Hawthorn Mellody, Inc. v. Lindley
| Citation | 417 N.E.2d 1257,19 O.O.3d 234,65 Ohio St.2d 47 |
| Decision Date | 18 March 1981 |
| Docket Number | No. 80-993,80-993 |
| Parties | , 19 O.O.3d 234 HAWTHORN MELLODY, INC. et al., Appellees, v. LINDLEY, Tax Commr., Appellant. |
| Court | Ohio Supreme Court |
Syllabus by the Court
The Supreme Court will not overrule findings of fact of the Board of Tax Appeals that are based upon sufficient probative evidence. (Citizens Financial Corp. v. Porterfield, 25 Ohio St.2d 53, 266 N.E.2d 828, approved and followed.)
The Tax Commissioner, appellant herein, is appealing from a June 30, 1980, decision of the Board of Tax Appeals ("board") which reduced certain sales tax assessments against Hawthorn Mellody, Inc. ("Hawthorn"), and two of its wholly-owned subsidiaries, Hawthorn Mellody Farm Dairy, Inc. ("Farm Dairy"), and Royal Crest Dairy Foods, Inc. ("Royal Crest"), appellees herein. Appellees are engaged in the business of processing and distributing milk, ice cream and other dairy products.
During their respective audit periods, appellees, 1 inter alia, purchased a refrigerant tank which stored ammonia; two "Muller" tanks which stored ice cream flavoring; and a certain portion of a case conveyor system which unstacked and cleaned milk cases returned from customers. Additionally, some pieces of equipment were transferred from Hawthorn's St. Louis division to its Royal Crest subsidiary, and from Hawthorn's New York wholly-owned subsidiary to Farm Dairy.
The Tax Commissioner, in his order of November 30 1977, ruled that the above transactions were subject to the sales tax, and assessed appellees accordingly. Pursuant to a consolidated appeal, the board reversed this order in part, determining that these transactions were not subject to the sales tax.
The matter is now before this court on an appeal as a matter of right.
Smith & Schnacke, Joseph M. Rigot and Maryann B. Gall, Columbus, for appellees.
William J. Brown, Atty. Gen., and Mark A. Engel, Columbus, for appellant.
The Tax Commissioner herein appeals a number of the board's determinations. For reasons set forth, we affirm in part and reverse in part.
The commissioner's first argument is that the board erred in determining that appellees' purchases of a refrigerant tank which stored ammonia, and two Muller tanks which stored ice cream flavoring were excepted from sales taxation as adjuncts to property used or consumed directly in the production of tangible personal property for sale under R.C. 5739.01(E)(2) and 5739.01(S).
The record indicates that the refrigerant tank interconnects with a refrigeration system through which ammonia (a coolant) circulates; and that refrigeration is essential to prevent spoilage during the processing of milk and ice cream. The record also indicates that the two Muller tanks are connected by a piping system to containers in which batches of unflavored ice cream are mixed with ice cream flavoring.
R.C. 5739.02 levies an excise tax on "each retail sale made in this state." R.C. 5739.01, in part, provides:
In Canton Malleable Iron Co. v. Porterfield (1972), 30 Ohio St.2d 163, 176-177, 283 N.E.2d 434, this court described the requirements for a sales tax exception under the above subsections as follows:
The commissioner herein argues that neither the refrigerant tank nor the Muller tanks are excepted from sales taxation under R.C. 5739.01(S) and Canton Malleable Iron Co. v. Porterfield, supra, because neither was used "after the transforming or conversion (i. e., the processing of milk and ice cream) ha(d) commenced."
There is no merit to this contention. Based upon record evidence, the board found that the processing of both the milk and ice cream commenced at a considerably early point in time, i. e., when raw milk was pumped from transportation vehicles (tankers) through a clarifier which separated dirt and other foreign particles from the raw milk. It is simply not this court's function to overrule board findings of fact which are based upon sufficient probative evidence. 2 R.C. 5717.04; see, e. g., Citizens Financial Corp. v. Porterfield (1971), 25 Ohio St.2d 53, 266 N.E.2d 828; Emery Industries v. Kosydar (1975), 43 Ohio St.2d 34, 330 N.E.2d 686; and Highlights for Children v. Collins (1977), 50 Ohio St.2d 186, 364 N.E.2d 13.
