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Tax Case Decision Has Broad Implications for Future Tax Cases

Image of pressure pumping equipment.

In today’s case, the Court stated it would no longer interpret tax laws in a way that favors taxation.

Image of pressure pumping equipment.

In today’s case, the Court stated it would no longer interpret tax laws in a way that favors taxation.

The Ohio tax commissioner improperly taxed a company for five types of equipment used in blending water, chemicals, and sand for the hydraulic fracturing of oil and gas deposits, the Supreme Court of Ohio ruled today.

A divided Supreme Court reversed an Ohio Board of Tax Appeals (BTA) decision on five of six pieces of equipment that Stingray Pressure Pumping argued should have been exempt from taxation. The tax dispute dates back to 2012.The Court noted the case was complicated by a 2018 change in state law that retroactively applied to Stingray’s purchases.

Writing for the Court majority, Justice R. Patrick DeWine explained that the Court would no longer construe tax statutes against the taxpayer. In the past, the Court has read tax statutes in a way that favors taxation. But the Court’s task is to “provide a fair reading of what the legislature has enacted,” he stated. The Court will now read tax statutes neutrally based on their plain and ordinary meaning—not in a manner that favors or opposes taxation, Justice DeWine concluded.

The Court had to determine whether the equipment at issue was used “directly in the production of oil and gas” as claimed by Stingray or if its use was primarily “storing, holding or delivering solutions,” which the BTA ruled is taxable. Justice DeWine explained that like numerous everyday items, the equipment at issue has multiple purposes. But the primary use is what matters. And the primary use of much of the equipment is to produce oil and gas, which means that the equipment is tax exempt, the opinion concluded.

Chief Justice Sharon L. Kennedy and Justices Patrick F. Fischer and Joseph T. Deters joined Justice DeWine’s opinion. Justice Jennifer Brunner concurred in judgment only.

In a partially concurring, partially dissenting opinion, Justice Michael P. Donnelly maintained that only two of the six disputed items are tax exempt. Justice Melody Stewart joined Justice Donnelly’s opinion.

State Challenges Tax Exemptions
Stingray assists oil and gas drillers in hydraulic fracturing, known as “fracking.” Stingray provides a service to well owners by pumping a mixture of water, chemicals, and sand deep into the earth to fracture and pop open rock formations so that oil and gas can be extracted.

Ohio imposes a sales tax on equipment sold in the state and a corresponding use tax on items purchased out of state and used in Ohio. Under R.C. 5739.02(B)(42)(a), equipment used directly in the production of crude oil and natural gas is exempt from the sales tax and generally exempt from the use tax.

Stingray did not pay taxes on equipment it purchased in 2012, claiming that equipment was used directly to produce oil and gas. The Ohio tax commissioner challenged the exemptions and found 60 pieces of equipment Stingray purchased were taxable. Stingray asked the commissioner to reconsider the assessment. In 2015, the commissioner concluded that only about 30 pieces were taxable.

The commissioner applied the 2014 version of R.C. 5739.02(B)(42)(a), which exempted from tax items that the purchaser intended to “use or consume the thing transferred directly in producing tangible personal property for sale by mining,” including in the production of oil and gas.

The commissioner’s determination meant six types of equipment from Stingray’s 30 disputed pieces of equipment were taxable. Those items were listed as “sand kings, blenders, hydration units, chemical addictive units, t-belts, and a data van.” The tax commissioner argued that this equipment was used in a “preliminary” stage prior to the actual injection of the mixture into the well.

Stingray appealed the commissioner’s decision to the BTA, which affirmed the tax commissioner’s assessments.

Law Change Impacts Tax Dispute
Stingray appealed the BTA’s decision to the Tenth District Court of Appeals. As the case was pending, state lawmakers amended state tax law and added language to expand on the term “to use or consume the thing transferred directly” in the production of oil and gas. The new version of the law contained two lists, one of equipment categories that constitute “things transferred” (tax exempt) and another of equipment categories that are not a “thing transferred” (taxable).

The Tenth District directed the BTA to consider the taxation of Stingray’s equipment using the new law. The BTA again found all the disputed equipment was taxable, finding none fell under the category in the list of “things transferred.” The BTA noted the new law still taxed items used “primarily in storing, holding, and delivering solutions or chemicals” to the well, and that this was the purpose of the six types of Stingray equipment it found taxable.

Stingray appealed to the Supreme Court, which agreed to hear the case.

Supreme Court Will Apply the Plain and Ordinary Meaning of Tax Statutes
Justice DeWine noted that the Supreme Court has previously applied a rule requiring that tax exemptions to be strictly interpreted against the taxpayer. He stated that this position was based on the Court’s notions of what constituted “good tax policy.” But the Court’s task, he explained, is to “provide a fair reading of what the legislature has enacted,” and not a reading that favors or opposes tax collection.

“Tax statutes must be read through a clear lens, not one favoring tax collection. Thus, we make clear today that henceforth we will apply the same rules of construction to tax statutes that we apply to all other statutes,” he wrote.

Supreme Court Analyzed How Equipment Used and Taxed
Both sides accepted the testimony in the record about the use of the equipment at issue. So, the Court looked to this testimony to examine how the equipment works.

A “hydration unit” draws fresh water and other items and pumps them into the “blender.” “Sand kings” hold sand, and the sand is fed on a conveyor belt, known as a “t-belt,” into the blender. A “chemical addictive unit” feeds additional chemicals into the blender, and the blender mixes all the items together. The blender transfers the mixture into a manifold, which is connected to pumps that send the mixture down the well to frack the rock formations.

Michael Rexroad, a Stingray executive, stated the ingredients must all be added together in a quick and coordinated process. The “data van” is a command center, he explained, where Stingray personnel monitor data regarding the volumes of sand and water and the well pressure. The van workers convey instructions to the operators of the other equipment to make the adjustments for the proper mix.

The Court ruled that the equipment sending materials in and out of the blender has storage and delivery functions, but that is not their primary use. As for the blender itself,  it holds the mixture, but blending, not holding, is its primary use, the opinion stated. Aside from the data van, the blender and four pieces of equipment are directly used in the production of oil and gas because the mixture goes “into the blender split seconds” before it is injected into the manifold and sent into the well, the opinion stated.

Emphasizing the primary-use point, Justice DeWine explained that “we think of a mechanical pencil as being used for writing, but it also stores—and may even deliver—the graphite that creates one’s signature.” And “a flashlight produces light, but it also holds and stores batteries. And a squirt gun wouldn’t be much use in soaking a victim if it didn’t also hold and deliver water.”

The Court noted that the new version of the law indicated that “motor vehicles of any kind” were not a “thing transferred.” The Court affirmed the tax commissioner’s determination that the data van is taxable.

Components Hold and Store Materials, Concurring and Dissenting Opinion Maintained
Justice Donnelly stated that he agreed with the majority that the hydration units and blenders were tax exempt, and that the data van was taxable. However, he maintained the sand kings, t-belts, and chemical-additive units were not tax exempt. He wrote the equipment holds and stores material and will be connected to other equipment that ultimately will be used in the well. The fact that the equipment “eventually has some connection with the hydraulic-fracturing process” does not transform it into property used directly in the fracking process, he concluded.

2022-0304. Stingray Pressure Pumping LLC v. Harris, Slip Opinion No. 2023-Ohio-2598.

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