Accel, Inc. v. Testa

• Decision Date: 06 December 2017
• Docket Number: No. 2015–1332,2015–1332
• Citation: 95 N.E.3d 345,152 Ohio St.3d 262,2017 Ohio 8798
• Parties: ACCEL, INC., Appellee and Cross–Appellant, v. TESTA, Tax Commr., Appellant and Cross–Appellee.
• Court: Ohio Supreme Court

152 Ohio St.3d 262

95 N.E.3d 345

2017 Ohio 8798

ACCEL, INC., Appellee and Cross–Appellant,

v.TESTA, Tax Commr., Appellant and Cross–Appellee.

No. 2015–1332

Supreme Court of Ohio.

Submitted September 26, 2017

Decided December 6, 2017

Corsaro & Associates Co., L.P.A., Joseph G. Corsaro, Christian M. Bates, Westlake, Steven B. Beranek, Sheffield Village, and Scott R. Poe, Westlake, for appellee and cross-appellant.

Michael DeWine, Attorney General, and Daniel W. Fausey, Assistant Attorney General, for appellant and cross-appellee.

Per Curiam.

{¶ 1} The Ohio Tax Commissioner, appellant and cross-appellee, conducted a consumer-use-tax audit of certain purchases made by appellee and cross-appellant, Accel, Inc., during the period January 1, 2003, through December 31, 2009, and the tax commissioner issued a tax assessment based on that audit. On appeal, the Board of Tax Appeals ("BTA") affirmed the assessment in part and reversed the assessment in part.

{¶ 2} The BTA reversed the imposition of use tax on materials Accel acquired to be used and incorporated into gift sets, holding that the purchases were entitled to exemption under R.C. 5739.02(B)(42)(a) and 5739.01(R) because the preparation of the gift sets involved "assembling" or "assembly." The BTA also reversed the imposition of use tax on certain transactions by which Accel obtained "employment services" through one of its suppliers, holding that the transactions were exempt under R.C. 5739.01(JJ)(3), which exempts transactions involving the assignment of employees "on a permanent basis." The tax commissioner appeals these findings and asserts in conjunction with his appeal that the BTA should have deferred to his factual findings.

{¶ 3} In its cross-appeal, Accel contests the BTA's ruling that no portion of the assessment is time-barred by R.C. 5703.58(B). Accel also contends that the production of gift sets qualifies for exemption directly under the definition of "manufacturing operation" in R.C. 5739.01(S) and that the employment-services transactions with a different supplier should also have been exempted.

{¶ 4} Finally, each party contests the BTA's decision to admit into evidence the report and testimony of the opposing party's expert witness.

{¶ 5} Based on our review of the issues presented, the record before us, the briefs, and the relevant case law, we conclude that the BTA acted reasonably and lawfully with respect to all of the contested findings. We therefore affirm the decision of the BTA.

COURSE OF PROCEEDINGS

{¶ 6} The tax commissioner issued a use-tax assessment against Accel on January 18, 2011. Accel petitioned for reassessment, and the tax commissioner issued his final determination on June 26, 2012, stating the amount of unpaid use tax as $2,447,159.84, plus preassessment interest of $651,862.91 and a penalty of $122,357.99, for a total assessment of $3,221,380.74. Accel appealed to the BTA.

{¶ 7} The BTA held a hearing at which Accel presented the testimony of its president, its cost-accounting manager, an expert on manufacturing, the tax department's audit agent, Accel's chief financial officer, and the chief financial officer of Resource Staffing, Inc., a company through which Accel obtained some of its workers. The tax commissioner presented the testimony of an expert on packaging. Numerous exhibits were introduced into evidence, some subject to objections to be resolved by the BTA in its decision.

{¶ 8} The BTA found that those items purchased by Accel that, through "assembly," became part of the gift sets qualified for exemption. BTA No. 2012–2840, 2015 WL 4410600, *3–4 (July 15, 2015). It arrived at this conclusion in two steps. First, the BTA stated that Accel was not engaged in "merely packaging products," and it went on to find that "Accel's activities do not involve packaging." Id. at *3. Second, the BTA determined that Accel's preparation of the gift sets did constitute "assembly." Id. at *4.

{¶ 9} Next, the BTA found that the evidence showed that the employees supplied to Accel by Resource Staffing were assigned "on a permanent basis," with the result that Accel did not owe sales or use tax on the purchase of employment services from Resource Staffing. Id. at *5. In contrast, the BTA found that there was insufficient evidence for it to find that employees supplied to Accel by Manpower, Inc., were assigned on a permanent basis, so those transactions were found to be taxable. Id. at *6.

{¶ 10} Finally, the BTA found that R.C. 5703.58(B) imposed no time bar on any aspect of the assessment, because that provision did not take effect until after the tax commissioner issued the assessment. Id.

ANALYSIS

Standard of Review

{¶ 11} In reviewing a decision of the BTA, we determine whether the decision is "reasonable and lawful." Satullo v. Wilkins , 111 Ohio St.3d 399, 2006-Ohio-5856, 856 N.E.2d 954, ¶ 14. Although the BTA is responsible for determining factual issues, this court " ‘will not hesitate to reverse a BTA decision that is based on an incorrect legal conclusion.’ " Id. , quoting Gahanna–Jefferson Local School Dist. Bd. of Edn. v. Zaino , 93 Ohio St.3d 231, 232, 754 N.E.2d 789 (2001).

