OAMCO v. Lindley, 85-1114

• Decision Date: 25 June 1986
• Docket Number: No. 85-1114,85-1114
• Citation: 24 Ohio St.3d 124,493 N.E.2d 1345
• Parties: , 24 O.B.R. 347 OAMCO, Appellant, v. LINDLEY, Tax Commr., Appellee.
• Court: Ohio Supreme Court

Page 124

24 Ohio St.3d 124

493 N.E.2d 1345, 24 O.B.R. 347

OAMCO, Appellant, v. LINDLEY, Tax Commr., Appellee.

No. 85-1114.

Supreme Court of Ohio.

June 25, 1986.

Rehearing allowed July 30, 1986.

Knepper, White, Arter & Hadden and R. Douglas Wrightsel, Columbus, for appellant.

Anthony J. Celebrezze, Jr., Atty. Gen., and James C. Sauer, Columbus, for appellee.

Murphey, Young & Smith and Joseph C. Winner, Columbus, urging reversal for amicus curiae, Barber-Greene Co.

Knepper, White, Arter & Hadden and Michael P. Mahoney, Columbus, urging reversal for amicus curiae, Flexible Pavements, Inc.

PER CURIAM.

At issue in this case is whether the various parts of the manufacturing process are directly related to, or used in, the manufacture of appellant's product. For the reasons which follow, we affirm in part and reverse in part the decision of the Board of Tax Appeals.

Initially, appellant would have this court adopt the integrated plant theory. This theory views all the components of the manufacturing process as a single unit for tax purposes, and would allow no inquiry beyond whether the whole plant was purchased at the same time. It further implies that every component of the plant is directly used in manufacturing. However, "[t]his theory has never been accepted in Ohio * * *." Southwestern Portland Cement Co. v. Lindley (1981), 67 Ohio St.2d 417, 419, 424 N.E.2d 304 , citing Youngstown Bldg. Material & Fuel Co. v. Bowers (1958), 167 Ohio St. 363, 149 N.E.2d 1 , and Ohio Ferro-Alloys Corp. v. Kosydar (1973), 34 Ohio St.2d 113, 296 N.E.2d 533 . The integrated plant theory would prevent a part-by-part analysis, which we think is essential. We therefore do not adopt this theory.

It is readily apparent that equipment used in the manufacturing of products is exempt from sales and use taxes. R.C. 5741.02(C)(2), 5739.01(E)(2), and 5739.02(B)(15) and (16). To qualify for such exemption, a particular component must be "used directly in manufacturing." Southwestern Portland Cement Co., supra, 670 Ohio St.2d at 419, 424 N.E.2d 304, citing Tri-State Asphalt Corp. v. Glander (1950), 152 Ohio St. 497, 90 N.E.2d 366 . To determine whether the component is used directly in manufacturing, we must ask, " 'when does the actual manufacturing activity begin and end * * *.' " Southwestern Portland Cement Co., supra, 67 Ohio St.2d at 421, 424 N.E.2d 304. "Manufacturing" has been statutorily defined to mean, "transformation or conversion of material or things into a different state or form from that in which they originally existed and * * * the adjuncts used during and in, and necessary to carry on and continue, production * * *." R.C. 5739.01(R).

In the context of this case, it is readily apparent that the transformation or conversion of material or things into a different state or form occurs primarily in the drum mixer. There, the various ingredients are heated and mixed so that they become the product ultimately sold. However, the manufacture of the product is, in no sense, either initiated or ended in the drum mixer.

As a matter of factual determination, the materials utilized are prepared before they reach the drum mixer. A precise mixing system composed of various small conveyor belts regulates the flow of aggregates from the bins. The result is a uniform size and weight of aggregate, which is essential to the required standardization of product. Likewise, the feed belt conveyor and scale are utilized to regulate the amount of asphalt cement to be added to a particular weight/volume of aggregate. Without these pieces of equipment, there could be no mix specifications, nor constancy of finished product. Without doubt, they are "adjuncts used during and in, and necessary to carry on and continue, production." R.C. 5739.01(R).

The heated main conveyor belt and surge bin are utilized to carefully remove the freshly mixed asphalt from the dryer drum into the trucks. The product, although complete in the dryer drum, is nevertheless not capable of maintaining itself in the form required for delivery. The heated conveyor belt moves the material in small batches to maintain the aggregate consistency. Without this heated equipment, the material would harden after exiting from the dryer drum. Thus, far from merely transporting the product, these machines maintain the product in heated, usable form until delivery. As such, they are crucial for this manufacturing process. Further, in Hawthorn Mellody v. Lindley (1981), 65 Ohio St.2d 47, 417 N.E.2d 1257 , the tax-exempt equipment was for the refrigeration of raw milk and ice cream. Such refrigeration was said to be "essential to prevent spoilage during the processing * * *." Id. at 48, 417 N.E.2d 1257. The heated main conveyor belt and surge bin are utilized in the very same sense by appellant. Without the heat, and special handling, the asphalt will quickly become an unmarketable, solid mass. Consequently, the equipment utilized to preserve the required product state is an adjunct to property used or consumed directly in the production of tangible personal property. See R.C. 5739.01(E)(2), and Hawthorn Mellody, supra, at 49-50, 417 N.E.2d 1257.

