Southwestern Portland Cement Co. v. Lindley

• Decision Date: 05 August 1981
• Docket Number: No. 80-1748,80-1748
• Citation: 21 O.O.3d 261,67 Ohio St.2d 417,424 N.E.2d 304
• Parties: , 21 O.O.3d 261 SOUTHWESTERN PORTLAND CEMENT COMPANY, Appellant, v. LINDLEY, Tax Commr., Appellee.
• Court: Ohio Supreme Court

Page 417

67 Ohio St.2d 417

424 N.E.2d 304, 21 O.O.3d 261

SOUTHWESTERN PORTLAND CEMENT COMPANY, Appellant, v. LINDLEY, Tax Commr., Appellee.

No. 80-1748.

Supreme Court of Ohio.

Aug. 5, 1981.

Frost & Jacobs, Dennis J. Barron and Michael F. Haverkamp, Cincinnati, for appellant.

William J. Brown, Atty. Gen., and Barbara E. Vest, Asst. Atty. Gen., for appellee.

PER CURIAM.

I.

The first issue presented is whether the Board of Tax Appeals properly ruled that the purchase of the clinker producing system, as evidenced by a single purchase agreement stating a single price, could be divided into taxable and non-taxable purchases for the purpose of tax assessment pursuant to R.C. 5739.01(E)(2). ¹

Appellant contends, in essence, that this division is unlawful because it purchased a system under one agreement and for one price. In addition, appellant argues that such a division violates the primary use test enunciated in Mead Corp. v. Glander (1950), 153 Ohio St. 539, 93 N.E. 19, and the principle that there is no authority for the division of a single piece of equipment into its taxable and non-taxable parts when determining if it is excepted from sales tax. Id. at page 544, 93 N.E. 19.

It is irrelevant that the appellant had one contract with one prime contractor and paid one figure for its production line. The tax status of each purchase is dependent upon its use (see, generally, White Motor Corp. v. Kosydar (1977), 50 Ohio St.2d 290, 364 N.E.2d 252) rather than on the method of purchase.

Likewise, appellant's claim that it purchased a "system" is not determinative of the taxation issue. Tax exemption by law is a function of the use of the items purchased and not a function of nomenclature. Taxpayers cannot avoid paying proper sales and use tax merely by asserting that their purchases comprise a system which cannot be divided into taxable and non-taxable components.

Appellant's contention that its system is a single piece of equipment contemplated by this court in Mead Corp. v. Glander, supra, is not well taken. The clinker producing system at issue is easily divisible into units having distinct and separate functions. The crushing machines, the kiln, the preheater, and in fact, all the component parts can be examined for their respective connections with cement production.

More accurately, appellant's clinker producing system can be characterized as a plant and is even referred to as such in the purchase agreement. Indeed, the agreement itself recognized the divisibility of the system by listing the component systems and by attaching equipment lists as part of the agreement. Furthermore, the appellant acknowledged the divisibility of the system when it obtained and then used cost breakdowns for its own tax purposes.

Appellant's position that its system should be excepted precipitates into an assertion that a manufacturing plant must be considered a unitary system, i. e., anything used necessary to the functioning of the system is directly used in manufacturing and, thus, excepted from taxation. Adoption of appellant's approach would require this court to accept the integrated plant theory. This theory has never been accepted in Ohio (see, e. g., Youngstown Bldg. Material & Fuel Co. v. Bowers (1958), 167 Ohio St. 363, 149 N.E.2d 1; Ohio Ferro-Alloys Corp. v. Kosydar (1973), 34 Ohio St.2d 113, 296 N.E.2d 533), and we decline to adopt it now.

The General Assembly has imposed a duty on the Tax Commissioner, the Board of Tax Appeals and the courts of this state to except from taxation the purchase of only those items used directly in manufacturing. See, e. g., Tri-State Asphalt Corp. v. Glander (1950), 152 Ohio St. 497, 90 N.E.2d 366. Such a determination requires the dissection of every purchase to insure the proper application of legislative guidelines for tax exception.

Appellant further argues that "arbitrary" amounts have been assigned to the assessed machines. More specifically, appellant contends that the use of the itemized work orders as the basis for assessment is contrary to: (1) R.C. 5739.02 which levies an excise tax on "each retail sale * * * if the price is in excess of one dollar"; (2) R.C. 5739.01(B), which defines "sale" as "all transactions by which title or possession, or both, of tangible personal property, is or is to be transferred * * * "; and (3) R.C. 5739.01(H), which defines "price" as "the aggregate value in money of anything paid or delivered, or promised to be paid or delivered, in the complete performance of a retail sale * * *."

