United States

Ohio: Blending Equipment Used in Hydraulic Fracturing Not Exempt from Use Tax

Jan 29, 2018
From KPMG TaxWatch

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The Ohio Board of Tax Appeals (BTA) recently ruled that a “blender” and related equipment, such as belts, silos, and hydration units, were not directly used in the production of crude oil and natural gas. The taxpayer was engaged in hydraulic fracturing (“fracking”) to support the extraction of crude oil and natural gas from shale formations. The blending equipment was used to prepare fracking fluid for its fracturing operations. Under Ohio law, a sales and use tax exemption applies to purchases of tangible personal property used directly in the production of crude oil and natural gas. In interpreting this exemption, the Ohio Supreme Court has previously applied a “direct use” test, which looks to when the production of crude oil and natural gas actually begins and ends. Applying this test, the court has determined that the production of crude oil and natural gas begins with the actual drilling of the well. As a result, the Tax Commissioner assessed use tax on the blending equipment, contending that only equipment that is directly used in injecting the fracking fluid into the well qualifies for exemption. The taxpayer appealed.

In affirming the assessment, the BTA relied on its prior decision in a similar case, which held that a blender and related equipment used in fracturing were, at best, an “adjunct” to the actual drilling process. The taxpayer argued that its facts were distinguishable from the prior decision because, unlike the equipment in that case, its equipment was used after drilling began. The BTA rejected this argument, noting that the focus of the inquiry should be the actual use of the equipment and not merely the sequence of events. As the items at issue were adjuncts to the drilling process, they were not directly used in the production of crude oil and natural gas. Therefore, the taxpayer’s blenders and related equipment were taxable. For more information on Stingray Pressure Pumping LLC v. Testa, please contact Dave Perry at 513-763-2402.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.