Court Opinion

ID: 4464954
Source: CourtListenerOpinion
Date Created: 2019-12-17 19:09:37.861066+00
Date Added: 2024-06-11T14:53:43.321571
License: Public Domain

[Cite as Stingray Pressure Pumping L.L.C. v. Tax Commr. of Ohio, 2019-Ohio-5198.]

                            IN THE COURT OF APPEALS OF OHIO

                                 TENTH APPELLATE DISTRICT

Stingray Pressure Pumping LLC,                     :
                                                                           No. 18AP-110
                Appellant-Appellant,               :                   (B.T.A. No. 2015-1465)
                                                                                 &
v.                                                 :                        No. 18AP-111
                                                                       (B.T.A. No. 2015-1823)
[Jeffrey A. McClain],                              :
Tax Commissioner of Ohio,                                           (REGULAR CALENDAR)
                                                   :
                Appellee-Appellee.
                                                   :

                                          D E C I S I O N

                                 Rendered on December 17, 2019

                On brief: Baker & Hosteller LLP, and Edward J. Bernert,
                for appellant. Argued: Edward J. Bernert.

                On brief: [Dave Yost], Attorney General, and Daniel G. Kim,
                for appellee. Argued: Daniel G. Kim.

                         APPEALS from the Ohio Board of Tax Appeals

KLATT, P. J.

        {¶ 1} Stingray Pressure Pumping LLC ("Stingray"), appeals from the decision of
the Ohio Board of Tax Appeals ("the BTA") entered on January 17, 2018. The BTA's
decision affirmed two final determinations of the Tax Commissioner of Ohio ("tax
commissioner") that assessed tax liability related to Stingray's purchases of certain
equipment it uses in its hydraulic fracturing operations. Because subsequent to the BTA's
decision an amendment to R.C. 5739.02(B)(42) became effective that retroactively applies
to the tax exemption at issue here, and because the BTA abused its discretion in refusing to
abate penalties for tax assessments that were later canceled, we reverse the BTA's decision
and remand for further consideration.
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No. 18AP-110 and 18AP-111

I.     FACTS AND PROCEDURAL BACKGROUND
       {¶ 2} The central issue in this appeal is whether an exemption to the excise ("sales")
tax applies to certain pieces of equipment purchased and used by Stingray in the production
of crude oil and natural gas by a process known as hydraulic fracturing. To understand the
context in which this issue arises, we start with a general description of hydraulic fracturing.
Hydraulic fracturing is the process of inserting water, chemicals, and sand under high
pressure through perforations in a casing that lines a well hole, to create fractures or cracks
in shale formations to allow the extraction of oil and gas held in the formation. The size of
the fractures is increased by the force of the hydraulic mixture delivered under pressure.
The hydraulic mixture contains water, chemicals, cross link fluid (slick water with some
friction reducer) and sand, called proppant, which holds the fractures open to allow the oil
and gas to flow through them.
       {¶ 3} The appropriate amount of pressure and the mixture of water, sand, and
chemicals is highly dependent on the geological conditions in the well. In some cases, the
well will not accommodate the pressure necessary to deliver the large quantities of
necessary sand. Gel made from guar and other materials is added when necessary to
increase viscosity for pumping when a lower pressure is required.             Guar acts as a
suspending agent that holds the sand in place in the fractures. The decisions regarding
what additives, and in what quantities, to mix into the fracturing fluid are made quickly
while preparing the fluid and injecting it into the well.
       {¶ 4} Stingray is engaged in the production of crude oil and natural gas from shale
formations by hydraulic fracturing. Stingray begins its hydraulic fracturing process after a
separate company digs a well and inserts a metal casing. The casing is cemented in place
in the well to ensure that it is held in place. A perforating company shoots holes in the
casing and creates a connection with the shale formation. These holes are similar to doors
that permit hydraulic fluid to flow. Only after the well is drilled, the casing is inserted and
cemented, and the production casing is perforated, does Stingray begin its hydraulic
fracturing production process.
       {¶ 5} The hydraulic fracturing production process involves numerous pieces of
equipment. Stingray purchased data van command posts, pumps, high pressure manifolds,
blenders, sand kings and sand silos, t-belts, hydration units, and related equipment for its
                                                                                                                3
No. 18AP-110 and 18AP-111

