Opinion
Nos. 28652 and 28653
Decided December 24, 1941.
Taxation — Manufacturer — Person processing iron and steel scrap for charging open-hearth furnace — Scrap metal listed and assessed at 50 per cent. of value, when — Sections 5385 and 5388, General Code.
1. A person who purchases, receives or holds iron and steel scrap, for the purpose of adding to its value by processing it in accordance with detailed specifications into such form that it may be used as a charge in an open-hearth furnace in the manufacture of steel, is a manufacturer within the meaning of Section 5385, General Code.
2. Scrap metal, purchased, received or held by such manufacturer for the purpose of so processing it and such as may be finished in such process of manufacturing for use in an open-hearth furnace in steelmaking, when stored as a finished product at the place of manufacture or at a warehouse in the same county therewith, shall be listed and assessed at fifty per centum of its true value in money on the days or at the times as of which it is required to be estimated on the average basis in accordance with Section 5388, General Code.
APPEALS from the Board of Tax Appeals.
These two causes involve appeals from decisions of the Board of Tax Appeals concerning respectively 1938 and 1939 personal-property-tax returns of the appellant, The Middletown Iron Steel Company.
The causes were heard before the board upon a stipulation of facts, exhibit A attached thereto and containing the specifications promulgated by The American Rolling Mill Company, and upon additional evidence.
The stipulation of facts reads:
"1. The Middletown Iron Steel Company is a corporation organized and existing under the laws of the state of Ohio, with its principal place of business located at Middletown, Ohio, and its yards are adjacent to the steel plant of The American Rolling Mill Company located on Lebanon Canal Road in the city of Middletown, Ohio.
"2. Such corporation is engaged in the business of buying and selling numerous grades of scrap iron and steel which it sells to The American Rolling Mill Company after processing as hereinafter described.
"3. Such corporation purchases such scrap iron, causes it to be shipped to its yards and, after receiving the same, separates the types of iron and steel. Thereupon, by use of acetylene torches, alligator shears, and electrically driven hydraulic presses which consist of a hopper, a box, a ram, chutes, and compressors, it cuts and separates such iron and steel into substantially uniform shapes and dimensions according to specifications promulgated by The American Rolling Mill Company to which it sells its scrap, a copy of which specifications is hereto annexed marked exhibit A and made a part hereof as though herein written at length.
"4. Such corporation obtains the scrap iron from many sources of supply, including railroads, public utilities, industrial plants, automobile wreckers, used machinery and appliance dealers, demolition projects and peddlers.
"A large proportion of the operations of the corporation consists of the preparation of so-called 'No. 1 hydraulically compressed bundles' which are described as follows:
"These bundles consist of new black steel sheet clippings, shearing, skeleton stamping scrap, side and end sheet scrap, hydraulically compressed into compact rectangular packages, not to exceed 20" in the longest dimension, weighing not less than seventy-five pounds per cubic foot; free of excessive rust, paint or protective coating of any kind, no detinned scrap, electrical sheets or material of 0.5 per cent. silicon is acceptable. The density of the steel bundle produced and the metallurgical quality of highly densified steel clips produces a form of processed scrap which is specified and required for open hearth use."
Exhibit A is as follows:
"The American Rolling Mill Company "Middletown, Ohio "Specifications for Iron and Steel Scrap "January 1, 1933"A. No. 1 Heavy Melting Steel Scrap
"Steel scrap 1/4" and over in thickness, not over 18" in width and not over 5' long. Individual pieces must be cut into such shape that they will be free from attachments and will lie flat in a charging box. Cut boiler plate must be cleaned of lime and free from stay bolts and not over 3' long. Smaller dimensions of plate scrap may be required upon mutual agreement between buyer and seller. No piece to weigh less than 10 pounds.
"May include structural shapes, bars and plates, steel castings, heavy chain, carbon tool steel, heavy forgings, forge butts and similar heavy material.
"This grade may also include new mashed pipe ends, original diameter 4" and over, thoroughly flattened, sheet bars, billets, blooms, rail ends, railroad steel scrap, such as angles, splices, couplers, knuckles, short rails, draw bars, cut cast steel bolsters, coil and leaf springs (all coil springs to be 3/8" or larger diameter).
"No needle or skeleton plate scrap, agricultural shapes, annealing pots, boiler tubes, grate bars, cast iron, malleable iron or curly or unwieldy pieces will be accepted.
