News and Insights

Louisiana Department Issues Ruling on Hydraulic Fracturing

Tax Development Nov 29, 2010

On November 10, 2010, the Louisiana Department of Revenue (“Department”) issued Revenue Ruling No. 10-003 to clarify the taxability of oil or gas well completion and rework services, including hydraulic fracturing services.

Hydraulic fracturing is the process of pumping thick fluid containing proppants into a well under extremely high pressure to generate new fractures through which oil and gas may flow. The service company recollects the fluid when the pressure is released, but the proppant remains in the formation.

Louisiana imposes sales tax on certain services, including the repair of tangible property. Repair or restoration of real property is not subject to Louisiana sales tax. The Department has determined that oil and gas wells are immovables or improvements to real property, not tangible personal property or movable property. Because hydraulic fracturing restores the functionality of an immovable or an improvement to real property, hydraulic fracturing is not a taxable service in Louisiana.

A proppant used by a well service company props fractures in the formation open to allow the oil to flow freely, establishing or restoring proper function to the well. Although the proppant stays in the formation, it does not become permanently affixed to the property.

The Department’s Revenue Ruling concludes as follows:

Although La. Rev. Stat. Ann. § 47:301(14)(g) defines taxable “sales of services” to include repair and routine servicing transactions, the tax is limited to transactions related to “tangible personal property.” The service and repair performed on a well is not within the scope of “sales of services,” as immovable property is not classified as tangible personal property. For that reason, the services offered by “Company A,” well completion or reworking existing wells, including the process called hydraulic fracturing are considered nontaxable services.

Accordingly, Louisiana will not impose a sales tax on “separately” stated service charges or labor charges. However, service or labor charges combined with taxable materials, such as the proppants purchased and used by “Company A,” will subject the entire bill to taxation.

Based on the Department’s stated conclusion, a nontaxable well completion or rework service will be totally taxable if the charges for proppants are not separated from charges for well servicing. Similarly, it may be inferred that the Department would consider separately stated charges for proppants taxable to the purchaser of the well service.