Opinion
No. 79-1365
Decided April 16, 1980.
Taxation — Sales tax — Exceptions — Purchases of products incorporated into packaging machines — Transfer of machines a "sale," when — R.C. 5739.01(B), construed.
APPEAL from the Board of Tax Appeals.
Big Drum, Inc., appellee herein, is an Ohio corporation which manufactures machinery and equipment used to package individual servings of ice cream products. Appellee also manufactures and sells or purchases and resells the various paper products and sugar cones used in the ice cream packaging machines. Appellee's primary customers are large dairies which produce the ice cream which the machines package. Although some of appellee's customers purchase the ice cream packaging machines and some of the machines are leased under a "lease contract," most of the machines are made available under the terms of a written "machine use agreement." The typical machine use agreement provides, in part:
"***USE FEE. In the event the User fails to purchase one million `Units of Supplies' during a Use Year, User shall pay to Drumstick [an operating division of appellee] an amount equal to $2.00 for each 1,000, or fraction thereof, `Units of Supplies' constituting the shortage and Drumstick may terminate this Agreement forthwith and thereupon User shall return the machine***."
The Tax Commissioner, appellant herein, assessed a sales tax on appellee's purchases of materials and parts incorporated by the appellee into machines transferred to appellee's customers. Appellant believed that these purchases were not excepted from sales tax under R.C. 5739.01(E) because there was a lack of consideration, as defined in 5739.01(B), when appellee transferred the machines to its customers.
R.C. 5739.01(E) permits a consumer to except from sales tax the purchase of parts and materials when the purpose of the consumer is "***(2) To incorporate the thing transferred as a material or part, into tangible personal property to be produced for sale by manufacturing***."
R.C. 5739.01(B) defines "sale" as including "***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 rental, in money or by exchange, and by any means whatsoever***."
The Board of Tax Appeals reversed the determination of appellant, stating in its decision and order:
"***In the present matter, ***[appellee's] customers specifically promised and did pay, two dollars per thousand units of supplies specifically, as and for, rent of the filling and packaging equipment. Further, those customers who did not use one million units specifically agreed to pay $2.00 for each thousand units less than one million they actually purchased. The end result of the contracted for promises was the guarantee, to the***[appellee], of at least $2,000.00 rental per year for the machines it transferred.***" (Emphasis sic.)
The cause is now before this court on an appeal as of right pursuant to R.C. 5717.04.
Messrs. Chamblin Snyder and Mr. Larry H. Snyder, for appellee.
Mr. William J. Brown, attorney general, and Mr. John C. Duffy, Jr., for appellant.
It is uncontested that the paper products and sugar cones are materials or parts incorporated into tangible personal property, i.e., the packaging machines. The issue we must decide is whether there is a "sale," as defined by R.C. 5739.01(B), when appellee transfers the packaging machines to its customers.
Appellant contends that our decision in Coca-Cola Bottling Corp. v. Kosydar (1975), 43 Ohio St.2d 186, is controlling in the present case. We held in Coca-Cola that "***[t]he transfer of such equipment to retailers without making a direct charge to the retailers for the equipment does not constitute an excepted purpose on the part of the consumer-wholesaler to purchase the equipment for resale in the same form it is received by the consumer, pursuant to R.C. 5739.01(E)(1); and, the agreement by retailers to use the equipment exclusively for dispensing appellant's products and to maintain a specified average sales volume of appellant's products, does not constitute consideration as contemplated by R.C. 5739.01."
Appellant argues that since appellee makes no "direct" charge to its customers for the use of the machines, there is no sale. This argument is without merit. We concluded in Coca-Cola, at page 194, by stating: "***the transfers to retailers of the items assessed by the Tax Commissioner were gratuitous, conditional and unsupported by any form of consideration." In the instant cause, appellee is in the business of manufacturing the machinery and equipment. Any allegation that appellee transfers these machines on a "gratuitous" basis is groundless. There was sufficient evidence in the record for the Board of Tax Appeals to conclude that the machines were rented to appellee's customers for consideration. Thus, on the facts in this case, there was a "sale" as defined in R.C. 5739.01(B).
We conclude that the decision of the Board of Tax Appeals was reasonable and lawful and it is hereby affirmed.
Decision affirmed.
CELEBREZZE, C.J., HERBERT, W. BROWN, P. BROWN, SWEENEY, LOCHER and HOLMES, JJ., concur.