U.S. Shoe Corp. v. Kosydar, VAISEY-BRISTOL
| Decision Date | 05 February 1975 |
| Docket Number | Nos. 74-83,VAISEY-BRISTOL,s. 74-83 |
| Citation | 41 Ohio St.2d 68,322 N.E.2d 668 |
| Parties | , 70 O.O.2d 159 The UNITED STATES SHOE CORP., Appellee and Cross-Appellant, v. KOSYDAR, Tax Commr., Appellant and Cross-Appellee. JOYCE, INC., Appellee and Cross-Appellant, v. KOSYDAR, Tax Commr., Appellant and Cross-Appellee.SHOE CO., INC., Appellee and Cross-Appellant, v. KOSYDAR, Tax Commr., Appellant and Cross-Appellee. to 74-85. |
| Court | Ohio Supreme Court |
Syllabus by the Court
1. In determining whether a manufacturer's purchases of raw materials and other items are excepted from sales taxes by R.C. 5739.01(E), the primary use which the purchaser makes of such materials and items is the controlling factor.
2. 'Personal service,' as used in R.C. 5739.01(B), means an act done personally by an individual; it is, in effect, an economic service involving either the intellectual or manual personal effort of an individual, and is not the saleable product of his skill. (Paragraph one of the syllabus in Koch v. Kosydar, 32 Ohio St.2d 74, 290 N.E.2d 847, approved and followed.)
These causes are here upon appeals and cross-appeals from the decisions and orders of the Board of Tax Appeals imposing sales and use tax assessments against the three appellees and cross-appellants (hereinafter referred to as taxpayers).
Taxpayers are primarily in the business of manufacturing men's, women's and children's shoes. Joyce, Inc., and Vaisey-Bristol Shoe Co., Inc., were incorporated subsidiaries of United States Shoe Corporation until November 1, 1969, when they merged into divisions of United States Shoe.
On October 12, 1972, the Tax Commissioner of Ohio (appellant and cross-appellee) issued an order for sales and use tax assessments against taxpayers concerning materials purchased and incorporated by them in the production and advertising of their products.
The first category assessed by the commissioners is comprised of raw materials and tools used in making shoes which serve as samples for taxpayers' salesmen. The samples are made in only small sizes, and are later sold to retailers after they are no longer needed for sales aids.
The second group of items assessed is composed of 'test-size shells' and 'lasts.' These are used as patterns for producing test-size shoes in the sample sizes. They, too, are later sold.
The third category involves finished shoes and handbags purchased by the companies. Both are examined by taxpayers' stylists for design ideas, are then utilized as samples, and are finally resold.
The last assessments concern expenditures to advertising agencies for services and promotional aids. The purchases included television and radio commercials, sales brochures, photographs, rental of movie projectors, salesmen's presentation kits, promotional films, and taxpayers' annual reports.
Taxpayers appealed from the assessments to the Board of Tax Appeals, contending that the purchases of raw materials and tools used to make sample shoes, test-size shells and lasts, and the finished shoes and handbags were excepted from taxation pursuant to R.C. 5739.01(E)(1) and (2). They argue that the advertising expenditures were not taxable under the 'personal service exception' of R.C. 5739.01(B).
The Board of Tax Appeals upheld the commissioner's finding that purchases of advertising materials were taxable, but determined that all other items in issue were excepted from any sales and use tax.
The commissioner and taxpayers appeal as a matter of right from those findings of the Board of Tax Appeals which are adverse to their interests.
Frost & Jacobs, Dennis J. Barron and Robert W. Carroll, Cincinnati, for appellees and cross-appellants.
William J. Brown, Atty. Gen., and Maryann B. Gall, Columbus, for appellant and cross-appellee.
The first issue presented herein involves the taxpayers' contention that materials used to make sample shoes, shells and lasts needed for test-size shoes, and finished shoes and handbags purchased from other manufacturers are excepted from sales taxes under R.C. 5739.01(E)(1) and (2). (The Vaisey-Bristol case does not, however, contain the question of samples.)
In enacting R.C. 5739.01(E), the General Assembly intended that a sales tax, in most cases, be levied only on the final sale of tangible personal property. To implement this purpose, the General Assembly provided that:
'(E) 'Retail sale' and 'sales at retail' include all sales except those in which the purpose of the consumer is:
'(1) To resell the thing transferred in the form in which the same is, or is to be, received by him;
'(2) To incorporate the thing transferred as a material or a part, into tangible personal property to be produced for sale by manufacturing * * * or to use or consume the thing transferred directly in the production of tangible personal property for sale by manufacturing * * *.'
