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General Assembly Ends with Line-Item Veto of Sales Tax Fix, Passage of OOGEEP Changes

Posted By Brian Hickman, Director of Government Affairs, Operations Managing Director, Monday, January 9, 2017
Updated: Monday, January 16, 2017

As the 131st General Assembly came to a close, your Association was hard at work ensuring that two important measures passed and enacted into law. The first measure was a clarification on how sales tax can be applied to tangible personal property pertaining to oil and gas operations. The second measure involved OOGA Board-approved changes to the Ohio Oil & Gas Energy Education Program (OOGEEP).

Recently, several oil and gas producers were being audited by the Ohio Department of Taxation (ODT). The reason for these audits was tied to the application of sales tax for oil and gas related sales. While the Association and its members always understood that what was taxable was what was defined by current law and practice, the ODT appeared to take a different view. As a result, OOGA members under audit were being assessed different tax valuations outside of what was commonly viewed as taxable.

In an effort to provide clarity to the situation, the OOGA inserted an amendment into Substitute Senate Bill 235 that would marry the definition of sales tax to a production operation as defined in Ohio Revised Code Section 1509.01. Generally speaking, the sales tax does not apply to items directly used in the exploration and production of oil and gas, or specifically a production operation. The sales tax only applies to indirect items, which includes things such as tanks or other storage devices used to hold hydraulic fracturing fluids, equipment used for earth moving and reclamation at the well site, and property used to transport, deliver, or remove other equipment to or from a well site or the storage of such equipment before its use at a well site.

Additionally, in the uncodified section of the law, this definition was applied retroactively to all sales since Substitute Senate Bill 165 was enacted (and when a production operation was defined in Ohio law). Therefore, this change is retroactive and effective as of June 30, 2010.

On December 22nd, Governor John Kasich, citing his ability to utilize a line-item veto, vetoed the sales tax provisions pertaining to oil and gas in Substitute Senate Bill 235, thus eliminating it from Ohio law.

In his veto message, Governor Kasich noted that there were several reasons for the veto. First, he noted that the language would expand the current exemption for the application of sales tax for tangible personal property purchased and directly used in oil and gas production. In his view, the language “goes well beyond the ‘direct use’ exemption for exploration and production and would result in a situation where oil and gas companies would be exempt from sales tax on almost everything they purchase.”

Kasich also noted that the loss of state and local government revenues was also considered in the veto. Per the Ohio Department of Taxation, this revenue loss was scored at $264 million ($215 million in state resources, $49 million to local governments) due to the retroactivity of these provisions. However, no further information or details on where the specific losses would come from where ever revealed.

“This revenue loss as well as the ongoing issues in the future would force the need to reassess current and upcoming budget plans, triggering a triaging of priorities to ensure the most essential functions can still be covered, such as education, policing, fire protection and ambulance services,” Kasich noted in his veto message.

The Governor concluded his veto message noting the “favorable tax climate” the oil and gas industry currently enjoys, stating that the language was “not necessary for this industry to flourish”.

“The oil and gas industry already has a very favorable tax climate in Ohio,” Kasich stated in his message. “This is true not only with respect to the severance tax, which is only 20 cents per barrel of oil and 3 cents per MCF of natural gas, but also with respect to the commercial activity tax (CAT) and the property tax. The oil and gas industry has continued to expand its production in Ohio, even in the face of price declines for oil and gas, which is further evidence that the industry tax climate is no barrier to exploration or production.”

Kasich concluded his remarks noting that such a measure would create an “uneven playing field” benefiting the oil and gas industry over other industries within the state. This could lead to other industries, such as the agriculture and manufacturing industries, to push for similar exemptions within the tax code. 

Also during “lame duck” session, an amendment was inserted into Amended Substitute House Bill 471 (the sunset review bill) that would make statutory changes to the OOGEEP program. The amendment expanded the OOGEEP operating committee from 7 members to 13 members in an effort to incorporate horizontal shale production. A change was also made to allow a horizontal shale producer to directly pay the program in lieu of the traditional first purchaser assessment. The measure also officially provided a mechanism for OOGEEP to administer administrative aspects of the referendum procedure.

As such, OOGEEP is in the process of creating the referendum to officially implement these changes into the program. The referendum will also include a 50% reduction in fees collected by the program.   

In other news, another measure passed the legislature that impacts local ballot initiatives, including those anti-industry groups who continue their fights against the oil and gas industry.  An amendment was included in Amended Substitute House Bill 463 that would provide a statutory mechanism for the Ohio Secretary of State to invalidate a local ballot initiative if the measure is outside of the powers of that locality. As such, municipalities cannot go against general law, which would include Ohio Revised Code Section 1509.02, which states that the siting and location of oil and gas wells are the “sole and exclusive” regulatory authority of the Ohio Department of Natural Resources.

Next up, the 132nd General Assembly begins on January 3rd  whose first big responsibility will be the next state budget bill. 

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