hydraulic fracturing operation. Each piece of equipment is permanently mounted on a
trailer and must be titled as a motor vehicle. Stingray believed that these equipment
purchases were not subject to sales tax under an exemption contained in former R.C.
5739.02(B)(42)(a). Stingray paid no sales tax at the time of the motor vehicle transfers but
supplied instead exemption certificates claiming "direct use – oil and gas." (Commissioner
Final Determination July 17, 2015 at 2.)1
          {¶ 6} The tax commissioner initially issued 60 assessments for sales tax liability
against Stingray. Each assessment corresponded to a piece of equipment Stingray
purchased for its hydraulic fracturing operation that the tax commissioner deemed subject
to the sales tax. Stingray disputed the assessments and filed petitions for reassessments
with the tax commissioner. Stingray argued that the equipment at issue was exempt under
former R.C. 5739.02(B)(42)(a) because the equipment was used directly in the production
of crude oil and natural gas. The tax commissioner decided Stingray's requests for
reassessments in two final determinations dated July 17 and August 24, 2015.2                           The tax
commissioner canceled 33 assessments based on his determination that certain pieces of
equipment qualified for an exemption under former R.C. 5739.02(B)(42)(a). However, the
tax commissioner left intact the monetary penalties associated with the initial assessments.
The tax commissioner affirmed the remaining 23 tax assessments based on his
determination that they related to equipment not directly used in the production of crude
oil and natural gas, and therefore, did not qualify for the exemption under former R.C.
5739.02(B)(42)(a).3
          {¶ 7}    The    tax    commissioner's        decisions      were     based      on    former      R.C.
5739.02(B)(42)(a), which provided:

1 Pursuant to R.C. 5739.02, an excise ("sales") tax is levied upon all retail sales made in Ohio. By virtue of
R.C. 5741.02, a corresponding tax is imposed on the storage, use, or consumption in this state of any tangible
personal property. The legislature has also provided numerous exceptions and exemptions to the collection
of sales tax, and, through R.C. 5741.02(C)(2), has mandated that if acquisition of an item within the state
would not be subject to tax, then the item's use within the state is correspondingly not subject to tax. (Jan. 17,
2018 Decision & Entry at 2.)

2 The commissioner's July 17, 2015 final determination addressed 29 assessments comprising $1,788,864.58
in tax, interest, and penalty; and the August 24, 2015 final determination addressed 31 assessments
comprising $1,840,055.53 in tax, interest, and penalty.

3   Stingray did not timely appeal the assessments of four other pieces of equipment.
                                                                                          4
No. 18AP-110 and 18AP-111

              For the purpose of providing revenue with which to meet the
              needs of the state, for the use of the general revenue fund of the
              state, for the purpose of securing a thorough and efficient
              system of common schools throughout the state, for the
              purpose of affording revenues, in addition to those from
              general property taxes, permitted under constitutional
              limitations, and from other sources, for the support of local
              governmental functions, and for the purpose of reimbursing
              the state for the expense of administering this chapter, an
              excise tax is hereby levied on each retail sale made in this state.

              ***

              (B) The tax does not apply to the following:

              ***

              (42) Sales where the purpose of the purchaser is to do any of
              the following:

              (a) To incorporate the thing transferred as a material or part
              into tangible personal property to be produced for sale by
              manufacturing, assembling, processing, or refining; or to use
              or consume the thing transferred directly in producing
              tangible personal property for sale by mining, including
              without limitation, the extraction from the earth of all
              substances that are classed geologically as minerals,
              production of crude oil and natural gas, or directly in the
              rendition of a public utility service, except that the sales tax
              levied by this section shall be collected upon all meals, drinks,
              and food for human consumption sold when transporting
              persons. Persons engaged in rendering services in the
              exploration for, and production of, crude oil and natural gas for
              others are deemed engaged directly in the exploration for and
              production of, crude oil and natural gas. This paragraph does
              not exempt from "retail sale" or "sales at retail" the sale of
              tangible personal property that is to be incorporated into a
              structure or improvement to real property.

