Federated Dept. Stores, Inc. v. Kosydar, 75-80

• Citation: 45 Ohio St.2d 1,340 N.E.2d 840
• Decision Date: 07 January 1976
• Docket Number: No. 75-80,75-80
• Parties: , 74 O.O.2d 1 FEDERATED DEPARTMENT STORES, INC., Appellant and Cross-Appellee, v. KOSYDAR, Tax Commr., Appellee and Cross-Appellant.
• Court: United States State Supreme Court of Ohio

Page 1

45 Ohio St.2d 1

340 N.E.2d 840, 74 O.O.2d 1

FEDERATED DEPARTMENT STORES, INC., Appellant and Cross-Appellee, v. KOSYDAR, Tax Commr., Appellee and Cross-Appellant.

No. 75-80.

Supreme Court of Ohio.

Jan. 7, 1976.

Syllabus by the Court

1. Where the record indicates that the taxpayer's real object in transactions involving the use of radio and T.V. tapes and films in advertising is to acquire the tapes and films, themselves, then the personal service performed in connection with the production of such advertising compositions is an inconsequential element of the transactions, and the transfer of such compositions is subject to the Ohio sales and use taxes, pursuant to R.C. Chapter 5739.

2. Where the record indicates that the taxpayer's real object in transactions involving the payment of hourly fees to free-lance artists for the production of specified sketches, for use by the taxpayer's advertising department in newspaper and magazine compositions, is to acquire the sketches, themselves, then the personal service performed by the artists is an inconsequential element of the transactions, and the transfer of the sketches is subject to Ohio sales and use taxes, pursuant to R.C. Chapter 5739.

3. Where the record in a case involving a sales and use tax assessment indictates that the partitions and fixtures in question were used primarily in separating various departments in the store and were only incidentally and indirectly facilitative in making retail sales, such property is not excepted from sales and use taxes, pursuant to the 'direct use' exception provisions of R.C. 5739.01(E)(2).

The appellant and cross-appellee, Federated Department Stores, Inc., Rike-Kumler Division, operates a group of retail department stores having six business locations in Dayton, Ohio. The appellee and cross-appellant, the Tax Commissioner of Ohio, levied a sales and use tax assessment for the audit period, January 1, 1969, to December 31, 1969, upon certain purchases of tangible personal property by the appellant. Appellant ultimately appealed the Tax Commissioner's assessment to the Board of Tax Appeals.

The items in issue before the board and in the present case consist of expenditures for radio and T.V. tapes and films and free-lance art work, including photographs and art work for use in magazine advertisements, and partitions, interior signs and light fixtures.

The Board of Tax Appeals determined that the purchase of radio and T.V. tapes and film commercials, photographs and advertising compositions did not meet the personal service exception to the Ohio sales tax pursuant to R.C. 5739.01(B), because the real object sought in each transaction was the tangible personal property itself. The board determined further that the free-lance art work was transferred as a part of a personal service transaction in which the intellectual and manual skill of the artist was the real object of the transaction. The board also found that the lights, wall partitions, toppers and related items, although indirectly facilitative to making retail sales, were not used directly in making retail sales.

Consequently, the Board of Tax Appeals affirmed the Tax Commissioner's assessment as to the partitions and related items and the advertising materials, and reversed the assessment as to the free-lance art work.

Appellant, Federated Department Stores, filed an appeal to this court from the board's decision affirming the assessments in question. The Tax Commissioner filed a cross-appeal from the board's decision reversing the assessment on the items constituting free-lance art work and finding them excepted from taxation as part of a personal service transaction.

The cause is now before this court upon appeals as of right from the decision of the Board of Tax Appeals.

Stanley J. Bowers, Columbus, and Samuel E. Dyer, Cincinnati, for appellant and cross-appellee.

William J. Brown, Atty. Gen., John C. Duffy, Jr., and Maryann B. Gall, Columbus, for appellee and cross-appellant.

J. J. P. CORRIGAN, Justice.

At issue in this case are two categories of tangible personal property claimed by appellant to be excepted from Ohio sales and use taxes, pursuant to R.C. 5739.01(B) and (E)(2). For purposes of this discussion, the tax in issue will be treated as sales tax, pursuant to R.C. 5741.02(C)(2).

I.

