Interlake, Inc. v. Kosydar

• Decision Date: 18 June 1975
• Docket Number: No. 74-634,74-634
• Citation: 71 O.O.2d 436,330 N.E.2d 444,42 Ohio St.2d 457
• Parties: , 71 O.O.2d 436 INTERLAKE, INC., Appellant, v. KOSYDAR, Tax Commr., Appellee.
• Court: Ohio Supreme Court

Page 457

42 Ohio St.2d 457

330 N.E.2d 444, 71 O.O.2d 436

INTERLAKE, INC., Appellant, v. KOSYDAR, Tax Commr., Appellee.

No. 74-634.

Supreme Court of Ohio.

June 18, 1975.

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

William J. Brown, Atty. Gen., and John C. Duffy, Jr., Columbus, for appellee.

PER CURIAM.

The issue in this case is whether the coking equipment is excepted from Ohio sales and use taxes.

Appellant contends that the equipment is excepted from the tax by R.C. 5739.01, which reads, 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 * * *.'

In R. R. Donnelley & Sons Co. v. Porterfield (1972), 30 Ohio St.2d 219, 224, 284 N.E.2d 171, 175, this court said:

'While the addition of the word 'directly' in the 1935 amendment is well known, the importance of the addition of other language is sometimes overlooked. The 1935 amendment did not except from the sales tax all sales where the purpose of the consumer was 'to use or consume the thing transferred directly in manufacturing * * * (or) processing.' Instead, the exception from taxation was limited to sales where the purpose of the consumer was 'to use or consume the thing transferred directly in the production of tangible personal property for sale by manufacturing (or) processing.' (Emphasis added.)'

In Ohio Ferro-Alloys Corp. v. Kosydar (1973), 34 Ohio St.2d 113, 115, 296 N.E.2d 533, 535, the court said:

'For materials or equipment to be excepted under the 'manufacturing exception,' they must be involved in the manufacturing process and that involvement must be direct.

'First, it is necessary to determine the beginning and end of the manufacturing process; anything that is used before or after such process is not within the exception of R.C. 5739.01(E)(2). This court, in Canton Malleable Iron Co. v. Porterfield (1972), 30 Ohio St.2d 163, 170, 283 N.E.2d 434, 439, held that 'the terms 'manufacturing' and 'processing' imply essentially a transformation or conversion of material or things into a different state or form from that in which they originally existed-the actual operation incident to changing them into marketable products."

In the present case, the 'tangible personal property for sale' that is produced by appellant, Interlake, is the merchant pig iron. The manufacturing process for which a beginning and end must be determined is the one that produces that marketable product. The transformation of the raw materials, iron ore, coke and limestone, into the particular article to be sold, merchant pig iron, begins in the blast furnace where they are heated together. See Jackson Iron & Steel Co. v. Glander (1950), 154 Ohio St. 369, 96 N.E.2d 21.

This court finds, therefore, that the excepted manufacturing in this case begins in the blast furnace. The coking equipment is involved in "* * * operations preliminary and preparatory to manufacturing or processing, and are not used or consumed directly in producing tangible personal property for sale by manufacturing or processing within the contemplation of the applicable statutes, and hence their purchase or use was not excepted from taxation' * * *.' Ohio Ferro-Alloys Corp. v. Kosydar, supra, at page 117, 296 N.E.2d at page 536.

Appellant also argues that it is entitled to an exemption under Tax Commissioner's Rule TX-15-08(9), which states:

'Persons engaged in the production of tangible personal property for sale by manufacturing, processing, assembling or refining, may claim exemption when purchasing:

'* * *

'(2) Production machinery, which means any machinery, equipment or other personal property which acts upon the materials or parts during the conversion of or assembling of the materials or parts into a finished product produced for sale.

'* * *

'(9) Machinery, equipment or other personal property used primarily to produce nonpurchased gas, water, steam or other products used to operate or to maintain the operating capacity of the machinery, equipment or other personal property in (2), (5), (8), (11) and (12) and fuel for such machinery, equipment or other personal property to the extent that the gas, water, steam or other products so produced are used to operate or to maintain the operating capacity of the machinery and equipment or other personal property in (2), (5), (8), (11) and (12) and equipment which transmits the gas, water, steam or other products to the machinery, equipment or other personal property in (2), (5), (8), (11) or (12).'

The question of the application of TX-15-08(9) to the instant case has been rendered moot by the foregoing determination that the equipment is not excepted from taxation by R.C. 5739.01(E)(2).

