Opinion
No. 70-159
Decided February 10, 1971.
Taxation — Sales tax — R.C. 5739.01 and 5739.02 — Presumption of taxability — Items not used directly in manufacturing or processing for sale — Fork-lift trucks used in business of fabricating homes — Transporting fabricated materials to area where "packaged" — "Assembling," defined.
1. Fork-lift trucks, as well as repairs to the trucks, which are used in appellant's business of fabricating homes and apartments, are not used or consumed "directly in the production of tangible personal property for sale by manufacturing, processing * * *," within the meaning of R.C. 5739.01(E) (2), and are not used "in the process of production for sale by * * * assembling * * *," within the meaning of R.C. 5739.02(B) (18), where they are employed to transport completely fabricated materials from a production area to an expediting area in which they are gathered together to make up a customer's "package."
2. "Assembling," as used in R.C. 5739.02(B) (18), means more than merely gathering together fabricated materials. It means to fit together various parts so as to make an operative whole.
APPEAL from the Board of Tax Appeals.
The Tax Commissioner issued a sales and use tax assessment against Scholz Homes, Inc., appellant herein. Challenging solely a portion of the assessment involving part of the sales tax on purchases, rentals and repairs of fork-lift trucks, and the penalties, the appellant submitted the matter to the Board of Tax Appeals which affirmed the Tax Commissioner's final order. In its notice of appeal to this court, the appellant challenged the board's decision only in so far as the sales tax assessment involving fork-lift trucks and repairs was concerned.
The record before the Board of Tax Appeals, which consists of the testimony by Raymond Holzman, appellant's assistant plant superintendent, and the Tax Commissioner's transcript, reveals the following facts:
During the taxable period involved, January 1, 1965, through December 31, 1967, the appellant was in the business of fabricating and erecting homes and apartments. The fabricating was performed at its plant in Toledo, Ohio. Customers purchase a house or apartment "package," which consists of various component materials, the "package" being shipped from the plant to the site where the house or apartment building is to be erected.
The items taxed in this case were five fork-lift trucks, purchased by the appellant; two fork-lift trucks rented by it and used as back-ups for trucks owned by the appellant; and repairs for all seven trucks.
Two types of materials were delivered to the appellant's plant. The first consisted of materials, such as doors, windows and fixtures, which were resold in the same form as received. The second was composed of raw materials, such as lumber, weather sheathing and rock lath, which were fabricated into wall panels and roof trusses, the only two items fabricated by the appellant.
Basically, the fork-lift trucks were used in five steps of Scholz's operations: (1) To unload raw materials from flatcars and boxcars and transport those items to a storage area; (2) to transport raw materials from a storage area to the fabricating or production area; (3) to move such materials among various stations within the production area; (4) to transport wall panels and roof trusses from the production area to the expediting (assembly) area, in which the sole operation is to gather together the various completed materials into a customer's "package"; and (5) to transport the packaged materials from the expediting area to the loading area.
The Board of Tax Appeals found "that the primary use of the fork-lift trucks is in receiving materials, hauling materials to the prefab sections, hauling prefab sections from the prefab area to the assembly areas and hauling other necessary but not prefab items to the assembly area preparatory to shipment." The board found further "that hauling of items to an assembly area preparatory to shipment is not using or consuming the personal property in question in the production of tangible personal property for sale by manufacturing or processing." Accordingly, the Board of Tax Appeals found that the fork-lift trucks owned and rented by the appellant, as well as the repairs which were made to these trucks, were subject to the sales tax, and affirmed the Tax Commissioner's final order. From that decision, appellant appealed directly to this court.
Messrs. Shumaker, Loop Kendrick and Mr. John C. Straub, for appellant.
Mr. Paul W. Brown, attorney general, and Mr. George M. Hausworth and Mr. Ralph Amiet, for appellee.
The issue raised is whether the Board of Tax Appeals' decision was unreasonable or unlawful in determining that the purchase, rental and repairs to the fork-lift trucks here involved, did not fall within the exceptions of R.C. 5739.01(E) (2) and 5739.02(B) (18).
R.C. 5739.01(E) (2), defines "retail sale" and "sales at retail" as follows:
"(E) `Retail sale' and `sales at retail' include all sales except those in which the purpose of the consumer is:
"* * *
"(2) To incorporate the thing transferred as a material or a part, into tangible personal property to be produced for sale by manufacturing, assembling, processing, or refining, or to use or consume the thing transferred directly in the production of tangible personal property for sale by manufacturing, processing, refining, or mining * * *."
R.C. 5739.02(B) (132 Ohio Laws 1985, 1989) stated:
"(B) The tax does not apply to the following:
" * * *
"(18) Sales to persons engaged in manufacturing, processing, assembling, or refining, of protective shipping materials, or handling and transportation equipment, except motor vehicles licensed to operate on the public highways, used in intra or inter plant transfers or shipments of tangible personal property in the process of production for sale by manufacturing, processing, assembling, or refining, where the plant or plants within or between which such transfers or shipments occur are operated by the same person:
" * * *
"The exemptions in division (B) (16), (17), (18), (19), (20), and (21) of this section shall not be construed to limit the exceptions contained in division (E) (2) of Section 5739.01 of the Revised Code."