The first category of goods assessed by the Tax Commissioner, and at issue herein, consists of advertising materials. These materials consist, in general, of radio and T.V. commercials, and free-lance artists' sketches used in newspaper and magazine compositions. The assessment relating to radio and T.V. commercials consists specifically of tapes and fims used to produce the commercials.

Appellant maintains that this property is the end product of an individual's personal or professional skills and is unsuitable for use by anyone other than the appellant. Appellant contends further that the property in question is an inconsequential part of the transaction, and, therefore, the transaction is a personal service, notwithstanding the evidence in the record to the effect that the appellant would not have paid the price but for the transfer of said property. We disagree.

It should be noted at the outset that R.C. Chapter 5739 taxes only tangible personal property. The so-called personal service exception in reality excepts from taxation that tangible personal property transferred as an inconsequential element of a personal service transaction.

This court, in Accountant's Computer Services v. Kosydar (1973), 35 Ohio St.2d 120, 298 N.E.2d 519, states the test for determining whether a 'sale' of tangible personal property may be excepted from the sales tax by virtue of R.C. 5739.01(B). The first three paragraphs of the syallbus in Accountant's, supra, state:

'1. In determining whether a 'sale' of tangible personal property may be excepted from the sales tax by the last sentence of R.C. 5739.01(B), the proper test is to determine whether the transaction involves a consequential or inconsequential professional, insurance, or personal service. If the service rendered is inconsequential, the exception is not available and the entire transaction is taxable. If a consequential service is rendered, then it must be ascertained whether the transfer of the tangible personal property was an inconsequential element of the trnsaction. If so, then none of the consideration paid is taxable.

'2. In determining whether a mixed transaction constitutes a consequential personal service transaction, a distinction must be made as to the true object of the transaction contract; that is, is the real object sought by the buyer the service per se or the property produced by the service.

'3. Where a transaction is mixed in such a manner that the tangible personal property transferred and the service rendered are distinct consequential elements having a fixed and ascertainable relationship between the value of the property and the value of the service rendered so that both may be separately stated, there exist two separate transactions, and the one attributable to the sale of the tangible personal property is subject to taxation under R.C. 5739.01(B) while the other is not.'

This court, in Accountant's, explained that once it has been concluded that a sale of tangible personal property has occurred, then the next step is to determine whether a consequential professional insurance or personal service is involved. The court states at page 132, 298 N.E.2d at page 527:

'To accomplish this, the Tax Commissioner, the Board of Tax Appeals, and this court, as necessary, must examine the real object sought by the buyer, i. e., the service per se or the property produced by the service, and determine if it was the buyer's object to obtain an act done personally by an individual as an economic service involving either the intellectual or manual personal effort of an individual, or if it was the buyer's object to obtain only the saleable end product of some individual's skill. Koch v. Kosydar, supra (32 Ohio St.2d 74, 290 N.E.2d 847).'

If the professional, insurance or personal service is inconsequential, then the exception cannot be available and the entire transaction is taxable.

Appellant relies upon Columbus Coated Fabrics v. Porterfield (1972), 30 Ohio St.2d 307, 285 N.E.2d 50, for the proposition taht where the item of tangible personal property transferred is an inconsequential element of the transaction, unsuitable for uses other than those intended by the purchaser and prepared at the request of a specific purchaser, the transaction is a personal service, notwithstanding the fact that the purchaser would not have paid the price but for the transfer of the property. We think this reliance is misplaced. This court, in Columbus Coated Fabrics, supra, recognized the fact that there exists no article fabricated by machine or handcrafted that is not the product of the exercise and application of individual ability and skill. The court, in its decision, pointed out that Recording Devices v. Porterfield (1972), 30 Ohio St.2d 208, 382 N.E.2d 626, provided the framework within which that case was to be decided.

Recording Devices, supra, at page 213, 283 N.E.2d at page 629, defined personal service as 'an act done personally by a particular individual; it is, in effect, an economic service involving either the intellectual or mannual personal effort of an individual, not the saleable product of his skill.'

The court, in Columbus Coated Fabrics, supra, did not substitute the criteria relied upon by appellant in the present case for the true object of the transaction, but merely cited the record in that case that the property was suitable for other uses and was neither prepared at the request of, nor for the specific purchaser, as evidence of the purchaser's real object to acquire the property and not the services producing it.

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