Summary
In General Motors, we held that the transfer of tooling from General Motors to its suppliers for their exclusive use in the production of automotive parts was supported by consideration and thus constituted a "resale" pursuant to R.C. 5739.01(E)(1).
Summary of this case from Procter Gamble Co. v. LindleyOpinion
No. 73-473
Decided March 20, 1974.
Taxation — Sales tax — Tooling used by outside supplier to produce parts for automobile manufacturer — Resale of tooling — Excepted from sales tax, when — R. C. 5739.01 (E)(1) — R.C. 5701.03 — Exceptions not applicable to sale of tooling — Evidence.
Where an automobile manufacturer enters into a series of transactions with an outside supplier as a part of a contract for the production of parts, subassemblies and components with a specific quality at stated unit prices and upon specific delivery schedules, with title to the tooling used in such production passing to the manufacturer upon payment to the outside supplier, and the outside supplier retains possession of the tooling for his exclusive use in production of the parts, such transaction constitutes a resale of the tooling to the outside supplier, supported by a consideration which consists of the mutual exchange of detrimental promises by each party, and such transactions are excepted from the imposition of Ohio sales and use taxes by virtue of R.C. 5739.01(E)(1) and 5741.02(C) (2).
APPEAL from the Board of Tax Appeals.
The appellant, General Motors Corporation, is engaged in the manufacture of automobiles, trucks, buses, appliances and accessories.
The present case involves an assessment by the Tax Commissioner of four categories of tooling, i. e., dies, jigs, fixtures and gauges, purchased by the appellant during the audit period, April 1, 1967, to August 31, 1967.
A die is a piece of equipment or tooling that is capable of forming or creating a part, either by pressure or molding techniques. Dies are cut in such a configuration that they form the desired metal, rubber or plastic part when pressure is applied by mechanical or hydraulic presses.
A jig is a holding device that is used with a single part to further machine it, or with more than one part in order to position the parts for further operations such as welding, bolting or assembling.
Approximately two percent of the Tax Commissioner's assessment related to gauges and fixtures. Appellant's gauging is both in process and in final inspection. The gauges and fixtures are used to determine that the part being produced conforms to the needs of the blueprint and that the final process is within the dimensional requirement and tolerances of the part.
A decision to produce tooling originates with the engineering and design group of a General Motors division. This group issues a design and engineering release which describes the need for a particular part and the actual design of the part which will perform a function within a vehicle. The central office purchasing department has the responsibility for determining, in conjunction with the quality and reliability department, who will manufacture the desired part. Chevrolet, for example, through its quality and reliability department and purchasing department, continually evaluates and qualifies outside manufacturers upon the basis of their facilities, equipment, processing capabilities and quality control habits in order to maintain a list of outside suppliers who are capable of performing on the same quality and production levels as General Motors' own plants. In conjunction with the sales department, the central office purchasing department determines the volume requirements of the part needed for an annual production year. A production buyer then prepares a competitive inquiry, consisting of a data print and a volume requirement, which may be sent to Chevrolet plants, other General Motors divisions, and outside suppliers. The inquiry requires the suppliers to submit, by a designated date, a piece cost for the part and a separate cost for the tooling necessary to produce the part. The central office purchasing department then examines the summary of quotations, projecting them to an annual cost basis, and makes a determination as to the best economic package for Chevrolet on each particular part.
If the central office purchasing department determines to buy the part instead of manufacturing it, an award is made to a qualified outside supplier. The award is documented with a purchase order sent to the supplier. If more than one part is required, the supplier must decide whether to make all the parts himself or to seek outside help on some of them. The outside supplier must also decide whether he will design the tooling himself or have the tooling produced for him by a tool house.
In either case, the outside supplier and Chevrolet are required to follow the progress of the tooling because Chevrolet has a predetermined date when the tooling must be completed in order to conform to the automobile manufacturer's production dates.
