Ohio Ferro-Alloys Corp. v. Kosydar

• Decision Date: 16 May 1973
• Docket Number: FERRO-ALLOYS,No. 72-766,72-766
• Citation: 296 N.E.2d 533,34 Ohio St.2d 113
• Parties: , 63 O.O.2d 195 OHIOCORP., Appellant, v. KOSYDAR, Tax Commr., Appellee.
• Court: Ohio Supreme Court

Page 113

34 Ohio St.2d 113

296 N.E.2d 533, 63 O.O.2d 195

OHIO FERRO-ALLOYS CORP., Appellant, v. KOSYDAR, Tax Commr., Appellee.

No. 72-766.

Supreme Court of Ohio.

May 16, 1973.

This is an appeal by Ohio Ferro-Alloys Corporation from a decision of the Board of Tax Appeals which modified a final order of the Tax Commissioner imposing a sales and use tax assessment.

Appellant is engaged in the business of producing and selling products known as ferro-alloys. The raw materials used in the production of ferro-alloys consist of various kinds of metallic ores and other materials containing carbon, such as coal, coke and wood chips. As the materials are removed from storage bins, they are weighed out in the proper quantities by electronically controlled sensing devices, and they are dropped onto a large rubber belt which moves around magnetic pulleys. The belt is equipped with steel side plates which form a trough three to four feet deep. On this belt, the various materials are mixed together by means of heavy chains and other devices hanging over the belt. The mixed materials are then dropped into a hoist which carries them to the various furnases. There the materials are subjected to intense heat, and the resulting molten metal is tapped out as soon as it accumulates in sufficient quantity to form a case. While the casts are still hot, they are weighed on a special scale, both to determine the yield being obtained from the raw materials as a means of assuring the efficient operation of the furnace and to provide information concerning the amount of the product which eventually will be available for shipment.

After the casts have cooled sufficiently they may either be taken to temporary storage bins, awaiting further processing, or to a cleaning floor, where excessive slag and other material adhering to the cast is removed. Then they are taken to crushing and screening equipment which breaks the casts down into sizes specified by the customer. From there, the material is removed for packaging or loading into trucks or railroad cars in bulk form.

In this appeal, appellant contests the decision of the Board of Tax Appeals holding that the following three categories of purchases are subject to taxation:

A. Items used in the operation and maintenance of equipment which weighs and pre-mixes materials to be charged into electric furnaces for the production of ferro-alloys.

B. Items used in the operation and maintenance of equipment (sometimes called 'wood hoggers') which processes wood logs into chips, for subsequent charging into the electric furnaces as one of the materials required for the production of ferro-alloys.

C. A small number of miscellaneous items for use in the weighing of hot metal casts after removal from the electric furnaces, in the recording of the performance of the electric furnaces, and in the lighting of temporary storage and dock areas.

Day, Ketter, Raley, Wright & Rybolt and John F. Buchman, Canton, for appellant.

William J. Brown, Atty. Gen. and Will Kuhlmann, Columbus, for appellee.

PER CURIAM.

The issue in this case is whether certain equipment purchased and used by appellant in the production of ferro-alloys is excepted from the Ohio sales and use taxes.

R.C. 5739.01(E)(2) provides, in part:

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

'* * *

'(2) To incorporate the thing transferred as a material or a part, into tangible personal property to be produced for sale by manufacturing, assembling, processing, or refining, or to use or consume the thing transferred directly in the production of tangible personal property for sale by manufacturing, processing * * *.' (Emphasis added.)

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 this case, appellant contends that the weighing and mixing of raw materials before they are charged into the furnance is necessary to obtain a satisfactory product and insure the efficient operation of the furnace. The materials are weighed prior to being charged into the furnace to assure that there is a proper proportion of the raw materials. They are also mixed in a certain way so that oxides and carbons are located next to one another; this pre-mixing and locating is necessary to make certain that the proper reaction will take place because the location of the materials cannot be changed once they are charged into the furnace. This weighing and mixing, however, does not amount to a change into a 'different state or form.' A witness for appellant testified to the importance of the mixing and weighing:

'* * * We alternate them, because intimacy of mixture of these compounds is important when the material reaches the furnance.

'* * *

'The most important change that occurs in this system is the-put it this way, the nonreversing, mixing of materials.' His testimony did not indicate that there was any change in form or state before the materials entered the furnace.

So the weighing and mixing of the raw materials occurs before the manufacturing process begins, and the equipment used in those processes is not excepted from tax under R.C. 5739.01(E)(2).

The 'wood hoggers' chop up logs into wood chips that are one of the essential materials to be charged into the furnaces. Appellant claims that the wood chips are one of the raw materials used in the manufacturing process and that the preparation of these is therefore one of the steps in transforming raw materials into the finished product.

As appellant states, the wood chips are the raw material, not the logs. The 'wood hoggers' merely produce wood chips; they do not convert logs into a final marketable product. It is not the logs that are transformed into the ferro-alloys; rather it is the wood chips that are so transformed. The process by which the 'wood hoggers' convert logs into wood chips is one step removed from the transforming of raw materials into marketable products. This process involves the preparation of raw materials prior to the commencement of...