Current through all regulations passed and filed through September 16, 2024
(A)
(1)
For the purposes of Chapters 5739. and 5741. of the
Revised Code and this rule, all purchases of tangible personal property are
taxable, except those in which the purpose of the consumer is to use or consume
the thing transferred directly in the production of crude oil and natural gas
for sale. This means that a person who buys tangible personal property and
directly uses or consumes it in the production of crude oil and natural gas for
sale does not have to pay sales or use tax on the thing
purchased.
(2)
"Production" means operations and tangible personal
property directly used to: expose and evaluate an underground reservoir that
may contain hydrocarbon resources; prepare the wellbore for production; and
lift and control all substances yielded by the reservoir to the surface of the
earth.
(3)
Additionally, this rule applies to persons engaged
directly in rendering services in the exploration for and production of crude
oil and natural gas for others. To that end, persons engaged in rendering the
exploration or production services can take advantage of this exemption if the
person directly uses or consumes the item in the production of crude oil and
natural gas for sale.
(4)
Nothing in this rule prohibits a taxpayer to avail
themselves of other exemptions, including but not limited to, the exemptions
found in Chapter 5709. of the Revised Code.
(B)
Any term not
defined below has the same meaning as in Chapter 5739. or 5741. of the Revised
Code. For purposes of this rule, the following definitions apply:
(1)
"Acidizing"
includes acid fracturing, matric acidizing, and acid washing.
(2)
"Artificial lift
system" includes the process used on oil and gas wells to encourage oil or gas
to the surface, including beam pumping, hydraulic pumping, electric submersible
pumping, and gas lift injection.
(3)
"Casing" means a
pipe placed in an oil or gas well as drilling progresses to prevent the wall of
the hole from caving in during drilling, to prevent seepage of fluids, and to
provide a means of extracting oil or gas if the well is productive. Types of
casing include conductor casing, intermediate casing, production casing, and
surface casing.
(a)
"Conductor casing" means one or more strings of casing
set and cemented to provide a base for an air body for diversion of shallow
naturally occurring natural gas including coalbed methane and to accomplish one
or more of the following well construction objectives:
(i)
Stabilize
unconsolidated sediments;
(ii)
Isolate shallow
aquifers that provide or are capable of providing groundwater for water wells
and springs in the vicinity of the well; or
(iii)
Isolate
groundwater before penetrating the workings of an active underground
mine.
(b)
"Intermediate casing" means one or more strings of
casing set after surface casing has been cemented through the base of the
deepest underground source of drinking water, but before drilling into the
permitted hydrocarbon reservoir(s) to isolate hydrocarbon or brine bearing flow
zones, stabilize the wellbore, to isolate protected groundwater if encountered
after drilling below surface casing, isolate lost circulation zones or other
potential geologic hazards, or serve as a base for well control
equipment.
(c)
"Production casing" means a string of casing set to
isolate the permitted hydrocarbon bearing reservoir(s), and other pressurized
flow or corrosive, hydrogen sulfide-bearing zones not effectively isolated by
previous casing(s).
(d)
"Surface casing" means a string of casing set and
cemented to isolate and protect the deepest underground source of drinking
water and to serve as a base for well control equipment.
(4)
"Centralizing equipment" means any device used to keep
downhole equipment in the center of the tubing, casing, or
wellbore.
(5)
"Completing a well" includes the steps taken to
transform a drilled well into a producing one. The steps of completion include
but are not limited to casing, cementing, perforating, gravel packing and
installing a production tree
(6)
"Drilling" means
the use of a rig for exposing the underground reservoir.
(7)
"Drilling
byproducts" includes wastewater, brine, fracking water, mud, cuttings, natural
gas, oil, hydrocarbons, hydrogen sulfide and all other chemicals. Liquids that
flow back from the wellbore during the drilling or fracturing process that are
recirculated downhole in a continuous process are not considered drilling
byproducts.
(8)
"Downhole" includes equipment, materials, or processes
that are used inside the well.
(9)
"Expose and
evaluate" includes drilling activities used in the search for a viable well
that may produce crude oil or natural gas.
(10)
"Field" means
the general area underlaid by one or more pools.
(11)
"Float" means a
valve, collar, joint, shoe or similar component of a casing string that is used
during cementing or downhole chemical injections to prevent backflow during a
drilling operation.
(12)
"Gas" means all natural gas and all other fluid
hydrocarbons that are not oil, including condensate.
