Opinion
Nos. 40746 and 40747
Decided May 8, 1968.
Taxation — Sales and use tax — Exemptions — Permitted but not required by Constitution — Sale of building and construction material — Sections 5739.02 (B) (14) and 5741.02 (C), Revised Code — Applicable, where — "Ownership" embraces holding legal title to realty — Contractor not "owner" of building, when — Agreement to construct post office building and lease to postal department — Constitutional law.
1. The sales and use tax exemptions for building and construction materials sold to construction contractors for incorporation into a structure or improvement to real property, granted under the provisions of Sections 5739.02 (B) (14) and 5741.02 (C), Revised Code, apply only where such structure or improvement to real property is owned or accepted for ownership by a governmental agency, federal or state, at the time of completion.
2. The term, "ownership," as used in Section 5739.02 (B) (14) of the Revised Code, embraces the holding of legal title to real property.
3. Where a contractor agrees with an agency of the United States to construct a post office building specifically suited to the needs of such agency, on land sold and conveyed by such agency to the contractor, and to lease the land and building to such agency by long-term lease, with renewal and purchase options at stated rentals and prices, and no provision is made for the payment by the agency to the contractor of the costs or contract price of such construction, such agency is not an "owner" of the post office building and such contractor is not entitled to sales and use tax exemptions for building and construction materials incorporated therein under the provisions of Sections 5739.02 (B) (14) and 5741.02 (C) of the Revised Code.
4. Section 2, Article XII of the Ohio Constitution permits but does not require the enactment of tax-exemption legislation.
5. Section 5739.02 (B) (14) of the Revised Code is a constitutional exercise of the state's power to tax and does not violate the supremacy clause, paragraph two of Article VI of the Constitution of the United States. ( Alabama v. King Boozer, 314 U.S. 1; Curry v. United States, 314 U.S. 14.)
APPEALS from the Board of Tax Appeals.
These causes are here on appeal from the decisions and orders of the Board of Tax Appeals confirming the issuance by the Tax Commissioner of sales tax assessments and penalties against appellants for building materials purchased and incorporated by them in a new United States Postal Facility at Toledo, Ohio.
Appellants in case No. 40747 are brothers, Robert and Norman B. Leventhal, who were officers and sole shareholders of Beacon Construction Company of Massachusetts, Inc., a Massachusetts corporation licensed to do business in Ohio. In 1964, the United States Post Office Department invited submission of bids for the construction and lease of a new post office building at Toledo upon a proposal labeled, "Agreement to Lease." Beacon's bid was accepted and it entered into a complex contract, denominated "Agreement to Lease," with the United States Post Office Department, whereby the department agreed to convey its post office site to Beacon, and Beacon agreed to construct a post office building according to the department's specifications and lease the building to the department. The contract provided that, at the completion of construction and acceptance by the department, Beacon would execute and deliver to the department a lease, with an initial term of thirty years and eight five-year renewal options, at stated annual rentals, with a further option to purchase the land and building at the end of any term at stated prices. Except for an option in the department to pay for changes during construction in lump sum or by adjustment to rentals, no provision was made for payment to Beacon for construction costs.
Following acceptance of appellant's bid and the giving of the requisite bonds, the department conveyed the building site to Beacon by quitclaim deed containing a defeasance clause vesting title in the department in the event of Beacon's nonperformance, and construction was begun by Beacon. During construction, the Beacon corporation was dissolved and its assets, including its rights under the contract and title to the post office site, passed to its shareholders, the appellants Leventhal. The Leventhals then conveyed the site, subject to completion of the building, to third parties identified as the "Brooker group." The building was completed by the Leventhals, doing business as the Beacon Construction Company, a partnership, and later by them as individuals. In June 1966, the building was completed and was accepted by the Post Office Department, and the Brooker group executed a lease of the property and improvements to the Post Office Department pursuant to the Beacon contract.
On July 20, 1966, the Tax Commissioner assessed a sales and use tax deficiency and penalties upon the building and construction materials purchased and incorporated in the structure by the Leventhals during the audit period of July 1, 1964 to June 30, 1966. An appeal was taken from this assessment to the Board of Tax Appeals by appellants, where the case was consolidated by stipulation with the companion case herein (No. 40746), and thereupon the Board of Tax Appeals affirmed the orders of the Tax Commissioner.
Appellant in case No. 40746 is a subcontractor to appellants in case No. 40747. Although the audit period and amounts differ, the assessments in the appeal of Smith Fireproofing Company cover materials incorporated in the same post office facility as in case No. 40747. It was stipulated by counsel before the Board of Tax Appeals that the issues in the cases at bar are identical and the determination of case No. 40747 controls in case No. 40746.
The causes are before this court on appeal as a matter of right from the decisions of the Board of Tax Appeals.
Messrs. Fuhrman, Gertner Britz, Mr. Marc Gertner, Mr. Abraham Gertner and Messrs. Roche Lean, for appellants.
Mr. William B. Saxbe, attorney general, and Mr. W. Robinson Watters, for appellee.
Messrs. Schwartz Schwartz and Mr. Stanley Schwartz, Jr., amicus curiae, for appellants.
