Timken Co. v. Lindley, CA-6621
| Decision Date | 21 October 1985 |
| Docket Number | No. CA-6621,CA-6621 |
| Citation | 29 Ohio App.3d 181,504 N.E.2d 455 |
| Parties | , 29 O.B.R. 211 TIMKEN COMPANY, Appellant, v. LINDLEY, Tax Commr., Appellee. * |
| Court | Ohio Court of Appeals |
Syllabus by the Court
1. In making a direct use analysis for sales tax purposes, the Board of Tax Appeals may not break up a single machine or system into component parts. [Timken Co. v. Kosydar (1977), 52 Ohio St.2d 131, 369 N.E.2d 1211 (6 O.O.3d 345), followed.]
2. Under R.C. 5739.02, sales are presumed taxable unless proven otherwise, and the taxpayer has the burden of proof to show that contested items had, in fact, been transferred to its manufacturing division. Such a transfer to its manufacturing division exempts said items from sales and use taxes.
3. The requirement of R.C. 5739.01(H) that charges for labor, installation or services "must appear in the sales agreement or on the initial invoice or initial billing rendered by the vendor to the consumer" in order for those charges to be exempt from the sales tax is satisfied where a contractor on a project of an extended nature submitted a partial bill, completely un-itemized, and then a final billing which gave details concerning the respective charges for labor, materials and other elements of costs. The circumstances of a particular case may be considered to determine whether the figures offered by the taxpayer, as based on the contractor's billings, are genuine, not imagined or arbitrary.
4. The fact that professional engineers and architects produce written reports, specifications, maps, drawings and similar documents which are used to communicate information to others does not make such professional services taxable, because such documents are "inconsequential elements" of the professionals' services which have been rendered. Engineers and architects should be afforded the same treatment as attorneys and accountants with respect to the taxability of their services. (R.C. 5739.01[B], applied.)
Day, Ketterer, Raley, Wright & Rybold and John F. Buchman, for appellant.
Anthony J. Celebrezze, Jr., Atty. Gen., and James C. Sauer, for appellee.
Appellant, the Timken Company, appeals from a decision of the Ohio Board of Tax Appeals. In its decision, the board modified in some respects a final order of the Tax Commissioner dated May 11, 1982, which in turn had affirmed, as modified, an assessment of sales and use taxes resulting from an audit covering the period from January 1, 1975 through December 31, 1977. Appellant's appeal is based on five assignments of error:
Because we find the board's decision unreasonable and unlawful, we sustain appellant's assignments of error and reverse the board's decision.
The taxpayer-appellant is a corporation engaged in the manufacturing of steel and steel products, including mechanical tubing, steel bars and bearings. Some of the tubing is sold outright as a product, while part of it is used in the manufacturing of bearings. With respect to the manufacture of steel itself, the continuous casting operation involves the pouring of molten steel into a series of molds, making several strands at one time. A tundish distributes the molten steel to each of the molds. As the steel cools, it goes through additional molds, and ultimately the strands of steel come out onto runout tables.
In addition to the strand casting, appellant produces ingots through the use of molds. Ingots are conditioned in soaking pits (furnaces) and then sent to blooming mills where they are converted into blooms or billets. These blooms of steel may be further processed to produce steel in sizes and shapes specifically ordered by the customer. This may be done through the use of rolling mills and forging presses. Finishing operations may include heat treatment, straightening, cutting, pickling and shot blasting, drawing, rolling and rough turning. In addition, the appellant uses several methods to inspect its product for quality control.
For purposes of tax payment, Timken reports and pays sales and use taxes to the state of Ohio under a direct payment permit granted by the Tax Commissioner, pursuant to R.C. 5739.031. On April 19, 1979, the Tax Commissioner issued the original notice of assessment, which assessed sales and use taxes, in addition to the amount reported and paid by Timken for the period in question. The assessment involved several hundred different items. Timken filed a petition for reassessment, in accordance with R.C. 5739.13, setting forth its objections to the assessment on approximately four hundred of the items. Following a hearing by a member of the Department of Taxation Hearing Board on the petition for reassessment, the assessment was reduced. Timken then appealed to the Board of Tax Appeals, contesting the assessment on a substantial number of the items, specifically identified in its notice of appeal to the board. At the hearing before the Board of Tax Appeals, Timken withdrew certain items from the appeal and submitted evidence in support of its position with respect to all the rest.
The Board of Tax Appeals found some of Timken's specifications of error were meritorious and ordered those items deleted from the assessment. Otherwise, the Tax Commissioner's final determination was affirmed. The Tax Commissioner was ordered to recompute the assessment and penalty accordingly. It is this decision of the board from which Timken appeals to this court.
The facts concerning the manufacturing operations of Timken are essentially undisputed. Furthermore, the decision of the board does not turn upon findings with respect to the facts, but upon the board's interpretation of the law in relation to undisputed facts and its misapplication of certain principles established in prior cases decided by the courts of Ohio.
Appellant assigns as its first assignment of error the board's determination that certain items of tangible personal property, specifically the emergency ladle system and the heat recuperators, were not purchased by Timken for use directly in the production of tangible personal property for sale, and were therefore not excepted from the sales tax as provided in R.C. 5739.01(E)(2). Based on the following analysis, we sustain appellant's first assignment of error.
The emergency ladle system is designed to catch any molten steel which escapes from the tundish or the molding pans in case of a failure of some kind, and includes a number of elements. Any steel actually caught in the ladle is taken to the ingot pouring floor and poured into ingots for further processing on Timken's mills. Steel not caught in the ladle drops onto the floor under the emergency ladle and hardens. That material is then recovered and eventually remelted as scrap.
We agree with appellant that the board completely erred in its description of the use of the steel from the emergency ladle. The board stated at page 10 of its decision:
"These ingots then constitute 'scrap metal' which form a raw material later inserted and used to form a 'new batch' of molten metal in the furnace where manufacturing begins." (Emphasis added.)
This statement reflects a confusion on the board's part concerning the use of metal poured from the emergency ladle into ingots with a spilled metal which has to be cut off the floor. Only the latter is used in the manner described by the board. The board then concluded, on the basis of its erroneous finding concerning the use of the steel from the emergency ladle:
"The Board finds that the emergency ladle and other items of equipment specifically used to receive, handle and prepare scrap metal to be later introduced, along with other raw materials, into the furnace where steel production begins with the melting of such materials do not qualify for the exception from taxation by reason of R.C. 5739.01(E)(2) and (R)."
This finding is factually incorrect and in the end entirely contrary to the undisputed testimony in this case.
The emergency ladle system is used in Timken's steel manufacturing operation at a time after the production of steel has commenced (by melting in the electric furnaces),...
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