a material extracted from the earth (e.g., electricity purchased for a well site or compressor station).
Freeman Law’s state and local tax team can help energy companies understand the sales tax exemptions that may be applicable to purchases of goods or services, assist in preparing any required documentation, such as exemption certificates for vendors, and assist in recovering sales tax payments made in error from the vendors or the State. Schedule a consultation or call (214) 984-3000 to discuss your corporate structuring or business and tax planning concerns.