When the tooling is completed and capable of producing a part, the outside supplier is required to produce a sample and submit it to the central office quality control department. This department checks the part against the original blueprint to determine if the part meets the material specifications, tolerances and details contained in the contract. If the part meets those requirements, Chevrolet advises the outside supplier to begin production and allows the supplier to submit its invoice for payment of the tooling cost.
At this time, General Motors takes title to the tooling. The purpose of taking title is twofold: First, the tooling which General Motors purchases is proprietary in nature, i. e., it is designed exclusively for the use of General Motors, and ownership prevents the outside supplier from manufacturing the desired part for any other organization; and, secondly, ownership of the tooling permits General Motors to remove the tooling from the outside supplier's plant in the event of strike, work stoppage, insolvency, or other inability to meet production schedules.
Although General Motors takes title to the tooling, such tooling remains in the possession of the outside supplier for production of General Motors' requirements of the designated part. The award to the outside supplier is conditioned upon the supplier maintaining General Motors' standards for quality and production. General Motors maintains a continuing surveillance and monitoring of the supplier's production and may, if the need arises, remove the tooling during production and place it in other plants capable of performing according to General Motors' standards.
In the instant case, General Motors paid for all the tooling manufactured or purchased by the outside suppliers and took title to it. The Tax Commissioner levied a sales and use tax assessment on all the tooling.
The Tax Commissioner, in assessing the tooling in question, determined that General Motors was the "consumer," as defined in R.C. 5739.01(D); that the tooling assessed was not used by the "consumer" directly in the production for sale by manufacturing, and therefore the purchases of tooling were not excepted from sales and use taxes by reason of R.C. 5739.01(E)(2) and 5741.02(C) (2); that there was no direct charge to the supplier for the use of the tooling, and therefore no sale of the tooling to the supplier within the meaning of R.C. 5739.01(B); and that R.C. 5701.03, which excepts "patterns, jigs, dies, or drawings * * * held for use" from the definition of "personal property," was inapplicable because the tax levied in this assessment was a tax on the transaction and the exercise of the right to sell and use property, not on the property itself.
The Board of Tax Appeals affirmed the order of the Tax Commissioner in all respects. The cause is now before this court upon an appeal from the decision of the Board of Tax Appeals.
Messrs. George, Greek, King, McMahon McConnaughey, Mr. Kiehner Johnson, Mr. Ross L. Malone, Mr. Paul H. Zalecki and Mr. Lawrence R. Sessoms, for appellant.
Mr. William J. Brown, attorney general, and Mrs. Maryann B. Gall, for appellee.
Appellant does not dispute the Tax Commissioner's determination that appellant was the "consumer" of the assessed tooling, as defined in R.C. 5739.01 (D), but propounds three propositions of law, each of which, if accepted by this court, would except appellant from the sales and use taxes imposed.
I.
Appellant's first proposition of law is that the exceptions to the statutory definition of "retail sale," provided by R.C. 5739.01(E), are predicated upon the purpose of the consumer that the item be used in an excepted manner. Appellant argues that the use of the tooling by an outside manufacturer directly in the manufacturing of component parts and subassemblies to be used in the production process of General Motors fulfills the requirement of R.C. 5739.01(E)(2) that the purpose of the consumer of the item transferred be "* * * to use or consume the thing transferred directly in the production of tangible personal property for sale by manufacturing, processing * * *." Appellant argues that the decision of the Board of Tax Appeals reads into the statute a limitation that the purpose of the consumer must be that the consumer, himself, use or consume the thing transferred directly by manufacturing personal property. Appellant contends that this was not the intention of the General Assembly and that the court decisions do not require that the transactions involved be subject to taxation. We disagree.
