Ohio governor vetoes sales tax exemption for oil and gas equipment
Alert
Using the rationale of Ohio’s fiscal health, last week Gov. John Kasich vetoed provisions in SB235 that would have clarified the application of Ohio’s sale tax to the oil and gas industry. Earlier this month, we reported that recent tax receipts in Ohio are 5 percent under projections, prompting the governor to predict that Ohio “is on the verge of a recession.” Not far removed from this warning, the governor’s veto message reveals that flagging tax revenues motivated the line-item veto.
Gov. Kasich’s veto message questions whether the Ohio General Assembly anticipated that the measure would “yield such a significant loss of tax revenue.” The statement is a reference to estimates by state tax officials that the measure would cause state and local governments to issue $264 million in sales tax refunds. The Columbus Dispatch reports that the estimate includes $211 million for oil and gas conduit pipe companies, $46 million for horizontal-well operators, $7 million for injection-well operations and an unknown amount for other minerals producers.
These refunds, however, are already due to taxpayers, according to legislators and industry advocates. Representative Ryan Smith, Chairman of the House Finance Committee, explained that “what we [are] doing is clarifying current law.… We view it as something that should have never been taxable.” Smith also stated that “If the state has to issue refunds, it’s because they collected taxes they should have never collected.”
Like most legal issues, there is no easy answer with respect to the disagreement between the Kasich administration and the Ohio Legislature. For the most part, the proposed law clarifies existing law, though the issue is best resolved through examining the language in SB235 itself.
The measure in SB235 vetoed by the governor would have specifically identified, for purposes of the exemption, property used to produce other “property for sale by production of crude oil and nature gas.” Under the bill, items used in a “production operation” are exempt, as that phrase is defined through Code Section 1509.01(AA). “Production operation” is statutorily defined to include the following:
O.R.C. 1509.01(AA) also lists additional items that are used in a “production operation,” including piping and equipment used in exploring, producing, processing, preparing for transport, and storing hydrocarbon gas or liquids. Equipment used in and around well pads is also considered part of a “production operation.” To limit the reach of the exemption, the measure in SB235 expressly disallowed exemption for storage devices used in hydraulic fracturing, equipment used in reclamation at a well site, or property to transport equipment to and from a well site.
There is no question that the vetoed language in SB235 proposed clarifying the specific property uses that fall within the existing sales tax exemption for property used “directly in producing tangible personal property for sale by production of crude oil and natural gas.”
Some may view the timing of the measure as more than a clarification of existing law. If enacted, the vetoed measure would have had retroactive effect to June 30, 2010. The Legislature expressly provided uncodified language that the measure is intended “to be applied retrospectively to all cases pending on or transaction occurring after [June 30, 2010].” In this way, the measure went beyond existing law, given that the statute of limitations for filing a sales tax refund is generally only four years from the date of the illegal or erroneous tax payment. Had SB235 taken effect, it would have provided access to refunds reaching back beyond the existing four year refund period.
In the meantime, taxpayers may enforce the existing sales tax exemption for equipment and other items used to produce crude oil and natural gas. The exemption is already on the books and taxpayers enjoy a four year period to seek refunds for any unlawful tax collections. Taxpayers who may have erroneously paid sales tax on the purchase or use of such items may consider contacting tax professionals with respect to whether a refund claim may be appropriate for their situation.
Gov. Kasich’s veto message questions whether the Ohio General Assembly anticipated that the measure would “yield such a significant loss of tax revenue.” The statement is a reference to estimates by state tax officials that the measure would cause state and local governments to issue $264 million in sales tax refunds. The Columbus Dispatch reports that the estimate includes $211 million for oil and gas conduit pipe companies, $46 million for horizontal-well operators, $7 million for injection-well operations and an unknown amount for other minerals producers.
These refunds, however, are already due to taxpayers, according to legislators and industry advocates. Representative Ryan Smith, Chairman of the House Finance Committee, explained that “what we [are] doing is clarifying current law.… We view it as something that should have never been taxable.” Smith also stated that “If the state has to issue refunds, it’s because they collected taxes they should have never collected.”
Like most legal issues, there is no easy answer with respect to the disagreement between the Kasich administration and the Ohio Legislature. For the most part, the proposed law clarifies existing law, though the issue is best resolved through examining the language in SB235 itself.
Overview of Ohio Senate Bill 235
On Dec. 8, 2016, the Ohio General Assembly passed Senate Bill 235 including a measure addressing sales tax exemption for items used “directly in producing tangible personal property for sale by production of crude oil and natural gas.” Existing Ohio law, namely Ohio Revised Code Section 5739.02(B)(42)(a), already provides that the sale of such items are exempt.The measure in SB235 vetoed by the governor would have specifically identified, for purposes of the exemption, property used to produce other “property for sale by production of crude oil and nature gas.” Under the bill, items used in a “production operation” are exempt, as that phrase is defined through Code Section 1509.01(AA). “Production operation” is statutorily defined to include the following:
[A]ll operations and activities and all related equipment, facilities, and other structures that may be used in or associated with the exploration and production of oil, gas, or other mineral resources * * * including operations and activities associated with site preparation, site construction, access road construction, well drilling, well completion, well stimulation, well site activities, reclamation, and plugging.
O.R.C. 1509.01(AA) also lists additional items that are used in a “production operation,” including piping and equipment used in exploring, producing, processing, preparing for transport, and storing hydrocarbon gas or liquids. Equipment used in and around well pads is also considered part of a “production operation.” To limit the reach of the exemption, the measure in SB235 expressly disallowed exemption for storage devices used in hydraulic fracturing, equipment used in reclamation at a well site, or property to transport equipment to and from a well site.
There is no question that the vetoed language in SB235 proposed clarifying the specific property uses that fall within the existing sales tax exemption for property used “directly in producing tangible personal property for sale by production of crude oil and natural gas.”
Some may view the timing of the measure as more than a clarification of existing law. If enacted, the vetoed measure would have had retroactive effect to June 30, 2010. The Legislature expressly provided uncodified language that the measure is intended “to be applied retrospectively to all cases pending on or transaction occurring after [June 30, 2010].” In this way, the measure went beyond existing law, given that the statute of limitations for filing a sales tax refund is generally only four years from the date of the illegal or erroneous tax payment. Had SB235 taken effect, it would have provided access to refunds reaching back beyond the existing four year refund period.
MOVING FORWARD
The clash between the Kasich administration and the General Assembly on oil and gas issues is nothing new and will likely persist into next year. Throughout his tenure in office, the governor has unsuccessfully proposed several severance tax hikes. With revenue shortfalls heading into the 2017 budget year, we will likely see yet another public debate regarding severance and sales tax issues affecting the oil and gas industry. The General Assembly has a particularly strong hand, though, due to Republican gains in the 2016 general election that affords the party veto-proof majorities in both houses.In the meantime, taxpayers may enforce the existing sales tax exemption for equipment and other items used to produce crude oil and natural gas. The exemption is already on the books and taxpayers enjoy a four year period to seek refunds for any unlawful tax collections. Taxpayers who may have erroneously paid sales tax on the purchase or use of such items may consider contacting tax professionals with respect to whether a refund claim may be appropriate for their situation.