(Emphasis added.)

       {¶ 8} Stingray appealed the tax commissioner's final determinations to the BTA
arguing that the 23 pieces of equipment deemed by the tax commissioner to be taxable
"work together in unison to [produce oil and gas] and cannot be separated from the
production process," and therefore, should be exempt. (Feb. 14, 2018 Stingray's 2015-1465
Notice of Appeal at 4.) Stingray also appealed the penalties associated with the assessments
                                                                                             5
No. 18AP-110 and 18AP-111

that were canceled along with the 23 assessments that remained in place. The BTA
consolidated the appeals for hearing and decision purposes.
       {¶ 9} On April 3, 2017, the BTA's attorney examiner conducted a combined hearing
on both final determinations. Based upon the record of that hearing, the BTA issued its
decision and order affirming the tax commissioner's final determinations (BTA Case Nos.
2015-1465 and 2015-1823 entered January 17, 2018). The BTA found that the contested
pieces of equipment used to blend the hydraulic fluid and control the overall process are
not exempt from sales tax because these pieces of equipment are not used directly in the
production of crude oil and natural gas. The BTA based its decision on its interpretation of
the exemption language contained in former R.C. 5739.02(B)(42)(a) ("to use * * * the thing
transferred directly in producing tangible personal property for sale by mining, including
without limitation * * * production of crude oil and natural gas") and on case law
interpreting the scope of that exemption. The BTA principally relied on its prior decision
in Indep. Frac Serv. v. Limbach, No. 1989-J-863 (June 28, 1991) and on Lyons v. Limbach,
40 Ohio St. 3d 92 (1988) (tax assessments upheld for land reclamation equipment and "frac
tanks" that store water at the well site because they were not used directly in the exploration
for, or production of, crude oil and natural gas) and Kilbarger Constr., Inc. v. Limbach, 37
Ohio St. 3d 234 (1988) (tax assessments upheld for equipment used to prepare a site for
drilling oil and gas wells because they were not used directly in exploration for or
production of oil and gas). The BTA stated:
              We find our decision in Independent Frac Service dispositive
              as to the blenders and the equipment which feeds material to
              it, i.e., the sand kings/silos and t-belts, chemical add, and
              hydration unit. Stingray fails to demonstrate how the facts of
              the process used in these matters are distinguishable from the
              process at issue in Independent Frac Service. Stingray argues
              that, because the well had not yet been drilled in Independent
              Frac Service, this board's conclusion was foregone under the
              case law holding that the actual drilling of the well is the first
              point at which the mining equipment could possibly be exempt.
              See Kilbarger, supra. However, we reject such conclusion and
              agree with the Tax Commissioner that [the] focus of the inquiry
              is the actual usage of the equipment and not merely the
              sequence of events. 2016-1465 S.T. at 4. We further agree with
              the commissioner's conclusion that, just as with the blenders in
              Independent Frac Service, the equipment at issue in these
              matters are adjuncts to the drilling process. See Lyons, supra.
                                                                                         6
No. 18AP-110 and 18AP-111

              In doing so, we reject Stingray's contention that these matters
              should be analyzed in a matter more similar to the analysis
              used in applying the manufacturing exemption. See id. at 95.

