Summary
In Gen. Motors Corp. v. Limbach (1989), 44 Ohio St.3d 115, 541 N.E.2d 593 (" GM"), cited for support by NLO, GM hired a construction manager to supervise the remodeling of its assembly plant.
Summary of this case from NLO, Inc. v. LimbachOpinion
No. 87-1954
Submitted January 11, 1989 —
Decided July 26, 1989.
Taxation — Sales tax — Transfer of tangible personal property through construction manager — Engineering drawings and designs — "Adjuncts" used in production exempt, when.
APPEAL and CROSS-APPEAL from the Board of Tax Appeals, No. 84-B-1021.
During the audit period, January 1978 through June 1981, General Motors Corporation ("GM"), appellant and cross-appellee, remodeled its Norwood assembly plant. It engaged the Gilbane Building Company to supervise the work as construction manager. Gilbane received bids, evaluated them, and made recommendations to GM. If GM approved, Gilbane issued purchase orders to the contractors. Gilbane then supervised the contractors in the field, but did not actually construct or install anything.
When a contractor submitted a billing, Gilbane reviewed it and forwarded it to GM for payment. GM then remitted a check to Gilbane, which placed the money in its account and paid the contractor with its check.
In the contested transactions, the Tax Commissioner, appellee and cross-appellant, assessed sales taxes for the entire billing forwarded to GM, including materials, labor, contractor overhead, and, in some instances, sales tax. The fee paid by GM to Gilbane for supervising the project is not at issue in this case. On appeal, the Board of Tax Appeals ("BTA") affirmed, and GM appealed.
GM also retained outside engineers to design production machines. The engineers prepared drawings and designs and incorporated them into bid packages. The bid packages were sent to contractors so that they could bid on building the particular machine. The successful bidder used the drawings and designs to draft its own plans to build the machine.
The commissioner assessed a sales or use tax on GM's payments to the engineering firms. The BTA affirmed, and GM appealed.
Since R.C. 5741.02(C)(2) provides concomitant use tax exemptions, only the sales tax will be discussed.
In her cross-appeal, the commissioner challenges the BTA's decision that reversed her assessment of pumps and associated equipment for a closed steam generation and recirculation system. She had assessed GM for purchases of feedwater pumps, condensate transfer pumps, and associated valves, wiring, gauges, and piping. The steam heated one washing solution that cleaned in-process raw metal and another solution that cleaned hooks which transported in-process materials. The steam was also used as a backup heat source to heat fresh air at some paint-spraying booths.
After the steam lost heat and condensed to water, the condensate transfer pumps forced the condensed water through the system and back to the powerhouse. The feedwater pumps forced condensate and fresh water to the top of the boiler and injected both into the boiler. The boiler then produced the steam for the above uses.
The cause is now before this court upon an appeal and cross-appeal as of right.
Carlile, Patchen, Murphy Allison and Robert J. Kosydar, for appellant and cross-appellee.
Anthony J. Celebrezze, Jr., attorney general, Mark A. Engel and Barton A. Hubbard, for appellee and cross-appellant.
I Construction Manager's Billings
GM argues that Gilbane, by acting as construction manager, performed a "personal service" for GM and did not transfer any tangible personal property to it. Thus, according to GM, the amounts reflected in those billings are not subject to sales tax.
During the audit period, personal services per se were not taxed. R.C. 5739.01(B) provides:
"* * * Other than as provided in this section `sale' or `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."
As noted previously, the charges collected by Gilbane for performing as the construction manager are not at issue. Rather, the assessment involves transactions in which tangible personal property was transferred from the contractors through Gilbane to GM, in the form of the completed renovations to GM's assembly plant. GM received tangible personal property in these transactions. The transactions are taxable unless GM correctly asserts an exemption, which it has not done. Contrary to GM's arguments, the commissioner did not assess tax on a "personal service" but rather on the transfer, through Gilbane, of tangible personal property and, therefore, the BTA's decision is neither unreasonable nor unlawful.
II Engineering Drawings and Designs
Regarding the engineering drawings and designs, the BTA concluded that GM sought "* * * the engineers' intellectual effort reduced to a tangible graphic form." The BTA found that the true objects were the end-products of this effort, i.e., the designs and drawings, and that these products could not be considered inconsequential. GM argues that the true objects were the personal services of the engineers.
These drawings and designs are essentially the same as the items considered in Emery Industries, Inc. v. Limbach (1989), 43 Ohio St.3d 134, 539 N.E.2d 608. Under the authority of that case, we reverse the BTA.
III Steam Recirculation System
According to R.C. 5739.01(E)(2), sales of items used or consumed directly in the production of tangible personal property for sale by manufacturing are not retail sales, and are therefore excepted from the tax levied under R.C. 5739.02. "Manufacturing" was defined, during the audit period, in R.C. 5739.01(S) (now redefined in division [R]) as:
"* * * 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." See 138 Ohio Laws, Part II, 4453.
In TimkenCCo. v. Kosydar (1977), 52 Ohio St.2d 131, 6 O.O. 3d 345, 369 N.E.2d 1211, this court held that "* * * gas meters, steam condensation lines, water softeners, various tanks and pits, and pumps making up a system used to supply and recirculate steam used to heat solutions which wash roller bearing parts at various stages of production[,]" id. at 135, 6 O.O. 3d at 348, 369 N.E.2d at 1214, fn. 1, did not bear a direct relationship to manufacturing, but were exempt as adjuncts under former R.C. 5739.01 (S).
According to Timken, they were adjuncts because (1) they were auxiliary or subsidiary to the manufacturing process since they kept the mill and the washing solution, which were used directly in manufacturing, in working order, (2) they were used at the manufacturing plant where the mill and the washing solution were used, (3) they were used after the transforming process had begun, and (4) they were related to direct use since the solution which it heated was used directly in transforming steel tubing into roller bearings. Id. at 140, 6 O.O. 3d at 350, 369 N.E.2d at 1217. The uses of the systems here and in Timken are nearly identical. Thus, under Timken, the BTA's decision is reasonable and lawful.
Accordingly, that portion of the BTA decision which assessed engineering designs and drawings is reversed, but the remainder of the decision is affirmed.
Decision affirmed in part and reversed in part.
MOYER, C.J., SWEENEY, HOLMES, WRIGHT, H. BROWN and RESNICK, JJ., concur.
DOUGLAS, J., concurs in part and dissents in part.
The onslaught against the Tax Code by a majority of this court continues. Even though this appears to be just another small chip in the protective coating crafted for the taxing statutes by the General Assembly, each successive chip continues to weaken the overall fabric and efficacy of the entire code. It appears the theory of the majority is fast becoming "give a little something to both sides and keep everybody happy." It is a dangerous game the majority continues to play!
I would affirm the decision of the BTA in all respects.