(13)
"Hydraulic
fracturing" means the use of fluid and material to create or restore small
fractures in a formation in order to stimulate production from new and existing
crude oil and natural gas wells.
(14)
"Hydrocarbon
gas" means a combustible organic gas containing only one carbon and one
hydrogen. Hydrocarbon gas includes, but is not limited to, propane, compressed
natural gas, liquified petroleum gas, methane, or any chemically similar gas,
but does not include gasoline or diesel fuel.
(15)
"Hydrocarbon
resource" includes a resource that contains hydrocarbon molecules, such as a
fossil fuel resource, natural gas, oil, or coal.
(16)
"Lift and
control" includes all methods used to raise oil, gas, or other comingled
substances to the surface after a well ceases to flow; techniques used to
control and manage the unexpected release of natural gas or crude oil pressure;
and operations that monitor the pressure throughout the life of the exploratory
or productive phase of the well.
(17)
"Mud logging"
means recording information derived from the examination and analysis of
formation cuttings made by the bit and of mud circulated out of a
borehole.
(18)
"Oil" means crude petroleum oil and all other
hydrocarbons, regardless of gravity, that are produced in liquid form by
ordinary production methods, but does not include hydrocarbons that were
originally in a gaseous phase in the reservoir.
(19)
"Perforation"
means a hole made in the casing, cement, and formation through which formation
fluids enter a wellbore.
(20)
"Pool" means an underground reservoir containing a
common accumulation of oil or gas, or both, but does not include a gas storage
underground reservoir. Each zone of a geological structure that is completely
separated from any other zone in the same structure may contain a separate
pool.
(21)
"Prepare the wellbore" includes the drilling of initial
conductor pipe (or casing to support the surface formations) or surface holes,
and placement of the conductor strings and pipes.
(22)
"Pressure
pumping equipment" includes equipment used in the propagation of fractures
through layers of rock using pressurized fracturing fluid and pumping the
cement into the wellbore to complete the well.
(23)
"Production
equipment" means wellhead and wellsite equipment used to refine, stabilize,
pump and compress hydrocarbon resources, including phase management and
produced water.
(24)
"Reservoir stimulation" includes hydraulic fracturing,
acidizing, and any means by which the reservoir is acted upon, by chemicals,
gases, pressure related services, or otherwise as a way to stimulate production
of the hydrocarbons.
(25)
"Subsurface wellbore" means a wellbore created below
the surface of the ground.
(26)
"Temporary
Impoundment" means all water, sediment, slurry, or other liquid or semi-liquid
holding structures and depressions, either naturally formed or artificially
built, that will not remain as part of the land use after the exploration for
or production of crude oil or natural gas.
(27)
"Tubular" means
any type of pipe, such as drill pipe, drill collars, pup joints, casing,
production tubing, and pipeline.
(28)
"Underground
reservoirs" means the stratum and subsurface area that are used or are to be
used for or in connection with the underground storage of oil or natural
gas.
(29)
"Wellbore" means a bore, whether drilled or bored,
within the state for production or extraction of gas or liquid
mineral.
(30)
"Wellbore pathway" means the manmade trail created to
access underground reservoirs at surface level.
(31)
"Well site"
means the area near the wellbore, including but not limited to, the well pad
and production operations that are directly associated with the well
pad.
(32)
"Workover services" means the repair or stimulation of
an existing production well for the purpose of restoring, prolonging, or
enhancing the production of hydrocarbons.
(33)
"Wireline
evaluation" means a cabling technology service used to lower equipment or
measurement devices into the well for the purpose of reservoir
evaluation.
(C)
In order to determine whether an item qualifies for an
exemption, it is important to review how the item is used or consumed. Simply
because an item is an enumerated thing transferred under division (B)(42)(q) of
section 5739.02 of the Revised Code does
not automatically mean that the item is directly used or consumed in the
production of crude oil and natural gas for sale. The following items and
examples are intended to illustrate different scenarios that are applicable to
an exemption analysis under this section.
(1)
Services provided
in the construction of permanent access roads; services provided in the
construction of the well site; and services provided in the construction of
temporary impoundments, when sold, are never, by themselves, considered taxable
transactions. To the extent an item is transferred in the use of these
services, the item may be directly used or consumed in the production of crude
oil and natural gas for sale.
For example, company B is in the
business of selling crude oil and natural gas. Company B hires company A to
clear, level and stabilize the site. Company A also constructs the well pad and
drills the wellbore. The fees charged by company A for site clearing, leveling
and stabilizing services are generally not taxable.
