In December, 2016, Governor John Kasich vetoed a part of Senate Bill 235 that would affect the oil and gas industry’s sale-tax exemption.
Ohio’s tax code states there is a direct use exemption for the Ohio oil and gas industry that excludes producers from sales tax on exploration and production of crude oil and natural gas. However, news outlets like the Columbus Dispatch reported this as being “a $264 million tax break for the oil and gas industry” and the Youngstown Vindicator called this a “retroactive windfall tax break granted to the oil and gas industry.”
In a statement about the veto, Governor Kasich said this part of the bill would have expanded the exemption given to the oil and gas industry to make them “exempt from sales tax on almost everything they purchase.” With this, he said there would be a “more favorable tax treatment” for the oil and gas industry compared to any other industry, making the exemption “not necessary for the industry.”
“If this item became effective, then one would expect the oil and gas companies to take advantage of it immediately,” he said in the statement. “The loss of $264 million to the state government and local governments would be a significant impact to the budgets.”
However, people like Senator Bill Coley, one of the primary sponsors of the bill, disagrees with this perception and believes this is more of a redefinition of the tax code for the oil and gas industry.
“(With) the new redefinition they started to demand payment for something they never collected before and it was not predicated on something we changed,” he said. “They were fixing a perceived problem and the governor had the ability to veto that out of the bill.”
Coley said this redefinition of the tax code affecting the oil and gas industry would cause well producers to slow down their production because of the increased taxes having to be paid. He said this would eventually result in less jobs being created and less money for people making royalties from well operation on their property.
“The state of Ohio benefits very much by oil and gas development in the state,” he said. “It brings a lot of prosperity to a portion of the state that has had many economic difficulties in the past in Eastern and Southeastern Ohio. It helps from that aspect and it allows people to develop their land to the fullest. Therefore, we want to encourage that and continue prosperity and I’m not aware of anyone who doesn’t want that to happen.”
Coley said there will be more hearings on it while the oil and gas industry goes through four to five months of uncertainty. Meanwhile, Shawn Bennett of the Ohio Oil and Gas Association (OOGA) thinks these are changes to a code that “protects operators from being unfairly taxed.”
“The reality is those numbers don’t add up,” he said. “These tax treatments we’ve received are under every other administration. There are no new tax dollars that are being appropriated for the oil and gas industry and that’s a misnomer.”
Bennett said, under other administrations, the oil and gas industry has received the same exemptions for years and “never taxed our operators.” He said this vetoed part of the bill wouldn’t have been a refund to the industry because it was a system they never had to pay taxes into.
“We haven’t paid into the system so there isn’t a large refund coming back to our operators; that’s where the confusion lies,” he said. “This is a tax we’ve never paid and they’re trying through audits to assess operators for these brand new interpretations of the tax code.”
He said the department of taxation was provided incorrect information that made the redefinition difficult for the sales tax exemption.
“I don't think there's anybody who's against fair and equal treatment under the law,” Bennett said. “This was about being treated fairly. Nobody likes a tax grab so hopefully through our outreach, people will get to the heart of the issue and understand a little better.”
He said he doesn’t think this issue will die down and he believes the conversation will continue into the next general assembly.
As for Jim Aslinides, a former member of the Ohio general assembly and president of OOGA, he thinks there was a big misunderstanding of the sales tax exemption code and the supposed windfall for the oil and gas industry.
“To simply suggest the only tax exemption available to oil and gas companies is the exploration and production exemption is a gross misunderstanding of its own code,” he said. “Their assertion ignores exemptions available to the industry. The only way they can assert $264 million is if they’d be successful in claiming that rightful exemptions belong to our industry the same as they belong to other manufacturing industries. It’s an inaccurate assertion.”
He said the industry has been asking for tax credits, which could have been misinterpreted as seeking special treatment from taxation. He said this is a modern day problem in understanding a process that has been constantly evolving over 80 years.
“We wanted to resolve this in the legislature because individual companies are now forced to deal with this in court and it’s very unfortunate,” he said. “For the state to assert that those dollars can be relied upon is a gross misunderstanding of the exemptions that are available to all industries in the state of Ohio.”
For now, the oil and gas industry will have to see this new interpretation of their sales tax exemption for some time before the new general assembly can introduce this part of the bill again.