To enhance cash flow, energy companies should review their tax procedures to determine if sales and use taxes were paid in error. If sales and use taxes for certain purchases of services or assets were paid in error, there may be an opportunity to obtain a cash refund of such taxes. As we continue to press through economic uncertainty, increasing inflation, and an ongoing health crisis, energy companies are likely becoming increasingly aware of how crucial cash flow generation is to their business affairs.
States have generally 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 energy companies. However, leaders in energy companies must not fall into the trap of assuming vendors are aware of all the potential exemptions or that they are correctly applying said 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 are not limited to:
- Downhole services that start or stimulate production (e.g., completions, fracking 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).
Sales and Use Tax Questions?
REDW’s trusted state and local tax (SALT) team can help leaders in energy companies to better understand the sales tax exemptions that may be applicable to their purchases of goods and services. We can also 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. Please reach out to George Rendziperis or James Ortiz below with any questions.