Alternatively, the commissioner argues that the refrigerant tank is not excepted from sales taxation under R.C. 5739.01(E)(2) and 5739.01(S) because neither the ammonia nor the refrigeration system, i. e., the properties to which the refrigerant tank are adjunct under R.C. 5739.01(S), is used "directly" in the production of milk and ice cream by "processing" within the meaning of R.C. 5739.01(E)(2) and 5739.01(S). 3 The commissioner argues that even though refrigeration may be essential during the processing of milk and ice cream, refrigeration does not actually "process" milk and ice cream because it does not transform or convert them into a different state or form as required by R.C. 5739.01(E)(2) and 5739.01(S). Rather, the commissioner argues, refrigeration merely preserves milk in its present state by preventing spoilage.
We must reject this argument. While mere essentiality to the production of tangible personal property by processing is not sufficient to satisfy the direct use requirement of R.C. 5739.01(E)(2), see, e. g., Canton Malleable Iron Co. v. Porterfield, supra, at pages 175-176, 283 N.E.2d 434; Custom Beverage Packers v. Kosydar (1973), 33 Ohio St.2d 68, 71-72, 330 N.E.2d 686, it would be unreasonable to disaggregate the processing of milk and ice cream in the manner necessary to determine that the refrigeration system and ammonia are not used directly in this process. Thus, as an adjunct to their direct use, the refrigerant tank also satisfies this requirement of R.C. 5739.01(E)(2). 4
Therefore, we affirm the board's decision that the purchases of the refrigerant tank and the two Muller tanks are excepted from sales taxation under R.C. 5739.01(E)(2) and 5739.01(S).
The commissioner next argues that the board erred in determining that a certain portion of appellees' case conveyor system was excepted from taxation as packaging equipment under R.C. 5739.02(B)(15).
The portion of the conveyor system at issue unstacks and cleans returned plastic and wire milk cases and then conveys them to another part of the system where they are automatically repacked with filled milk cartons. The commissioner has not assessed other portions of the conveyor system.
R.C. 5739.02, in part, provides:
There is no dispute that appellees are engaged in an activity mentioned in R.C. 5739.01(E)(2), and that the portion of the conveyor system at issue is machinery or equipment within the meaning of R.C. 5739.02(B)(15). In addition, the commissioner does not dispute that the plastic and wire milk cases are "packages" within the meaning of R.C. 5739.02(B)(15). Cf. Custom Beverage Packers v. Kosydar, supra, at pages 73-74, 330 N.E.2d 686; Cole National Corp. v. Collins (1976), 46 Ohio St.2d 336, 338, 348 N.E.2d 708; Highlights for Children v. Collins, supra, at page 191, 364 N.E.2d 13.
The commissioner's argument is that, in view of the definition of "packaging" in R.C. 5739.02(B)(15), i. e., "placing therein," the portion of the conveyor system at issue is not excepted from taxation as "machinery * * * (or) equipment * * * use(d) in packaging tangible personal property produced for sale * * * " under R.C. 5739.02(B)(15). It is the commissioner's position that only machinery or equipment used in placing tangible personal property produced for sale in packages is entitled to a tax exception.
The commissioner buttresses the above argument by relying on National Tube Co. v. Glander (1952), 157 Ohio St 407, 105 N.E.2d 648, for the proposition that statutes relating to exceptions from taxation are to be strictly construed against the taxpayer. In this connection, he asks that we ignore dictum in Custom Beverage Packers v. Kosydar, supra, at page 73, 330 N.E.2d 686, to the effect that machinery or equipment need only "operate" on a package to be excepted from taxation under R.C. 5739.02(B)(15). The commissioner asserts that the board relied on this overly broad dictum in erroneously granting a tax exception in this case and in other cases. See, e. g., Pepsi-Cola Bottling Co. of Cincinnati v. Kosydar (November 27, 1973), 49 BTA Decns., Index No. 12, at page 11.
We agree with the commissioner's construction of R.C....
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