Summary
In Kroger, supra, the BTA had found that "the items comprising the product-packaging lines * * * were used in `an integrated activity and an essential part of the packaging activity' * * *."
Summary of this case from Union Carbide Corp. v. LimbachOpinion
No. 89-569
Submitted March 15, 1990 —
Decided September 12, 1990.
Taxation — Sales tax — Exceptions — R.C. 5739.01(E)(2) — Food-packaging lines when used in "an integrated activity and an essential part of the packing activity" — Air curtains not excepted from sales tax when no evidence is presented with regard to how the curtains were utilized.
APPEAL from the Board of Tax Appeals, No. 85-D-1114.
During the audit period, January 1, 1978 through December 31, 1980, appellee, the kroger Company, operated in Ohio as a manufacturer and retailer of food and miscellaneous products. The issues in this appeal involve its purchases of machinery, equipment and miscellaneous items, used in appellee's product-packaging lines, and air curtains. The Tax Commissioner held such purchases subject to the sales and use tax.
Apparently, several different products are packaged in a similar manner. For purposes of illustration, appellee presented evidence to the Board of Tax Appeals ("BTA") of the operation of its jelly-packing line. The manager of sales and use taxes in appellee's tax department described the steps involved in the processing of products for packaging and for ultimate sale to retailers. Glass jars are received in corrugated boxes, placed on conveyors and moved to equipment which lifts the boxes off the jars. The jars are then transported separately from the boxes, the jars moving to the cleaner where, through the use of compressed air, they are cleaned. They are then moved to the filler, where the jars are filled with the partially processed product, and then on to the "capper." At this point jar lids or caps are received from a rotary cap sorter. These caps are aligned and fed into the machine, which sterilizes the air space above the product within the jar, heats the cap and softens its seal so that the jars seal properly. The machine then screws the cap onto the jar. After the capper, the product enters a water bath which begins the cooling and setting process. The product still a liquid, is then introduced into a large cooler, which causes a chemical change, and it solidifies to become jelly.
Appellee presented no evidence to the BTA concerning the make-up of the air curtains or how they were used.
The BTA reversed the Tax Commissioner's assessments and granted exception from taxation: (a) as to the items comprising the product-packaging lines, based on its finding that they were used in "an integrated activity and an essential part of the packaging activity," and (b) as to the air curtains, based on the Tax Commissioner's concession of exemption of a dust collection system and the BTA's inference that their use was "essentially a part of the dust collection and control system and process."
Jones, Day, Reavis Pogue, Roger F. Day and Timothy R. Pickrel, for appellee.
Anthony J. Celebrezze, Jr., attorney general, Richard C. Farrin and Martha Jane Cooper, for appellant.
For the reasons which follow, we affirm the decision in part and reverse in part.
I
In essence, the Tax Commissioner's principal argument is that exception from taxation is based upon the specific requirements of R.C. 5739.02 (B)(15) and is available only for purchases of packages or equipment for use in packing tangible personal property produced for sale and used directly in inserting such product into the package. We disagree.
R.C. 5739.02 provides in part as follows:
"(B) The tax does not apply to the following:
"* * *
"(15) Sales to persons engaged in any of the activities mentioned in division (E)(2) of section 5739.01 of the Revised Code, of packages, including material and parts therefor, and of machinery, equipment, and material for use in packaging tangible personal property produced for sale, or sold at retail. Packages include bags, baskets, cartons, crates, boxes, cans, bottles, bindings, wrappings, and other similar devices and containers and `packaging' means placing therein."
R.C. 5741.02(C)(2) provides a concomitant exception for use tax.
With regard to the items constituting the conveyor equipment, the Tax Commissioner's argument is the same as that advanced by the Tax Commissioner in Hawthorn Mellody, Inc. v. Lindley (1981), 65 Ohio St.2d 47, 19 O.O. 3d 234, 417 N.E.2d 1257. That case is dispositive of the issue now before us. The syllabus in Hawthorn Mellody reads as follows:
The Supreme Court will not overrule findings of fact of the Board of Tax Appeals that are based upon sufficient probative evidence. ( Citizens Financial Corp. v. Porterfield, 25 Ohio St.2d 53, approved and followed.)"
We also observed:
"The commissioner's argument is that, in view of the definition of `packaging' in R.C. 5739.02(B)(15), i.e., `placing therein,' the portion of the conveyor system at issue is not excepted from taxation as `machinery * * * [or] equipment * * * use[d] in packaging tangible personal property produced for sale * * *' under R.C. 5739.02(B)(15). It is the commissioner's position that only machinery or equipment used in placing tangible personal property produced for sale in packages is entitled to a tax exception." (Emphasis sic.) Id. at 51, 19 O.O. 3d at 237-238, 417 N.E.2d at 1261.
We concluded our analysis of the facts presented in Hawthorn Mellody by observing:
"Based upon the above evidence, we find that the portion of the conveyor system at issue is an integral part of machinery or equipment used in placing tangible personal property produced for sale (milk cartons) in packages (milk cases). Thus, the conveyor is excepted from taxation under R.C. 5739.02(B)(15)." Id. at 53, 19 O.O. 3d at 238, 417 N.E.2d at 1262.
The BTA was correct to follow the analysis of Hawthorn Mellody and its action was reasonable and lawful.
II
Also involved in this appeal are air curtains. As indicated earlier, appellee failed to present evidence with regard to how the air curtains were utilized. This failure, although apparently not considered significant by the BTA, is determinative. In presenting the issue to the BTA, appellee had the burden of proving that it was entitled to exception from the sales tax by reason of the manner of use of the item in question. It failed. The syllabus of Hatchadorian v. Lindley (1986), 21 Ohio St.3d 66, 21 OBR 365, 488 N.E.2d 145, controls:
"1. The Tax Commissioner's findings are presumptively valid, absent a demonstration that those findings are clearly unreasonable or unlawful.
"2. When no competent and probative evidence is developed before the Board of Tax Appeals to show that the Tax Commissioner's determination of the value of property is factually incorrect, it is error for the board to reverse that determination."
The decision of the BTA in granting exception for the air curtains was unreasonable and unlawful and is hereby reversed.
Decision affirmed in part and reversed in part.
MOYER, C.J., SWEENEY, HOLMES, DOUGLAS and WRIGHT, JJ., concur.
H. BROWN and RESNICK, JJ., dissent.