Ohio Issues Sales and Use Tax Regulation on Oil and Gas Production

Ohio is adopting a new regulation on the sales and use tax exemption available to the oil and gas industry effective February 10, 2022. The regulation clarifies the administration of the exemption available to the oil and gas industry and includes relevant definitions of industry-specific terms as well as definitive examples of how the sales and use tax exemption applies to various taxpayers involved in oil and gas exploration and production.

The exemption in Ohio applies to property and services directly used in the exploration and production of crude oil and natural gas. The regulation spells out that the production exemption is available to businesses that produce oil and gas for others. A business does not need to sell oil or gas to qualify for the exemption. Contract drillers and service providers are eligible to utilize the exemption on property and services that they directly use in oil and gas production.

The regulation addresses many of the activities specific to drilling for oil and gas. For example, property used in the wellbore is exempt as directly used in production while the well pad is not considered directly used. The well pad is considered a business fixture and materials used to build the well pad are taxable. The regulation also discusses the different methods used to produce oil and gas, including hydraulic fracturing (fracking), and how the exemption applies. Property and services used in fracking are exempt as are any fluids or materials “pumped downhole”.

Taxpayers in the oil and gas industry will find the regulation useful in addressing sales and use tax issues related to the exploration and production exemption in Ohio. Download a copy of the regulations here. If your business has questions about the new regulation, HBK’s SALT practice can assist you. Please contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com with questions.

About the Author(s)
Matt Dodge is a member of the HBK State and Local Tax (SALT) practice with a focus on sales/use tax. Matt has vast experience in the construction, oil & gas, manufacturing, retail, service provider and transportation industries. He can be reached at 724-934-5300, or by email at mdodge@hbkcpa.com.
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.