Ohio: Manufacturing exemption update

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The Ohio Supreme Court recently weighed in on the manufacturing exemption for sales and use taxation while the General Assembly elaborated upon an exemption for equipment used to produce oil and gas.  On May 31, the court issued its decision in LaFarge N. Am., Inc. v. Testa to overrule the tax commissioner’s position as to where the manufacturing process begins for tax exemption purposes.  On June 14, Gov. Kasich signed Ohio House Bill 430 into law to clarify the sales and use tax exemption for items used in the production of oil and gas.


In a unanimous decision, the Ohio Supreme Court in LaFarge N. Am. held that that  equipment used in crushing “slag” may qualify as exempt for use in a manufacturing operation via R.C. 5739.02(B)(42)(g).   Slag is a byproduct of the steel-making process with other industrial applications including use as a base for roads.  Over several decades, several steel mills deposited excess slag into a “slag mountain” near Youngstown.  The taxpayer in the case, Lafarge North America, used equipment such as bulldozers and front-end loaders to break apart the slag from slag mountain and then transport the slag to its facility in Lordstown for screening and processing.  Lafarge eventually sells the slag for use in road construction. 

At issue in the case was use tax that the tax commissioner assessed upon audit for equipment, repair parts, and fuel used to remove the slag from slag mountain and transportation to Lordstown.  The tax commissioner did not dispute that LaFarge had a manufacturing operation to manufacture slag, but instead contested where the manufacturing process began.   According to the tax commissioner, breaking slag off of slag mountain was akin to removing raw materials from storage which has traditionally been understood to occur prior to the start of the manufacturing process.

But the Supreme Court disagreed.   The court ruled that the cutting and crushing of slag off of slag mountain “changed, converted, or transformed” slag in a different manner than conventional removal of raw materials from storage.   For this reason, the court held that the manufacturing process begins once LaFarge cuts slag from the mountain and equipment, repair parts, and fuel used at that stage are used in manufacturing.  

The court nonetheless remanded the case to the Board of Tax Appeals for an inquiry into the primary use of the repair parts and fuel.  The manufacturing exemption applies only to items used “primarily” in manufacturing.  As a result, the BTA is now tasked with determining whether these items are used primarily for breaking up slag mountain as opposed to other uses including a landfill operation.


For its part, the General Assembly made efforts to clarify the sales and use tax exemption for items “used directly in the production of crude oil or natural gas.”  Formerly codified in R.C. 5739.02(B)(42)(a), the exemption is now found in new R.C. 5739.02(B)(42)(q) and includes a definition of “production” as well as a list of taxable and exempt items.   If the item is used directly in “production” or expressly identified on the tax exempt list, then it is exempt from sales and use taxation. 

"Production" is now defined by statute to “mean[] operations and tangible personal property directly used to expose and evaluate an underground reservoir that may contain oil or gas, to prepare the wellbore for production, and to lift and control all substances yielded by the reservoir to the surface of the earth. 

Per the Ohio Legislative Service Commission Bill Analysis, the exempt items include the following: 

  • Services provided to construct permanent access roads, the well site, and temporary impoundments
  • Equipment and rigging used for the specific purpose of creating with integrity a wellbore pathway to underground reservoirs
  • Casing, tubulars, and float and centralizing equipment
  • Trailers to which production equipment is attached
  • Drilling and workover services used to work within a subsurface wellbore; well completion services, including cementing of casing; wireline evaluation, mud logging, and perforation services; reservoir stimulation, hydraulic fracturing, and acidizing services; and any items used directly in providing any of those services
  • Pressure pumping equipment
  • Artificial lift systems equipment
  • Wellhead equipment and well site equipment used to separate, stabilize, and control hydrocarbon phases and produced water
  • Items directly used to control production equipment

The taxable list includes the following: 

  • Items used primarily in the exploration and production of any mineral resource other than oil or gas
  • Items used primarily in storing, holding, or delivering solutions or chemicals used in well stimulation
  • Items used primarily in preparing, installing, or reclaiming foundations for drilling or pumping equipment or well stimulation material tanks
  • Items used primarily in transporting, delivering, or removing equipment to or from the well site or storing such equipment before its use at the well site
  • Items used primarily in gathering operations occurring off the well site, including gathering pipelines transporting hydrocarbon gas or liquids away from a crude oil or natural gas production facility
  • Well site fencing, lighting, or security systems
  • Communication devices or services
  • Office supplies
  • Trailers used as offices or lodging
  • Motor vehicles of any kind
  • Items used primarily for the storage of drilling byproducts and fuel not used for production
  • Items used primarily as safety devices
  • Data collection or monitoring devices; (14) access ladders, stairs, or platforms attached to storage tanks

House Bill 430 additionally amends R.C. Chapter 5709 to provide that property may qualify for a “water pollution control facility” exemption with the approval of the Ohio Department of Natural Resources.  Prior law required the director of the Ohio Environmental Protection Agency to approve. 

The legislation further states that it is a “remedial” provision that applies to any cases or audits pending on or after May 18, 2018.  

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