Ohio sales or use tax refund opportunity for producers of crude oil and natural gas
In 2018, Ohio amended its sales or use tax exemption statute for services and property used directly in the production of crude oil and natural gas for sale. This legislative change was intended to clarify existing Ohio law and, therefore, expressly stated the changes can be applied retroactively. These changes may provide refund opportunities for taxpayers in the oil and gas industry with operations in Ohio.
The legislative clarification expanded the exemption beyond prior case law. The prior test was adopted based on the manufacturing exemption and didn’t consider the differences of the processes between the two very distinct industries. Further, a taxpayer had to determine when the actual exploration for and production of crude oil and natural gas began and ended and whether the property was used or consumed during that process.¹ Under prior law, production began at the actual drilling of the well.² Now, certain services and tangible personal property for preparation activities are now exempt. Additionally, certain adjuncts previously considered taxable, such as trailers attached to production equipment, are now exempt. A list of services and tangible personal property that are now exempt or taxable by statute are included for your reference. If a service or specific item of tangible personal property isn’t listed, an analysis should be completed to determine the taxability.
Recently, the 10th District Court of Appeals remanded Stingray Pressure Pumping LLC v. Jeffrey A. McClain, No. 18AP-110, No. 18AP-111, Dec. 17, 2019, to the Board of Tax Appeals (BTA) to determine whether certain equipment purchased by the taxpayer for use in its hydraulic fracturing operations in Ohio may be exempt from sales or use tax for being used directly in the production of crude oil and natural gas for sale.
The taxpayer, Stingray Pressure Pumping LLC, is a producer of crude oil and natural gas for sale and uses the hydraulic fracturing process in its operations. Stingray claimed purchases of equipment related to its Ohio hydraulic fracturing operations weren’t subject to Ohio sales tax under the law prior to the 2018 amendment. The tax commissioner and the BTA rejected the taxpayer’s argument that the equipment qualified under the Ohio exemption prior to its amendment. On appeal, the 10th District Court of Appeals analyzed the issue by considering the 2018 legislative clarification. Due to the complexity of hydraulic fracturing operations, the Court of Appeals remanded Stingray to the BTA to determine if the equipment is exempt under the 2018 amendment.
Although the case is pending at the BTA, it provides an opportunity for Ohio taxpayers in the oil and gas industry to review purchases to determine if transactions are now exempt under the expanded clarification and definitions.
If Ohio sales or use tax was previously paid on an underlying transaction, the taxpayer may file a refund claim with the Ohio Department of Taxation. Generally, taxpayers may request sales or use tax refunds for the past four years of purchases. A taxpayer with a pending appeal should consider updating its appeal based on this decision.
If you have questions about the exemption or other state and local tax issues, please contact Julie Corrigan at 216-274-6509, Adam Garn at 614-222-9200, or Stephen Palmer at 614-222-9137.
The following services and tangible personal property are exempt from tax under the statute:
(I) Services provided in the construction of permanent access roads, services provided in the construction of the well site, and services provided in the construction of temporary impoundments
(II) Equipment and rigging used for the specific purpose of creating with integrity a wellbore pathway to underground reservoirs
(III) Drilling and workover services used to work within a subsurface wellbore, and tangible personal property directly used in providing such services
(IV) Casing, tubulars, and float and centralizing equipment
(V) Trailers to which production equipment is attached
(VI) Well completion services, including cementing of casing, and tangible personal property directly used in providing such services
(VII) Wireline evaluation, mud logging, and perforation services, and tangible personal property directly used in providing such services
(VIII) Reservoir stimulation, hydraulic fracturing, and acidizing services, and tangible personal property directly used in providing such services, including all material pumped downhole
(IX) Pressure pumping equipment
(X) Artificial lift systems equipment
(XI) Wellhead equipment and well site equipment used to separate, stabilize, and control hydrocarbon phases and produced water
(XII) Tangible personal property directly used to control production equipment
The following services and tangible personal property are taxable under the statute:
(I) Tangible personal property used primarily in the exploration and production of any mineral resource regulated under Chapter 1509. of the Revised Code other than oil or gas
(II) Tangible personal property used primarily in storing, holding, or delivering solutions or chemicals used in well stimulation as defined in Section 1509.01 of the Revised Code
(III) Tangible personal property used primarily in preparing, installing, or reclaiming foundations for drilling or pumping equipment or well stimulation material tanks
(IV) Tangible personal property used primarily in transporting, delivering, or removing equipment to or from the well site or storing such equipment before its use at the well site
(V) Tangible personal property used primarily in gathering operations occurring off the well site, including gathering pipelines transporting hydrocarbon gas or liquids away from a crude oil or natural gas production facility
(VI) Tangible personal property that’s to be incorporated into a structure or improvement to real property
(VII) Well site fencing, lighting, or security systems
(VIII) Communication devices or services
(IX) Office supplies
(X) Trailers used as offices or lodging
(XI) Motor vehicles of any kind
(XII) Tangible personal property used primarily for the storage of drilling byproducts and fuel not used for production
(XIII) Tangible personal property used primarily as a safety device
(XIV) Data collection or monitoring devices
(XV) Access ladders, stairs, or platforms attached to storage tanks
¹ Kilbarger Constr., Inc. v. Limbach (1988), 37 Ohio St.3d 234, 525 N.E.2d 483.