Bird & Son, Inc. v. Limbach

• Decision Date: 23 August 1989
• Docket Number: No. 87-2173,87-2173
• Citation: 543 N.E.2d 1161,45 Ohio St.3d 76
• Court: Ohio Supreme Court
• Parties: BIRD & SON, INC., Appellant, v. LIMBACH, Tax Commr., Appellee.

Page 76

45 Ohio St.3d 76

543 N.E.2d 1161

BIRD & SON, INC., Appellant, v. LIMBACH, Tax Commr., Appellee.

No. 87-2173.

Supreme Court of Ohio.

Submitted Feb. 7, 1989.

Decided Aug. 23, 1989.

Syllabus by the Court

1. 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.

2. Equipment utilized to provide an immediate supply of raw materials to machinery employed directly in the production of tangible personal property is an adjunct used during and in the production of a product and necessary to carry on and continue that production. Such equipment is therefore subject to exemption from sales and use taxation pursuant to former R.C. 5739.01(S).

At all times relevant to the instant appeal, appellant, Bird & Son, Inc., manufactured roofing shingles at its plant in Franklin, Ohio. The manufacturing process under scrutiny herein ¹ involves the conversion of wood pulp and wood flour into a thin roll of dry felt.

The felt paper is the base material from which the shingles are derived. The paper enters the plant upon a conveyer belt which transports it through a "saturator" containing heated liquid asphalt. After immersion in the asphalt, the saturated paper is coated further with liquid asphalt and stone dust. Thereafter, the coated paper proceeds along the conveyer underneath a "blender box" composed of separate conduits which deposit granules on the paper.

The conduits through which the Within the manufacturing plant, the sources of the materials supplied to the machine bins are numerous silos containing granules of distinctive colors. The silos are, in turn, supplied the materials by rail cars and trucks which convey the granules by means of a bucket elevator and deposit them in the individual silos.

granules flow are fed the material by individual machine bins suspended above the blender box and corresponding to the conduits.

The granules are discharged from the bottom of the silos onto a conveyor belt. The process involves the discharge from multiple silos so as to achieve a desired color mixture. The blending of the colors is achieved on the conveyor, which thereafter transports the various mixtures to the particular machine bins.

The machine bins, therefore, act as the source of the previously combined granules which are applied to the coated paper by the blender box. The individual conduits within the blender box are employed in a nearly simultaneous fashion so as to further refine the shades of color applied to the shingle. Thus, the term "blender box" is a misnomer. The individual conduits within the blender box act as applicators of the pre-mixed granules. Whatever blending of granules occurs is accomplished initially on the conveyer belt below the silos, with further refinement of the color tone when multiple mixtures are applied together to the coated paper by the blender box.

Following granule application, the treated sheets proceed along the conveyor where the reverse side of the sheets undergo talc application from an apparatus suspended above the conveyor. Thereafter, "release film" is applied to the talc side of the shingle. The talc and release film are employed to prevent the shingles, when later cut and stacked, from adhering to each other. The granules are subsequently imbedded in the reverse side of the shingle and the finished product is cut, stacked and packaged.

Following an audit of appellant's purchases for the period commencing April 1, 1977 and ending May 31, 1980, the tax commissioner rendered her decision on February 1, 1985 concerning certain components of appellant's manufacturing plant. On March 15, 1985, appellant filed an appeal of the Tax Commissioner's determination to the Board of Tax Appeals ("board"). At issue before the board were assessments of sales and use tax with respect to, inter alia, the silos, silo foundations, machine bins, blender box and the conveyors linking this machinery and employed in the application of the granules and talc. On November 23, 1987, the board affirmed the assessment of all equipment employed in this system prior to the use of the blender box. Other assessments by the Tax Commissioner were addressed by the board, but are not the subject of the instant appeal. On December 23, 1987, appellant filed its notice of appeal from the decision of the board.

The cause is now before this court upon an appeal as of right.

Bodiker & Holland and David H. Bodiker, for appellant.

Anthony J. Celebrezze, Jr., Atty. Gen., and Richard C. Farrin, for appellee.

SWEENEY, Justice.

