Babcock & Wilcox Co. v. Kosydar

• Decision Date: 22 December 1976
• Docket Number: Nos. 76-275 and 76-288,s. 76-275 and 76-288
• Citation: 358 N.E.2d 544,48 Ohio St.2d 251,2 O.O.3d 416
• Parties: , 2 O.O.3d 416 The BABCOCK & WILCOX CO., Appellant and Appellee, v. KOSYDAR, Tax Commr., Appellee and Appellant.
• Court: Ohio Supreme Court

Page 251

48 Ohio St.2d 251

358 N.E.2d 544, 2 O.O.3d 416

The BABCOCK & WILCOX CO., Appellant and Appellee, v. KOSYDAR, Tax Commr., Appellee and Appellant.

Nos. 76-275 and 76-288.

Supreme Court of Ohio.

Dec. 22, 1976.

The Babcock & Wilcox Company (hereinafter 'taxpayer') is a New Jersey corporation with two manufacturing facilities located in Ohio. Its primary business involves the 'design, engineering, manufacturing and erection of steam generating equipment' at plants located in Barberton and Canton.

The bulk of the equipment manufactured by the taxpayer is sold to public utility companies. The products are designed to meet the specific needs of individual customers. Due to the size of the completed product, various components are manufactured at the taxpayer's Ohio plants and are then shipped to the customer's site by rail, motor carrier or barge. Depending upon the individual arrangement, the generating plant may or may not be assembled by the taxpayer, though, as a general rule, Babcock & Wilcox prefers to complete the election by assembling the fabricated components.

This cause involves the sales tax ^* aspects of five controversial assessments by the Tax Commissioner and the subsequent disposition of the appeals therefrom by the Board of Tax Appeals. Implicit therein is the penalty imposed by the Tax Commissioner to the extent that the assessment is affirmed by this court's decision herein.

The cause, as it was presented to this court, consists of two appeals from the Board of Tax Appeals: (1) the appeal by Babcock & Wilcox (case No. 76-275) consisting of four separate categories of assessment; and (2) the appeal of the Tax Commissioner (case No. 76-288) involving a single assessment.

Succinctly stated here, and more fully treated in the opinion, infra, taxpayer seeks review of the assessments on the following:

1. Blueprints, drawings, instruction booklets, and related reproduction equipment;

2. payments for computer time-sharing;

3. certain transportation equipment used in transferring semifinished manufactured goods; and

4. fans and dust dollector equipment.

The Tax Commissioner in his appeal sought review of the Board of Tax Appeals' decision reversing his order assessing certain patterns purchased by taxpayer which were allegedly held for use and not for sale.

These appeals are now before this court as a matter of right, and have been consolidated for final disposition.

Dargusch & Hutchins, Carlton, S. Dargusch and Gerald A. Donahue, Columbus, for appellant and appellee.

William J. Brown, Atty. Gen., John C. Duffy, Jr., and Michael L. Moushey, Columbus, for appellee and appellant.

I.

PER CURIAM.

The taxpayer proposes initially that the blueprints, drawings and instruction booklets used during and in the manufacturing process or produced for sale with the final product are excepted from the sales tax by R.C. 5739.01(E)(2).

Taxpayer's engineering department designs power generation units specifically fitted to the customer's needs. The end product of the engineering department is a vellum, or master copy, from which blueprints are made or copied. Some of the blueprints are used by taxpayer's production employees during the process of manufacturing the component parts.

In many instances, the blueprints are recopied on Xerox machines located in the engineering department and various shop areas. Blueprints and instructions used in the shop area are often recopied when they are no longer legible from weld splatter, oil drops, damage or use. Drawings, blue prints and instructions are also reproduced and transferred directly to the customer for his information regarding the system's equipment.

Taxpayer argues that the blueprint or instruction booklet is a necessary item to the production worker since he is directed to perform his specific task by following the instructions set forth thereon much in the same manner as the driver of an automobile utilizes a road map.

The Tax Commissioner, although conceding that the blueprints and other printed paper materials are necessary in varying degrees, concludes that they do not perform, or directly relate to, changing the physical shape or form of the metals or materials. The Commissioner, conceding further that such materials are of great utility to the production personnel, concludes nevertheless that the materials are physically inert, and therefore do not directly relate to changing the shape or form of articles in the manufacturing process.