There are certain fundamental guidelines which we must follow in resolving this issue. Pursuant to statute and in the interest of finality, where a decision of the Board of Tax Appeals is appealed to this court, our sole function is to determimne whether the board's decision is unreasonable or unlawful. Hercules Galion Products v. Bowers (1960), 171 Ohio St. 176; R.C. 5717.04. Each sale is presumed to be taxable unless an exception is established by the taxpayer. R.C. 5739.02(B). The primary use of an item determines whether it is to be taxed or excepted. Paragraph two of the syllabus of Mead Corp. v. Glander (1950), 153 Ohio St. 539. Furthermore, when the Board of Tax Appeals considers a case such as this, it is not compelled to accept the testimony of the sole witness, but instead it is free to weigh and to accept or reject such testimony. Ace Steel Baling v. Porterfield (1969), 19 Ohio St.2d 137, 138.
The appellant contends that the board's decision is unlawful because the fork-lift trucks, which it employs in moving materials from the fabricating area to the expediting area and in gathering the materials together in the expediting area into the "package" ordered by its customers, were being used "directly in the production of tangible personal property for sale by manufacturing, processing."
"The terms, `manufacturing' and `processing' * * * imply essentially a transformation or conversion of materials or things into a different state or form from that in which they originally existed — the actual operation incident to changing them into marketable products." National Tube Co. v. Glander (1952), 157 Ohio St. 407, paragraph four of the syllabus. (Emphasis added.)
"In determining whether tangible personal property is used or consumed directly in the production of tangible personal property for sale by manufacture or processing, and, therefore, whether its sale or use is excepted from taxation under the provision of subdivision (E) (2) of Section 5739.01, or subdivision (C) (2) of Section 5741.01, Revised Code, the test is not whether such property is essential to the operation of an `integrated plant,' the test to be applied being, when does the actual manufacturing or processing activity begin and end, and is the property used or consumed during and in the manufacturing or processing period." Youngstown Building Material Fuel Co. v. Bowers (1958), 167 Ohio St. 363.
Holzman's testimony clearly established that the operation in the expediting area consisted solely of gathering materials together for shipment. He testified that no materials were nailed, sawed, or put together in the expediting area. Therefore, there was no "transformation or conversion of materials or things into a different state or form from that in which they originally existed" in the expediting area. Whatever manufacturing or processing that was done to those materials was performed before they reached the expediting area.
France Co. v. Evatt (1944), 143 Ohio St. 455, and Northwestern Ohio Poultry Assn. v. Schneider (1965), 2 Ohio St.2d 34, cited by the appellant, do not support the conclusion which the appellant has drawn. Those cases do not stand for the proposition that gathering together fabricated materials constitutes processing, notwithstanding such materials will later become component parts of a "package." We hold that such an activity is neither manufacturing nor processing within the meaning of sales tax statutes. Furthermore, the fabricating process having been completed before these materials were moved to the expediting area, appellant's use of fork-lift trucks in transporting the fabricated materials to the expediting area was not an activity which excepted them from the tax. Powhatan Mining Co. v. Peck (1953), 160 Ohio St. 389.
The appellant contends further that the activity within the expediting area, as well as the movement of materials to that area, should be regarded as "in the process of production for sale by * * * assembling" under R.C. 5739.02(B) (18).
In view of the context in which the term "assembling" is used in that section, as well as the presumption in Section 5739.02(B) "that all sales made in this state are subject to the tax until the contrary is established," this court holds that the word "assembling," as used in R.C. 5739.02(B) (18), means more than the mere gathering together of fabricated materials. It means "to fit together various parts * * * so as to make into an operative whole." Webster's Third New International Dictionary. As there was no evidence before the Board of Tax Appeals to indicate that there was anything more than a gathering together of materials to make up the customer's "package" in the expediting area, appellant's contention is without merit.
The Board of Tax Appeals based its decision to firm the Tax Commissioner's assessment on R.C. 5739.01 (E) (2) and 5739.02(B) (18). We affirm that decision.
In the latter part of 1967, which was within the audit period here involved, subdivision (S), defining the terms "manufacturing" and "processing" and referring to subdivision (E) (2), was added to R.C. 5739.01. (Am. Sub. S.B. 350, 132 Ohio Laws 1981, 2308, and Am. Sub. H.B. 919, 132 Ohio Laws 1985, 2787.) There is no indication that either counsel or the board considered the effect of this definition upon the tax assessment.
Decision affirmed.
O'NEILL, C.J., SCHNEIDER, HERBERT, DUNCAN, CORRIGAN and LEACH, JJ., concur.