Offshore Oil and Gas Exploration Equipment Exempt from Sales and Use Tax in Texas

In a recent Letter Ruling, the Texas Comptroller of Public Accounts stated that the purchase of materials by an offshore geological surveying company used to assemble seismic nodes qualify for the exemption from sales and use tax for tangible personal property used exclusively in the exploration for or production of oil, gas, sulphur, or other minerals offshore and outside the territorial limits of Texas. Provided no other use occurs within Texas, the assembly or fabrication of the materials into nodes is not taxable as long as the property is removed forthwith beyond the territorial limits of Texas at the first practical or reasonable opportunity.

The Comptroller determined that the taxpayer, who received delivery of the materials four and a half months after ordering them in late 2004 and early 2005, assembled and tested the nodes for nine and a half months from the date the materials were ordered, and placed the assembled nodes off shore, outside the boundaries of Texas by October 2005 met the definition of “forthwith”. Further, the taxpayer’s year-long storage of and minor maintenance of the nodes in Texas, due to the exploration company’s cancelation of the contract, does not qualify as divergent use because the storage was deemed temporary based on current business, economic, and market conditions at the time of storage, and because the items were not put to any other use and were removed again forthwith from Texas. (Letter No. 200807119L, Texas Comp, July 17, 2008)

Posted on August 11, 2008