Owens-Illinois, Inc. v. Joanne Limbach, Tax Commissioner of Ohio

• Decision Date: 30 September 1987
• Docket Number: 87-LW-3817,83-A-292
• Parties: OWENS-ILLINOIS, INC., Appellant, v. Joanne LIMBACH, Tax Commissioner of Ohio, Appellee.
• Court: Ohio Court of Appeals

OWENS-ILLINOIS, INC., Appellant, v. Joanne LIMBACH, Tax Commissioner of Ohio Appellee.

No. 83-A-292.

87-LW-3817 (6th)

Court of Appeals of Ohio, Sixth District Lucas

September 30, 1987

Appeal from Board of Tax Appeals No. 83-A-292.

DECISION AND JOURNAL ENTRY

This matter is before the court on direct appeal from the Board of Tax Appeals. Our standard of review in such cases is to determine whether the decision of the Board of Tax Appeals is reasonable and lawful. See R.C. 5717.04.

Appellant, Owens-Illinois, Inc., is an Ohio corporation with world headquarters located in Toledo, Ohio. The company is a multiproduct manufacturer with plants and research and development facilities throughout the state of Ohio and in many other states. Appellant operates on a divisional basis and maintains accounting records accordingly.

In 1964, appellant and appellee, Tax Commissioner, negotiated an agreement with the Department of Taxation of the State of Ohio for a Direct Payment Permit pursuant to R.C. 5739.031 R.C. 5739.031 allows the Tax Commissioner to authorize manufacturers and other consumers who purchase tangible personal property under circumstances which normally make it impossible at the time of the purchase to determine the manner in which it will be used, to pay sales and use tax directly to the state instead of to the vendor or seller. The Direct Payment Permit became effective on January 1, 1965. Thereafter, appellant filed its quarterly returns on a regular basis and remitted the taxes due according to the chart of accounts established in December, 1964.

As part of the decision of the Board of Tax Appeals, the following was stated therein at 8:

"* * * [t]he documents comprising the permit and procedure were the direct pay permit from the Taxation Department (Exhibit 1), Appellant's 1964 chart of accounts with notation of treatment to each account therein listed (Exhibit 6), a letter of November 18, 1964, from Appellant to the Taxation Department detailing the direct pay procedure (Exhibit 7), schedules accompanying the letter of November 18, 1964, setting forth the taxability and rate of taxability of certain accounts of Appellant (Exhibits 8A-8I) and a letter of December 14, 1964 (Exhibit 9), in which the Appellant detailed an amendment to the direct pay procedure wherein the procedure would apply to purchases and leases of automobiles and trucks^according to the procedure detailed in the November 18, 1964, letter the tax applicable to such expenses had been payable to the vendor.'

A letter sent March 23, 1978, notified appellant that an audit assignment had been issued for appellant. The audit period as extended covered January 1, 1975 through December 31, 1978. The audit consisted of performing a test check of accounts during the period from February 1, 1978 through April 30, 1978. The purpose of the audit, as stated in the letter was "* * * to educate the permit holder on the tax status of property assets and expense account items in accordance with the sales and use laws and rules promulgated by the Tax Commissioner as well as assisting the permit holder in establishing and submitting a revised direct pay procedure for expense accounts for future reporting purposes.' Appellant initially acquiesced to the use of a test check for this stated purpose. Later, in March or April of 1980, appellant learned through conversations with employees of appellee that new percentages developed through test checking would be applied retroactively to various accounts for the audit period. A proposed agreement concerning the test check was later prepared by appellee's agents, but appellant refused to sign it.

The appellee proceeded with the test check for the foregoing period without the consent of appellant. Subsequently, appellee issued an assessment based upon the test check in an amount of $1,999,787.03, including penalties. Appellant filed a Petition for Reassessment. Appellee affirmed the assessment in its entirety on February 17, 1983.

Appellant appealed to the Board of Tax Appeals. The board modified and affirmed the final order of appellee.

Appellant appealed directly to this court and asserts numerous assignments of error which will be addressed individually.

I.

In its fourth assignment of error appellant asserts:

"4. The Board erred in finding that appellant was required to give prior notice to appellee of certain organizational and accounting changes in appellant's business for purposes of computing appellant's sales and use tax under the 1964 direct pay permit administrative procedural agreement ("the 1964 agreement') between appellee and appellant despite the fact that the 1964 agreement contained no such prior notice provision.'