There exists in the case at bar, as well as in other decisions involving this section, the problem of determining the 'purpose of the consumer' when the retail sale is made. Taxpayers contend that use of the samples to sell other shoes is only secondary to their main purpose, that of producing the sample shoes for sales to retailers.
This court, in construing R.C. 5739.01, enunciated the 'primary use test' in order to determine how the exception should be applied to purchases of tangible personal property used for both excepted and nonexcepted purposes. Mead Corp. v. Glander (1950), 153 Ohio St. 539, 93 N.E.2d 19; Ace Steel Baling v. Porterfield (1969), 19 Ohio St. 137, 249 N.E.2d 892. Thus, as was stated in Weigand v. Bowers (1960), 171 Ohio St. 78, 79, 167 N.E.2d 772, 774: However, taxpayers contend that this test is not applicable to claims for exception under the first part of R.C. 5739.01(E)(2), 'the incorporation exception. They also assert that the rule is only utilized in cases where concurrent uses are involved, whereas the instant case involves consecutive uses. We disagree. In Richardson-Merrell v. Porterfield (1972), 32 Ohio St.2d 281, 291 N.E.2d 528, the test was applied in a case wherein a taxpayer claimed exception under the 'incorporation section.' Also, in Jim White Chevrolet Co. v. Porterfield (1970), 22 Ohio St.2d 79, 258 N.E.2d 113, the criterion was employed in a situation where consecutive uses were present. Thus, under R.C. 5739.01(E), application of the primary use test is proper in all cases where the 'purpose' of the taxpayer is unclear because dual uses exist.
In regard to the sample shoes, taxpayers claim that their benefit as a promotional aid was incidental to their main purpose, that of being manufactured for sale to retailers. However, the factual pattern presented to us compels a different conclusion. The purchase of raw materials which were incorporated into the samples for advertising was credited to accounts separate from those which contained materials for taxpayers' regular line of shoes. The samples were retained by salesmen for up to four months, and then were returned in a shopworn condition, causing them to be sold at a lower price than the standard shoes. At times they were so ragged that they had to be discarded. Furthermore, the samples amounted to only five to seven percent of taxpayers' production run, and they were the entire means of promoting the remaining 93 to 95 percent of its product. Taken together, this is persuasive evidence that taxpayers' primary use (and therefore the purpose) of the samples was for advertising, and not as inventory for sale.
In Jim White Chevrolet v. Porterfield, supra, 22 Ohio St.2d 79, 258 N.E.2d 113, taxpayer purchased automobiles that were 'assigned to other persons for the purpose of exposure to the public.' The cars were later sold, but at a price below that which would have been charged if they were new. In denying an exception under R.C. 5739.01(E), the court found the primary use to be for advertising. It is our conclusion therefore, that the Board of Tax Appeals erred in determining that the samples were excepted from taxation. We also find that the test-size shoes and finished handbags and shoes were used mainly to stimulate design ideas, to experiment with new materials, or to try new stitching techniques. Therefore, these items are not excepted from taxation by R.C. 5739.01(E), and that part of the Board of Tax Appeals' decision is reversed.
The second issue presented is whether taxpayers' purchases from advertising agencies are excepted from sales taxes under R.C. 5739.01(B), which provides, in part:
"Sale' and 'selling' include all transactions by which title or possession, or both of tangible personal property, is or is to be transferred * * *. Other than as provided in this section, 'sale' and 'selling' do not include professional, insurance, or personal service transactions which involve the transfer of tangible personal property as an inconsequential element, for which no separate charges are made.'
Taxpayers assert that they contracted for the personal services of the agencies, and the items they received were inconsequential elements of the transaction, thus allowing them an exception under the above section. Paragraph one of the syllabus in Koch v. Kosydar (1972), 32 Ohio St.2d 74, 290 N.E.2d 847, defines personal service as 'an act done personally by an individual; it is, in effect, an economic service involving either the intellectual or manual personal effort of an individual, and is not the saleable product of his skill.' (Emphasis added.) Thus, if the real object sought by the buyer is property produced by the service, and not the service per se, we must deny the exception. Paragraph graph two of the syllabus in Accountant's Computer Services v. Kosydar (1973), 35 Ohio St.2d 120, 298 N.E.2d 519. In the instant case, the Board of Tax Appeals found that taxpayers' main concern was to...
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