(BTA Decision and Order at 3.)
       {¶ 10} The BTA also denied Stingray's request that the assessed penalties be abated,
stating:
              Finally, we find that Stingray has failed to meet its burden with
              regard to abatement of the assessed penalties. Although it
              requested abatement in its notices of appeal, it has presented
              no further argument in support. In consideration of whether
              the assessed penalties should have been abated, we look to the
              Supreme Court's decision in Jennings & Churella Constr. Co.
              v. Lindley, 10 Ohio St. 3d 67 (1984), where it held that
              "[r]emission of the penalty is discretionary. * * * Appellate
              review of this discretionary power is limited to a determination
              of whether an abuse has occurred." Id. at 70. Further, in
              Huffman v. Hair Surgeon, Inc., 19 Ohio St. 3d 83 (1985), the
              court held " ' "In order to have an 'abuse' in reaching such
              determination, the result must be so palpably and grossly
              violative of fact and logic that it evidences not the exercise of
              will but perversity of will, not the exercise of judgment but
              defiance thereof, not the exercise of reason but rather of
              passion or bias. * * *" ' State v. Jenkins (1984), 15 Ohio St. 3d
1674, 222." Id. at 87. See also J.M. Smucker, L.L.C. v. Levin,
              113 Ohio St. 3d 337, 2007-Ohio-2073, ¶ 16. Here, upon review
              of the record, we conclude there is no evidence that the
              commissioner abused his discretion with regard to the amount
              of the penalties assessed.

Id. at 3-4.
       {¶ 11} Stingray appeals the decision of the BTA affirming the tax commissioner's
final determinations.   However, subsequent to the filing of this appeal, the General
Assembly amended R.C. 5739.02(B)(42), expressly as a remedial measure, to clarify the
tax exemption at issue here. Because this amendment did not become effective until after
the BTA issued its decision and order, the BTA did not apply the amended statute in
rendering its determinations.
II.    ASSIGNMENTS OF ERROR
       {¶ 12} Stingray presents two assignments of error for our review:
              [1.] The Board of Tax Appeals erred in affirming the decision
              of the Ohio Tax Commissioner by agreeing with the Tax
                                                                                              7
No. 18AP-110 and 18AP-111

              Commissioner that certain hydraulic fracturing equipment
              does not qualify for exemption from Ohio's sales and use tax
              under R.C. 5739.02(B)(42)(a).

              [2.] The Board of Tax Appeals erred in refusing to eliminate
              the penalty for the equipment that qualifies for exemption from
              Ohio's sales and use tax under R.C. 5739.02(B)(42)(a).

III.   LEGAL ANALYSIS

       A. Standard of Review
       {¶ 13} An appellate court reviews a BTA's decision to determine whether it is
"reasonable and lawful." R.C. 5717.04; NWD 300 Spring, L.L.C. v. Franklin Cty. Bd. of
Revision, 151 Ohio St. 3d 193, 2017-Ohio-7579. ¶ 13. "[I]f it is both, we must affirm." Id. "It
is well-settled that [an appellate] court will defer to factual determinations of the BTA if the
record contains reliable and probative support for them." Strongsville Bd. of Edn. v.
Wilkins, 108 Ohio St. 3d 115, 2006-Ohio-248, ¶ 7.
       {¶ 14} The facts in this appeal are largely undisputed. However, the parties disputed
the proper construction and application of the exemptions to Ohio's sales tax set forth in
former R.C. 5739.02(B)(42)(a). An issue involving an application of the law to largely
undisputed facts is reviewed de novo. Equity Dublin Assocs. v. Testa, 142 Ohio St. 3d 152,
2014-Ohio-5243, ¶ 22; Lafarge N. Am., Inc. v. Testa, 153 Ohio St. 3d 245, 2018-Ohio-2047,
¶ 13. Accordingly, we review the legal issues presented in this matter de novo.
       B. Assignments of Errors
              1. First Assignment of Error
       {¶ 15} By its first assignment of error, Stingray contends that the BTA erred in
affirming the decision of the tax commissioner because the 23 pieces of hydraulic fracturing
equipment at issue qualify for exemption from Ohio's sales tax under former R.C.
5739.02(B)(42)(a).     Because the General Assembly amended R.C. 5739.02(B)(42) to
modify the language governing the sales tax exemption for certain kinds of property used
in the production of crude oil and natural gas, we begin our analysis by determining
whether the amended statute applies to this case. At the court's request, the parties
provided supplemental briefing on this question. Although they interpret the amended
statute differently, both Stingray and the BTA argue that the amended statute applies to
this case. We agree.
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No. 18AP-110 and 18AP-111

