NLO, Inc. v. Limbach

• Decision Date: 16 June 1993
• Docket Number: No. 92-1381,92-1381
• Citation: 613 N.E.2d 193,66 Ohio St.3d 389
• Parties: NLO, INC., Appellant, v. LIMBACH, Tax Commr., Appellee.
• Court: Ohio Supreme Court

Page 389

66 Ohio St.3d 389

613 N.E.2d 193

NLO, INC., Appellant, v. LIMBACH, Tax Commr., Appellee.

No. 92-1381.

Supreme Court of Ohio.

Submitted April 6, 1993.

Decided June 16, 1993.

Vorys, Sater, Seymour & Pease, Raymond D. Anderson and Eric A. Pierce, Columbus, for appellant.

Lee I. Fisher, Atty. Gen., and Barton A. Hubbard, Asst. Atty. Gen., for appellee.

PER CURIAM.

In Proposition of Law No. 1, NLO argues that it was not the consumer in these transactions because it merely received physical possession of the items, while DOE paid for them and received title. The commissioner responds that receipt of possession is enough if another pays the consideration for the item.

A "sale," on which the tax is levied (R.C. 5739.02), includes "[a]ll transactions by which title or possession, or both, of tangible personal property, is or is to be transferred, or a license to use or consume tangible personal property is or is to be granted." R.C. 5739.01(B)(1). However, no sale occurs when no consideration is paid. R.C. 5739.01(B); Barth Corp. v. Schneider (1966), 6 Ohio St.2d 108, 35 O.O.2d 131, 216 N.E.2d 43. But, under Penton Publishing Co. v. Kosydar (1976), 45 Ohio St.2d 16, 74 O.O.2d 43, 340 N.E.2d 396, a third party may pay the consideration for the transfer to a consumer, who would then owe the tax. Here, DOE provided the money to pay for the transfer of the disputed items to NLO, and this payment provided consideration for a sale to NLO.

In Gen. Motors Corp. v. Limbach (1989), 44 Ohio St.3d 115, 541 N.E.2d 593 ("GM [1989]"), cited for support by NLO, GM hired a construction manager to supervise the remodeling of its assembly plant. The manager received bids, evaluated them, and made recommendations to GM. On GM's approval, the manager issued purchase orders to the contractors and supervised the contractors in the field.

When a contractor submitted a bill, the manager reviewed it and forwarded it to GM for payment. GM then sent a check to the manager, which deposited the money in its account and paid the contractor with its check. The commissioner assessed GM for the entire billing forwarded to GM, and we affirmed.

GM did not argue that the manager, and not GM, was the consumer. Instead, it raised the argument, which we rejected, that the manager performed a personal service and did not transfer any tangible personal property to it. We explained that GM received tangible personal property in these transactions and was required to pay the tax on such transactions. According to the decision, " * * * the commissioner did not assess a tax on a 'personal service' but rather on the transfer, through [the manager], of tangible personal property * * *." 44 Ohio St.3d at 116, 541 N.E.2d at 595. Thus, GM (1989) does not support NLO's argument here.

In Proposition of Law No. 2, which is NLO's main argument, NLO contends that it purchased the items and, simultaneously with delivery, resold them to DOE because DOE then obtained title. Consequently, it applies for exception under the resale exception of R.C. 5739.01(E)(1). The commissioner replies that this exception applies only where the resale is to a consumer who uses or consumes the thing. Instead, so she argues, NLO obtained the items, used and consumed them in performing the contract, and did not resell them in the same form received.

R.C. 5739.01(E)(1) states:

"(E) 'Retail sale' and 'sales at retail' include all sales except those in which the purpose of the consumer is:

"(1) To resell the thing transferred or benefit of the service provided, by a person engaging in business, in the form in which the same is, or is to be, received by him[.]"

NLO relies chiefly on Dresser Indus., Inc. v. Lindley (1984), 12 Ohio St.3d 68, 12 OBR 60, 465 N.E.2d 430. In Dresser, Dresser's Jeffrey Mining Machinery Division contracted with the United States government to design and develop an explosion-proof electrical enclosure and to engineer the development of a miner-bolter system. Under the contracts, all tangible personal property and services purchased by Jeffrey in performing the contract were to, and did, become the property of the government.

Jeffrey engaged several subcontractors to supply technical and engineering plans, engineering data, prototypes, and equipment. Under the prime contract, the government ultimately received the reports and equipment.