"Must be free from dirt, excessive rust or scale, or foreign material of any kind. No alloy scrap will be accepted or silicon material over 0.5 of 1 per cent., or material containing brass, copper, or any foreign metals.
" American Railway Association Specifications Nos. 7, 8, 9, 21, 24, 31, 36 and 44 will be accepted, if within the above specifications.
"B. No. 2 Melting Steel
"Plate scrap such as car sides, automobile frame stock, tank and skelp crops, 1/8" and heavier, steel parts of agricultural implements, wagons, buggies, and scraped automobiles, auto and buggy springs cut apart, rods and bars, 1/2" and heavier, punchings, 1/4" and over in thickness, heavy clippings, new unmashed pipe ends, under 4" diameter, horse shoes and similar material. Car sides and all light plates to be sheared 15" x 15" or under and all tires and light rods to be 12" and under in length. Any curved or twisted pieces must be sheared into such shape that they will lie flat in a charging box and not tangle in handling with a magnet, all to be free from cast iron, malleable iron, burnt scrap, dirt or foreign material of any kind.
"Maximum size 15" wide by 3' long.
"No alloy steel scrap, silicon material over 1/2 of 1 per cent., material containing brass, copper or any foreign metals or lime deposit, will be accepted.
" Within the limits of this specification, American Railway Association classification No. 25 will be accepted.
"C. Heavy Shoveling Steel Scrap
"Heavy, clean wrought iron and steel scrap, 1/4" and over in thickness, not exceeding 8" in breadth or length and no piece to be less than the equivalent of 1/2" square 3" long. May include clean horse shoes, railroad spikes, bolts, nuts, tie plates, etc., boiler, bridge and structural punchings and clippings, small bar and shafting crops ends and other similar material.
"To contain no burnt material, cast or malleable scrap, cut pipe and tank, skeleton stock, badly corroded material, or any twisted or tangled scrap. Must be free from foreign metals of all kinds, limed material, galvanized, painted, enameled or other coated stock, dirt and rubbish of all kinds, brass and copper, alloy steel and scrap containing more than 1/2 of 1 per cent. silicon.
"Must be loaded in separate cars from other grades of scrap.
" American Railway Association classification No. 58 will be acceptable on this specification, if within the limits of the above specifications.
"D. No. 1 Busheling
"Clean iron and soft steel pipes and flues, tank, cut hoops and bands No. 12 gauge and heavier, steel plate punchings and clippings, soft steel and iron forgings, and flashings; no dimension over 8". To be free from burnt material, hard steel, cast, malleable, and galvanized, or coated stock of any kind, limed material, brass and copper and scrap containing more than 1/2 of I per cent. silicon.
" American Railway Association specifications Nos. 14 and 58 will be accepted, if within the limits of the above specifications.
"E. Axle Turnings
"Heavy, short first cut turnings from wrought iron and steel railroad axles or heavy forgings, and railchips, to weigh not less than 75 lbs. per cu. ft.
"To be free from dirt, alloy steel, brass, copper, or foreign metals of any kind.
"F. No. 1 Machine Shop Turnings
"New, clean steel or wrought iron turnings, short or curly stock, free from lumps, badly tangled or matted material, cast iron borings, excessive oil, dirt, alloy steel, copper, brass, or foreign materials of any kind. Badly rusted or corroded stock will not be accepted.
"G. Hydraulic Compressed Sheet Scrap
"New, black soft steel sheet clippings, shearings, skeleton stamping scrap, side and end sheet and tin mill scrap, hydraulically compressed into compact, rectangular packages not to exceed 20" longest dimensions, weighing not less than 75 lbs. per cu. ft.; must be clean and free from excessive rust, paint or protective coating of any kind. No detinned scrap, electrical sheets containing silicon over 1/2 of 1 per cent., alloy steel, brass or copper, will be accepted.
"H. Baled Sheet Scrap
"New, black soft sheet steel clippings, shearings, skeleton stamping scrap, side and end sheet and tin mill scrap, machine baled into rectangular packages, tied with wire or bands, or sufficiently compact not to come apart in handling with a magnet, not over 20" longest dimension, weighing not less than 45 lbs. per cu. ft.; must be clean and free from excessive rust, paint or protective coating of any kind. No detinned scrap, electrical sheets containing silicon over 1/2 of 1 per cent., alloy steel, brass or copper will be accepted.