A review of the decisions interpreting R.C. 5739.01 (E) (2) clearly establish that in order to qualify for an exception to the statutory definition of "retail sale" the property transferred must be used or consumed directly by the user or consumer. Apex Powder Corp. v. Peck (1954), 162 Ohio St. 189; Zinc Engravers v. Bowers (1958), 168 Ohio St. 43; State, ex rel. Stutler, v. Yacobucci (1959), 169 Ohio St. 20; Victory Express v. Bowers (1959), 169 Ohio St. 227; H.J. Heinz Co. v. Bowers (1960), 170 Ohio St. 423; Coca Cola Bottling Co. v. Bowers (1960), 171 Ohio St. 26.
Judge Thomas J. Herbert, in Zinc Engravers, directed his attention to a proposition similar to that of appellant in the present case. In Zinc Engravers, the A. Polsky Company, a department store, purchased mats and engravings from Zinc Engravers and paid a sales tax on the purchases. Subsequently, the mats and engravings were transferred without consideration to the Akron Beacon Journal for use in printing Polsky's advertising material in the newspaper, at certain fixed rates. Title to the mats and engravings was at all times in Polsky, and, after use by the newspaper, the mats and engravings were returned to Polsky. Polsky delivered to and filed with Zinc Engravers a purported blanket certificate of exemption, which the Tax Commissioner disallowed.
As one of the grounds for its appeal, Zinc Engravers maintained that the "direct use" exception from the definition of "retail sale," pursuant to R.C. 5739.01(E) (2), was applicable. The appellant contended that this court's decision in Apex Powder Corp., supra ( 162 Ohio St. 189), excepted the sales of the mats and engravings because "`the purpose of the consumer was to purchase the said engravings, etchings and mats for use directly in the production of tangible personal property for sale by manufacturing or processing.'"
The court held that the mats and engravings were not used or consumed directly in the production of tangible personal property. It stated that the appellant had established only that its purpose was that the items "transferred be used or consumed directly in such production of tangible personal property." It was admitted that the use or consumption of the transferred property was by some one other than the consumer, and, in view of the clear language of R.C. 5739.01, the court declined to extend the Apex ruling, stating, at page 52:
"We do not believe that the Legislature intended the exception under this category [direct use in manufacturing of tangible personal property] to be extended beyond the use or consumption by the consumer himself."
Appellant also cites Apex Powder Corp v. Peck, supra ( 162 Ohio St. 189), State, ex rel. Stutler, v. Yacobucci, supra ( 169 Ohio St. 20), H.J. Heinz Co. v. Bowers, supra ( 170 Ohio St. 423), Coca Cola Bottling Co. v. Bowers, supra ( 171 Ohio St. 26), and House of Seagram v. Bowers (1964), 175 Ohio St. 465, for the proposition that the exception contained in R.C. 5739.01(E) (2) is wholly dependent upon the use of, and the purpose to use, the transferred property and not the status of the user. However, a review of the cited cases clearly shows that none involved a use or consumption of transferred property by some one other than the consumer.
The Apex case, in fact, involved a sales and use tax assessment on drilling and blasting equipment purchased and used by the appellant in performing mining operations for others. The Tax Commissioner sought to tax the purchases upon the basis that the consumer did not own, nor could he sell, the tangible personal property produced by mining. The court held that the statutory language requiring a consumer to have a "purpose * * * to use * * * [a] thing transferred directly in the production of tangible personal property for sale by * * * mining" contained no requirement that the sale be made by the consumer.
Conversely, in the present case, R.C. 5739.01(E) (2) mandates that the consumer "* * * use or consume the thing transferred directly in the production of tangible personal property for sale by manufacturing * * *." (Emphasis added.) In this context, and in light of prior decisions of this court, the word "directly" can only be interpreted as requiring a direct use or consumption by the consumer of the transferred property.
Accordingly, the decision of the Board of Tax Appeals that appellant was not entitled to a tax exception under R.C. 5739.01(E) (2) is reasonable and lawful.
II.