The commissioner assessed Jeffrey's purchases, but we affirmed the BTA's reversal of the commissioner's order. We applied the primary-use test because Jeffrey used the items and thereafter transferred them to the government in the form received by Jeffrey. The court held that Jeffrey's primary purpose in obtaining the items was to resell them as an integral part of the finished product. Our decision rested only in part on the agreement that title to the tangible property created for the projects vested automatically in the government. This agreement compelled Jeffrey to resell the property.

We cannot apply Dresser to the instant facts. In Dresser, the government hired Jeffrey to invent machinery; here, the government hired NLO to operate its plant and manufacture uranium. In Dresser, Jeffrey received reports and prototype equipment to invent and develop machinery; here, NLO used or consumed the purchases, sometimes entirely, in operating the plant. Indeed, many of the disputed purchases were discarded, if not totally consumed, and, thus, possession could not be transferred to the government. Moreover, NLO does not argue that the property had serial uses as in Dresser; it argues that it purchased the property with DOE's money and that it resold the property to DOE at the exact time it received it from the vendor. Thus, Dresser is not on point.

Furthermore, in United States v. New Mexico, supra, the United States Supreme Court held that, under contracts similar to NLO's, sales to the contractor "are in neither a real nor a symbolic sense sales to the 'United States itself.' " 455 U.S. at 743, 102 S.Ct. at 1387, 71 L.Ed.2d at 598. That court characterized these transactions as an effort by the government "to tap the expertise of industry, without subjecting its contractors to burdensome federal procurement regulations." Id. at 737, 102 S.Ct. at 1384, 71 L.Ed.2d at 594. The New Mexico court ultimately decided that federal immunity does not prohibit the tax; NLO here contends, instead, that state law excepts the disputed sales.

We find that Gen. Motors Corp. v. Kosydar (1974), 37 Ohio St.2d 138, 66 O.O.2d 304, 310 N.E.2d 154 ("GM [1974]" ), presents a better analogy. In GM (1974), GM purchased parts from outside suppliers. A supplier needed tooling, i.e., dies, jigs, fixtures and gauges, to manufacture the parts. The supplier obtained the tooling by either producing it itself or purchasing it from tool houses. GM paid the supplier for the tooling costs. GM then took title to the tooling, even though the supplier maintained possession of the tooling to produce the part. According to the decision, GM took title to prevent the supplier from manufacturing the desired part for any other organization and to enable GM to remove the tooling from the supplier if work stoppages, insolvency, or other inability prevented the supplier from meeting the production schedule. The commissioner assessed GM for the tooling purchases.

We ruled that the contracts between GM and the suppliers were bilateral "requirements contracts." GM granted exclusive licenses to the suppliers to use GM's tooling and bought from the suppliers all of GM's requirements that the suppliers produced with the tooling. In return, the suppliers promised to produce exclusively for GM all the parts GM required. We decided that the suppliers' agreements constituted consideration for the transfer of possession of the tooling to them, so that it was a sale to the suppliers.

We held that GM purchased the tooling by paying for it and receiving title to it, but that GM resold the tooling to the supplier when it placed the supplier in possession. Thus, GM's purchase of the tooling was excepted under the resale exemption because it resold the tooling to the suppliers.

In the instant case, DOE, in a role analogous to GM's, agreed to install NLO in DOE's plants and to purchase whatever NLO needed to purify uranium. NLO agreed to operate the plant under these conditions and transfer all its production to DOE, which agreed to accept all production. Thus, under GM (1974), DOE purchased the disputed items and resold them to NLO. Consequently, DOE's purchases are excepted under the resale exception, while the transfers to NLO are not, since NLO is the ultimate consumer. This result, taxing NLO as the consumer, logically extends GM (1974).

In Proposition of Law No. 4, NLO argues that the enactment of Am.Sub.H.B. No. 298, eff. July 26, 1991, is a concession that the subject transactions were formerly excepted. The commissioner, conversely, maintains that Am.Sub.H.B. No. 298 codified existing law.

Am.Sub.H.B. No. 298 amended R.C. 5739.01(D), as of August 1, 1991, to define the performer under a facility management contract who purchases property and services to perform the contract as a "consumer." The Act specifically denied exception for this type of purchase under the resale exception.

Prior to New Mexico, the commissioner treated these purchases as excepted under the resale exception. The instant case indicates her change of mind. Thus, some confusion existed whether these sales were excepted. However, clarifying the taxable status of a sale falls short of the state's conceding that the sales were previously excepted. We conclude that this Act codified the law set forth in GM (1974).

In Proposition of Law No. 5, NLO contends that the Supremacy Clause of the federal Constitution immunizes NLO's purchases from sales and...