"I. Hand-bundled Sheet Scrap
"New, black soft steel clippings, shearings, skeleton stamping scrap, side and end sheet and tin mill scrap, securely tied with not less than two wires or bands into packages not over 18" x 18" x 3', weighing not over 125 lbs., to be bundled in such a manner that packages will not come apart in handling with a magnet; must be clean and free from excessive rust, paint or protective coating of any kind. No detinned scrap, electrical sheets containing silicon over 1/2 of 1 per cent., alloy steel, brass or copper will be accepted.
"J. Loose Sheet Clippings
"New, black soft steel sheet clippings, shearings and stampings, 3/16" and lighter, free from excessive rust, paint or protective coating of any kind, to be not over 18" wide or long or if edge trimmings or shearings to be not over 12" by 5' long. No detinned scrap, electrical sheets containing silicon over 1/2 of 1 per cent., high carbon material, alloy steel, brass or copper, will be accepted.
"*K. No. 1 Cast Iron Scrap
"To contain all kinds of machinery and similar cast iron scrap, nothing under 10 lbs. or over 500 lbs. in weight nor over 48" long or 18" wide. To contain no brake shoes, cast iron soil or water pipe, stove scrap, or burnt iron of any description, and be free from steel parts.
"*L. No. 2 Cast Iron Scrap
"To contain all kinds of agricultural implements of cast iron, free from steel parts, nothing under 10 lbs. or over 500 lbs. in weight nor over 48" long or 18" wide. To contain no stove scrap or burnt iron of any description.
"*M. No. 3 Cast Iron Scrap
"To consist of cast iron scrap with steel parts attached, nothing under 10 lbs. or over 500 lbs. in weight nor over 48" long or 18" wide.
"*N. Heavy Breakable Cast Scrap
"Heavy cast iron suitable for breaking under and with buyer's drop. Pieces not to exceed 10 tons in weight. Free from anvil blocks, hammer bases, and like material, over charging box size and containing no burnt iron.
"* — Classification of Iron and Steel Scrap (First Revision). Simplified Practice Recommendation R58-28 — Department of Commerce, Bureau of Standards, Washington, D.C."
The following facts appear in the testimony and are not in dispute:
The American Rolling Mill Company (which is not connected in any way with appellant company) manufactures sheet steel and about 90 per cent. of its output is automobile steel which must be free from alloy steel. Formerly it prepared its own scrap, at least, in large measure. It still possesses one or more hydraulic presses which it uses to process some scrap in making steel; but now a large part of the preparation of the scrap used has been taken over by others including the appellant. In fact, the bulk of appellant's business is with The American Rolling Mill Company, to which appellant sold about 180,000 tons of scrap in 1939, 60,000 of which was processed by appellant.
The appellant has in its plant of 20 acres adjacent to the Middletown plant of The American Rolling Mill Company, large, heavy, and expensive machinery for the purpose of handling, cutting, pressing and treating the scrap in making it a "merchantable product" usable in steelmaking, namely, a power plant with 3 generators to supply electric current, 5 overhead cranes about 700 feet long and 75 feet high, electric lifting magnets, 19 alligator shears with scissors blades operated by gears and motor, and large hydraulic bailing presses, operated with oil instead of water to prevent freezing and capable of exerting a pressure of 3,500 pounds per square inch.
On arrival of the scrap at appellant's plant by truck or railroad it is sorted into piles. Non-ferrous metals such as tin, lead, copper, etc., are separated therefrom. Rust, silica, paint, etc., are removed as required. Large pieces are burned down with an acetylene torch to a size to be taken by the shears and then cut to specifications.
Clippings, which come largely from the making or cutting of automobile fenders, are put into the presses and compressed into bundles, 18 by 20 inches with the third dimension variable, and usually with a weight when complete of about 500 pounds. The bailing process including previous preparation must be done according to specifications so that a full charge of about 4,000 pounds may be put into the charging box of the furnace at one time as an essential of economical operation. If specifications are not followed the steel produced may be faulty.
On delivery to the steelmaker its inspector examines the processed scrap and rejects any that is not in accordance with specifications.
In doing this work of preparing scrap for steelmaking, formerly done by the steelmaker, and in handling scrap, the appellant employs many skilled laborers and in operation of its plant employs an average weekly force of about 40 men.
The Board of Tax Appeals decided that the appellant was not engaged in manufacturing. The appeals to this court followed.
Mr. Isadore Topper, Mr. Howard Gould and Mr. Leon Gould, for appellant.
Mr. Thomas J. Herbert, attorney general, and Mr. Aubrey A. Wendt, for appellee.
