Copperweld Steel Co. v. Edgar L. Lindley, Tax Commissioner of Ohio

• Decision Date: 30 June 1986
• Docket Number: 3529,86-LW-1707
• Parties: COPPERWELD STEEL COMPANY, Appellant/Cross-Appellee, v. Edgar L. LINDLEY, Tax Commissioner of Ohio, Appellee/Cross-Appellant.
• Court: Ohio Court of Appeals

COPPERWELD STEEL COMPANY Appellant/Cross-Appellee, v. Edgar L. LINDLEY, Tax Commissioner of Ohio Appellee/Cross-Appellant.

No. 3529.

86-LW-1707 (11th)

Court of Appeals of Ohio, Eleventh District, Trumbull County.

June 30, 1986

Civil Appeal from the Board of Tax Appeals

No 80-A-107

Lynn B Griffith, Jr., Warren, for appellant/cross-appellee.

Anthony J. Celebrezze, Jr., Attorney General, Mark A. Engel, Assistant Attorney General, Columbus, for appellee/cross-appellant.

Before ALFRED E. DAHLING, P.J., and DONALD R. FORD and ROBERT E. COOK, JJ.

OPINION

COOK Judge.

Copperweld Steel Company is a specialty steel company producing structural grade steel alloy in Warren, Ohio. It uses cranes and scales to weigh and mix iron and alloy which is then heated in furnaces to molten metal and poured into molds forming ingots that eventually are cooled and run through rolling mills to form billets. The resulting steel is then tempered, cut and sized to a customer's specifications.

As a result of an audit of Copperweld's purchases for the period of January 1, 1972 through December 31, 1974, the Tax Commissioner of Ohio assessed sales taxes against Copperweld. Copperweld objected to a portion of the assessment and filed a petition for reassessment. On April 14, 1980, the tax commissioner made a final determination of Copperweld's sale and use tax assessment for the period in question of $104,164.52, including penalties.

Copperweld appealed the commissioner's decision to the Ohio Board of Tax Appeals, hereinafter referred to as the Board, which, on January 8, 1985, affirmed in part and reversed in part the final determination of the commissioner.

Copperweld, hereinafter referred to as appellant, has filed an appeal from the decision of the Board of Tax Appeals and assigned the following eight assignments of error (Assignment of Error No. 3 being omitted):

"1.The Board of Tax Appeals erred in determining that certain production cranes and others items purchased by appellant are not items used or consumed directly in the production of tangible personal property by manufacturing or processing or are not adjuncts thereto and therefore excepted from taxation pursuant to R.C. ] 5739.01(E)(2) and (S) [BTA Decision and Order, Schedules A, C and L, pages 8, 11 and 19].

"2.The Board of Tax Appeals erred in determining that the emergency back-up fuel oil storage tank and lines were taxable and not accessions to the realty within the definition of real property nor directly used in production by manufacturing, processing or conversion.

"3.No assigned error set forth.

"4.The Board of Tax Appeals erred in finding that a pickling acid system is taxable since the pickling acid system is used directly in production of tangible personal property by manufacturing. R.C. ] 5739.01(E)(2).

"5.The Board of Tax Appeals erred in finding that sump pumps are not used either directly in production by manufacturing or an adjunct thereto as provided in R.C. ] 5739.01(E)(2) and (S) nor are used as machinery, equipment and other personal property used to repair or maintain machinery, equipment and other personal property used in production as provided in Tax Rule 5703-9-21(M).

"6.The Board of Tax Appeals erred in determining that the vac-all machine (Schedule I) is not used as machinery, equipment and other personal property used to repair or maintain machinery, equipment and other personal property within O.A.C. ] 5703-9-21(B) or (D) and therefore exempted from tax pursuant to O.A.C. ] 5703-9-21(M).

"7.The Board of Tax Appeals erred in determining that the material handling equipment was taxable and not machinery, equipment and other personal property used to repair or maintain machinery, equipment and other personal property pursuant to O.A.C. ] 5703-9-21(M).

"8.The Board of Tax Appeals erred in determining that certain miscellaneous Schedule C items were taxable since these items are exempt or otherwise not the proper object of tax pursuant to R.C. ] 5739.01, et seq., R.C. ] 5741.01, et seq., and the tax rules promulgated by the Tax Commissioner."

Assignments of error one and four are well-taken in part and without merit in part. Assignments of error five and six are well-taken. Assignments of error two, seven, and eight are without merit.