The unlicensed front-end loading vehicle as well as the holding bins are asserted to be tax-exempt under the holding of National Lime & Stone Co. v. Kosydar (1974), 38 Ohio St.2d 206, 311 N.E.2d 899 . In that case, the front-end loading vehicles were utilized to load and blend piles of stone aggregate as part of the processing of raw stone into special sizes of crushed stone. The holding bins were used to keep the materials categorized. Id. at 207, 311 N.E.2d 899. In the present case, the same equipment is put to the same use. Also, appellant's finished product similarly requires special mixes of particular sizes of stone. We must therefore conclude that the bins and front-end loader herein were as directly involved in transforming materials into the finished product as the equipment in National Lime & Stone Co., and thus subject to the exemption in R.C. 5739.01(R).

The control house, which functions to control all of the equipment and therefore regulate all variables, is exempted to the extent and in the direct proportion that it controls equipment subject to an exemption. Also, repair parts allocable to exempt equipment are hereby exempted. However, we are unable to find any exception applicable to the truck scales, since they are used outside the manufacturing process.

Accordingly, the decision of the Board of Tax Appeals is affirmed in part and reversed in part.

Decision affirmed in part and reversed in part.

SWEENEY, LOCHER, HOLMES and DOUGLAS, JJ., concur.

CLIFFORD F. BROWN and WRIGHT, JJ., concur in judgment.

CELEBREZZE, C.J., concurs in part and dissents in part.

WRIGHT, Justice, concurring.

While I agree with the majority's outcome, I would go further and adopt the integrated plant theory. I believe that when all the component parts of a manufacturing plant are indispensable to the production process, the parts should be excluded from Ohio sales and use taxes.

This court has stated that the primary purposes of the manufacturing exemption are: (1) to encourage the production of more valuable tangible personal property for sale by exempting the property used and consumed by the producer in producing such ultimate tangible personal property, and (2) to avoid double taxation. See, e.g., Bailey v. Evatt (1944), 142 Ohio St. 616, 620, 53 N.E.2d 812 . The integrated plant theory better serves these purposes than does the physical change theory. Instead of creating an incentive to use modern, efficient systems and machines that enhance economic and industrial growth through improved and effective competition, the physical change theory encourages the use of inefficient plant design and obsolete equipment.

Appellant's manufacturing process for asphalt concrete presents a perfect example of this technological disincentive. The items in the contested assignment are integral parts of appellant's plant and are necessary for the manufacture of asphalt. Appellant owns a "drum mix" plant, which is a sophisticated, cost-effective, continuous production plant. In the less efficient "batch" method of production, a physical change in the product occurs in several components rather than just one. Use of the "batch" method would allow a number of the component parts to be deemed tax-exempt under the physical change theory. Application of this theory to the efficient, integrated "drum mix" method in which the actual physical change occurs in only one component of production will increase the cost of utilizing this new technology. Manufacturers will then be discouraged from utilizing the more efficient, technologically superior plant design.

Further, the physical change theory arbitrarily ignores the importance of particular components of the manufacturing process. Equipment that makes small, relatively unimportant changes in a product is tax-exempt. In contrast, equipment that enables a major change to occur or to be preserved is taxable.

The application of the physical change theory has created unnecessary and inappropriate confusion as to which equipment is or is not exempt. Over the last several decades, the Ohio courts and the Board of Tax Appeals have decided, on a case-by-case basis, whether specific machinery or equipment is excluded from Ohio sales and use taxes under this exemption. ¹ See, e.g., Southwestern Portland Cement Co. v. Lindley (1981) 67 Ohio St.2d 417, 424 N.E.2d 304 ; Ohio Ferro-Alloys Corp. v. Kosydar (1973), 34 Ohio St.2d 113, 296 N.E.2d 533 ; Canton Malleable Iron Co. v. Porterfield (1972), 30 Ohio St.2d 163, 283 N.E.2d 434 ; Youngstown Bldg. Material & Fuel Co. v. Bowers (1958), 167 Ohio St. 363, 149 N.E.2d 1 . Because each manufacturing process or system is unique, a decision as to where the physical transformation or conversion begins or ends with respect to a certain manufacturing process applies only to...