The sole question is whether the appellant taxpayer, in processing scrap metal according to specifications so that the product would be usable in open-hearth furnaces for the production of steel, was a manufacturer. If so, the metal in process will be assessed at fifty per cent. of its true value in money; if not, at seventy per cent.
Section 5385, General Code, reads:
"A person who purchases, receives or holds personal property, of any description, for the purpose of adding to the value thereof by manufacturing, refining, rectifying, or by the combination of different materials with a view of making a gain or profit by so doing, is a manufacturer, and, when he is required to return a statement of the amount of his personal property used in business, he shall include therein the average value estimated, as hereinafter provided, of all articles purchased, received or otherwise held for the purpose of being used, in whole or in part, in manufacturing, combining, rectifying or refining, and of all articles which were at any time by him manufactured or changed in any way, either by combination or rectifying, or refining or adding thereto (separately listing finished products not kept or stored at the place of manufacture or at a warehouse in the same county therewith), which, from time to time, he has had on hand during the year next previous to listing day annually, if he has been engaged in such manufacturing business so long, and if not, then during the time he has been so engaged."
Section 5388, General Code, reads in part:
"Excepting as herein otherwise provided, personal property shall be listed and assessed at seventy per centum of the true value thereof, in money, on the day as of which it is required to be listed, or on the days or at the times as of which it is required to be estimated on the average basis, as the case may be. * * *
"Personal property of the following kinds, used in business, shall be listed and assessed at fifty per centum of the true value thereof, in money, on the day as of which it is required to be listed, or on the days or at the times as of which it is required to be estimated on the average basis, as the case may be: * * *
"(2) The average value of all articles purchased, received or otherwise held by a manufacturer for the purpose of being used, in whole or in part, in manufacturing, combining, rectifying or refining; the average value of all articles which were at any time by him manufactured or changed in any way, either by combining or rectifying, or refining or adding thereto, but not including finished products unless kept or stored at the place of manufacture or at a warehouse in the same county therewith * * *."
The precise question here is an open one in Ohio.
In Engle v. Sohn Co., 41 Ohio St. 691, which involved a statute in substantially the same form as the one in the present case, it was held that one who purchases and slaughters swine for the purpose of adding to the value thereof by certain processes and combinations with other materials in the production of bacon, lard and cured meats for the purpose of making gain or profit therefrom is a manufacturer. In the opinion it is pointed out that 14 different materials were combined with the raw pork in producing those articles. The court was therefore dealing with a kind of manufacturing which involved "a combination of different materials."
On the other hand, it was held in Schumacher Stone Co. v. Tax Commission, 134 Ohio St. 529, 18 N.E.2d 405, that machinery used in the crushing and screening of limestone into various merchantable sizes could not be assessed for taxation as personal property used in manufacturing. It was expressly stated in the opinion in the latter case that it was not claimed that the process involved either refining or rectifying. We shall revert to that case later as it has become a bone of contention in the present litigation.
In the meantime and throughout, it must be borne in mind that the instant appeals differ from the two cases just now cited and commented on in that the complete operation in the preparation of scrap metal is in the nature of a refining or rectifying process which requires elimination of foreign elements and a change of form to make the processed material usable for a specific purpose.
Many cases from various jurisdictions have been cited pro and con in the briefs of counsel herein. Although such cases are instructive, only two of them afford a close parallel, namely, David J. Joseph Co. v. City of Ashland, 223 Ky. 203, 3 S.W.2d 218, and Mayor and City Council of Baltimore v. State Tax Comm., 161 Md. 234, 155 A. 739. The former involved the processing of scrap iron into a "finished scrap product" (as it was called in the stipulation of facts therein) to be used by purchasers in steelmaking plants and in foundries. The court held that machinery used in cutting up the scrap in the operation of the scrap yard was "manufacturing machinery" within the meaning of the Kentucky statute.
The case was grounded on Commonwealth, for Use of Rockcastle County, v. W. J. Sparks Co., 222 Ky. 606, 1 S.W.2d 1050, in which it was held that machinery used in mining, crushing and screening stone was used in manufacturing. It is argued that this court should reach a different conclusion from the Kentucky court with respect to processing scrap metal because of the difference in attitude of the two courts with reference to the nature of the stone-crushing business. In our judgment this argument should not prevail as there is an essential difference between the stone crushing and scrap processing.