The tax commissioner, hereinafter referred to as cross-appellant, filed a cross-appeal and has filed the following three assignments of error:

"1.The Board of Tax Appeals erred in determining that certain warning sirens, warning flasher lights, oil dry compound, and overhead plant fans were excepted from taxation pursuant to Ohio Administrative Code 5703-9-21(N) as personal safety devices or R.C. ] 5739.01(E)(2) as items used directly in the production of tangible personal property for sale by manufacturing or processing [BTA Decision and Order at 13, 20].

"2.The Board erred in determining that transactions by which returnable pallets were transferred to the appellee in exchange for a monetary deposit were not sales and so were not subject to the Ohio Sales Tax [BTA Decision and Order at 19].

"3.The Board erred in determining that certain purchases of construction materials by the appellee, which materials were then incorporated into the appellee's plant by parties other than the vendors of the materials, were excepted from the definition of a sale pursuant to R.C. ] 5739.01(B), and that the third parties who affected the incorporation on behalf of the appellee were the consumers of the materials responsible for the payment of tax on the appellee's purchases [BTA Decision and Order at 10-11]."

The first assignment of error of the cross-appeal is well-taken in part and without merit in part. Assignments of error two and three of the cross-appeal are well-taken.

As its first assignment of error, appellant contends the Board erred in determining that "certain production cranes and other items purchased by appellant" are not exempt from taxation pursuant to R.C. 5739.01(E)(2) and (S).

Appellant first argues that the legislative intent of R.C. 5739.01(E)(2) is to exempt from taxation all articles necessary for the production, by manufacturing, of tangible personal property. Appellant further argues that articles used in the weighing of raw materials are necessary to the production, by manufacturing, since there can be no marketable product without the proper control of the weight of the raw materials. Appellant argues that the Board should have applied R.C. 5739.01(E)(2) and (S) in the manner it suggests and, as a result, exempted cranes 4, 6, 26, 47, 48, 50 and 51, clamshell buckets, charging buckets, scales and alloy platforms from taxation.

R.C. 5739.02 levies an excise tax on each retail sale made in the State of Ohio with certain exceptions. R.C. 5739.01(E)(2) defines "retail sale" and "sales at retail" as follows:

"(E) "Retail sale' and "sales at retail' include all sales except those in which the purpose of the consumer 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 by manufacturing, processing, refining, or mining * * *."

The term "manufacturing" is defined in R.C. 5739.01(S) as follows:

"The transformation or conversion of material or things into a different state or 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 transformation or conversion has commenced."

In essence, R.C. 5739.01(E)(2) and (S), read in pari materia, exempt from sales tax those purchases used directly in the production, by manufacturing, of a finished product or adjuncts thereto. The all important issue is when does the production or manufacturing process begin?

In Ohio, it has been consistently held that production, by manufacturing, begins with the physical or chemical transformation of raw goods or material into a different state or form from that in which they originally existed. Manufacturing is the operation that actually changes raw materials into a saleable product. Southwestern Portland Cement Co. v. Lindley (1981), 67 Ohio St.2d 417; Canton Malleable Iron Co. v. Porterfield (1972), 30 Ohio St.2d 163; Youngstown Building Material & Fuel Co. v. Bowers (1958), 167 Ohio St. 363; National Tube Co. v. Glander (1952), 157 Ohio St. 407.

The "essentiality" test, proposed by appellant, has been rejected by the Ohio Supreme Court. Southwestern Portland Cement Co. v. Lindley, supra. In a case on point, the court has held that in steel production, "manufacturing" begins with the melt of raw materials in the furnaces. Ohio Ferro-Alloys Corp. v. Kosydar (1973), 34 Ohio St.2d 113.

Appellant, as to its first assignment of error, alternatively argues that, as to cranes 3, 5, 23 and 25, they should be exempt from taxation because they are used directly in production or as an adjunct thereto [R.C. 5739.01(E)(2) and (S) ] or as machinery or equipment used to repair or maintain production machinery [O.A.C. 5703-9-21(M) ].

A review of the record indicates that cranes 3, 23 and 25 are used "after the melt" but that they are not used directly in the production, by manufacturing, process nor an adjunct thereto. They are used as auxiliary cranes to transport ladles within the melt shop for relining. As to crane 5, the record indicates it too is used to move empty ladles and therefore not used directly in production, by manufacturing, nor an adjunct...