35 Miss. Admin. Code Pt. IV, Subpt. 10, Ch. 02 — Drilling Contractors (Oil and Gas Wells)

Definitions
100 Definitions. Certain words, terms and phrases used in this regulation have meanings
ascribed to them as follows:

# 1.

Interest Well. When the driller owns a portion of the lease and one or more other
persons own the remaining portion upon which a well is drilled, such a joint leasehold
is known as an "interest well".

# 2.

Ownership Well. When a drilling contractor owns 100% of a lease and drills a well
on it, he has no taxable income.

# 3.

Operator. One who holds all or a fraction of the working or operating rights in an oil
or gas lease, and is obligated for the costs of production either as a fee owner or under
a lease or any other form of contract creating working or operating rights.

# 4.

Bottom-Hole Contribution. Money or property given to an operator for his use in the
drilling of a well on property in which the payor has no interest. The contribution is
payable whether the well is productive or nonproductive.

# 5.

Dry-Hole Contribution. Money or property given to an operator for his use in the
drilling of a well on property in which the payor has no interest. Such contribution is
payable only in the event the well is found to be nonproductive.

# 6.

Total Contract Price or Compensation Received. Amounts received as compensation
for performing a drilling contract, including assignments of dry -hole or bottom -hole
contributions and anything else of value. When the kind and amount of compensation
received by the contractor is contingent upon production, the compensation received
shall be the total compensation receivable in the event the well is a dry-hole.

# 7.

a. Taxable Compensation. In determining "taxable compensation", certain items are
deductible from the "compensation received" when the regular retail tax or, if
applicable, the contractor's tax (road construction, site preparation, etc.) has been
paid by the contractor to the person making the sale or rendering the service and
as enumerated below:
i. Additives
ii. Casing
iii. Cement
iv. Coring
v. Directional Drilling
vi. Fishing tool rentals
vii. Logging
viii. Mud
ix. Perforation
x. Road Construction
xi. Site preparation
xii. Testing
xiii. Water
b. No other expenses or cost incurred by the driller in the drilling operation is
excludable in determining "taxable compensation".
101 (Reserved)
Qualifications and Payment of Tax
200 Qualifications and Payment of Tax. A drilling contractor taxable under Section 27-65-21
on a specified contract exceeding $10,000 shall qualify with the State Tax Commission to
identify the specific contract before work is begun.
201 The contractor's tax together with any use tax due must be paid before work is begun on
contracts exceeding $75,000 unless a surety bond is filed with the State Tax Commission
for these taxes (Section 27-65-21). (See "Bond Requirement".)
202 On taxable contracts of $75,000 or less, or when a bond is filed, the tax due under Section
27-65-21 must be paid on a monthly basis as compensation is received. Any use tax on
equipment shall be payable on or before the twentieth (20th) day of the month following
the month in which the property is brought into Mississippi.
203 The 2% vendor's discount does not apply to the tax levied under Section 27-65-21.
204 (Reserved)
Tax Rates and Activities Taxed
300 Tax Rates and Activities Taxed. A tax of 3½% is levied on the "taxable compensation"
received when the contract price exceeds $10,000 for drilling, redrilling, directional
drilling or working over a gas well, oil well or salt water disposal well. This tax applies
also to interest well contracts on the "taxable compensation" received from the other
owners. Drilling, redrilling, directional drilling or working over a gas well, oil well or salt
water disposal well performed as sub work for a prime contractor is not subject to tax
when the prime contractor has paid the 3½% tax on the total "taxable compensation".
301 Contracts of $10,000 or less and oil field services involving activities other than those
listed in the preceding paragraph are taxed at the regular retail rate of tax on the gross
income of the business as provided by Section 27-65-23 of the Sales Tax Law.
302 (Reserved)
Bond Requirement
400 Bond Requirement. A surety bond must be filed on taxable contracts exceeding $75,000
performed in this state unless the tax is prepaid. Such bonds shall be either (a) "job
bonds" which guarantee payment when due of the aforesaid taxes resulting from
performance of a specified job or activity regardless of date of completion; or (b)
"blanket bonds" which guarantee payment when due of the aforesaid taxes resulting from
performance of all jobs or activities taxable under Section 27 -65-21 begun during the
period specified therein, regardless of the date of completion. The bond must be
sufficient to cover the liability for sales, use, income and withholding taxes and must be
approved by the Commissioner.
401 (Reserved)
Sales or Use Tax on Purchases
500 Sales or Use Tax on Purchases. Drilling contractors and operators are required to pay
retail sales or use tax on the purchase of all equipment, materials or supplies. Material
Purchase Certificates are not issued to drilling contractors.
501 Directional drilling is subject to the regular retail rate of tax unless it is performed by the
drilling contractor. If the directional drilling is performed by the drilling contractor, it is
subject to the contractor's tax as a part of the drilling contract.
502 A truck (chassis, motor, etc.) used to haul specialized equipment is taxed at the special
3% rate of sales or use tax and the specialized equipment mounted thereon is taxed at the
regular retail rate of tax (example: drilling or workover rigs).
503 When property has not been use in another state and is imported into this State for use,
the taxable basis is the value of the property at the time of importation. Credit for sales or
use tax paid to another state in which the property was acquired or used may be taken in
computing the amount of use tax due this State, but such credit must be computed by
applying the rate of sales or use tax paid to another state of the value of the property at
the time it enters Mississippi.
504 Owners or other persons receiving benefit from use of tangible personal property in this
State are liable for use tax on such property.
505 (Reserved)
Rentals
600 Rentals. Rental or lease of equipment and other tangible personal property is taxed at the
same rates as sales of the same property. The lessor is primarily liable for this tax but is
required to add tax to his invoice and to collect the amount of tax due from the lessee.
601 Adequate records must be maintained to substantiate classifications of income and
purchases.
602 (Reserved)