Koch v. Kosydar, 72-333

• Decision Date: 06 December 1972
• Docket Number: No. 72-333,72-333
• Citation: 61 O.O.2d 329,32 Ohio St.2d 74,290 N.E.2d 847
• Parties: , 61 O.O.2d 329 KOCH, d. b. a. Pacific International, Appellee, v. KOSYDAR, Tax Commr., Appellant.
• Court: Ohio Supreme Court

Page 74

32 Ohio St.2d 74

290 N.E.2d 847, 61 O.O.2d 329

KOCH, d. b. a. Pacific International, Appellee, v. KOSYDAR, Tax Commr., Appellant.

No. 72-333.

Supreme Court of Ohio.

Dec. 6, 1972.

Syllabus by the Court

1. 'Personal service,' as used in R.C. § 5739.01(B), means an act done personally by an individual; it is, in effect, an economic service involving either the intellectual or manual personal effort of an individual, and is not the saleable product of his skill.

2. The procedure for determining whether the transfer of possession of tangible personal property qualifies it for tax exemption as a personal service transaction under R.C. § 5739.01(B) is, in addition to determining the economic inconsequentiality of the property, to determine whether the overall effort exerted in rendering the service is substantially provided by (1) the persons rendering the service, (2) the property transferred or (3) the subscribers. If the overall effort is not substantially made by the persons rendering the service, a personal service transaction does not exist.

Appellee, William J. Koch, doing business as Pacific International, is a licensed representative of Pacific International, Ltd., a California corporation which nationally advertises a program to cure enuresis. Inquiries received from prospective customers are sold to appellee.

Appellee, or one of his representatives, then approaches prospective customers to describe and sell the program offered by Pacific International. If a customer agrees to buy the program, appellee has him sign a contract, the cost of which varied between $290 and $395 during the audit period. Purchasers of the program receive possession and use of a mechancial device called the 'Little Watchman,' an instruction manual, and a packet of report cards.

The 'Little Watchman' consists of two pieces of reinforced wire screen connected to a battery. The enuretic sleeps on top of the screen, and the 'Little Watchman' is activated by drops of urine hitting the screen, which causes a bell or a buzzer to sound. The device is originally attached to the bed by appellee or one of his representatives.

The instruction manual describes in detail the parents' role in the successful treatment of enuresis. When an emission occurs the enuretic is awakened by the bell. Upon awakening, the enuretic, fully awake, must go to the bathroom. To insure this result, one of the parents must also be awakened by the bell. If the enuretic fails to awaken, the parents are instructed to splash cold water on his face.

In addition, the parents are instructed to provide the child with a hard bed; to increase the child's liquid intake at bedtime; to establish a routine bedtime for the child; and to prevent the enuretic from watching exciting TV programs before going to bed. The enuretic must be encouraged to awaken before the bell sounds, and the parents must prepare a record of each emission on report cards, noting the time, size of spot, and other information. These cards are then mailed to Pacific International's case direction center, where they are reviewed and an appropriate letter is pulled from a file and sent back to the parents.

The cost of the 'Little Watchman' over its 8-year expected life averages $52.50, and each unit is used by approximately three customers in the course of a year, producing a resulting cost per subscriber of $2.65. Comparable units could be purchased locally for $19.95. Appellee acquired the 'Little Watchman' from Pacific International, Ltd., but paid neither the Ohio sales nor use tax upon the subsequent purchases.

Appellee appealed the Tax Commissioner's assessment order to the Board of Tax Appeals, which reversed the order of the Tax Commissioner. From that decision, the Tax Commissioner has appealed to this court pursuant to R.C. § 5717.04.

Young & Jones and Fred E. Jones, Lebanon, for appellee.

William J. Brown, Atty. Gen., Maryann B. Gall and Will Kuhlmann, Columbus, for appellant.

STERN, Justice.

The Board of Tax Appeals, in reversing the assessment order of the Tax Commissioner, relied upon its interpretation of the syllabus in Machinery Moving v. Porterfield (1971), 26 Ohio St.2d 99, 269 N.E.2d 418, which provides:

'The transfer of possession of bins and containers under refuse removal contracts is a personal service transaction and involves only the transfer of tangible personal property as an inconsequential element, for which no charge is made, and such transfer is exempt from the sales tax under R.C. 5739.01(B).' Machinery Moving v. Porterfield, supra, is not controlling in the instant case.

It is not disputed that the cost of the equipment here involved is economically inconsequential when compared with the entire charge. However, economic inconsequentiality is not the sole determining factor. Recording Devices v. Porterfield (1972), 30 Ohio St.2d 208, 211, 283 N.E.2d 626.

We look as well to the function of the equipment in regard to the overall service being provided. In Machinery Moving, the bins were inanimate objects. Both the bins and the subscribers involved there played only a minor role in the overall service transaction. A similar situation existed in American District Telegraph Co. v. Porterfield (1968), 15 Ohio St.2d 92, 238 N.E.2d 782, which involved a central alarm system. In ADT, no function was performed by the subscribers and, although the alarm device did send a signal from the subscribers' premises, that function was insignificant when compared to the substantial service performed by those offering the service.

In ADT, this court held that the alarms, by themselves, were useless, since the subscribers had sought protection of their property, which, the court said 'comes only * * * when those companies (ADT) contact the local authorities and send out their own guards.' The court stated further that 'the equipment * * * may reasonably be viewed as only an aid in the rendering of protection service.'

In this case, the 'Little Watchman' was not just an aid; it was essential in solving the enuretic's problem.

Further, as was pointed out in Columbus Coated Fabrics v. Porterfield (1972), 30 Ohio St.2d 307, 310, 285 N.E.2d 50, the emphasis in ADT was placed upon the substantial manual personal service provided by the persons rendering the service. The same is true in Machinery Moving, for in both cases the subscriber contracted to...