Decision affirmed.

C. WILLIAM O'NEILL, C. J., and HERBERT, STERN, CELEBREZZE and WILLIAM B. BROWN, JJ., concur.

CORRIGAN and PAUL W. BROWN, JJ., dissent.

WILLIAM B. BROWN, Justice (concurring).

The dissenting opinion correctly states that '(u)nless our decision in Mead (Corp. v. Glander (1950), 153 Ohio St. 539, 93 N.E.2d 19) is to be overruled, we must hold herein that Interlake's manufacturing process began when it converted coal to coke in its coke ovens.'

When this court decided Ohio Ferro-Alloys Corp. v. Kosydar (1973), 34 Ohio St.2d 113, 296 N.E.2d 533, I considered the Mead decision as being overruled. I join the majority in this case which reinforces that fact sub silentio.

PAUL W. BROWN, Justice (dissenting).

Interlake, Inc., has challenged a use tax assessed by the Tax Commissioner of Ohio on repair parts and operating supplies for Interlake's coke ovens and coke handling equipment, and on a conveyor belt used to convey coke from the coke oven to the blast furnace. The Board of Tax Appeals, in affirming the commissioner's assessment, divided the manufacture of pig iron into steps, and held that only the final step in the process constituted 'manufacturing' within the meaning of R.C. 5739.01(E)(2). The majority of this court affirms.

Today's decision marks a clear break with historical and judicial precedent. From its early beginnings in Ohio history, the manufacture of pig iron has begun with the assembling of raw materials, and the conversion of wood to charcoal or coal to coke. Since the inception of sales and use taxes, in the mid-1930's, the parts, supplies, and equipment used in the conversion process have been excepted from taxation.

Now, the Tax Commissioner has assessed, and the Board of Tax Appeals and the majority affirmed, a use tax on just such items, despite the fact that the applicable statutes remain substantially unchanged. I fail to see the rationale behind this departure from past practice, and therefore dissent.

I

Interlake, the appellant herein, manufactures merchant pig iron at its Toledo, Ohio, facility. Interlake produces some 300 different grades of pig iron, each according to customer order or specification. Prices vary by grade, which are distinguished from one another by their chemical composition.

In manufacturing pig iron, Interlake utilizes three primary raw materials-raw coal, iron ore, and limestone. The coal is crushed and blended into a uniform granular mixture, and charged into coke ovens, where volatile matter is driven off, leaving a 90 percent carbon content residue of coke. This incandescent coke is pushed out of the coke ovens, quenched with water, cooled, crushed to a suitable size, and conveyed directly by conveyor belt to the blast furnace.

One-half hour after the coke is removed from the coke oven, it arrives at the blast furnace. There, coke, iron ore and limestone are continuously fed into the top of the blast furnace, where hot air ignites the coke. As the materials gravitate from the top, the ore releases its iron content. The limestone reacts with impurities in the ore and coke to form slag. Molten iron is ultimately tapped from the bottom of the blast furnace into ladles. These ladles are then transported directly to pig casting machines, where 20 and 40 pound pigs are cast into their physical form.

The process herein described, by which Interlake combines coal, iron ore, and limestone to produce pig iron, continues hour after hour, day after day. It was discussed by Mr. Robert Naslund, Interlake's general superintendent, in testimony before the Board of Tax Appeals. Naslund was asked:

'Q. Will you again state briefly how you make these different grades of pig iron?

'A. There is a variety of controls that we employ in changing the chemistry of pig iron, the chemistry being the key with respect to specifications as far as our customers are concerned. We change the amount of coke employed in the blast furnace, producing a particular grade. We change our mix to change the chemistry in the ultimate product. They are blended in the blast furnace to come out with a particular chemistry that we are looking for. We change and alter the temperature of the air that enters into the blast furnace used to oxidize the coke to ultimately form carbon monoxide which is the work horse in the blast furnace, and the key in making pig iron.'

Later in the proceeding, Naslund responded to the following questions:

'Q. Without varying the various amounts of carbon in the iron could you actually produce the number of grades you do produce?

'Q. No, we couldn't.

'* * *

'Q. Is it possible for you to make pig iron without the use of coke in the process you described?

'A. No, we do not do it.'

II

This appeal presents two major issues for determination: First, whether the conversion of coal to coke is 'manufacturing,' within the meaning of R.C. 5739.01(E)(2) and (S), and decisions of this...