Both sides rely on R.C. 5739.01(E)(2) and 5739.01(S) to support their respective positions.

R.C. 5739.01(E)(2) provides, in pertinent part:

'(E) 'Retail sale' and 'sales at retail' include all sales except those in which the purpose of the customer is:

'* * *

'(2) To incorporate the thing transferred as a material or a 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 the production of tangible personal property * * * for sale * * *.'

R.C. 5739.01(S) reads as follows:

'(S) 'Manufacturing' or 'processing' means the transformation or conversion of material or things into a different state or form from that in which they originally existed and, for the purpose of the exceptions contained in division (E)(2) of this section, includes the adjuncts used during and in, and necessary to carry on and continue, production to complete a product at the same location after such transforming or converting has commenced.'

It should be noted that the latter section incorporates by reference subsection (E)(2), and expounds upon the purpose of the exception of the former by including 'adjuncts' whose use is necessary in the manufacturing process.

This court, in Ohio Ferro-Alloys Corp. v. Kosydar (1973), 34 Ohio St.2d 113, 296 N.E.2d 533, affirmed the enunciation established in Canton Malleable Iron v. Porterfield (1972), 30 Ohio St.2d 163, 283 N.E.2d 434, which set forth the test for the allowance of the exception under subsection (S) of R.C. 5739.01, as follows:

'* * * three requirements an adjunct must fulfill to be excepted: (1) used at the same location; (2) used after the transforming or conversion has commenced; and (3) related to direct use or consumption in production.'

The Commissioner argues tht this court has considered the language of R.C. 5739.01(E)(2) many times, and cites the following language from Jackson Iron & Steel Co. v. Glander (1950), 154 Ohio St. 369, at page 373, 96 N.E.2d 21, at page 23:

"To come within the exceptions from taxation imposed by the sales and use tax acts, the sale must be of (1) items necessary and not merely facilitative to the actual business of producing tangible personal property which is to be sold, (2) items used for transporting articles where such transportation is a part of the processing of such articles and (3) items used or consumed during the actual manufacturing or processing.

"In other words for the purchase of an item to be excepted from taxation under the Sales Tax Act or the Use Tax Act the item must be indispensable to and directly connected with the actual manufacture or processing of the particular article to be sold."

The Commissioner is correct in his emphasis of this case as authority, for the reason that the language used therein respecting R.C. 5739.01(E)(2) seems to have withstood the test of time. However, the General Assembly, effective September 1, 1967, enacted subsection (S) of R.C. 5739.01 utilizing that language referred to above with reference to R.C. 5739.01(E)(2).

Taxpayer contends that a blueprint in the hand of a production worker while the product is being manufactured and while that production worker is engaged in the production process by following the instructions on the blueprint can be readily compared to a worker's use of a tool which is clearly excepted under those conditions. This court concludes that the taxpayer's position in this case, that the blueprints are used by production employees directly in the manufacturing process, is a more reasonable interpretation of R.C. 5739.01(S), as it incorporates R.C. 5739.01(E)(2).

However, we are not persuaded by the use of the same analogy in taxpayer's claim regarding the excepted status of the Xerox machines. The machines are used to make copies of the blueprints for production personnel, not to produce tangible goods for sale. Nor can it be said that the machines fall within the exception of goods used or consumed directly in the production of tangible personal property. The entry of the Board of Tax Appeals adequately states the position of this court on this issue, which it stated:

'* * * the testimony of appellant's (taxpayer's) witnesses clearly indicated that the items in issue were purchased primarily to make blueprints and other copies to be utilized by the engineering department and production personnel.'

We conclude, therefore, that although the blueprints drawings and instruction booklets are entitled to exception, the Xerox machines are not, and the decision of the Board of Tax Appeals is modified accordingly.

II.

Taxpayer's second proposition of law is that payments for computer time-sharing where there is no transfer of title or possession are neither a sale nor a retail sale, and no tax should be levied thereon under R.C. 5739.02. Taxpayer's engineering department used computers owned by Service Bureau Corporation or General Electric Corporation for calculations in the design of pressure vessels and to control tapes that would guide a machine tool in the cutting of metal. The terminal located on the taxpayer's premises is connected to the computer. The information from the computer is transmitted to the taxpayer over a Bell Data phone in the form of electrical impulses that translate into a typewritten exposition of the calucation. The testimony herein revealed that the sole reason for taxpayer's contracting with either Service...