Quarrying requires that the stone be broken up into pieces or fragments. The crushing of stone by the quarryman is but a form of the breaking-up procedure. The screening of crushed stone into assorted sizes is only a separation process — not a refining or rectifying process — and nothing is added. After all, crushing, screening and assorting may well be regarded as steps in quarrying which in a broad sense involves fitting stone for use. Accordingly such treatment of stone was not deemed manufacturing. The difference in the nature of scrap processing will be made clear, we venture to say, as the discussion develops.
In Mayor and City Council of Baltimore v. State Tax Comm., supra, it was held that machinery of a plant in which hulls of steel vessels were stripped of all wood and miscellaneous equipment, then cut into sections of suitable size and shipped to the steel-mill furnaces to be converted into steel ingots is used "entirely or chiefly in connection with manufacturing" within the meaning of the state statute. The opinion in that case will be referred to later.
Appellant herein contends that, in treating the scrap as required by the specifications, it was engaged in manufacturing and that such treatment is a refining and rectifying process. We have stated above that the treatment was in the nature of refining or rectifying, but we put the decision in this case upon a broader ground and shall explain our position fully.
In many lines of manufacturing today, parts are produced in various separate factories operated by different persons or corporations and the parts assembled by a producing company into a completed product ready for the market. The production of each part is a distinct and complete step in the manufacturing process. The construction of the mechanical parts of an automobile is as much manufacturing as assembling the parts into the finished product. The maker of cloth or thread or buttons is as much a manufacturer as the one who takes these articles and from them fabricates clothing in a clothing factory.
The preparation of scrap so that it is properly usable as a charge in an open-hearth furnace in the manufacture of steel is a task of some intricacy. An examination of the specifications set forth in the stipulation of facts shows how elaborate that preparation must be. The unloading and moving by large mechanical cranes, the sorting into various piles according to metallic content, the removing of rust, dirt, paint and other foreign matter when required, the elimination of alloy and non-ferrous metal, foreign material and the like, the cutting by acetylene torch so that cut-off parts are small enough to be taken by the alligator shears, the shearing to size by that scissors-like implement, and the packing of clippings into bundles by the heavy hydraulic presses, are among the things essential to be done. In the force of upward of 40 men it is necessary to have those skilled in the operation of machinery, the methods of preparation and the nature of the metals dealt with. The objective is the creation of a charge that will fit the furnace without further effort or labor and that may be used economically.
Most of appellant's product goes to The American Rolling Mill Company. It is significant that the latter company formerly prepared its own scrap and still does prepare it to some extent. It could hardly be said that a manufacturer of steel in the preparation of scrap as a part of the process in steelmaking was not engaged in an act which was a necessary part of steel production. See Mayor and City Council of Baltimore v. State Tax Comm., supra. The fact that appellant now performs this part of the work does not change its character. The nature of the act remains the same.
Significant language was used in Mayor and City Council of Baltimore v. State Tax Comm., supra, at page 238, in speaking of the work of cutting up the steel hulls for furnace use: "The point made by the city is that the company does not make or manufacture anything; it merely takes a large piece of steel and cuts it into small pieces. This is, all true, but it loses sight of the scale and character of the operation and the means employed. It is one of the stages, and a very important one, in the conversion of a large mass of steel into a variety of useful steel products, and whether the whole transaction is done by one mill or two mills does not affect the application of the statute to one or both." (Italics ours.)
In the instant case a product was turned out, to wit, processed scrap, which would fit into open-hearth furnaces and which was ready for use in charging them. In our judgment, the charge, if we may call it such, was a finished product within the meaning of Section 5388(2), General Code. We are compelled to hold that the processing of scrap according to specifications was an integrated step in the manufacture of steel.
For the reasons given we hold that insofar as appellant was engaged in processing scrap according to the specifications set out it was engaged in manufacturing and subject to a tax of 50 per cent. of the true value in money estimated on the average basis, as provided in Section 5388, General Code; but insofar as it received, stored, handled or sold scrap without any processing, it was not. About two-thirds of the scrap metal sold to The American Rolling Mill Company was not processed at all by appellant and would therefore be subject to a listing and assessment of 70 per cent. of the true value in money.
No other question is presented by the record.
The decisions of the Board of Tax Appeals are reversed and the causes are remanded to the board for further proceedings in accordance with this opinion.
Decisions reversed.
TURNER, MATTHIAS, HART, ZIMMERMAN and BETTMAN, JJ., concur.
WEYGANDT, C.J., dissents upon authority of Schumacher Stone Co. v. Tax Commission, 134 Ohio St. 529, 18 N.E.2d 405.