(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.
