Ohio Steel Tube Co. v. Joanne Limbach, Tax Commissioner of Ohio

• Decision Date: 09 July 1987
• Docket Number: CA-2454,87-LW-2476
• Parties: OHIO STEEL TUBE COMPANY, Plaintiff-Appellant, v. JOANNE LIMBACH, TAX COMMISSIONER OF OHIO, Defendant-Appellee.
• Court: Ohio Court of Appeals

OHIO STEEL TUBE COMPANY Plaintiff-Appellant, v. JOANNE LIMBACH, TAX COMMISSIONER OF OHIO Defendant-Appellee.

No. CA-2454.

87-LW-2476 (5th)

Court of Appeals of Ohio, Fifth District Richland

July 9, 1987

Administrative Appeal from the Board of Tax Appeals Case No. 83-G-259

LYNN B GRIFFITH, JR., WILLIAM PAUL McGUIRE, LETSON, GRIFFITH, WOODALL & LAVELLE, Warren, For Plaintiff-Appellant.

ANTHONY J. CELEBREZZE, JR., Attorney General, FLOYD J. MILLER, JR., Ass't Attorney General, Columbus, For Defendant-Appellee.

OPINION

MILLIGAN Judge.

SALES AND USE TAXATION^PURCHASE OF TANGIBLE PERSONAL PROPERTY^MANUFACTURING AND PROCESSING

This is another vignette in the continuing saga of conflict between the State of Ohio, through its sales and use taxing authority, and Ohio's industrial complex. Where the legislature has failed to act with clarity, the courts have been thrust into the unappropriate role of crafting legislature guidelines by judicial fiat.

This appeal arises from a decision and order by the Ohio Board of Tax Appeals ("Board') which modified a final order of the Ohio Tax Commissioner, appellee herein. The Commissioner's final order levied a sales and use tax assessment against appellant, Ohio Steel Tube Company, as a result of appellant's purchases of tangible personal property in connection with the construction of a manufacturing plant in Shelby, Ohio. Appellant appeals the Board's decision and order, pursuant to R.C. 5717.04, and assigns as error:

ASSIGNMENT OF ERROR NO. I

THE BOARD OF TAX APPEALS ERRED IN FINDING PROPANE AND FUEL OIL DISTRIBUTION LINES ARE SUBJECT TO SALES AND USE TAX SINCE THEY ARE USED DIRECTLY OR AS AN ADJUNCT IN THE PRODUCTION OF TANGIBLE PERSONAL PROPERTY FOR SALE BY MANUFACTURING PROCESSING OR MINING. R.C. ]] 5739.01(E)(2), 5739.01(S) (NOW RENUMBERED (R)), O.A.C. RULE 5703-9-21(I).

ASSIGNMENT OF ERROR NO. II

THE BOARD OF TAX APPEALS ERRED IN FINDING TAXABLE EQUIPMENT WHICH REMOVES RUST AND SCALE FROM COILED FLAT ROLLED STEEL, THE RAW MATERIAL USED IN PRODUCING WELDED TUBING, SINCE SUCH EQUIPMENT PRODUCES A PHYSICAL CHANGE IN THE RAW MATERIAL SO THAT SUCH EQUIPMENT IS WITHIN THE SCOPE OF R.C. ] 5739.01(E)(2) AND (S) (NOW RENUMBERED (R)).

ASSIGNMENT OF ERROR NO. III

THE BOARD OF TAX APPEALS ERRED IN FINDING TAXABLE SAFETY EQUIPMENT INCLUDING EXHAUST HOOD AND CRANE WALKWAYS WHICH ARE PROVIDED OR INSTALLED PRIMARILY FOR THE PROTECTION OF A PRODUCTION EMPLOYEE FROM A PHYSICAL DANGER OF THE OCCUPATION IN WHICH HE IS ENGAGED. R.C. ] 5739.01(E)(2), O.A.C. RULE 5703-9-21(L).

ASSIGNMENT OF ERROR NO. IV

THE BOARD OF TAX APPEALS ERRED IN FINDING THAT A PICKLING ACID SYSTEM IS TAXABLE SINCE THE PICKLING ACID SYSTEM IS USED DIRECTLY OR ADJUNCT TO PRODUCTION OF TANGIBLE PERSONAL PROPERTY BY MANUFACTURING. R.C. ] 5739.01(E)(2) AND (S).

ASSIGNMENT OF ERROR NO. V

THE BOARD OF TAX APPEALS ERRED IN FINDING TAXABLE A TRUNK SCALE TO WEIGH MATERIAL IN PRODUCTION (I.E. TUBING) USED DURING THE PERIOD OF PRODUCTION AFTER A CHANGE IN FORM HAS TAKEN PLACE IN THE PRODUCT BUT BEFORE A PROTECTIVE COATING OF OIL HAS BEEN APPLIED ON THE PRODUCT. R.C. ] 5739.01(E)(2) AND (S).

ASSIGNMENT OF ERROR NO. VI

THE BOARD OF TAX APPEALS ERRED IN DETERMINING THAT CERTAIN FIRE EXTINGUISHERS, WARNING PAINT, PLANT FIRE PROTECTION EQUIPMENT AND AUTOMATIC SPRINKLER SYSTEM WERE NOT EXEMPT PURSUANT TO O.A.C. RULE 5703-9-21(N).

