Summary
In Ball, "[t]he Tax Commissioner contest[ed] the exception of the * * * carton-forming system * * *. R.C. 5739.02(B)(15) provides an exception for machinery and equipment used in `packaging.
Summary of this case from Am. Natl. Can Co. v. TracyOpinion
No. 90-2495
Submitted October 11, 1991 —
Decided February 12, 1992.
APPEAL and CROSS-APPEAL from the Board of Tax Appeals, No. 88-H-1091.
These are appeals from the final determination of the Board of Tax Appeals ("BTA") of November 23, 1990.
At issue is the Tax Commissioner's assessment of sales and use taxes for purchases by Ball Corporation for its plastic division in Bowling Green, Ohio. Ball manufactured plastic bottles having a layer impermeable to oxygen, which it sold to the food service industry. In addition it provided its customers with "reshippers," partitioned cardboard cartons, which it assembled and labeled with quality control information. The assessment involved Ball's purchase and use of a raw material handling and processing system purchased from Pacific Engineering Corporation. This system was used in connection with Ball's blow-molded extrusion process and consisted of silos, vacuum systems used to transport material to dryers, dryers used to remove moisture from raw material, storage bins, "Gaylords" (cardboard cartons utilized to store and transport raw material), scales, controls, and machine hoppers. Also at issue are an automated carton-forming system purchased from Wayne Automation Corporation and an automated conveyor system purchased from E.W. Buschman Company. These latter systems were used in the assembling of the reshippers and in the preparation of Ball's product for delivery to its customers.
Bottles that Ball manufactures are designed to contain perishable foods, such as ketchup, and consist of six separate layers. The inner and outer layers are of virgin polypropylene, two layers consist of a glue referred to as "admer," one is a layer of ethylene vinyl alcohol monomer ("EVOH") and one a layer of "regrind" which is trim or scrap from the production of bottles or from imperfect bottles. Polypropylene utilized in manufacturing bottles is transported to the plant by railroad cars, stored in silos and then drawn by a vacuum system, and transported, sometimes first to surge bins or to dryers, and then to machine hoppers located at extrusion machines. EVOH is transported to the plant in Gaylords. EVOH and regrind are processed through dryers in order to remove moisture. This is essential to maintain the integrity of the oxygen barrier layer of the bottles. EVOH and regrind are likewise transported by vacuum tube to dryers and then to machine hoppers. The hoppers above the extrusion machines weigh and hold quantities of raw material. In each case raw materials move by gravity from the hoppers into extrusion machines. There heat and pressure transform the pellets of raw material into a molten state. The materials are combined in layers in the extrusion machines to form tubes which are then blown in molds and become bottles.
Ball sold its customers a "total package" consisting of "a coextruded barrier plastic container with a carton and partitions as a package." This package, after Ball's customers filled the bottles with their products, ended up with the "end customer," the grocery store. The reshippers would be labeled with either the name of Ball's customer or an identification of the contents.
The conveyor system was used to move the constructed cartons to a work station where partitions were inserted by an employee and from there to a packaging point where "the packer would install the bottles into the cartons." After that the cartons were shrink-wrapped, inspected and shipped to customers.
The BTA found that the raw materials processing and feeding equipment purchased from Pacific Engineering Corporation, other than that equipment utilized in connection with the regrind, was used prior to the onset of manufacturing and was taxable. The BTA affirmed this portion of the assessment. The Tax Commissioner's assessment of the regrind equipment was reversed and was excepted as "handling and transportation equipment used in intraplant or interplant transfers of tangible property while in the process of production for sale by manufacturing." The BTA also excepted from taxation the automated carton-forming system (Wayne Automation Corporation) and the automated conveyor system (E.W. Buschman Company) as machinery or equipment used in packaging items for sale under former R.C. 5739.02(B)(15) and Kroger Co. v. Limbach (1990), 53 Ohio St.3d 245, 560 N.E.2d 192, finding that they were integral parts of machinery or equipment used in placing tangible personal property produced for sale in packages.
This cause is now before this court upon an appeal and cross-appeal as of right.
Jones, Day, Reavis Pogue and John C. Duffy, Jr., for appellant and cross-appellee.
