Canton Malleable Iron Co. v. Porterfield

• Decision Date: 24 May 1972
• Docket Number: No. 71-671,71-671
• Citation: 283 N.E.2d 434,30 Ohio St.2d 163
• Parties: , 59 O.O.2d 178 CANTON MALLEABLE IRON CO., Appellee, v. PORTERFIELD, Tax Commr., Appellant.
• Court: Ohio Supreme Court

Page 163

30 Ohio St.2d 163

283 N.E.2d 434, 59 O.O.2d 178

CANTON MALLEABLE IRON CO., Appellee, v. PORTERFIELD, Tax Commr., Appellant.

No. 71-671.

Supreme Court of Ohio.

May 24, 1972.

Syllabus by the Court

In order to obtain an exception from the sales tax pursuant to R.C. § 5739.01(S), a claimant must show that the thing for which the exception is sought is an 'adjunct,' used in production to complete a product at the same location and after transformation or conversion has commenced, and, pursuant to R.C. § 5739.01(E)(2), must also show that the thing is an adjunct to direct use or consumption in production for sale.

This is a tax case arising out of a claimed exception from the excise tax levied on retail sales made in this state under R.C. § 5739.02.

Appellee has, for over 90 years, operated a malleable iron foundry at Canton, Ohio, where it produces a variety of malleable iron castings primarily for the transportation industry. In order to cut down traditionally high labor costs and increase the productivity of its foundry, appellee planned for and installed equipment which permitted the automatic and continuous production of castings. The new pieces of equipment, designed and engineered to function together as an integrated system, operate as follows: Sand, stored in a large bin, is dropped onto a conveyor belt and transported to a sand muller where it is mixed, with a selected blend of silica sand, water and bonding additives into a homogenous sand compound having a pliable or formable quality. The prepared sand is then moved to a molding machine which forms it into a casting mold. From the molding machine, finished molds are continuously conveyed into a pouring area where each mold, in sequence, is filled with molten iron and is carried away, sufficient time having elapsed to allow the casting to solidify, to an oscillating or shake out screen. Once on the screen, the sand is shaken free and is taken back to the storage bin to be used again. The casting is transported to another area for further processing.

All the equipment described is interlocked electrically. If one of the pieces fails to operate properly, the whole system shuts down automatically. The system occupies an area of 30,000 square feet in appellee's plant, adjacent to the melting furnaces.

It is the repair and replacement parts for this automated system for which the appellee claimed exception from taxation. The Board of Tax Appeals found that 'the continuous process casting equipment used by appellant is an 'adjunct' within the concept of Revised Code Section 5739.01(S) and as such the replacement parts used in this machine are excepted from taxation * * *.'

The matter is before this court pursuant to the Tax Commissioner's appeal as of right from that decision.

Dargusch & Day and Roger F. Day, Columbus, for appellee.

William J. Brown, Atty. Gen., and Peter A. Stratigos, Columbus, for appellant.

HERBERT, Justice.

This case involves a claimed exception from Ohio's tax on sales of tangible personal property at retail. R.C. § 5739.02, which provides for the levy of the tax states, in part:

'For the purpose of providing revenue * * * an excise tax is hereby levied on each retail sale made in this state.'

R.C. § 5739.01, a definitional section, provides, in part:

'(E) 'Retail sale' * * * include(s) all sales except those in which the purpose of the consumer is:

'* * *

'(2) * * * to use or consume the thing transferred directly in the production of tangible personal property for sale by manufacturing, processing * * *.

'* * *

'(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.'

The question presented to this court is whether the system heretofore described, and, therefore, parts necessary for its repair, are excepted from the sales tax of R.C. § 5739.02 by reason of R.C. § 5739.01(E)(2) and (S).

The Ohio retail sales tax act was first enacted in 1934 (H.B.No.134, 115 Ohio Laws, pt. 2, 306) as a temporary emergency measure. In its original form, it defined the subjects of taxation as:

'* * * all sales excepting those in which the purpose of the consumer is * * * (b) * * * to use or consume the thing transferred in manufacturing * * *.'

That language excluded certain transactions in which the purpose of the buyer was to use the purchased item in the production of other tangible personal property for sale. ¹

In 1935, the General Assembly amended that section of the statute. (H.B.No.572, 116 Ohio Laws, pt. 2, 69, 70) to read:

'* * * all sales excepting those in which the purpose of the consumer is * * * (b) * * * to use or consume the thing transferred directly in the production of tangible personal property for sale by manufacturing * * * processing * * *.' (Emphasis added.)