Appellant's second proposition of law is that the transactions between General Motors and its outside suppliers, as a part of the contract for the production of parts, subassemblies and components with a specific quality at stated unit prices and upon specific delivery schedules, in which the title to tooling passed to General Motors, and the outside supplier retained possession of the tooling for exclusive use in manufacturing such parts for General Motors, constitute purchases for resale which are excepted from sales and use taxes by R.C. 5739.01(E) (1) and 5741.02(C) (2).
With that proposition, we agree.
R.C. 5739.01(E) excepts from the definition of "retail sale" and "sale at retail" those sales 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."
R.C. 5739.01(B) defines "sale" and "selling," as follows:
"`Sale' and `selling' include all transactions by which title or possession, or both, of tangible personal property, is or is to be transferred, or a license to use or consume tangible personal property is or is to be granted * * * for a consideration in any manner, whether absolutely or conditionally, whether for a price or a rental, in money or by exchange, and by any means whatsoever; and include the production or fabrication of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the production of fabrication work * * *."
R.C. 5741.02(C) (2), a use tax statute, incorporates by reference the sales tax exceptions of R.C. Chapter 5739.01.
Both the Tax Commissioner and the Board of Tax Appeals, in considering this proposition, determined that the outside suppliers did not receive possession of the tooling by virtue of a sale, since the property transferred by the consumer (General Motors) was not acquired by the outside suppliers for a consideration.
The Board of Tax Appeals correctly cited Barth Corp. v. Schneider (1966), 6 Ohio St.2d 108, and Kloepfer's v. Peck (1953), 158 Ohio St. 577, for the proposition that in order for a transfer of possession of property to constitute a sale within the meaning of the Sales Tax Act the transfer must be for a consideration. R.C. 5739.01(B) clearly states a broad definition of "consideration," as follows:
"* * * for a consideration in any manner, whether absolutely or conditionally, whether for a price or rental, in money or by exchange, and by any means whatsoever * * *."
The contractual agreements between General Motors and its outside suppliers constitute bilateral "requirements" contracts. The agreement calls for a mutual exchange of promises between General Motors and its suppliers. General Motors covenants to the suppliers to grant an exclusive license to use General Motors' tooling and a promise to pay the suppliers for all General Motors' requirements of the tooling which the suppliers produce. In return, the suppliers promise to produce all the parts General Motors requires according to the time, quality and quantity specifications General Motors establishes, and to produce those parts exclusively for General Motors. Where the terms of such a contract are specific, the agreement to buy or sell what will be "needed" or "required" has been enforced by the courts with little difficulty, and has been held to be based upon consideration. 1 Williston on Contracts (3 Ed.), 402, Consideration, Section 104A; Laveson v. Warner Mfg. Corp. (D.C.N.J., 1953), 117 F. Supp. 124; Oregon Plywood Sales Corp. v. Sutherlin Plywood Corp. (C.A. 9, 1957), 246 F.2d 466; Foley Lumber Industries v. Buckeye Cellulose Corp. (C.A. 5, 1961), 286 F.2d 697. See, also, R.C. 1302.19 (UCC 2-306), recognizing requirements contracts. In Fuchs v. United Motor Stage Co. (1939), 135 Ohio St. 509, this court recognized the business necessity for, and the legality of, requirements contracts, stating that the mutual promises of the buyer to buy and the seller to sell the requirements of a commodity are consideration one for the other. Likewise, it has been stated another way — that the promise of a seller not to manufacture except for the buyer, or the promise of the buyer not to buy except from a particular seller, is clearly a promise to do something detrimental. Williston, supra, page 406.
In the present case, it is clear that the transfer of possession of the tooling by General Motors to its suppliers was not gratuitous. The suppliers were bound to supply all of General Motors' requirements for the goods, subject to General Motors' time and quality control standards and the threat of removal of the tooling if such standards were not met. We hold, therefore, that the suppliers' agreement constituted adequate consideration for a "sale" of the tooling within the meaning of R.C. 5739.01(B), and such tooling is, therefore, excepted from the imposition of the Ohio sales and use taxes by virtue of the exceptions contained in R.C. 5739.01(E) (1) and 5741.02(C) (2).