       {¶ 16} R.C. 5739.02(B)(42) was amended, effective September 13, 2018, by 2017
H.B. No. 430, Section 3.4 R.C. 5739.02(B)(42)(q) was added to clarify the direct use
exemption previously contained in R.C. 5739.02(B)(42)(a). It provides:
               For the purpose of providing revenue with which to meet the
               needs of the state, for the use of the general revenue fund of the
               state, for the purpose of securing a thorough and efficient
               system of common schools throughout the state, for the
               purpose of affording revenues, in addition to those from
               general property taxes, permitted under constitutional
               limitations, and from other sources, for the support of local
               governmental functions, and for the purpose of reimbursing
               the state for the expense of administering this chapter, an
               excise tax is hereby levied on each retail sale made in this state.

               ***

               (B) The tax does not apply to the following:

               ***

               (42) Sales where the purpose of the purchaser is to do any of
               the following:

               ***

               (q) To use or consume the thing transferred directly in
               production of crude oil and natural gas for sale. Persons
               engaged in rendering production services for others are
               deemed engaged in production.

               As used in division (B)(42)(q) of this section, "production"
               means operations and tangible personal property directly used
               to expose and evaluate an underground reservoir that may
               contain hydrocarbon resources, prepare the wellbore for
               production, and lift and control all substances yielded by the
               reservoir to the surface of the earth.

               (i) For the purposes of division (B)(42)(q) of this section, the
               "thing transferred" includes, but is not limited to, any of the
               following:

               (I) Services provided in the construction of permanent access
               roads, services provided in the construction of the well site, and

4R.C. 5739.02 was amended two more times, effective March 20, and July 22, 2019, but no changes were
made to R.C. 5729.02(B)(42)(q).
                                                                                 9
No. 18AP-110 and 18AP-111

             services provided     in   the   construction    of   temporary
             impoundments;

             (II) Equipment and rigging used for the specific purpose of
             creating with integrity a wellbore pathway to underground
             reservoirs;

             (III) Drilling and workover services used to work within a
             subsurface wellbore, and tangible personal property directly
             used in providing such services;

             (IV) Casing, tubulars, and float and centralizing equipment;

             (V) Trailers to which production equipment is attached;

             (VI) Well completion services, including cementing of casing,
             and tangible personal property directly used in providing such
             services;

             (VII) Wireline evaluation, mud logging, and perforation
             services, and tangible personal property directly used in
             providing such services;

             (VIII) Reservoir stimulation, hydraulic fracturing, and
             acidizing services, and tangible personal property directly used
             in providing such services, including all material pumped
             downhole;

             (IX) Pressure pumping equipment;

             (X) Artificial lift systems equipment;

             (XI) Wellhead equipment and well site equipment used to
             separate, stabilize, and control hydrocarbon phases and
             produced water;

             (XII) Tangible personal property directly used to control
             production equipment.

             (ii) For the purposes of division (B)(42)(q) of this section, the
             "thing transferred" does not include any of the following:

             (I) Tangible personal property used primarily in the
             exploration and production of any mineral resource regulated
             under Chapter 1509. of the Revised Code other than oil or gas;

             (II) Tangible personal property used primarily in storing,
             holding, or delivering solutions or chemicals used in well
             stimulation as defined in section 1509.01 of the Revised Code;
                                                                                10
No. 18AP-110 and 18AP-111

             (III) Tangible personal property used primarily in preparing,
             installing, or reclaiming foundations for drilling or pumping
             equipment or well stimulation material tanks;

             (IV) Tangible personal property 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;

             (V) Tangible personal property 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;

             (VI) Tangible personal property that is to be incorporated into
             a structure or improvement to real property;

             (VII) Well site fencing, lighting, or security systems;

             (VIII) Communication devices or services;

             (IX) Office supplies;

             (X) Trailers used as offices or lodging;

             (XI) Motor vehicles of any kind;

             (XII) Tangible personal property used primarily for the storage
             of drilling byproducts and fuel not used for production;

             (XIII) Tangible personal property used primarily as a safety
             device;

             (XIV) Data collection or monitoring devices;

             (XV) Access ladders, stairs, or platforms attached to storage
             tanks.

