White Motor Corp. v. Kosydar, s. 76-928

• Decision Date: 29 June 1977
• Docket Number: 76-969,Nos. 76-928,s. 76-928
• Citation: 4 O.O.3d 451,364 N.E.2d 252,50 Ohio St.2d 290
• Parties: , 4 O.O.3d 451 WHITE MOTOR CORPORATION, Appellee and Appellant, v. KOSYDAR, Tax Commr., Appellant and Appellee.
• Court: Ohio Supreme Court

Page 290

50 Ohio St.2d 290

364 N.E.2d 252, 4 O.O.3d 451

WHITE MOTOR CORPORATION, Appellee and Appellant, v. KOSYDAR, Tax Commr., Appellant and Appellee.

Nos. 76-928, 76-969.

Supreme Court of Ohio.

June 29, 1977.

Syllabus by the Court

1. Designs and drawings which are purchased and then used when ordering tools and machines from a company which manufactures them according to the designs and drawings are subject to sales and use taxes pursuant to R. C. Chapter 5739, for the reason that the taxpayer's real object is to acquire the designs and drawings themselves which set forth the plans from which the manufacturer can produce the tools and machines.

2. Where a taxpayer buys engineering designs and service manuals to be used in connection with the repair and maintenance of machinery and equipment used directly in the production of tangible personal property for sale by manufacturing, such designs and manuals are not used directly in the manufacturing process and the purchase of such items is not excepted from sales and use taxes pursuant to R. C. 5739.01(E)(2). (Babcock & Wilcox v. Kosydar, 48 Ohio St.2d 251, 358 N.E.2d 544, distinguished.)

3. A system for recirculating coolant used in the manufacturing process is not directly used in the production of tangible personal property for sale by manufacturing and its purchase, therefore, is not excepted from sales and use taxes pursuant to R. C. 5739.01(E)(2) and 5739.01(S).

This cause involves appeals from a decision of the Board of Tax Appeals dated August 3, 1976, as corrected by journal entry of August 9, 1976.

The Board of Tax Appeals modified the assessment of the Tax Commissioner and affirmed a sales and use tax assessment of $74,519.53 against the White Motor Corporation. The amount of that assessment was $142,470.14 less than had been assessed by the Tax Commissioner.

On August 9, 1976, the board issued a correcting entry deleting an additional $3,096.76 from the assessment, that amount being conceded by the Tax Commissioner as having been omitted by the board.

The Tax Commissioner appealed to this court, and White Motor Corporation filed a separate notice of appeal.

A joint record was filed for these cases, which were consolidated for disposition by this court.

White Motor Corporation was engaged during the audit period in the manufacture and sale of motor trucks, farm equipment and their component parts including gasoline and diesel engines. The entire tax assessment involves purchases by White for its plant at Canton, Ohio. The Canton plant was a new facility for the manufacture and assembly of up to 60,000 tractor engines per year.

Various parts of an engine, such as heads, blocks, flywheels, and connecting rods, are cast at White's Foundry in Charles City, Iowa. The Charles City plant is a wholly-owned and controlled subsidiary of White. The heads and blocks are also preliminarily machined at Charles City. Upon completion of the casting and machining operations, the engine components are shipped from Charles City to the Canton plant for further manufacture and assembly into completed tractor engines. The completed engines are then returned to Charles City for assembly into farm tractors.

Upon arrival at the Canton plant, the engine components go directly to one of the machining or production lines for further manufacture (grinding, tapping, drilling etc.) or, if the parts cannot be accommodated immediately on the machining or production lines, to a temporary storage facility known as the "Low Bay Triax."

The "Low Bay Triax" is an automated materials handling and temporary storage system. The Canton plant is designed for a 30-day turnaround. To accommodate the differing production rates for the various components, it is sometimes necessary to temporarily store the in-process components in the Low Bay Triax upon their arrival from Charles City. Once the in-process components are removed from the Low Bay Triax for further manufacture, they are not returned to the unit. Finished engines and components are never stored in the Low Bay Triax.

The board held the Low Bay Triax to be excepted from tax under the provisions of R. C. 5739.01(E)(2), 5739.02(B)(16) and Tax Commissioner's Rule TX-15-08(2) and (6).