The contract between appellant and the Fuller Company did not include itemized prices. The document from which the assessment was made is the cost breakdown of the clinker production line's component parts. This document was prepared upon appellant's request and relied upon by appellant for its own tax purposes. Appellant's claim that the assessments which were based on its own records were arbitrary is not well taken.

II.

The primary substantive issue is whether the various assessed equipment obtained by the purchase of the clinker production system is excepted from taxation, under R.C. 5739.01(E)(2) and 5739.01(S), either as items used directly in manufacturing or as "adjuncts."

R.C. 5739.01 prescribes the requisites for the direct use exception as follows:

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

" * * *

"(2) * * * (T)o use or consume the thing transferred directly in the production of tangible personal property * * * for sale by manufacturing, processing * * *."

"Manufacturing" and "processing" are defined in R.C. 5739.01(S) as follows:

" 'Manufacturing' or 'processing' means the transformation or conversion of material or things into a different state or form from that in which they originally existed and, for the purpose of the exceptions contained in division (E)(2) of this section, includes the adjuncts used during and in, and necessary to carry on and continue, production to complete a product at the same location after such transforming or converting has commenced."

The basic test for determining whether particular items of property are excepted under R.C. 5739.01(E)(2) and (S) is stated in the syllabus of Youngstown Bldg. Material & Fuel Co. v. Bowers, supra, as follows:

" * * * when does the actual manufacturing or processing activity begin and end, and is the property used or consumed during and in the manufacturing process or period." See, also, Canton Malleable Iron Co. v. Porterfield (1972), 30 Ohio St.2d 163, 283 N.E.2d 434.

This court has more fully defined these two steps. The first step of determining when the manufacturing process begins and ends includes a determination of whether the process at issue is an excepted one or one that is preliminary or preparatory to manufacturing. In Interlake v. Kosydar (1975), 42 Ohio St.2d 457, 459, 330 N.E.2d 444, this court stated that the rule to be "(t)he manufacturing process for which a beginning and end must be determined is the one that produces the marketable product." See, also, Ohio Ferro-Alloys Corp. v. Kosydar, supra.

The second step of determining if the equipment is used "during and in" manufacturing includes a determination of whether the equipment may be classified as "adjunct" under R.C. 5739.01(S) when read in pari materia with R.C. 5739.01(E)(2). In order to except equipment as "adjunct," the equipment must be auxiliary to the manufacturing process and it must be used at the same location where the production is occurring, used after the transforming or conversion has commenced, and be related to direct use or consumption in production. Canton Malleable Iron Co. v. Porterfield, supra, Hawthorn Mellody v. Lindley (1981), 65 Ohio St.2d 47, 417 N.E.2d 1257; Babcock & Wilcox v. Kosydar (1976), 48 Ohio St.2d 251, 358 N.E.2d 544.

In reviewing cases applying R.C. 5739.01(E)(2) and 5739.01(S), this court will not overrule board findings of fact which are based on sufficient probative evidence. R.C. 5717.04; see Emery Industries v. Kosydar (1975), 43 Ohio St.2d 34, 330 N.E.2d 686; Highlights for Children v. Collins (1977), 50 Ohio St.2d 186, 364 N.E.2d 13; Hawthorn Mellody v. Lindley, supra, at page 49, 417 N.E.2d 1257. Moreover, this court has recognized that the Board of Tax Appeals is vested with wide discretion in determining the weight to be given to evidence and the credibility of witnesses, and its determination will not be disturbed absent a showing of patent abuse of discretion. Cardinal Federal S. & L. Assn. v. Bd. of Revision (1975), 44 Ohio St.2d 13, 19, 336 N.E.2d 433. This court must thus determine whether the board's decision as to numerous assessments was reasonable and lawful.

The assessments appealed can be grouped into two general classes of equipment. The first group of items are used at the clinker production facility. In analyzing whether these items are excepted under R.C. 5739.01(E) (2) and (S), the board was required to make two initial determinations. First, the board impliedly found the clinker production system to be in the manufacturing process since most of its equipment was excepted. This finding does not appear to be unreasonable. Secondly, the board's finding that the crushing of raw materials was the first step in the manufacturing process is likewise not unreasonable.

Appellant's contention that the board was unreasonable in refusing to except equipment used in the handling, storage and transportation of raw materials prior to crushing or of raw materials not crushed is not well founded. This court has consistently held that the mere transportation and storage of unchanged raw materials is not part of the manufacturing process. National Tube Co. v. Glander (1952), 157 Ohio St. 407, 105 N.E.2d 648; Youngstown Bldg. Material & Fuel Co. v. Bowers, supra; Ohio Ferro-Alloys Corp. v. Kosydar, supra. Since the equipment is not excepted, the structures and...