The amendment qualified the use exclusion with the word 'directly.' The effect was to change the exclusion from one involving property used or consumed in certain industries, to one involving property used or consumed in a certain manner in certain industries. The result was a broadening of the tax base. ² In that form, the tax was made permanent in 1936 (H.B.No.694, 116 Ohio Laws, pt. 2, 323) as Section 5546, General Code, and specifically as Sections 5546-1 and 5546-2.

Over the years, this court has often stated that statutes relating to the exemption or exception from sales or use taxes are to be strictly construed, and that one claiming such exemption or exception must affirmatively show his right thereto. Celina Mutual Ins. Co. v. Bowers (1965), 5 Ohio St.2d 12, 213 N.E.2d 175. See, also, Ohio Ferro-Alloys Corp. v. Donahue (1966), 7 Ohio St.2d 29, 218 N.E.2d 452; L. A. Wells Construction Co. v. Bowers (1955), 164 Ohio St. 357, 130, N.E.2d 803; Standard Oil Co. v. Peck (1955), 163 Ohio St. 63, 125 N.E.2d 342; B. F. Goodrich Co. v. Peck (1954), 161 Ohio St. 202, 118 N.E.2d 525; National Tube Co. v. Glander (1952), 157 Ohio St. 407, 105 N.E.2d 648; Pioneer Linen Supply Co. v. Evatt (1946), 146 Ohio St. 248, 65 N.E.2d 711; State, ex rel. Foster v. Evatt (1944), 144 Ohio St. 65, 56 N.E.2d 265; State, ex rel. Keller v. Forney (1923), 108 Ohio St. 463, 141 N.E. 16. As we said in B. F. Goodrich Co v. Peck, supra, 161 Ohio St. at 207, 208, 118 N.E.2d at 528:

'* * * the reason for applying such a rule * * * (is) the * * * 'presumption * * * that every sale or use of tangible personal property in this state is taxable. " (G.C. 5546-2 and 5546-26, now R.C. §§ 5739.02 and 5741.02.) Clearly, strict construction was to be made against exception from taxation.

In that light, prior opinions of this court have discussed the development of the exception for 'direct use' in the production of tangible personal property for sale by manufacturing, etc., and problems associated with its interpretation and application. In each of those instances, this court was asked to determine what the General Assembly meant by the word 'directly'; whether, in a particular case, there was a direct use of the item whose sale or use was claimed excepted from the sales or use tax. Because the answers to that question often turned, of necessity, on factual grounds, a certain degree of misunderstanding arose wherein our decisions were frequently looked upon as completely 'ad hoc determinations based on the facts presented in each particular case.' Orr Felt & Blanket Co. v. Schneider (1965), 3 Ohio St.2d 14, 22, 209 N.E.2d 150, 155. As stated in Powhatan Mining Co. v. Peck (1953), 160 Ohio St. 389, 393, 116 N.E.2d 426, 428:

'What may appear to one person to be a direct use in a particular case may appear to another equally intelligent and reasonable person not to be a direct use. This probably explains many of the differences of opinion which have been exhibited by the decisions of this court in determining whether, in a particular case, a direct use was or was not involved. * * *'

However, we cannot allow answers to questions as to whether a direct use is involved to be dependent only upon the facts and circumstances of each case, without reference to prior decisions rendered in other related cases. To do so would contribute to the confusion caused by the use of ambiguous statutory wording such as 'directly.' As we aslo said in Powhatan, at page 394, 116 N.E.2d at page 428:

'* * * Our aim should be to remove that ambiguity. This can only be done by endeavoring to make each decision rendered consistent with previous decisions rendered. The results may be what will seem to reasonable and intelligent persons to represent the drawing of artificial and arbitrary boundaries or lines. However, such boundaries or lines should be helpful as a guide to those charged with the administration of the tax laws and to members of the bar, who must advise their clients as to the meaning of those laws.'

From 1935 to 1962, while the 'direct use' exception remained in effect, our decisions recognized and attempted to effectuate that aim.

In Saunders Mills v. Evatt (1942), 139 Ohio St. 227, 39 N.E.2d 526, we held that motor trucks purchased in Ohio for employment solely in transporting agriculatural produce were not used 'directly in the production of tangible personal property for sale by manufacturing, processing * * * within * * * Section 5546-1, General Code.'

In Fyr-Fyter Co. v. Glander (1948), 150 Ohio St. 118, 122, 124, 80 N.E.2d 776, 777, we said that when the General Assembly inserted the word 'directly' into the exception it meant to narrow it, and that 'directly' was the crucial word in te exception. So crucial, in fact, that we held 'the fact that certain items of tangible personal property...