NDM Acquisition Corp. v. Tracy, 95-1804

• Decision Date: 24 July 1996
• Docket Number: No. 95-1804,95-1804
• Citation: 666 N.E.2d 1080,76 Ohio St.3d 83
• Parties: NDM ACQUISITION CORP., Appellant, v. TRACY, Tax Commr., Appellee.
• Court: Ohio Supreme Court

Page 83

76 Ohio St.3d 83

666 N.E.2d 1080

NDM ACQUISITION CORP., Appellant, v. TRACY, Tax Commr., Appellee.

No. 95-1804.

Supreme Court of Ohio.

Submitted April 4, 1996.

Decided July 24, 1996.

During the audit period, November 1, 1989 through June 30, 1990, appellant, NDM Acquisition Corp. ("NDM"), manufactured various disposable and reusable products for use in hospitals and elsewhere in the medical field. In order to induce potential customers to switch from competitive products, NDM gave away certain products, such as cables for EKG machines. In this manner, potential customers were able to use NDM's disposable electrodes on a continuing basis.

During the audit period, when NDM removed a free sample from inventory, it accrued and paid a use tax on the cost of the materials contained in the free sample. As a result of the audit performed by the Tax Commissioner, additional use tax was assessed against NDM based on the difference between the fully absorbed cost and the cost of the materials.

Full absorption accounting includes in the cost of a product, the cost of the materials, the cost of direct labor, and the indirect costs, such as taxes and depreciation and organizational costs related to manufacturing.

The Board of Tax Appeals ("BTA") affirmed the commissioner's assessment.

The cause is now before the court upon an appeal as of right.

Baker & Hostetler, Edward J. Bernert and George H. Boerger, Columbus, for appellant.

Betty D. Montgomery, Attorney General, and James C. Sauer, Assistant Attorney General, for appellee.

PER CURIAM.

The primary issue raised by NDM is whether the price of the free samples, against which the use tax is assessed, includes only the cost of the materials or whether it also includes internal labor and overhead costs. R.C. 5741.01(G)(1) defines "price" as:

" 'Price' * * * means the aggregate value in money of anything paid * * * by a consumer to a seller in the complete performance of the transaction * * * by which tangible personal property has been purchased * * * for * * * use * * * in this state, without any deduction or exclusion on account of the cost of the property sold, cost of materials used, labor or service cost * * * or any other expense. * * * If a consumer produces the tangible personal property used by him, the price is the produced cost of such tangible personal property. * * * " (Emphasis added.)

In addition, R.C. 5741.01(D) defines "purchase" to include "production, even though the article produced * * * was used * * * by the producer."

NDM contends that for the tangible personal property it produces and gives away, the term "produced cost" in R.C. 5741.01(G)(1) includes only the cost of the materials used. A similar contention was put forth recently by the taxpayer in Am. Cyanamid Co. v. Tracy (1996), 74 Ohio St.3d 468, 659 N.E.2d 1263. In Am. Cyanamid, the taxpayer-drug company distributed free samples of drugs it manufactured outside Ohio, to physicians in Ohio. American Cyanamid contended that the use tax should be imposed only upon the cost of the raw materials and packaging used in the free samples. We disagreed, finding that "the term 'produced cost' includes both labor and overhead." Id. at 471, 659 N.E.2d at 1266.

In Am. Cyanamid, we stated that there was no indication that the General Assembly meant to limit "produced cost" to raw materials. Id. Therefore, based on the plain wording of R.C. 5741.01(G)(1) and our decision in Am. Cyanamid, we find that NDM was correctly assessed use tax upon the fully absorbed cost of the free samples.

NDM also contends that as a result of a prior audit, it was misled as to the commissioner's policy on taxing free goods. During this prior audit the tax agent initially assessed the fully absorbed cost of the free samples. One of the NDM's employees wrote a letter to the tax agent stating that only the cost of the materials should be assessed. For reasons which do not appear in the record, the tax agent canceled the use tax assessed against the costs of the free samples other than the cost of the materials.

In Switzer v. Kosydar (1973), 36 Ohio St.2d 65, 65 O.O.2d 215, 303 N.E.2d 860, the taxpayer had been advised by an agent of the Department of Taxation that he was not required to collect tax on his sales of fish to operators of pay lakes. In addition, the evidence in Switzer indicated that, until recently, the commissioner had not assessed the sales of other fish haulers operating like Switzer. We upheld the assessment against Switzer based upon Recording Devices, Inc. v. Bowers (1963), 174 Ohio St. 518, 23 O.O.2d 150, 190 N.E.2d 258, wherein we held in paragraph one of the syllabus, "Estoppel does not apply against the state of Ohio as to a taxing statute."

In Recording Devices we did recognize an exception to the general rule concerning estoppel. The facts in Recording Devices showed that the taxpayer had received a letter from the Ohio Tax...