The BTA Reviews Tax–Commissioner Determinations De Novo

{¶ 12} Under his second proposition of law, the tax commissioner argues that the BTA erred because it "merely substituted its own fact finding for that of the Tax Commissioner." The tax commissioner relies on Hatchadorian v. Lindley , 21 Ohio St.3d 66, 488 N.E.2d 145 (1986), paragraph one of the syllabus, which articulates a "clearly unreasonable or unlawful" standard for rebutting the tax commissioner's findings. We have mentioned that standard in subsequent cases. E.g., Am. Fiber Sys., Inc. v. Levin , 125 Ohio St.3d 374, 2010-Ohio-1468, 928 N.E.2d 695, ¶ 42 ; Newman v. Levin , 120 Ohio St.3d 127, 2008-Ohio-5202, 896 N.E.2d 995, ¶ 31 ; Nusseibeh v. Zaino , 98 Ohio St.3d 292, 2003-Ohio-855, 784 N.E.2d 93, ¶ 10. Although the "clearly unreasonable and unlawful" standard does imply that the BTA should accord deference to the tax commissioner's findings of fact, two strands of case law establish that deference is not required.

{¶ 13} First, longstanding case law unequivocally holds that the BTA's standard for reviewing the tax commissioner's findings is de novo, as to both facts and law. Key Servs. Corp. v. Zaino , 95 Ohio St.3d 11, 16, 764 N.E.2d 1015 (2002), citing Higbee Co. v. Evatt , 140 Ohio St. 325, 332, 43 N.E.2d 273 (1942) ; accord MacDonald v. Shaker Hts. Bd. of Income Tax Rev ., 144 Ohio St.3d 105, 2015-Ohio-3290, 41 N.E.3d 376, ¶ 21. De novo review is, of course, the opposite of deferential review.

{¶ 14} Second, our case law establishes—without any reference to a "clearly unreasonable" standard—that the tax commissioner's findings are presumed valid subject to rebuttal: "The rule is well settled that a taxpayer challenging the assessment has the burden to ‘ " ‘show in what manner and to what extent * * * the commissioner's investigation and audit, and the findings and assessments based thereon, were faulty and incorrect.’ " ' " Krehnbrink v. Testa , 148 Ohio St.3d 129, 2016-Ohio-3391, 69 N.E.3d 656, ¶ 30, quoting Maxxim Med., Inc. v. Tracy , 87 Ohio St.3d 337, 339, 720 N.E.2d 911 (1999), quoting Federated Dept. Stores, Inc. v. Lindley , 5 Ohio St.3d 213, 215, 450 N.E.2d 687 (1983), quoting Midwest Transfer Co. v. Porterfield , 13 Ohio St.2d 138, 141, 235 N.E.2d 511 (1968). Notably, under this standard, the burden for rebutting the tax commissioner's findings is simply to prove that the findings were incorrect.

{¶ 15} We recently invoked the Hatchadorian standard in the context of vacating a finding of the BTA that had contradicted the tax commissioner's own finding that a trust was a "nonresident trust" for purposes of R.C. 5747.01(I)(3). T. Ryan Legg Irrevocable Trust v. Testa , 149 Ohio St.3d 376, 2016-Ohio-8418, 75 N.E.3d 184, ¶ 62–63. But close examination shows that our decision in that case did not require the BTA to defer to the tax commissioner as a finder of fact. To the contrary, we set forth two specific reasons for setting aside the BTA's finding of the trust's residency. First, the BTA's finding was defective because the BTA failed to consider one essential statutory element of trust residency. Id. at ¶ 58. Second, the tax commissioner's finding that the trust was a nonresident trust had not been contested at the BTA and no probative evidence had been presented to show that the tax commissioner's original determination was factually incorrect. Id. at ¶ 62. These considerations did not cause us to reverse the BTA's residency finding; instead, we vacated the BTA's finding on the grounds that the presumptive validity of the tax commissioner's finding had not been rebutted because it had not been contested, with an offer of proof, at the BTA. Id. at ¶ 63. Thus, as relevant here, T. Ryan Legg Irrevocable Trust stands for nothing more than the proposition that the BTA must affirm a finding of the tax commissioner when the finding has not been shown to be incorrect.

{¶ 16} For the foregoing reasons, we reject the tax commissioner's second proposition of law. We hold that the BTA owed no deference to the tax commissioner's findings beyond placing the evidentiary burden on the taxpayer, Accel, to show them to be, by a preponderance of the evidence, incorrect. And in reviewing the BTA's own factual findings, "[w]e must affirm * * * if they are supported by reliable and probative evidence, and we afford deference to the BTA's determination of the credibility of witnesses and its weighing of the evidence subject only to an abuse-of-discretion review on appeal." HealthSouth Corp. v. Testa , 132 Ohio St.3d 55, 2012-Ohio-1871, 969 N.E.2d 232, ¶ 10.

Accel's Preparation of Gift Sets Could Reasonably Be Found to Involve "Assembling" or "Assembly"

{¶ 17} R.C. 5739.02(B)(42)(a) provides an exemption from taxation for "[s]ales where the purpose of the purchaser is to * * * incorporate the thing transferred as a...