Lee I. Fisher, Attorney General, and M. Linda Weigand, for appellee and cross-appellant.
For the reasons which follow, the decision of the BTA is affirmed in part, reversed in part and remanded for further consideration consistent with this opinion.
I
Despite the complexities and improvements in sophisticated manufacturing processes, the issue for resolution in this case is as it was over thirty years ago when we decided Youngstown Bldg. Material Fuel Co. v. Bowers (1958), 167 Ohio St. 363, 5 O.O.2d 3, 149 N.E.2d 1. Here, as there, the challenge is to identify the beginning and the end of the manufacturing process and to determine whether items in dispute were used or consumed directly in the production of tangible personal property for sale by manufacturing or processing or in "packaging." See former R.C. 5739.01(E)(2) and (R), Am.Sub.H.B. No. 291, 140 Ohio Laws, Part II, 2872, 3216 and 3219, and former R.C. 5739.02(B)(15), Am.S.B. No. 231, 140 Ohio Laws, Part I, 790, 832. It is not to determine whether such items are essential to the operation of an integrated plant; the question is rather, "when does the manufacturing or processing activity begin and end, and is the property used or consumed during and in the manufacturing or processing period." Id. at 367, 5 O.O.2d at 5, 149 N.E.2d at 3-4.
Ball contends that manufacturing began at the dryer upon removal of moisture and a change in the molecular structure of EVOH and regrind. The commissioner says processing began in the extrusion machine when pellets were transformed from a solid state into a molten state and, in combination with other raw materials, bottles were produced. The commissioner also points out that Ball's plant manager conceded that after the removal of the moisture the pellets of raw material remained as pellets with no visible difference.
It is true that EVOH was hygroscopic and it was essential that the moisture be removed in order to maintain the integrity and salability of the product. However, following the drying process the raw material was not changed in form. It was still raw material. Moreover, it was not Ball's final salable product. On the other hand, following the processing within the extruder and blow molder, plastic bottles were available for insertion into partitioned cartons, to be shrink-wrapped and shipped to its customers. Thus, manufacturing began at the coextrusion machine and ended after the bottles were trimmed and made ready for shipment.
"Equipment utilized for the storage and delivery of raw materials prior to the transformation thereof into a finished product is not used or consumed directly in the production of tangible personal property and thus is not subject to exemption from sales and use taxation pursuant to R.C. 5739.01(E)(2) and 5741.02(C)(2), respectively." Bird Son, Inc. v. Limbach (1989), 45 Ohio St.3d 76, 543 N.E.2d 1161, paragraph one of the syllabus. As we stated, id. at 78, 543 N.E.2d at 1164, quoting Natl. Tube Co. v. Glander (1952), 157 Ohio St. 407, 409, 47 O.O. 313, 314, 105 N.E.2d 648, 650:
"`* * * every sale or use of tangible personal property in this state is [presumed to be] taxable[,]' * * * and * * * exemptions from sales or use taxation `are to be strictly construed, and one claiming exemption must affirmatively establish his right thereto.' * * *
"* * * It has been held that manufacturing and processing `"* * * imply essentially a transformation or conversion of material or things into a different state or form from that in which they originally existed — the actual operation incident to changing them into marketable products."' Canton Malleable Iron Co. v. Porterfield [(1972), 30 Ohio St.2d 163] at 170, 59 O.O.2d [178] at 181-182, 283 N.E.2d [434] at 439. * * *"
Ball corporation did not sell EVOH or regrind pellets; it sold bottles in partitioned cartons.
"* * * `* * * The manufacturing process for which a beginning and end must be determined is the one that produces * * * [the] marketable product. * * *' Interlake, Inc. v. Kosydar (1975), 42 Ohio St.2d 457, 459, 71 O.O.2d 436, 437, 330 N.E.2d 444, 446[.] * * *
"* * *
"* * * Accordingly, the exemption is dependent upon the direct application of the property to the manufacturing process and not merely its contemporaneous utilization during the fabrication of a marketable product." Id., 45 Ohio St.3d at 79, 543 N.E.2d at 1164-1165.