It is true that there is no express requirement in the 1964 agreement that appellant give notice of accounting changes as there appears to have been in the case of Morton-Norwich Products, Inc. v. Lindley (Aug. 29, 1979), Wayne App. No. 1602, unreported, at 2; and Gorman-Rupp Co. v. Limbach (Mar. 26, 1986), Bd. Tax App. No. 84-E-377, unreported, at 6. Furthermore, it is true that there is no provision in R.C. 5739.031 expressly mandating that the direct payment permittee give the commissioner notice of any changes. Moreover, appellee's own pamphlet Outline for Development and Review of Direct Payment Procedure (Exhibit 11) provides at 10-11: "VI. REVIEW OF PERMIT HOLDERS PROCEDURE

"Periodically, it is necessary to review direct payment accounts. This is done through ST 810 (pre-audit) investigation assignments. The purpose in issuing such assignments is to determine whether the permit holder is operating in accordance with Section 5739.031 of the Revised Code. The following instructions are to be followed in completing these ST 810's:

"A. Read and evaluate their procedure.

"* * *

"F. The direct pay examiner has a responsibility to see that these procedures are brought up to date in a manner that both the permit holder and our department understands and is fair and equitable to both parties.'

Nevertheless, we agree with the board's finding at 18:

"* * * The Board finds that the absence of a written agreement regarding notice does not abolish the requirement that such notice be given. Notice, the Board finds, is inherent in the concept of a direct payment procedure. The same would be meaningless if the next day following the establishment of a direct payment permit and procedure the permittee was free to alter and/or abolish the accounts upon which the procedure was based. * * *'

The permitted cannot hide behind the permit and agreement to absolve itself from paying the resulting increase in tax liability which may develop from an accounting change. As appellee points out in her brief at 18-20:

"* * * direct pay authority under R.C. 5739.031 is an accomodation [sic] to the taxpayer, as well as the Tax Commissioner, and * * * percentages authorized under an agreement are applicable provided there is no substantive change in the accounts. New accounts resulting from substantive changes in the accounting system are not covered by the direct pay agreement and are not protected by R.C. 5739.031 from assessment. It is, therefore, in a permit-holder's interest to advise the Tax Commissioner of accounting changes so that the agreement can be amended or expanded, if necessary, to accomodate [sic] such changes.

"* * *

"* * * the duty to keep the Commissioner advised of changes in the taxable status of accounts arises under R.C. 5739.031 which requires the permittee to report and pay tax directly to the state and to maintain records necessary to permit the Tax Commissioner to enforce the requirement. * * *'

Appellee's means of enforcement leads us to address the third assignment of error.

II.

Appellant asserts:

"3. The Board erred in determining that appellee had the power to make a retroactive assessment of sales and use tax against appellant contrary to the express provisions of the 1964 direct pay permit administrative procedural agreement which had been entered into by and between appellant and appellee.'

The board held in part at page ten of its decision:

"Section 5739.031 provides the legal authority for direct payment permits. Among other things it requires the holder of such a permit to retain and make available records regarding purchases.

"It shall be the duty of every permit holder required to make a return and pay any tax under this section to keep and preserve suitable records of purchases together with invoices of purchases, bills of lading and such other pertinent records and documents in such form as the commissioner required [sic] by regulation. All such records and other documents shall be open during business hours to the inspection of the commissioner, and shall be preserved for a period of four years, unless the commissioner in writing has authorized their destruction or disposal at an earlier date, or by order requires that they be kept longer.'

"The above language clearly imports (a deficiency assessment is permitted within four years. Section 5739.16, O.R.C.) that a direct payment permittee is subject to examination and assessment as are other sales and use tax taxpayers.'

The board further held at 12-13:

"* * * [The state tax agents] were authorized to test compliance with the direct pay procedure, as Appellants admit, but finding non-compliance (such as accounting changes, etc.) they were authorized to determine the degree of non-compliance and issue assessments for the amount unpaid^determined by a test check, if appropriate. To argue that the Tax Commissioner may find non-compliance with the direct pay procedure but may not proceed to audit and assess the deficiencies is to say that non-complying taxpayers are entitled to retain their ill-gotten

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