Summary
In B.F. Goodrich Co. v. Lindley, 58 Ohio St.2d 364, 390 N.E.2d 330 (1979), the BTA had applied a primary-use test to determine that all the taxpayer's fuel purchases at issue were exempt from taxation, because the majority of the fuel was used for an exempt purpose.
Summary of this case from Epic Aviation, L.L.C. v. TestaOpinion
No. 78-874
Decided June 13, 1979.
Taxation — Use taxes — Fungibles used for taxable and non-taxable purposes — Primary use test — Applicability.
The primary use test does not apply to a sale of fungibles used for both taxable and non-taxable purposes where such use is apportionable before or after sale. ( Richardson-Merrell v. Porterfield, 32 Ohio St.2d 281, overruled; Emery Industries v. Kosydar, 43 Ohio St.2d 34, modified.)
APPEAL from the Board of Tax Appeals.
The parties have stipulated the following facts:
The B.F. Goodrich Company (appellee) is engaged in the manufacture and sale of rubber products and chemicals. The B.F. Goodrich Chemical Company (appellee) is engaged in the manufacture and sale of chemical products. Each appellee purchases coal and fuel oil for the purpose of consuming such fuel in the generation of steam for use in the manufacture of products for sale and in the heating of the company's plants and buildings. By monthly engineering studies and by use of steam meters, the appellees determined that the amount of fuel used for heating plants and buildings from 1971 to 1974 ranged from 8.02 percent to 46.47 percent of the total fuel purchases. A use tax was computed upon the average unit cost of the fuel used for heating purposes. This tax was reported and paid quarterly in accordance with direct payment permits issued by the Tax Commissioner to each appellee, pursuant to R.C. 5739.031.
R.C. 5739.031 provides in part:
"The tax commissioner may authorize a manufacturer or other consumer, who purchases tangible personal property under circumstances which normally make it impossible at the time of the purchase to determine the manner in which it will be used, to pay the sales tax levied by or pursuant to section 5739.02, 5739.021, or 5739.023 of the Revised Code or the use tax levied by or pursuant to section 5741.02, 5741.021, or 5741.022 of the Revised Code directly to the state, and waive the collection of the tax by the vendor or seller; but no such authority shall be granted or exercised except upon application to the commissioner and the issuance by the commissioner of a direct payment permit. If a direct payment permit is granted, then payment of the sales and use taxes on all purchases, including purchases of tangible personal property the use of which is known at the time of the purchase, shall be made directly to the treasurer of state by the permit holder."
This cause originated in applications for refund of the use tax paid by the appellees on the portions of fuel used for heating buildings from 1971 to 1974. The claim was based on the taxpayers' contention that because the fuel was primarily used for tax-excepted purposes (in the manufacture of products for sale), the holding of this court in Emery Industries v. Kosydar (1975), 43 Ohio St.2d 34, mandates a finding of factual nontaxability for the entire fuel purchases and hence a refund of the taxes paid.
The Tax Commissioner denied the refunds. Upon appeal by the taxpayers, the Board of Tax Appeals reversed that holding contending that the reversal was required by our holding in Emery.
The cause is now before this court as a matter of right.
Messrs. George, Greek, King, McMahon McConnaughey and Mr. Kiehner Johnson, for appellees.
Mr. William J. Brown, attorney general, Mr. James C. Sauer, for appellant.
We conclude that the holding of the Board of Tax Appeals violates the statutory scheme and is unreasonable and unlawful.
Clear statutory language makes the purpose of the consumer the basis of his claim of exemption. If that purpose comes under attack, actual use has evidentiary value tending to illuminate that purpose and may assist the fact-finder in a reasonable rationalization of an order denying the claimed exception in whole or in part.
The so-called primary use test, a judicial creation developed in Mead v. Glander (1950), 153 Ohio St. 539, was extended to fungibles in Richardson-Merrell v. Porterfield (1972), 32 Ohio St.2d 281, a case in which part of the goods manufactured for sale (drugs) was used for samples. In that case, the fractional portion of raw material incorporated by manufacture in the product and given as samples rather than sold at retail was 8 percent. This use was incidental to the 92 percent clearly excepted use and was so incidental and complementary to the excepted purpose as to not detract from the credibility of that purpose. Since that evidence was not destructive of the overall tax exempt purpose claimed, it can not be reasonably said that the taxpayer, under those circumstances, failed to affirmatively establish his right to the exception claimed as required by our opinion in National Tube Co. v. Glander (1952), 157 Ohio St. 407. This then was an adequate evidentiary basis for deciding Richardson-Merrill, supra.
We are not saying that the mere showing by the Tax Commissioner of an unforeseen incidental and inconsequential nonexcepted use requires apportionment when a taxpayer in good faith claims exception and shows that substantially all the subject material was used for purposes consistent with his claim. The inconsequential use may there be disregarded without giving lip service to this court's primary use test.
However, the extension of the primary use test to fungibles was unnecessary. The fact that the extension was destructive of the overall tax scheme becomes apparent from the Board of Tax Appeals' use of its rationale in the reversal of the Tax Commissioner's order here. The conclusion that it is inappropriate to use the primary use test rather than to follow the clear requirements of the statute is particularly obvious here by reason of the presence of direct payment permits sought under R.C. 5739.031. Such permits presuppose use of fungibles for mixed taxable and excepted purposes, and acknowledge that a substantial (not incidental or inconsequential) amount will be used for taxable purposes, that the amount so used will be measured as used, and that the tax will be paid.
Appellees here assert, and the Board of Tax Appeals here holds, that our decisions in Richardson-Merrell and in Emery require exemption of such fungibles in their entirety under these circumstances whenever exempt use is the primary use of such fungibles.
We renounce this proposition. We conclude that since the extension of the primary use test to sales of fungibles in Richardson-Merrell was unnecessary and erroneous, that part of its holding must be overruled. We conclude further that the primary use test cannot be used to permit a consumer, merely by failing to separate or apportion fungibles used for mixed taxable and non-taxable purposes, to escape payment of tax clearly contemplated by the statute.
Our overruling of Richardson-Merrell requires reexamination of our holding in Emery. There, a non-excepted use of steam derived from the oil or coal there purchased was perceived to be incidental, even though that use amounted to 13.7 percent of the steam produced. That case cannot be interpreted to mandate the proposition that payment of tax on a substantial contemplated and non-excepted use can be avoided by admixing a somewhat larger quantity of coal used for an excepted purpose.
To the extent that Emery depends upon the holding in Richardson-Merrell that the primary use test applies to fungibles where the purpose of the use of fungibles is apportionable between taxable and non-taxable purposes, before or after the date of sale, that holding must be considered to be modified by what we say here.
Accordingly, the decision of the Board of Tax Appeals being unreasonable and unlawful is reversed.
Decision reversed.
CELEBREZZE, C.J., HERBERT, W. BROWN, SWEENEY, LOCHER and HOLMES, JJ., concur.