Texas Comptroller of Public Accounts    STAR System


August 12, 2002 

Subject: Sand Separator 


Taxpayer is a service company working for oil and gas exploration firms. Upon 
the completion of a new well, Taxpayer is called in to separate out sand and 
other drilling residuals from the oil or gas. Until sand is separated out, oil 
and gas cannot be transferred to a gathering line for further processing and 
eventual sale. Taxpayer has treated its service as a non-taxable service. 

Because oil or gas cannot be transferred to the gathering line and thereby 
cannot be eventually sold without the removal of the sand, Taxpayer contends 
that the removal of impurities from a product to be sold is processing and is 
claiming the manufacturing exemption on its purchases of sand separators and 
parts. Do these items qualify for the manufacturing exemption?


It is the agency's understanding that the primary purpose of a sand separator 
is to clean the well after a frac job, but prior to actual processing of oil or 
gas. The description that the agency found on the Internet indicates that after 
a well is opened after a frac, the flow is directed through a sand separator 
where the clean gas is routed back to a sales line inlet and onto and through 
the production equipment. All solids and liquids are dumped from the sand 
separator into the flow back tank, which allows the producer to sell gas while 
cleaning the well. 

This description indicates that Taxpayer is providing a nontaxable service of 
removing impurities (sand, drill mud, prop, boxite or other abrasives, etc.,) 
that were injected downhole by Taxpayer or others during the initial drilling 
of the well or during a workover of the well. The removal of impurities in this 
situation is not a processing operation. Therefore, the sand separator used by 
Taxpayer is not eligible for the manufacturing exemptions under Texas Tax Code 
151.318. This conclusion is consistent with Rule 3.324 (relating to Oil, Gas 
and Related Well Service) that states the removal of impurities from the 
product being removed is a non-taxable service. Non-taxable service providers 
must pay tax on equipment, supplies and chemicals used to perform their 
nontaxable service.

ASK POLI - 200208347T

DATE: 08/12/2002