Any tangible personal property Company
A utilizes in creating the wellbore such as a drill or casing for the wellbore
are considered exempt because those items are directly used or consumed in the
production of crude oil and natural gas for sale. In addition, the sale or
transaction whereby company B acquires the wellbore is also considered exempt,
because the wellbore is directly used in the production of crude oil and
natural gas for sale.
The well pad is part of the wellsite,
but is considered a business fixture and not directly used in production of
crude oil or natural gas. Accordingly, the materials company A purchases and
consumes in creating the well pad are not directly used or consumed in the
production of crude oil and natural gas for sale so the materials are not
considered exempt under division (B)(42)(q) of section
5739.02 of the Revised Code.
Furthermore, the sale or transaction whereby company B acquires the well pad is
also not considered exempt under division (B)(42)(q) of section
5739.02 of the Revised
Code.
Company A also provides for the seeding
of the grass after these activities described in this paragraph are complete.
Such service is considered a taxable service pursuant to section
5739.01 of the Revised Code. A
grass seeding service is not directly used or consumed in the production of
crude oil and natural gas for sale so the service is not considered exempt
pursuant to division (B)(42)(q) of section
5739.02 of the Revised
Code.
(2)
Equipment and rigging used for the specific purpose of
creating with integrity a wellbore pathway to underground reservoirs may be
directly used or consumed in the production of crude oil and natural gas for
sale.
For example, well integrity begins with
design and moves to properly constructed wellbore pathways. A company utilizes
computer software for wellbore placement and to test the stress felt on the
wellbore pathways. The same company also uses cement on the wellbore pathway to
ensure that the groundwater is protected from the chemicals and product being
removed from the underground reservoir.
Here, the computer software utilized to
determine placement is taxable because drilling has not commenced and is
therefore not directly used or consumed in the production of crude oil or
natural gas for sale. The computer software used to test the stress felt on the
wellbore pathways and the cement that encases the wellbore pathway is exempt
because it is directly used or consumed in the production of crude oil and
natural gas for sale by interacting with a necessary function of the integrity
of the wellbore pathway
(3)
Drilling and
workover services used to work within a subsurface wellbore are never, by
themselves, considered taxable transactions. To the extent tangible personal
property is directly used in providing such services and directly used or
consumed in the production of crude oil and natural gas for sale, the item is
exempt.
For example, company B is in the
business of selling crude oil and natural gas. Company D provides the equipment
and crew that drills a well and will also workover a well when restricted flow
begins. These activities take place within the wellbore. The fees charged for
these services are not taxable. Such services are not considered taxable
services pursuant to section
5739.01 of the Revised Code.
Additionally, any rig company D utilizes is considered exempt because that rig
is directly used or consumed in the production of crude oil and natural gas for
sale.
(4)
Casing, tubulars, and float and centralizing equipment
that are directly used or consumed in the production of crude oil or natural
gas for sale are exempt.
For example, a company installs a float
collar to prevent over-displacement of the cement and a float shoe to prevent
cement from flowing back into the casing after placement in the wellbore. The
float collar and the float shoe are exempt.
(5)
To the extent
production equipment is exempt under division (B)(42)(q) of section
5739.02 of the Revised Code, the
trailers to which production equipment is attached are also exempt.
For example, a company leases a
pumpjack on a trailer that is used to lift liquid out of the wellbore, as well
as electrical equipment on a trailer used to light up operations in the
evening. The pumpjack and corresponding trailer are exempt because the pumpjack
is used directly in the production of crude oil or natural gas for sale. The
lighting and corresponding trailer are taxable because the lighting is not used
directly in the production of crude oil or natural gas for sale.
(6)
Services provided to complete a well, including the services
of cementing a well casing are not, by themselves, considered taxable
transactions. To the extent tangible personal property is directly used in
providing such services and directly used or consumed in the production of
crude oil and natural gas for sale, the item is exempt.
For example, company B is in the
business of selling crude oil and natural gas. Company G is hired to insert
production tubing and safety valves to complete the well. The fees charged for
these services are not taxable. Such services are not considered taxable
services pursuant to section
5739.01 of the Revised Code.
Additionally, the tubing and safety valve company G utilizes in its services
are considered exempt because those items are directly used or consumed in the
production of crude oil and natural gas for sale.
(7)
Services provided
to perform wireline evaluation, mud logging, and perforation are not, by
themselves, considered taxable transactions. To the extent tangible personal
property is directly used in providing such services and directly used or
consumed in the production of crude oil and natural gas for sale, the item is
exempt.
