State sales tax rules can be confusing because of problems with word choice, grammar, and general context. The result is often uncertainty for the taxpayer in knowing when their sales or purchases are subject to tax, which can lead to state revenue departments that overreach in their assessments against you. When disputes arise over the meaning of a sales tax law, state courts will have varying methods for determining the interpretation moving forward.
In a recent case, the Ohio Supreme Court drastically altered its methods for interpreting unclear tax laws to create greater fairness for taxpayers. We explain this shift in more detail below and discuss how the Supreme Court’s new standard could help businesses with future appeals of poorly applied Ohio sales tax laws.
A Summary of the Ohio Supreme Court’s Decision in Stingray Pressure Pumping, LLC
The Ohio Supreme Court’s new precedent came from Stingray Pressure Pumping, L.L.C. v. Harris. The taxpayer in the case had appealed denied exemption claims for several purchases related to its fracking business. Ohio had a general exemption for equipment purchases “used directly in the production of crude oil and natural gas.” See FormerR.C. 5739.02(B)(42)(a) (emphasis added). Further, the Ohio legislature amended this statute to establish non-exhaustive lists of equipment the exemption included and excluded.
However, the Ohio Department of Taxation and Board of Tax Appeals (BTA) denied all the taxpayer’s exemptions alleging that each use was preliminarily and not in direct production of the crude oil and natural gas. In their decisions, both groups applied an interpretation from prior cases that a taxpayer must show that the statute clearly expresses the exemption in relation to the facts of the claim.
The issue for the Supreme Court in its review was over how broadly or narrowly to interpret the exemption statute and its application to equipment used to prepare the injection of fracking fluid into a well. The Court also noted that prior interpretations of tax exemption statutes were done in a way that strictly construed them against the taxpayer. In other words, when disputes over Ohio tax exemptions occur, an assumption exists in favor of tax collection. The Court rejected this tradition in its decision and largely affirmed that the taxpayer’s exemptions were valid except for the purchase of a data van.
How the Ohio Supreme Court Plans to Interpret Tax Law Moving Forward
While most Ohio sales and use taxpayers are not in the business of oil and gas production, the Stingray decision could set the table for future appeals over the interpretation of tax laws. The explanation from the Supreme Court was clear. In future sales tax interpretation disputes, the Court will seek to interpret tax statutes with their fair meaning, using a clear lens as opposed to one that presumptively favors tax collection. The unequivocal statement from the Court was that it would apply the same rules of construction to tax statutes that it applies to all other laws. See Stingray, page 8, paragraph 22.
What the New Standard in Tax Interpretation Could Mean for Your Future Ohio Sales and Use Tax Appeals
Ohio’s new standard in the interpretation of sales and use tax laws could be a positive sign for taxpayers with doubts about assessments and other rulings from the Department of Taxation. When tax laws are truly ambiguous or vague, taxpayers could have a better chance of success when appealing to the Court of Appeals or Supreme Court.
This shift could also provide greater power to Ohio taxpayers when negotiating settlements or audit findings for assessments that involve questionable application of sales tax statutes. The Department of Taxation could be more willing to settle in certain cases to avoid the risk of decisions that further limit tax collection in future cases. Of course, this potential will wholly depend on the specifics of a dispute, including the history between the parties, the amount in dispute, and the interpretation arguments available.
If you have questions about the application of an Ohio sales and use tax law to your business, now could be an opportunity to address those concerns. Our team of sales tax professionals regularly assists business owners or their CPAs with the most complex aspects of sales tax compliance, including challenges with the Ohio Department of Tax and BTA.Schedule a free consultation today.