             The enumeration of tangible personal property in division
             (B)(42)(q)(ii) of this section is not intended to be exhaustive,
             and any tangible personal property not so enumerated shall not
             necessarily be construed to be a "thing transferred" for the
             purposes of division (B)(42)(q) of this section.

             The commissioner shall adopt and promulgate rules under
             sections 119.01 to 119.13 of the Revised Code that the
             commissioner deems necessary to administer division
             (B)(42)(q) of this section.
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No. 18AP-110 and 18AP-111

                  As used in division (B)(42) of this section, "thing" includes all
                  transactions included in divisions (B)(3)(a), (b), and (e) of
                  section 5739.01 of the Revised Code.

          {¶ 17} Under R.C. 1.48, legislation and amendments to previously enacted
legislation are presumed to be prospective unless the General Assembly expressly makes it
retrospective. See R.C. 1.48; Heyman v. Heyman, 10th Dist. No. 05AP-475, 2006-Ohio-
1345, ¶ 9. In this case, 2017 H.B. No. 430, Section 3, specifically expresses that "[t]he
amendment by this act to sections * * * 5739.02 of the Revised Code is a remedial measure
intended to clarify existing law and applies to all cases pending on a petition for
reassessment or further appeal, or transactions subject to an audit by the Department of
Taxation, on or after, May 18, 2018." Therefore, the General Assembly has expressed a clear
intent to have the amended statute apply retroactively to those matters still on appeal. This
case involves "further appeal" from petitions for reassessment filed by appellant and was
pending on May 18, 2018.5
          {¶ 18} When the legislature manifests its intent to have a statute or statutory
amendment applied retrospectively, the constitutional protections afforded in Ohio
Constitution, Article II, Section 28, are implicated. That section provides, as follows:
                  The general assembly shall have no power to pass retroactive
                  laws, or laws impairing the obligation of contracts; but may, by
                  general laws, authorize courts to carry into effect, upon such
                  terms as shall be just and equitable, the manifest intention of
                  parties, and officers by curing omissions, defects, and errors, in
                  instruments and proceedings, arising out of their want of
                  conformity with the laws of this state.

          {¶ 19} Ohio courts have interpreted this constitutional provision to prohibit the
retroactive application of laws that are substantive in nature only, but laws of a remedial
nature are permitted to be retrospective. Heyman at ¶ 10. Moreover, statutes are presumed
to be constitutional. Mahoning Edn. Assn. of Dev. Disabilities v. State Emp. Relations Bd.,
137 Ohio St. 3d 257, 260. " 'An enactment of the General Assembly is presumed to be
constitutional, and before a court may declare it unconstitutional it must appear beyond a
reasonable doubt that the legislation and constitutional provisions are clearly

5   R.C. 5739.02 Editor's Note acknowledges Section 3, 2017 H.B. No. 430.
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No. 18AP-110 and 18AP-111

