Ball Corp. v. Limbach

• Decision Date: 12 February 1992
• Docket Number: No. 90-2495,90-2495
• Citation: 584 N.E.2d 679,62 Ohio St.3d 474
• Parties: BALL CORPORATION, Appellant and Cross-Appellee, v. LIMBACH, Tax Commr., Appellee and Cross-Appellant.
• Court: Ohio Supreme Court

Page 474

62 Ohio St.3d 474

584 N.E.2d 679

BALL CORPORATION, Appellant and Cross-Appellee, v. LIMBACH, Tax Commr., Appellee and Cross-Appellant.

No. 90-2495.

Supreme Court of Ohio.

Submitted Oct. 11, 1991.

Decided Feb. 12, 1992.

Jones, Day, Reavis & Pogue and John C. Duffy, Jr., Cleveland, for appellant and cross-appellee.

Lee I. Fisher, Atty. Gen., and M. Linda Weigand, Barberton, for appellee and cross-appellant.

PER CURIAM.

For the reasons which follow, the decision of the BTA is affirmed in part, reversed in part and remanded for further consideration consistent with this opinion.

I

Despite the complexities and improvements in sophisticated manufacturing processes, the issue for resolution in this case is as it was over thirty years ago when we decided Youngstown Bldg. Material & Fuel Co. v. Bowers (1958), 167 Ohio St. 363, 5 O.O.2d 3, 149 N.E.2d 1. Here, as there, the challenge is to identify the beginning and the end of the manufacturing process and to determine whether items in dispute were used or consumed directly in the production of tangible personal property for sale by manufacturing or processing or in "packaging." See former R.C. 5739.01(E)(2) and (R), Am.Sub.H.B. No. 291, 140 Ohio Laws, Part II, 2872, 3216 and 3219, and former R.C. 5739.02(B)(15), Am.S.B. No. 231, 140 Ohio Laws, Part I, 790, 832. It is not to determine whether such items are essential to the operation of an integrated plant; the question is rather, "when does the manufacturing or processing activity begin and end, and is the property used or consumed during and in the manufacturing or processing period." Id. at 367, 5 O.O.2d at 5, 149 N.E.2d at 3-4.

Ball contends that manufacturing began at the dryer upon removal of moisture and a change in the molecular structure of EVOH and regrind. The commissioner says processing began in the extrusion machine when pellets were transformed from a solid state into a molten state and, in combination with other raw materials, bottles were produced. The commissioner also points out that Ball's plant manager conceded that after the removal of the moisture the pellets of raw material remained as pellets with no visible difference.

It is true that EVOH was hygroscopic and it was essential that the moisture be removed in order to maintain the integrity and salability of the product. However, following the drying process the raw material was not changed in form. It was still raw material. Moreover, it was not Ball's final salable product. On the other hand, following the processing within the extruder and blow molder, plastic bottles were available for insertion into partitioned cartons, to be shrink-wrapped and shipped to its customers. Thus, manufacturing began at the coextrusion machine and ended after the bottles were trimmed and made ready for shipment.

"Equipment utilized for the storage and delivery of raw materials prior to the transformation thereof into a finished product is not used or consumed directly in the production of tangible personal property and thus is not subject to exemption from sales and use taxation pursuant to R.C. 5739.01(E)(2) and 5741.02(C)(2), respectively." Bird & Son, Inc. v. Limbach (1989), 45 Ohio St.3d 76, 543 N.E.2d 1161, paragraph one of the syllabus. As we stated, id. at 78, 543 N.E.2d at 1164, quoting Natl. Tube Co. v. Glander (1952), 157 Ohio St. 407, 409, 47 O.O. 313, 314, 105 N.E.2d 648, 650:

" ' * * * every sale or use of tangible personal property in this state is [presumed to be] taxable[,]' * * * and * * * exemptions from sales or use taxation 'are to be strictly construed, and one claiming exemption must affirmatively establish his right thereto.' * * *

" * * * It has been held that manufacturing and processing ' " * * * imply essentially a transformation or conversion of material or things into a different state or form from that in which they originally existed--the actual operation incident to changing them into marketable products." ' Canton Malleable Iron Co. v. Porterfield [ (1972), 30 Ohio St.2d 163] at 170, 59 O.O.2d at 181-182, 283 N.E.2d at 439. * * *"

Ball corporation did not sell EVOH or regrind pellets; it sold bottles in partitioned cartons.

" * * * ' * * * The manufacturing process for which a beginning and end must be determined is the one that produces * * * [the] marketable product. * * *' Interlake, Inc. v. Kosydar (1975), 42 Ohio St.2d 457, 459, 71 O.O.2d 436, 437, 330 N.E.2d 444, 446[.] * * *

" * * *

" * * * Accordingly, the exemption is dependent upon the direct application of the property to the manufacturing process and not merely its contemporaneous utilization during the fabrication of a marketable product." Id., 45 Ohio St.3d at 79, 543 N.E.2d at 1164-1165.

Moreover, there is no particular significance to when an item of tangible personal property might change form unless it is "converted into a marketable product." (Emphasis sic.) Id. at 80, 543 N.E.2d at 1165.

In Bird & Son, supra, as in the instant case, the transportation of raw material to the machine is "preliminary to the manufacturing process," id. at 80, 543 N.E.2d at 1166, and "equipment utilized for the storage and delivery of raw materials prior to the transformation thereof into a finished product is not used or consumed directly in the production of tangible personal property * * *." Id. at 81, 543 N.E.2d at 1166.

The test for determining the exemption from taxation of equipment by reason of its status as adjunct under former R.C. 5739.01(S), later codified at (R), is: " * * * as announced in Canton Malleable Iron Co. * * *:

" 'Subsection (S) demands that the thing sought to be excepted from taxation be (1) an adjunct, (2) used at the same location, and (3) used after the transforming or conversion has commenced. Subsection (E)(2) adds the additional requirement that the...