Opinion
No. 40601
Decided March 27, 1968.
Sales tax — Divisible contract — Agreement for leasing tractor-trailer equipment — Provision for maintaining and servicing equipment not "sale" — Provision for furnishing motor fuel, exempt.
1. A contract which provides (a) for the leasing of tractor-trailer equipment at a fixed annual rental, (b) for the maintaining and servicing of such equipment, including the furnishing of replacement parts and labor, at a fixed charge of 20 cents per mile, and (c) for the furnishing of all motor fuel required to operate such equipment at the actual cost of such fuel, is a divisible contract.
2. The maintaining and servicing of the equipment, including the furnishing of replacement parts and labor, at a fixed charge of 20 cents per mile, is a transaction which is not taxable as a sale under the provisions of Sections 5739.01(B) and 5739.02, Revised Code.
3. The furnishing of all motor fuel required to operate such equipment at the actual cost of such fuel is a transaction which is exempt from the sales tax under the provisions of Section 5739.02(B)(6), Revised Code.
APPEAL from the Court of Appeals for Franklin County.
On June 8, 1959, Material Contractors, Inc., entered into a contract with the Corrugated Container Company for a term of four years, with provisions for the annual renewal thereafter.
Under that contract, Material Contractors promises (1) to lease certain tractor-trailer equipment to Corrugated Container at a fixed annual rental, (2) to service and maintain such equipment and provide all necessary labor and items of tangible personal property incidental to that purpose, at a fixed charge of 20 cents per mile, (3) to furnish all gasoline and other motor fuel needed by the lessee to operate the equipment, and (4) to furnish necessary licenses to operate the equipment. The license fee is not involved in the instant dispute.
That agreement provides further that, in consideration for the promises of the lessor, as set forth above, Corrugated Container promises (1) to pay an annual specified rental for use of the equipment leased, (2) to pay a fixed service charge of 20 cents per mile for maintenance of such equipment, (3) to reimburse the lessor for the actual cost of fuel furnished to operate such equipment, and (4) to reimburse the lessor for any amounts which the lessor pays for license fees on the leased equipment.
During the period in issue, Material Contractors, on its sales tax returns, reported the annual rental charges as taxable and paid sales taxes thereon, but paid no taxes on the fixed mileage charge for parts and labor or the fuel charges.
The Tax Commissioner contended that the fixed mileage charge and the fuel charge were in effect part of the "price" paid for the equipment rental and, thus, subject to the sales tax and issued a sales tax assessment against Material Contractors.
Material Contractors appealed to the Board of Tax Appeals, which held that the "price" as defined by Section 5739.01(H), Revised Code, upon which the sales tax attaches, is all the consideration paid by the lessee, including the annual rental, mileage service charge for parts and labor and the charge for the cost of the fuel. The Board of Tax Appeals said that Material Contractors was engaged in one business activity — the rental of motor vehicles in operative condition. The board held that the lease could not be construed to embody four separate agreements with divergent tax consequences so as to exempt the amounts paid for servicing and fuel from the tax.
The taxpayer appealed this decision to the Court of Appeals, which court, with one judge dissenting, held that the judgment of the board was unreasonable and unlawful and reversed the decision of the Board of Tax Appeals.
The Court of Appeals found that the agreement was "divisible." In substance, the court said that the agreements to service and furnish fuel for the vehicles were separate and distinct from the basic rental agreement. In the court's words, it was "not a service or labor performed to maintain the equipment in rental condition, but rather the servicing of rented equipment." Thus, the court concluded that those charges were not part of the consideration paid for the equipment and, therefore, were not part of the "price" and not subject to the sales tax.
The cause is before this court upon the allowance of a motion to certify the record.
Messrs. George, Greek, King, McMahon McConnaughy, Mr. David Stradley, Messrs. Wright, Harlor, Morris, Arnold Glander, Mr. C. Emory Glander and Mr. James H. Ledman, for appellee.
Mr. William B. Saxbe, attorney general, and Mr. Edgar L. Lindley, for appellant.
The question presented to the court may be stated thus: Is the lease agreement between Material Contractors and Corrugated Container divisible?
In substance, the agreement provides four undertakings by each of the parties.
Material Contractors agrees:
1. To lease certain motor vehicle equipment to Corrugated Containers;
2. To maintain the equipment in workable condition, using its own labor and materials;
3. To supply all gasoline and motor vehicle fuel necessary to operate the equipment;
4. To furnish all licenses needed to operate the vehicles.
In turn, Corrugated Container agrees:
1. To pay an annual rental for use of the equipment during the term of the agreement;
2. To pay a fixed service charge of 20 cents per mile for the maintenance and repair work undertaken by lessor;
3. To reimburse lessor for the actual cost of fuel used by the vehicles;
4. To reimburse lessor for amounts expended by it for license fees.
This court defined "divisibility" in Huntington Finke Co. v. Lake Erie Lumber Supply Co. (1924), 109 Ohio St. 488, 143 N.E. 132, in the first paragraph of the syllabus as follows:
"Whether a contract * * * is entire or divisible depends generally upon the intention of the parties, and this must be ascertained by the ordinary rules of construction, considering not only the language of the contract, but also, in cases of uncertainty, the subject-matter, the situation of the parties, and circumstances surrounding the transaction, and the construction placed upon the contract by the parties themselves. * * *" See Armstrong v. Bankers Life Assn. (1940), 217 Ind. 601, 615, 29 N.E.2d 415; 3A Corbin, Contracts, 292, Sections 695 and 696.
When the principles set forth in Huntington, supra, and Armstrong, supra, and the criteria established by Corbin, supra, are applied to the agreement in the instant case, it is apparent that the agreement is divisible.
The next question to be determined by this court may be stated thus: Since the contract is divisible, what are the sales tax consequences of the separate transactions undertaken pursuant to the contract?
Under the contract, only the rental transaction was a "sale," within the meaning of Section 5739.01(B), Revised Code, and only those amounts paid as annual rental for the use of the equipment may be considered in determining the "price," within the meaning of Section 5739.01(H), Revised Code.
Under the agreement, the maintenance and repair of the equipment by the lessor, including the furnishing of material and labor for a fixed service charge of 20 cents per mile is not subject to the sales tax under the provisions of Section 5739.01(B), Revised Code. That section, in defining "sale," provides:
"* * * Other than as provided in this section, `sale' and `selling' do not include * * * personal service transactions which involve the transfer of tangible personal property as an inconsequential element, for which no separate charges are made."
Under the portion of the agreement which provides that the lessor furnish the fuel required to operate the equipment and that the lessor be reimbursed for the actual cost of such fuel by the lessee on an annual basis, such a transfer of fuel is not taxable as a sale because the provisions of Section 5739.02(B)(6), Revised Code, exempt such a transaction from the application of the sales tax in the following language:
"(B) The tax [sales tax] does not apply to the following:
"* * *
"(6) Sales of motor vehicle fuel upon receipt, use, distribution, or sale of which in this state a tax is imposed by the law of this state * * *." See M.C. Milligan, Inc., v. Bowers (1958), 2 Ohio Tax Cases, paragraph 200-840, page 11980, BTA No. 37370.
No claim is made in this court that the sales tax is due on the amounts paid for license fees.
The judgment of the Court of Appeals is affirmed.
Judgment affirmed.
TAFT, C.J., ZIMMERMAN, MATTHIAS, HERBERT, WASSERMAN and BROWN, JJ., concur.
WASSERMAN, J., of the Eighth Appellate District, sitting for SCHNEIDER, J.