incompatible.' " Id., quoting State ex rel. Dickman v. Defenbacher, 164 Ohio St. 142 (1955),
paragraph one of the syllabus.
       {¶ 20} In this case, we find that applying the amended statute retroactively does not
offend constitutional principles. The amendment clarifies the preexisting exemption from
sales tax for equipment used directly in the production of crude oil and natural gas. The
exemption was available before and after the amendment. H.B. No. 430 clarifies the scope
of the direct use exemption for equipment used in the production of crude oil and natural
gas. Thus, we find that the statutory amendment applies to this case.
       {¶ 21} Amended R.C. 5739.02(B) provides that the sales tax does not apply to:
(42) sales where the purpose of the purchaser is to (q) use or consume the "thing
transferred" directly in the production of crude oil and natural gas for sale. "Production" is
defined in R.C. 5739.02(B)(42)(q) as operations and tangible property directly used to
(1) expose and evaluate an underground reservoir that may contain hydrocarbon resources,
(2) prepare the wellbore for production, and (3) lift and control all substances yielded by
the reservoir to the surface of the earth.
       {¶ 22} The amended statute further provides a non-exhaustive list of services,
equipment, and items that qualify as a "thing transferred." R.C. 5739.02(B)(42)(q)(i).
Potentially relevant to the equipment at issue here are provisions: "VIII" ("Reservoir
stimulation, hydraulic fracturing, and acidizing services, and tangible personal property
directly used in providing such services, including all material pumped downhole"), "IX"
("Pressure pumping equipment"), and "V" ("Trailers to which production equipment is
attached").
       {¶ 23} The amended statute also provides a non-exhaustive list of tangible personal
property and other items that do not qualify as a "thing transferred" for purposes of the
exemption. R.C. 5739.02(B)(42)(q)(ii). Some of these provisions are potentially applicable
to the equipment at issue here.
       {¶ 24} As previously described, the process of extracting crude oil and natural gas
by hydraulic fracturing appears to be complex. The precise function and use of each piece
of equipment at issue here must be assessed based on the definition of "production" as well
as the lists of items qualifying or not qualifying as a "thing transferred" to determine if the
tax exemption applies.
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No. 18AP-110 and 18AP-111

       {¶ 25} The BTA had no opportunity to assess the equipment at issue using the
clarified standard provided in R.C. 5739.02(B)(42)(q). We decline to address whether the
contested equipment is exempt from sales tax under R.C. 5739.02(B)(42)(q) for the first
time on appeal. The BTA should first make such determinations on remand. Thereafter, if
necessary, this court will determine the reasonableness and lawfulness of such decision.
Therefore, we remand the matter to the BTA for further proceedings. See Salem v.
Koncelik, 164 Ohio App. 3d 597, 2005-Ohio-5537, ¶ 20 (10th Dist.) (This court declined to
address the consideration of Ohio Adm.Code 3745-1-07(A)(6)(b) for the first time on
appeal and remanded to the Environmental Review Appeals Commission to determine
whether the director's action was unreasonable or unlawful and whether the requirements
of Ohio Adm.Code 3745-1-07(A)(6)(b) had been met.).            For this reason, we sustain
Stingray's first assignment of error.
              2. Second Assignment of Error
       {¶ 26} Stingray argues that the penalty should have been eliminated for the 33
pieces of equipment that qualified for exemption from Ohio's sales tax based on the tax
commissioner's reassessment.
       {¶ 27} The BTA found that Stingray had failed to meet its burden with regard to the
abatement of the assessed penalties, having presented "no further argument in support."
(BTA Decision at 3.) The BTA noted that remission of the penalty is discretionary, and that
appellate review "is limited to a determination of whether an abuse has occurred." Id.,
Jennings & Churella Constr. Co. v. Lindley, 10 Ohio St. 3d 67, 70 (1984). The BTA held that
determining whether an abuse occurred, "the result must be palpably and grossly violative
of fact and logic." (Quotation and citations omitted.) Huffman v. Hair Surgeon, Inc., 19
Ohio St. 3d 83, 87 (1985). The BTA concluded that there is no evidence that the tax
commissioner abused his discretion with regard to the amount of penalties assessed.
       {¶ 28} With respect to the items that were ultimately determined to be exempt from
taxation, we respectfully disagree. It is illogical and grossly unfair to assess penalties for
nonpayment of taxes on items that were determined to be exempt from tax. Accordingly,
Stingray's second assignment of error is sustained.
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No. 18AP-110 and 18AP-111

IV.   CONCLUSION
      {¶ 29} Based on the foregoing, we sustain Stingray's two assignments of error,
reverse the decision and order of the Ohio Board of Tax Appeals and remand this matter to
the Ohio Board of Tax Appeals to re-assess the equipment at issue according to R.C.
5739.02(B)(42)(q) and this decision.
                                                   Judgment reversed; case remanded.

                   LUPER SCHUSTER, and BRUNNER, JJ., concur.