For example, company B is in the
business of selling crude oil and natural gas. Company H is hired to lower
equipment down the wellbore and operate such equipment for testing. The fees
charged for these services are not taxable. Such services are not considered
taxable services pursuant to section
5739.01 of the Revised Code.
Additionally, the cable used to lower the logging equipment and the logging
company H utilizes in its services are exempt because those items are directly
used or consumed in the production of crude oil and natural gas for
sale.
(8)
Services to perform reservoir stimulation, hydraulic
fracturing, and acidizing services are not, by themselves, considered taxable
transactions. To the extent tangible personal property is directly used in
providing such services and directly used or consumed in the production of
crude oil and natural gas for sale, the item is exempt.
For example, company B is in the
business of selling crude oil and natural gas. Company J is hired to perform
hydraulic fracturing and acidizing services at the well site. The fees charged
for these services are exempt. Such services are not considered taxable
services pursuant to section
5739.01 of the Revised Code.
Additionally, the chemicals and equipment used to perform hydraulic fracturing
and acidizing services at the well site are considered exempt because those
items are directly used or consumed in the production of crude oil and natural
gas for sale.
(9)
All material pumped downhole during reservoir
stimulation, hydraulic fracturing, and acidizing are exempt.
For example, drilling mud, fracking
solution, pumping fluids and acid a company pumps downhole during drilling,
fracking or to complete the well would be exempt.
(10)
Pressure pumping
equipment directly used or consumed in the production of crude oil and natural
gas for sale is exempt.
For example, a company is in the
business of selling crude oil and natural gas. The company utilizes a frac pump
that is paired with an engine used to power the pump that stimulates the well.
The frac pump is exempt because it is used to pump the hydraulic fracking
fluids into the well and is therefore directly consumed in the production of
crude oil or natural gas. The engine used to power the pump is exempt because
it functions in unison to create the high-pressure injection that actually
fractures the rock formation and frees the crude oil and natural
gas.
(11)
Artificial lift systems equipment directly used or
consumed in the production of crude oil and natural gas for sale is exempt.
These systems alter pressure within the reservoir and encourage oil or natural
gas to the surface. These systems are exempt because they are directly used in
the production of crude oil and natural gas.
(12)
Equipment used
to separate, stabilize, and control hydrocarbon phases and produced water at
the wellhead and well site, when the equipment is directly used or consumed in
the production of crude oil and natural gas for sale, is exempt.
For example, a company is in the
business of selling crude oil and natural gas. At the wellhead, the company
utilizes a condensate stabilizer to reduce the vapor's pressure of natural gas
for insertion into the storage tanks. The condensate stabilizer is
exempt.
(13)
Tangible personal property directly used to control
production equipment is exempt.
For example, a company is in the
business of selling crude oil and natural gas. The company purchases a software
package that programs and operates the drilling rig. Additionally, the company
purchases software that monitors the level of fracking fluid that is
distributed into the blenders. The software that programs and operates the
drilling rig is exempt as directly used in the production of crude oil and
natural gas. The equipment that monitors the fracking fluid is used before
actual fracturing takes place. Therefore, the software that monitors the
fracking fluid is taxable.
(F)
Pursuant to division (SS) of section
5739.01 of the Revised Code,
"lease" or "rental" means any transfer of the possession or control of tangible
personal property for a fixed or indefinite term, for consideration. "Lease" or
"rental" includes future options to purchase or extend, and agreements
described in
26
U.S.C. 7701(h)(1) covering
motor vehicles and trailers where the amount of consideration may be increased
or decreased by reference to the amount realized upon the sale or disposition
of the property. "Lease" or "rental" does not include providing tangible
personal property along with an operator for a fixed or indefinite period of
time, if the operator is necessary for the property to perform as designed. For
purposes of that division and this rule, an operator has to do more than
maintain, inspect, or set-up the tangible personal property in order for the
transaction to fall outside a "lease" or "rental" and instead, be considered
the sale of a service. Leased or rented tangible personal property without an
operator may still be taxable or exempt based based upon its function or use in
the hands of the lessee.
For example, company B is in the
business of selling crude oil and natural gas. Company B hires company C, and
company C is responsible for the operation of a compressor. However, the use of
the compressor by company B in the business of selling crude oil and natural
gas does not warrant an onsite employee to operate the compressor. Therefore,
this is the lease or rental of this tangible personal property without an
operator and is a taxable retail sale. Company B's lease or rental of the
compressor may be taxable or exempt based upon its function or use in the hands
of company B.