Moreover, there is no particular significance to when an item of tangible personal property might change form unless it is "converted into a marketable product." (Emphasis sic.) Id. at 80, 543 N.E.2d at 1165.
In Bird Son, supra, as in the instant case, the transportation of raw material to the machine is "preliminary to the manufacturing process," id. at 80, 543 N.E.2d at 1166, and "equipment utilized for the storage and delivery of raw materials prior to the transformation thereof into a finished product is not used or consumed directly in the production of tangible personal property * * *." Id. at 81, 543 N.E.2d at 1166.
The test for determining the exemption from taxation of equipment by reason of its status as adjunct under former R.C. 5739.01(S), later codified at (R), is: "* * * as announced in Canton Malleable Iron Co. * * *:
"`Subsection (S) demands that the thing sought to be excepted from taxation be (1) an adjunct, (2) used at the same location, and (3) used after the transforming or conversion has commenced. Subsection (E)(2) adds the additional requirement that the thing be adjunct to direct use or consumption. * * *' (Emphasis sic.) [ Canton Malleable Iron Co., supra,] at [30 Ohio St.2d] 176-177, 59 O.O.2d at 185, 283 N.E.2d at 442. * * *" Bird Son, supra, 45 Ohio St. 3d at 82, 543 N.E.2d at 1167.
Since the transformation occurs only after material has left the hoppers, the function of the hoppers is preliminary to the actual transformation of tangible personal property into the product which is to be sold by Ball. Therefore, it falls short of entitlement to exemption. With regard to the appeal of Ball Corp., the decision of the BTA which denied exception for the raw material handling and processing system is reasonable and lawful and is affirmed. See, also, Rotek, Inc. v. Limbach (1990), 50 Ohio St.3d 81, 552 N.E.2d 640.
II
The Tax Commissioner contests the exception of the (Wayne) automated carton-forming system and the (Buschman) automated conveyor system. R.C. 5739.02(B)(15) provides an exception for machinery and equipment used in "packaging." She urges that exception be denied because only machinery and equipment used "in placing the item for sale in the packages" qualifies. She contends that the BTA erred in extending the exception to machinery or equipment which is neither packaging machinery or equipment, nor an integral part of packaging machinery or equipment. Exceptions from taxation are to be strictly construed. The statute defines packaging as "placing therein" and no exception is provided for equipment used to form a package. Neither is an exception provided for machinery which transports packages as the machinery here in issue does. "To be excepted from taxation under R.C. 5739.02(B)(15), machinery or equipment must be used in placing tangible personal property produced for sale in packages." Hawthorn Mellody, Inc. v. Lindley (1981), 65 Ohio St.2d 47, 52, 19 O.O.3d 234, 238, 417 N.E.2d 1257, 1261.
Ball argues that the equipment was essential to and an integral part of the packaging process and was thus entitled to exception from taxation. Moreover, and alternatively, in its notice of appeal to this court and in its reply brief, Ball asserted that exception must be granted under former R.C. 5739.01(E) because the carton-forming and conveying system was: "use[d] * * * directly in the production of tangible personal property * * * for sale by manufacturing [or] processing."
We agree with the commissioner that the carton-forming and conveying system is not packaging machinery or equipment or an integral part thereof, and thus is not entitled to exception on that basis. The BTA decision granting that exception is unreasonable and unlawful and is reversed. However, the carton-forming system which produces cartons which Ball sells to its customers may qualify for exception. The BTA did not address this issue because it allowed for exception from taxation on another ground. The matter is remanded to the BTA with instructions to determine whether the automatic carton-forming system is excepted from taxation as machinery or equipment used directly in the production of tangible personal property for sale by manufacturing or processing as contemplated by former R.C. 5739.01(E).
With regard to the automated carton-forming system and the automated conveyor system, the BTA decision finding the machinery or equipment excepted from taxation is unreasonable and unlawful and is reversed and the cause is remanded.
Decision affirmed in part, reversed in part and cause remanded.
MOYER, C.J., SWEENEY, HOLMES, DOUGLAS, WRIGHT, H. BROWN and RESNICK, JJ., concur.