I

The instant appeal involves the levy of various sales and use tax assessments upon equipment employed in the manufacturing operation conducted by appellant. Appellant contends that the various items of equipment are exempt from sales and use taxation pursuant to R.C. 5739.01 "(E) 'Retail sale' and 'sales at retail' include all sales except those in which the purpose of the consumer is:

                (E)(2) and 5741.02(C)(2), respectively.  R.C.  5739.01(E)(2) defines the types of sales at issue in the case sub judice.   This section provides in relevant part
                

" * * *

"(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 * * *." (Emphasis added.)

Similarly, R.C. 5741.02(C)(2) provided during the relevant audit period:

"(C) The [use] tax does not apply to the storage, use, or consumption in this state of the following described tangible personal property, nor to the storage, use, or consumption in this state of tangible personal property purchased under the following described circumstances:

" * * *

"(2) Tangible personal property, the acquisition of which, if made in Ohio, would be a sale not subject to the tax imposed by sections 5739.01 to 5739.31 of the Revised Code[.]" 135 Ohio Laws, Part II, 519. ²

The application of R.C. 5739.01(E)(2) and its predecessors has not been without difficulty. This is due in large part to the variety of manufacturing processes to which the language contained therein has been applied. See National Tube Co. v. Glander (1952), 157 Ohio St. 407, 409, 47 O.O. 313, 314, 105 N.E.2d 648, 650; Canton Malleable Iron Co. v. Porterfield (1972), 30 Ohio St.2d 163, 173, 59 O.O.2d 178, 183, 283 N.E.2d 434, 440; and Columbus Bituminous Concrete Corp. v. Bowers (1962), 173 Ohio St. 103, 106, 18 O.O.2d 355, 356-357, 180 N.E.2d 142, 145.

However, the analysis of its application to the facts of a particular case must begin with the recognition that " * * * every sale or use of tangible personal property in this state is [presumed to be] taxable[,]" National Tube Co. v. Glander, supra, 157 Ohio St. at 409, 47 O.O. at 314, 105 N.E.2d at 650, and that exemptions from sales or use taxation "are to be strictly construed, and one claiming exemption must affirmatively establish his right thereto." Id.; Canton Malleable Iron Co. v. Porterfield, supra, 30 Ohio St.2d at 166, 59 O.O.2d at 179, 283 N.E.2d at 437. R.C. 5739.01(E)(2) is therefore subject to the aforementioned rules of statutory construction. It provides an exemption from taxation for tangible personal property used directly in the manufacturing process.

In order to determine whether tangible personal property is employed directly in manufacturing it is essential to ascertain the points at which the manufacturing process begins and ends. Ohio Ferro-Alloys Corp. v. Kosydar (1973), 34 Ohio St.2d 113, 115, 63 O.O.2d 195, 197, 296 N.E.2d 533, 535. 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, supra, 30 Ohio St.2d at 170, 59 O.O.2d at 181-182, 283 N.E.2d at 439. See, also This is clearly the import of the term "manufacturing" as defined in former R.C. 5739.01(S), infra. ³ Accordingly, the crucial focus in determining whether an item is used "directly" in manufacturing must be whether the item is employed directly " * * * in the process of transforming or converting tangible personal property into tangible personal property for sale * * *." Canton Malleable Iron Co. v. Porterfield, supra, 30 Ohio St.2d at 173, 59 O.O.2d at 183, 283 N.E.2d at 440.

i Ohio Ferro-Alloys Corp. v. Kosydar, supra, 34 Ohio St.2d at 115, 63 O.O.2d at 197, 296 N.E.2d at 535; National Tube Co. v. Glander, supra, 157 Ohio St. at 410, 47 O.O. at 315, 105 N.E.2d at 650.

Thus, despite the diverse factual contexts to which R.C. 5739.01(E)(2) has been applied, a synthesis of past decisions reveals a nearly uniform analysis. The central inquiry remains as follows: "[w]hen does the manufacturing or processing activity begin and end, and is the property used or consumed during and in the manufacturing or processing period?" Youngstown Bldg. Material & Fuel Co. v. Bowers (1958), 167 Ohio St. 363, 367, 5 O.O.2d 3, 5, 149 N.E.2d 1, 4. See, also, Columbus Bituminous Concrete Corp. v. Bowers, supra, 173 Ohio St. at 106, 18 O.O.2d at 356, 180 N.E.2d at 145. " * * * 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; Southwestern Portland Cement Co. v. Lindley (1981), 67 Ohio St.2d 417, 421, 21 O.O.3d 261, 264, 424 N.E.2d 304, 307. Consequently, tangible personal property which is employed in...