The Ohio Supreme Court, reversing the Board of Tax Appeals, held that various items of equipment used in providing fracking services were directly used in the production of oil and gas and, consequently, were exempt from Ohio use tax. The decision shows the importance of testimony in tax cases. Stingray Pressure Pumping, L.L.C. v. Harris, Slip Opinion No. 2023-Ohio-2598 (Aug. 2, 2023).

The Facts: Fracking entails pumping a pressurized mixture of water, chemicals, and sand into the earth to fracture and open rock formations and extract oil and gas. Stingray Pressure Pumping (“Stingray”) purchased numerous pieces of equipment which it used in its fracking business. While the Tax Commissioner acknowledged that some of the equipment was exempt from tax, he asserted that several pieces of equipment used in the process were taxable because they also served a storage function.

The statute at issue (which was amended during the litigation and which both sides agreed applied) provided an exemption where the purpose of the purchaser was to “use or consume the thing transferred directly in production of crude oil and natural gas for sale.” R.C. 5739.02(B)(42)(q) (emphasis added). The statute also included a list of items that qualified as a “thing transferred” and another list of items that did not constitute a “thing transferred.” Id.

The Decision: The Court acknowledged that each piece of equipment at issue served multiple purposes as each was used both in hydraulic fracturing and also had a storage or delivery function. It noted, however, that numerous everyday items have storage, holding or delivery functions in addition to other functions. “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, therefore, looked to the primary use of each item and found that all but one item (a motor vehicle described as a “data van”) qualified for the exemption. The Court relied heavily on the testimony of a single witness, Stingray’s vice president of operations, who described in detail how each of the various pieces of equipment were used in the fracking process in a rapid, synergetic process which he analogized to a recipe in which all the ingredients must be added together.

For example, the testimony demonstrated that the use of a “blender” (which mixes the chemicals, water, gel, and sand together) “for blending outranks, in terms of essentiality or utility, the use of a blender for holding. A washing machine holds clothes during a wash cycle, but no one would say the primary use is to hold clothes. Similar logic applies here.”

After determining that all but one of the pieces of equipment qualified as a “thing transferred,” the Court had little difficulty in concluding that that equipment was used directly in the production of oil and gas for sale, again relying on the testimony of Stingray’s witness.

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