On February 12, 2014, Ohio House Ways and Means Committee Vice-Chair Rep. Gary Scherer offered a substitute House Bill 375 to the Ways and Means Committee, including significant amendments from the prior version of House Bill 375 previously reported here. The Ohio Legislative Service Commission has published a Substitute Bill Comparative Synopsis, which describes the significant changes to House Bill 375 as introduced.  Perhaps the biggest change is changing the base of the tax from “net proceeds” to “gross receipts” from the first sale of oil or natural gas, without deduction for costs.  While this change does away with the lengthy debate over what properly was included in deductible “post-production costs,” it significantly increases the burden of the tax.  The proposal also shortens the cost-recovery period for wells from five to three years, and increases the tax rate that will apply during the productive years of most wells from 2% to 2.25%.

Another significant change is unifying the treatment for horizontal and traditional wells, which would have been taxed differently under the proposal as introduced.  The party upon whom the tax is visited also changes – under the bill as introduced, the tax was borne by the well owner, but a severer or holder of a royalty interest could be designated to pay the tax.  Under the substitute bill, the tax is squarely on the well owner, though now only the royalty interest holder will be entitled to claim the corresponding income tax credit.  This income tax credit also would now come with significant limitations – a cap on the amount of the income tax credit to the lesser of 12.5% or the actual proportion of the tax that the royalty interest holder is contractually required to pay the well owner, and the royalty interest holder cannot claim the credit in any year in which it claims the Ohio small business investor income deduction recently enacted in the Ohio biennial budget bill, H.B. 59.

In addition, the exclusion from the Ohio Commercial Activity Tax (“CAT”) proposed under the bill as introduced is significantly limited in the substitute bill.  Receipts would be excluded from the CAT base only if the CAT taxpayer is subject to the personal income tax, or is a pass-through entity and its investors are subject to the personal income tax.  The effective date of the new law would be pushed from April 1, 2014 to October 1, 2014, and the filing date for the first returns would be pushed out to 60 days after the end of the first calendar quarter ending after the law takes effect.

On February 26, 2014 the Committee heard Interested Party testimony from: Tuscarawas County Commissioner, Kerry Metzger; President and Executive Director of the Economic Development and Finance Alliance of Tuscarawas County and Secretary of the Board of the Eastern Ohio Development Alliance, Harry Eadon; Executive Director of Battelle for Kids, Jim Mahoney; and Ohio Program Coordinator of FracTracker, Ted Auch, taking written testimony from President and CEO of Appalachian Partnership for Economic Growth, John Molinaro.  Comments from Metzger recommended shifting priorities for severance tax revenues away from state expenditures and toward local priorities, particularly for infrastructure.  Eadon’s testimony supported the substitute bill, and requested legislators keep in mind the principle that revenues derived should be used to mitigate the short- and long-term impacts of the extraction and to build a better economic future for the regions affected by extraction.  Mahoney requested legislators establish a fund for strategic planning that develops the human infrastructure in addition to the physical infrastructure by supporting educational and economic targets.  Auch proposed that the Muskingum Watershed Conservancy District increase the cost of fresh water it provides to producers to better capture the externalities associated with the increased water usage required by horizontal drilling. Molinaro’s statement expressed his organization’s support for the bill, and gratitude for both of his prior recommendations regarding long-term economic stability and self-sufficiency having been incorporated into the substitute bill.