In order to equip the Canton plant with the necessary production machinery to manufacture engines, White obtained the professional services of two engineering and design firms, Spartan Design, Inc. ("Spartan") and Techni-Tool. Spartan was employed by White to engineer and design tools which would meet the specific technical requirements of White. White submitted to Spartan drawings of the gear needed. Spartan then quoted the price at which it would design a tool to manufacture the gear. Upon acceptance of the price White issued a purchase order to Spartan. Spartan prepared a series of custom-made drawings or blueprints of the tool as a culmination of its design and engineering services. White submitted the engineering drawings to a tool manufacturer who then manufactured the tool for White.

Essentially the same sequence of events occurred in White's transactions with Techni-Tool.

All the manufacturing equipment at the Canton plant comprising the head and block production line was purchased by White from The Cross Company ("Cross"). Cross is engaged in the business of designing, engineering and manufacturing special or custom-made machines and equipment. Unlike the transactions with Spartan and Techni-Tool, when White entered into the agreement with Cross, it was for both the designing and the construction of the machines. White ordered only the entire system. However, when Cross billed White for the work it did separate the cost of the drawings from the cost of manufacturing the machines. The assessment was only upon the cost of the drawings and did not include the cost of the machines. The engineering and design services of the Cross engineers were essentially identical to the services performed by Spartan and Techni-Tool.

Also included in the lump-sum price charged by Cross were certain engineering manuals. These were used by White to repair and maintain the production machines engineered and built by Cross. Only one manual was received for each machine.

The Board of Tax Appeals concluded that the services performed by Spartan, Techni-Tool and Cross constituted "such 'personal service transactions' as to qualify for tax exception under Revised Code § 5739.01(B)."

The production machines on which engine heads and engine blocks are manufactured into finished engine components constitute what is known as the "head and block lines." Each machine on the head and block lines is a wet machine in that a liquid coolant must be applied to the surface of the part being machined. The tool doing the milling, and the head or block on which the operation is being performed, would heat rapidly, destroying the tool and the part being machined, unless the surface is continually cooled. Therefore, the interface between the tool and the block or head is flooded by spraying it with liquid coolant, a water soluble oil.

After the coolant is sprayed on the surface of the block or head, the coolant drops through a receiving funnel located at the base of the production machine into an underground trough. The coolant collects in a U-shaped channel along with the scrap metal chips and dust produced by the machining operations. The coolant is then conveyed by means of air pressure through the underground trough to a collecting tank located outside the Canton plant where a conveyor lifts the bigger chips out of the coolant. The wet chips are dropped onto a "chipwringer" which wrings the coolant out of the chips. The coolant is then pumped back through a system of filters and pipes located partly in the underground trough and partly overhead and reused in the machining operations. Filters throughout the pipe system remove tiny metal particles from the coolant which are not removed by the chip-wringers. The whole system for recirculating the coolant is known as the Hydromation System. It was installed because it is uneconomical to throw the coolant away after use.

It is not possible to operate the machines on the head and black line without the use of the coolant. It is essential to apply it to the surface of the heads and blocks in order to cool the surface being machined.

The Board of Tax Appeals concluded that the Hydromation System is subject to tax since it "is neither used nor consumed directly to produce tangible personal property for sale by manufacturing or processing, nor is it an 'adjunct' as that term is used in § 5739.01(S), Ohio Revised Code."

The cause is before this court upon appeals as matter of right.

William J. Brown, Atty. Gen., and Michael L. Moushey, Columbus, for appellee and appellant.

Squire, Sanders & Dempsey, William H. Conner, William H. Lutz, Jr., and James H. Woodring, Cleveland, for appellant and appellee.

C. WILLIAM O'NEILL, Chief Justice.

The first issue is whether the Low Bay Triax system is excepted from the Ohio sales tax under R. C. 5739.02(B)(16) and Rule TX-15-08.

The Canton plant builds tractor engines by taking various component parts and, after various processing steps, assembles them into a finished product. The Canton plant does not produce these components. They are manufactured at the Charles City, Iowa Foundry. It has been stipulated that the Charles City Foundry is a wholly-owned subsidiary of the White Motor Corporation. The Low Bay Triax is used exclusively to store components that are not needed immediately when they arrive from Charles City. This Triax neither transports any items through the plant nor stores any work in progress.

The Board of Tax Appeals concluded that the Low Bay Triax system was not amendable to taxation, stating:

"It is the opinion of the Board of Tax Appeals, for purposes of TX-15-08, the term 'persons' may include a combination of corporate subsidiaries or subdivisions...