Ohio Board of Tax Appeals Affirms Assessment of Use Tax on Fracturing Equipment

The Ohio Board of Tax Appeals (BTA) has affirmed the decision originally made by Ohio’s tax commissioner to assess use tax on equipment used for hydraulic fracturing operations.

Equipment affected by this ruling includes the following:  

  • Blenders
  • Missiles
  • Pumps
  • Sand king
  • Sand silo

Court Ruling

In Stingray Pressure Pumping LLC v. Testa, the appellant argued against the tax assessment, stating that the equipment was directly used in the exploration for and production of crude oil and natural gas—activities that are exempt under Ohio Revised Code (RC) 5739.02(B)(42)(a).

In a previous court case, the BTA determined that a blender and related equipment didn’t qualify for the use-tax exemption. The taxpayer asserted that because drilling hadn’t yet begun in that case, it couldn’t be applied to the current case.  

Ultimately, the BTA found that the taxpayer’s hydraulic fracturing operations were distinct from its drilling operations. The BTA also established that the taxpayer hadn’t satisfied the burden of proof that the blender and related equipment were directly used in drilling.

Therefore, the blender and other select equipment were ruled as ineligible for the exemption, because it wasn’t found to be used directly in the production of crude oil and natural gas. Because the equipment that injected into the well was directly used in drilling, it was determined to be exempt.

Impact to Service Companies

Oil and gas service companies that previously claimed an exemption on certain equipment purchases may now be subject to use tax under examination. Ineligible equipment includes anything that isn’t part of the actual drilling or otherwise directly used in the exploration for and production of crude oil and natural gas. 

This ruling could have implications beyond hydraulic fracturing as well, touching other services that the tax commissioner considers adjunct to drilling operations.

Potential for Increased Assessments

This decision more clearly defines the direct-use concept previously applied by the Ohio tax commissioner. It also further excludes adjunct operations from the use-tax exemption, even when drilling has already begun.

In cases where a taxpayer believes use tax was unfairly assessed, the burden of proof rests with the taxpayer. An assessment of interest and penalties would likely apply under examination, and abatement of those penalties is discretionary.  

We’re Here to Help

For more information about how this court decision might affect you or your business, please contact your Moss Adams professional or email statetax@mossadams.com.