FACTS

Appellant is an Ohio corporation with its headquarters in Shelby, Ohio. Its business is the manufacture of seamless and welded steel tubing. The manufacturing process of these two types of steel tubing forms the factual basis for understanding the tax assessment.

The first type of tubing manufactured by appellant is seamless tubing. The raw material for such tubing is steel bars. These bars are cut to correct lengths and then heated in a rotary hearth furnace until they are sufficiently pliable. The heated steel bars are then worked on by a machine called a "piercer' which makes a hole in the bar, turning the bar into a hollow steel tube. The seamless tubing is next processed according to the size and type of tubing desired by rolling it in such a way that length and diameter are affected. The tubing is afterwards placed in a slow-cool furnace or cooling rack. After cooling, the tubing is "pickled' in a tank of sulphuric acid to remove rust and scale. Following this pickling process, the tubing is placed in a third furnace, an "annealing' or "stress' furnace, where the tubing is heated for further processing such as being put through a mandrel, being "pointed,' having ends trimmed, and being straightened. Finally, the tubing is tested for strength, cut to length, bundled, weighed, treated with an oil solution to protect it from corrosion, and sent to the shipping department.

The second type of tubing is welded tubing. The manufacturing process of this type of tubing starts with a flat rolled coiled steel as a raw material. This steel is processed by the removal of rust and scale. The flat rolled coiled steel is then "cold rolled' and electrically welded to form steel tubes. The welded steel is "pickled,' then heat softened and worked and finished. Like seamless tubing, the welded tubing is lastly bundled and treated with an oil solution to protect it from corrosion before being sent to shipping.

The furnaces at appellant's plant are fueled by natural gas. In addition, propane gas and fuel oil systems are also available. The latter two sources of energy are stored in tanks near the plant site and are directed through distribution lines to the appropriate work places for use.

The Board's opinion characterized the tangible personal property in dispute as follows:

1) plant fuel/power system;

2) fans, hoods, safety items;

3) acid handling equipment;

4) production machinery.

ASSIGNMENT OF ERROR NO. I

Appellant challenges the Board's finding that appellant's purchase of tangible property used to construct the propane/fuel oil distribution lines is subject to sales and use taxation. Appellant argues that these lines are used directly or as an adjunct in the production of tangible personal property for sale by manufacturing, processing, or mining.®1¯

The Ohio Supreme Court has recently delineated the mode of analysis in analyzing sales and use tax cases.

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 5939.02(B)(15) and (16). To qualify for such exemption, a particular component must be "used directly in manufacturing.' Southwestern Portland Cement Co, supra, at 419, citing Tri-State Asphalt Corp. v. Glander (1950), 152 Ohio St. 497 [41 O.O. 40]. 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, at 421. "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 * * *.' (Emphasis added). R.C. 5739.01(R).

OAMCO v. Lindley (1986), 24 Ohio St.3d 124, 125, on rehearing (1986), 27 Ohio St.3d 7, 8.

In addition to the statutory framework, the Tax Commissioner has promulgated rules which interpret and define the applicable tax statutes. The relevant rules for this assignment of error are:

(I) Power producing or generating equipment used primarily to produce or generate power to operate the machinery equipment or other personal property in (B), (D), (F), (J), (K), (L), (M), (N), and (O), fuel for such power producing or generating equipment to the extent that the power produced is used to operate the machinery equipment or other personal property in (B), (F), (J), (K), (L), (M), (N), and (O), equipment which transmits the power produced for such purpose to the machinery equipment or other personal property in (B), (D), (F), (J), (K), (L), (M), (N), and (O), and equipment which transmits purchased electricity from and including the last transformer or other device the output of which is power in the form or voltage usable by a machine as in (B), (D), (F), (J), (K), (L), (M), (N), and (O), to that production machinery.

. . .

(K) Equipment which transmits purchased water, gas, steam, or other products, from the point where the product being transmitted is diverted to each production machine in (B), (D), (F), (I), (M), (N), and (O).

The furnaces which appellant uses for manufacturing have dual burners which can use fuel oil or propane when the natural gas supply is curtailed. T.10, 11, 30, 31, 36. The fuel oil and propane are used for the same purposes as the natural gas. T.33, 34. In addition, the fuel oil and propane distribution lines are used exclusively for production in the furnaces and burners, and for no other use. T.49.

The Board found that the natural gas distribution line, providing the primary energy source for manufacturing, was exempt. However, it ruled that the other two lines were auxiliary in nature, and were not exempt. The question is whether a back-up energy distribution line is exempt under R.C. 5739.01(E)(2), when such line is part of an overall energy distribution line system and is used exclusively for the same purpose as the primary distribution line.

The Board relied on Southwestern Portland Cement Co. v. Lindley (1981), 67 Ohio St.2d 417, to find the items taxable.

The fuel oil distribution system was also assessed. This system is used as an auxiliary heat source for the kiln in the event the kiln does not produce sufficient heat. Since the fuel distribution system is auxiliary in nature and only used in

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