Opinion
No. 89-473
Submitted March 28, 1990 —
Decided May 23, 1990.
Taxation — Franchise tax — Credit for investment in property used in manufacturing — R.C. 5733.061 — Manufacturer not eligible for exemption when property not listed on personal property tax return as equipment used in manufacturing.
APPEAL from the Board of Tax Appeals, Nos. 86-D-1386 and 86-D-1387.
Ares, Inc., appellant, contracted with the United States and several foreign companies to provide each with various prototype weapons, including seventy-five mm. automatic cannons, ninety mm. gun systems, and thirty-five mm. automatic cannons. Within specifications required by each purchaser, Ares designed each prototype with some of its equipment and then machined and tested the prototype with other equipment. Ordinarily, it submitted the underlying design data with the prototype weapon. Ares did not provide large supplies of the weapons; typically another company built the quantity that was needed, evidently from the prototype and design data. In the years under review, Ares also made a prototype shotgun and fourteen special tooling fixtures for producing it for the Ithaca Gun Company, and airplane landing gear struts for Gould, Inc.
Ares applied for franchise tax credits for 1981, 1982, and 1983 under R.C. 5733.061, claiming that, for each year, it had listed its property as used in manufacturing and paid personal property tax on it in the next prior year. Under this statute, a 1980 personal property tax return would relate to a 1981 franchise tax credit, a 1981 property tax return would relate to a 1982 credit, and a 1982 property tax return would relate to a 1983 credit.
On its 1981 personal property tax return, Ares described its business as "Research and development — Small firearms." However, Ares did not offer complete 1980 and 1982 personal property returns into evidence, and the record does not contain them. For all contested years, Ares depreciated its property with a Class III rate (8.4 to 11.6 year life) under the Tax Commissioner's, appellee's, 302 computation. See Ohio Adm. Code 5703-3-11; 1 Baldwin's Ohio Tax Law and Rules (1988), Illustrative Forms 27, IF 3.02, at 9.
The commissioner found that Ares performed research and development, was not a manufacturer and, therefore, did not qualify for the franchise tax credit. According to the commissioner, the research data, not the products themselves, interested Ares's customers. Consequently, she denied the credits.
On appeal, the Board of Tax Appeals ("BTA") first found that it could not properly determine franchise tax credits for 1982 and 1983 since Ares had not submitted personal property tax returns relating to those credits. According to the BTA, it could examine the 1981 personal property tax return, the only one submitted, to determine the 1981 credit but not to determine the 1982 or 1983 credit. As to the 1981 credit, the BTA found that Ares had not shown that it was entitled to the credit as a matter of law. The BTA determined that Ares, if it were a manufacturer, should have listed its property as Class V property (14.8 to 17.2 year life, Baldwin's Ohio Tax Law and Rules, supra, at Illustrative Forms 27, IF 3.02, at 9) used in manufacturing "ordnance and accessories, ammunition, small arms," (see id. at 23, IF 3.02, at 5) rather than as Class III. Listing its property under Class III, as property used in research and development ( id. at 25-26, IF 3.02, at 28, miscellaneous business services), Ares had obtained a more favorable depreciation rate and, consequently, a lower personal property tax. The BTA, therefore, affirmed the commissioner's final orders.
As indicated, however, the 1981 personal property tax return relates to the 1982 franchise tax credit. Thus, under the BTA's reasoning, sufficient evidence existed to rule on the 1982 credit but not on the 1981 and 1983 credits.
This cause is now before this court upon an appeal as of right.
Baker Hostetler and Kiehner Johnson, for appellant.
Anthony J. Celebrezze, Jr., attorney general, and James C. Sauer, for appellee.
R.C. 5733.061, during the relevant tax years, set forth the disputed credit:
"A credit shall be allowed against the tax imposed by Chapter 5733. of the Revised Code for each taxable year. The credit shall equal the lesser of the amount of tax otherwise due under such chapter or the difference between:
"(A) The tangible personal property taxes timely paid in the taxable year that were charged against engines, machinery, tools, and implements owned by the taxpayer, listed for taxation in this state under section 5711.16 of the Revised Code as used or designed to be used in refining or manufacturing, and acquired on or after January 1, 1978; minus
"(B) The taxes that would have been charged against such property and paid during such year had it been listed and assessed for taxation at twenty per cent of its true value." Am. Sub. H.B. No. 828 (137 Ohio Laws, Part II, 3500, 3502-3503).
