Eastern Machinery Co. v. Peck

• Decision Date: 08 July 1953
• Docket Number: No. 33403,33403
• Parties: , 51 O.O. 57 EASTERN MACHINERY CO. v. PECK, Tax Com'r.
• Court: Ohio Supreme Court

Page 144

160 Ohio St. 144

114 N.E.2d 55, 51 O.O. 57

EASTERN MACHINERY CO. v. PECK, Tax Com'r.

No. 33403.

Supreme Court of Ohio.

July 8, 1953.

Syllabus by the Court.

A person, who is engaged in the business of purchasing used but unusable machine tools which he rebuilds or reconditions for service by supplying needed parts and resells to the trade generally, is a manufacturer of such tools within the purview of Sections 5385, 5386 and 5388, General Code, and is entitled to have such tools as are on hand listed for taxation at 50 per cent of their average value.

This appeal presents a question as to the validity of the Tax Commissioner's tax assessment on tangible and intangible personal property of the Eastern Machinery Company, hereinafter designated Eastern, for its fiscal years of 1947 and 1948.

It was stipulated that the following statements, among others, are true:

'2. Eastern buys and sells used machine tools: i. e. power driven tools used for working metal by turning, grinding, shaping, boring, planing, etc. Depending upon size, such tools are used to manufacture products ranging in size and weight from the smallest gear or other part of a watch or scientific instrument to the largest parts of locomotives, turbines, steam engines, etc. They are also used to manufacture other machine tools.

'3. Eastern owns and occupies a plant located at 1000 Tennessee avenue, Cincinnati, Ohio. The site consists of 11 acres of land and the structure contains 135,000 square feet of floor space. * * *

'4. Eastern purchases machine tools of every type and in every condition. Some are comparatively new, others very old, and practically all are unusable when purchased. Many have broken parts, others are badly worn in all parts and some are obsolete; the principal reason that most of them are sold by their owners to Eastern is that the machines will no longer work with the high degree of precision required of machine tools, whose work must often be done within tolerances of tenths of thousands of an inch. Eastern does its buying in every section of the United States and in foreign countries. All machine tools purchased are shipped to its plant in Cincinnati, where they are kept on hand, in the same condition as when received, until sold. * * *

'5. Eastern's sales of machine tools amounted to $1,010,657 for its fiscal year ending September 30, 1947, and to $1,323,324 for its fiscal year ending September 30, 1948: Eastern paid $643,520 for the machine tools sold in the former fiscal year and $558,836 for those sold in the latter fiscal year. Approximately five per cent of sales in both years resulted from sales of machines directly from stock 'as is.' All other machines sold in said years (approximately 95 per cent of sales) were completely disassembled after orders were received for them, all worn or broken parts repaired or replaced, and flat bearing surfaces (such as bases, beds, carriages, knees, saddles, rails, etc.) machined to the extent necessary to secure a smooth surface Some (approximately 35 per cent of sales) were redesigned and rebuilt to perform different operations than they were originally intended to perform, and/or modernized by the installation of (a) self-contained motor drive arrangements to replace belt drive arrangements, and/or (b) hydraulic feeds and speeds to replace mechanical movements, necessitating in most cases the designing and installation of anti-friction bearings and new oil systems. Other (approximately 60 per cent of sales) were restored to original condition. In all cases, delicate readjustments were made to allow for the machining of flat bearing surfaces and all component parts were refitted and realigned within .001 of an inch. All machines were also cleaned, scraped and repainted, inside and out, and unconditionally guaranteed for 30 days from delivery.

'6. All new parts and pieces used in said machines were manufactured by Eastern in its plant, except anti-friction bearings, motors, accessories, fittings, and a relatively small quantity of parts purchased from the original manufacturers of the machines. Eastern purchased raw stocks of steel, cast iron, bronze, brass, aluminum and other materials, and castings of all sorts (many of which it designed) from which it made said parts and pieces when and as needed for use in a particular machine. The cost of said raw stocks, castings, bearings, motors, and the parts purchased from the manufacturers of the machines, amounted to approximately $56,000 in the fiscal year ended September 30, 1947 and $94,000 in the fiscal year ended September 30, 1948, of which amounts approximately 7 1/2 per cent was paid for parts purchased from the manufacturers of the machines, approximately 15 per cent for bearings, motors, and other accessories and fittings, and approximately 77 1/2 per cent for raw stocks of metal and castings.'

In making such parts and pieces and in repairing and altering parts of the machine tools sold by it, Eastern used the following machine tools: Planers, engine lathes, milling machines, gear cutting machines, radial drill presses, upright drill presses, planer type surface grinder, horizontal precision boring machine, universal cylindrical grinder and metal shaping machine, together with a large volume of hand tools and precision measuring instruments. These machines are highly complicated and the bulk of the work which they do must be performed with the greatest care and precision. Only experienced and highly skilled mechanics can operate the machines and perform the other work involved in reassembling and rebuilding machine tools. Eastern employed 36 such mechanics and four other persons to make the parts and to do all the work on the machines sold in the years in question.

The Tax Commissioner found that the rebuilding of the machine tools constituted repairing, not manufacturing, and assessed such as were held for rebuilding at 70 per cent of their average value instead of 50 per cent as returned by Eastern.

On appeal, the Board of Tax Appeals affirmed the order of the Tax Commissioner.

The cause is now in this court on appeal from the decision of that board.

Dargusch, Caren, Greek & King, Columbus, for appellant.

C. William O'Neill, Atty. Gen., and Hugh A. Sherer, Columbus, for appellee.

HART, Judge.

The question chiefly presented is whether, for the purpose of determining the basis of taxation the rebuilding of such machine tools constituted manufacturing or repairing. In each of the tax returns in question, Eastern listed all its machine tools on hand during the preceding fiscal years, which had not been rebuilt but were being held for that purpose, at 50 percent of their true value. It claims that such listing was in accord with the provisions of subparagraph (2) of Section 5388, General Code, which authorizes a 50 per cent value listing 'of all articles purchased, received or otherwise held by a manufacturer for the purpose of being used, in whole or in part, in manufacturing, [or] combining * * *; [and] the average value of all articles which were at any time by him manufactured or changed in any way, either by combining * * * or adding thereto'.

The Tax Commissioner concedes that Eastern was a 'manufacturer' within the purview of Section 5385, General Code, so far as it made the parts used to replace worn and broken ones, but was a 'repairer' in performing the other operations involved in rebuilding the machines.

The question, therefore, is what is the percentage of value at which machine tools held for rebuilding should be listed for tax purposes. The answer depends upon whether Eastern, in carrying on the business above described, was engaged in manufacturing within the purview of Sections 5385 and 5388, General Code.

Section 5385, General Code, defines, for tax purposes, a manufacturer as follows:

'A person who purchases, receives or holds personal property * * * for the purpose of adding to the value thereof by manufacturing * * * or by the combination of different materials with a view of making a gain or profit by so doing, is a manufacturer * * *.'

The Board of Tax Appeals proceeded on the assumption that, since the General Assembly, in enacting the statutes, granted manufacturers a 'preferential tax base' amounting to a partial tax exemption, the statutes should be strictly construed against the claim of the manufacturer or one engaged in manufacturing seeking the 50 per cent property valuation as a tax base. However, a study of the legislative history of these statutes tends to dispel that assumption and conclusion. These statutes were amended by the Eighty-ninth General Assembly by the enactment of Amended Senate Bill No. 323, 114 Ohio Laws,...