Upon the basis of such exceptions, the decision of the Board of Tax Appeals, insofar as it refused to grant a tax exception under R.C. 5739.01(E) (1), is unreasonable and unlawful.
III.
Appellant's third proposition of law is that the provisions of R.C. 5701.03 specifically except patterns, jigs and dies from the definition of personal property and, therefore, such items are not personal property subject to the definition of "sale" contained in R.C. 5739.01(B) nor subject to the levy of sales taxes pursuant to R.C. 5739.02.
R.C. 5701.03 excepts from the definition of "personal property" patterns, jigs, dies, or drawings which are held for use and not for sale in the ordinary course of business. As was pointed out by this court in Celina Mutual Ins. Co. v. Bowers (1965), 5 Ohio St.2d 12, and Howell Air v. Porterfield (1970), 22 Ohio St.2d 32, the Ohio sales and use taxes are not taxes on property, but are excise taxes on the exercise of the privileges incident to ownership. The tax is levied on transactions with respect to the property. In the instant case, the property was purchased by appellant and resold to appellant's suppliers; it was not held for use. The jigs and dies are not, therefore, entitled to exception from the definition of personal property under R.C. 5701.03, and the decision of the Board of Tax Appeals denying such exception is reasonable and lawful.
For the reasons expressed in Part II of this opinion the decision of the Board of Tax Appeals is unreasonable and unlawful and is, therefore, reversed.
Decision reversed.
O'NEILL, C.J., HERBERT, STERN, CELEBREZZE and W. BROWN, JJ., concur.
I concur in the judgment of reversal, but for reasons other than those stated in the majority opinion.
Under the circumstances of this case, the sale in question is within the exception contained in R.C. 5739.01(E) in that "the purpose of the consumer is * * * to use or consume the thing transferred directly in the production of tangible personal property for sale by manufacturing."
Under R.C. 5739.01(E), the purpose of the consumer is controlling, and I find no language in the statute that requires the Tax Commissioner, or the Board of Tax Appeals, to look beyond the purpose of the consumer.
An excepted purpose must exist at the time of the sale in order to make it an excepted sale. The character and identity of the user is immaterial as long as no other sale occurs, and may not become apparent until the performance of the manufacturing process for which the tooling is designed is commenced. When the manufacturing process has commenced, it is immaterial, for the purpose of the exception, whether General Motors employs an individual on the payroll of one of its divisions to use the tool or employs an independent outside corporation for the same purpose. Only one sale has occurred, and whether the sale is within the exception of the statute is determined by the consumer's purpose at the time the sale — not by the nature of a contractual arrangement between the consumer and the agent using the tool, whether corporate or individual.
Zinc Engravers v. Bowers (1958), 168 Ohio St. 43, supports appellant's position rather than that of the appellee, for there the court held that the consumer did have the purpose of retailing when it purchased the engravings, and allowed an exception from taxation upon the basis that they were used directly in making retail sales in spite of the fact that the use was actually by a third party. There was only one sale and the undeniable purpose of the consumer at the time of the sale was to use the property directly in making retail sales.
Apex Powder Corp. v. Peck (1954), 162 Ohio St. 189, 191, supports this holding and contains the following:
"* * * The statutory words only require that such consumer must have a `purpose * * * to use * * * the thing transferred directly in the production of tangible personal property for sale.'"
Since the use of the tooling by the supplier was for and on behalf of General Motors, and as its corporate agent, I conclude that there was no sale by General Motors, and that both the holding and the use of the patterns, jigs, dies, or drawings were such that R.C. 5701.03 applies so as to except those items from the statutory definition of personal property. I would reverse the decision of the Board of Tax Appeals in its entirety.