R.C. 5711.16 provides:
"A person who purchases, receives, or holds personal property for the purpose of adding to its value by manufacturing, refining, rectifying, or combining different materials with a view of making a gain or profit by so doing is a manufacturer. * * *
"* * * A manufacturer shall * * * list all engines and machinery, and tools and implements, of every kind used, or designed to be used, in refining and manufacturing, and owned or used by such manufacturer."
Ares argues that it is a manufacturer and entitled to the credit despite the commissioner's finding that it performed only research and development and despite the BTA's finding that Ares misclassified its property when it listed the property for personal property taxation. The commissioner maintains that Ares is not eligible for the franchise tax credit because it did not list its property on the personal property tax return as equipment used in manufacturing or refining.
We hold that, for franchise tax year 1982, Ares may not claim the exemption because it did not list its property on the personal property tax return as equipment used in manufacturing. As for franchise tax years 1981 and 1983, we hold that Ares did not present sufficient evidence to show the manner of listing of its property and, thus, did not sustain its burden of proof.
The backdrop for this case, as in all cases where a taxpayer seeks a reduction in taxes, is the principle that taxation is the rule, and exemption is the exception. Since the reduction depends on legislative grace, the statute must clearly express the exemption, Cleveland v. Bd. of Tax Appeals (1950), 153 Ohio St. 97, 99-100, 41 O.O. 176, 178, 91 N.E.2d 480, 482, paragraph one of the syllabus, and a taxpayer must show his entitlement to it, Natl. Tube Co. v. Glander (1952), 157 Ohio St. 407, 47 O.O. 313, 105 N.E.2d 648, paragraph two of the syllabus.
Under R.C. 5733.061, nevertheless, a corporation may claim the credit if it (1) acquired the property on or after January 1, 1978, (2) listed the property under R.C. 5711.16 as used or designed to be used in refining or manufacturing, and (3) timely paid the tangible personal property tax on it in the appropriate taxable year.
The BTA did not clearly rule on whether Ares was a manufacturer. In any event, Ares is a manufacturer.
Under R.C. 5711.16, a person who combines different materials with a view to making a gain or profit is a manufacturer. In Eastern Machinery Co. v. Peck (1953), 160 Ohio St. 144, 51 O.O. 57, 114 N.E.2d 55, we held that a person who rebuilt or reconditioned unusable tools was a manufacturer. We noted, id. at 149-150, 51 O.O. at 60, 114 N.E.2d at 57-58, that G.C. 5385 (now R.C. 5711.16) broadened the traditional definition of "manufacturer" or "manufacturing." We reasoned that "* * * articles which are manufactured or changed in any way either by combining them or adding thereto are entitled to the status of [manufactured personal property]." Id. at 150, 51 O.O. at 60, 114 N.E.2d at 58. Under this case, thus, Ares is a manufacturer because it received sheet, bar, and tube steel products, added to their value by altering and combining them, and produced prototype weapons to earn a profit.
Nevertheless, a manufacturer does not automatically qualify for the disputed credit. The taxpayer must also list the property for taxation as used or designed to be used in manufacturing. R.C. 5711.01(D) defines "list" as:
"* * * [T]he designation, in a return, of the description of taxable property, the valuation or amount thereof, the name of the owner, and the taxing district where assessable."
Furthermore, R.C. 5711.02 requires each taxpayer to "truly and correctly list" all its taxable property on its return. R.C. 5711.21 states that "* * * the assessor shall be guided by the statements contained in the taxpayer's return * * *." Therefore, listing property on a return requires more than accumulating a list of property and writing it on a tax schedule. A taxpayer describes it and designates its value. This listing, which must be correct, guides the commissioner in assessing the property.
Given the strict construction required of, and the strict compliance mandated for, exemption statutes, Ares did not list its property as used in manufacturing. Ares, at least in its 1981 personal property return, described itself as a researcher and developer and used a Class III designation to depreciate its property. A research and development laboratory would depreciate its property in this class. On the other hand, a weapon manufacturer, as is Ares, would depreciate using Class V. In the 1981 return, therefore, Ares described, and thus listed, its property as research and development property and not as manufacturing property. Consequently, for franchise tax year 1982, Ares does not qualify for the R.C. 5733.061 credit because it failed to satisfy a statutory condition for the credit.
As for the 1981 and 1983 franchise tax credits, Ares failed to establish its entitlement to the credits because it failed to show how it listed its personal property.
Accordingly, we affirm the decision of the BTA since it is reasonable and lawful.
Decision affirmed.
MOYER, C.J., SWEENEY, HOLMES, DOUGLAS, WRIGHT, H. BROWN and RESNICK, JJ., concur.