The principal question in this case is whether the purchases assessed are exempt from sales and use taxation by the state of Ohio under the provisions of Section 5739.02 (B) (14) of the Revised Code.
Section 5739.02 (B) (14) provides, in pertinent part:
"(B) The [sales] tax does not apply to the following:
"* * *
"(14) Building and construction materials sold to construction contractors for incorporation into a structure or improvement to real property under a construction contract with this state or a political subdivision thereof or with the United States government or any of its agencies, building and construction materials sold to construction contractors for incorporation into a structure or improvement to real property which are accepted for ownership by this state or any of its political subdivisions or by the United States or any of its agencies at the time of completion of such structures or improvements * * *." (Emphasis added.)
It appears that the General Assembly contemplated two separate types of building construction agreements in subsection (14) as stated below:
(1) Where a government agency enters into a construction contract with a builder whereby the latter builds a structure on real estate owned by the governmental agency and the building and construction materials are sold to the contractor for incorporation into the structure or improvement, such materials are exempt from taxation.
(2) Building and construction materials sold to construction contractors for incorporation into a structure or improvement to real estate which are accepted for ownership by a governmental agency at the time of completion, are exempt from the sales tax.
A brief reference to the authority granted by federal statutes to the Postmaster General in acquiring facilities for use in the postal service, may cast further light upon the intent of the General Assembly in respect to Subsection (B) (14), supra.
Chapter 23, Title 39, U.S. Code, in its pertinent part reads:
"Section 2102 Leases.
"(a) Notwithstanding any other provision of law the Postmaster General may lease, on such terms as he deems appropriate, real property necessary to the conduct of the affairs of the department. * * *" (Emphasis added.)
Section 5739.02 (B) (14) contains no provision for the exemption of building and construction materials incorporated in the construction of leased property from the sales tax.
Section 2103, Title 39, U.S. Code, authorizes the Postmaster General to acquire by purchase, condemnation, lease, donation, appropriation or to dispose of real estate for the best interest of the United States.
The Post Office Department originally owned the real estate upon which the Toledo Post Office building was located. Moreover, under the authority granted to the Department by Section 2103, supra, it sold and conveyed the land to Beacon and then leased the structure to be erected on the site under government specifications for a thirty-year period with eight successive five-year additional option periods. This indicates that the government had a reason not to enter into a contract for the building of a facility on land which it owned. Had the federal government owned the land upon which the facility was built, then the building and construction materials incorporated into the building would have been exempt from sales tax.
Beacon acquired title to the land upon which it built the structure under the agreement to lease, and leased the real estate and improvements to the United States Post Office Department. The building and construction materials going into the leased premises were, therefore, not exempt from sales tax.
Thereafter, Beacon's interest was solely to receive the rent under the terms of the lease. The post office side and the improvements thereon were never "accepted for ownership" by the Post Office Department, nor did either party to the lease so intend.
Appellants have cited several cases decided in other jurisdictions which allow tax exemptions of materials used in military housing projects authorized by the Defense Housing Act, Section 801 et seq., as amended, Section 1594, Title 42, U.S. Code. We have examined the cases cited by appellant, and note that they differ substantially from the case at bar.
In those cases, the federal agencies retained title to the land upon which the structures were built. See Knapp-Stiles, Inc., v. Department of Revenue, 370 Mich. 629, 122 N.W.2d 642. Where private enterprise has retained a substantial interest in a military housing project, a tax on the materials incorporated in the construction of such building projects has been sustained. See Gay v. Jemison (Fla.), 52 So.2d 137.
Appellants raise two constitutional questions. First, it is urged that these assessments of the sales tax violate Section 2, Article XII of the Ohio Constitution which authorizes the enactment of tax-exemption statutes. This section permits such exemptions, but it does not purport to assure them by legislation.
The second constitutional attack is that these taxes violate the supremacy clause, Article VI of the Constitution of the United States. Indirect state taxation of federal instrumentalities, whereby the federal government bears the ultimate economic burden of the tax, has been held permissible so long as the tax imposed by the state does not discriminate against the federal government. In the cases of Alabama v. King Boozer, 314 U.S. 1, 86 L. Ed. 3, and Curry v. United States, 314 U.S. 14, 86 L. Ed. 9, direct government contractors were required to pay state sales and use taxes although such taxes increased the contract price to the federal government through the "cost-plus" terms of the contract. No authority has been cited, nor does our search reveal any authority holding that the Ohio sales tax discriminates against the United States. Accordingly, there is no occasion to hold invalid the assessments of the Ohio sales and use taxes here involved. See Phillips Chemical Co. v. Dumas Independent School Dist., 361 U.S. 376, 4 L. Ed. 2d 384. It is our conclusion that the assessments at bar were a proper exercise of constitutional power.
The decisions of the Board of Tax Appeals, being neither unreasonable nor unlawful, are therefore affirmed.
Decisions affirmed.
ZIMMERMAN, MATTHIAS, SCHNEIDER and BROWN, JJ., concur.
TAFT, C.J., and O'NEILL, J., dissent.