Summary
In Botkins Grain Feed Co. v. Lindley (1982), 1 Ohio St.3d 64, the clause "* * * incorporated into a structure or improvement * * *" was held to require an actual physical annexation of the sale product before the sale qualified as tax-exempt. Since the Botkins transaction involved no physical annexation, the seller was held not to be a construction contractor, and therefore not liable for use tax.
Summary of this case from Jennings Churella Constr. Co. v. LindleyOpinion
No. 81-1725
Decided July 21, 1982.
Taxation — Use taxes — Sales of portable livestock capsules — Excepted from taxation, when — Taxpayer not construction contractor — R.C. 5739.01(B), construed.
O.Jur 2d Sales, Use Taxes §§ 17, 21.
1. A seller is not a construction contractor subject to use taxes under R.C. 5741.02(A), with respect to portable livestock capsules constructed offsite and delivered on site by a manufacturer, where the principal activity of the seller is assisting in the placement of the capsule on real property and the connection of utility lines.
O.Jur 2d Sales, Use Taxes § 21.
2. Livestock capsules are not "incorporated into a structure or improvement" within the meaning of R.C. 5739.01(B) where they are merely present on real property and are not physically affixed to the relevant structure or improvement.
APPEAL from the Board of Tax Appeals.
Botkins Grain Feed Company, appellee, is an Ohio corporation engaged in numerous agriculturally related enterprises, including the sale of equipment and other merchandise for the feeding and housing of livestock. Among the items sold by appellee are certain house-like structures, designated as capsules, for use in calf raising and swine farrowing.
The basic structure consists of a base, four walls, a gable roof and an access door. On the average, the capsules stand approximately seven feet high at the roof line, eight feet at the peak. The capsules are available in widths of 12 feet or 24 feet, referred to as "single-wides" and "double-wides" respectively, and vary in length from 22 feet to 54 feet. The weight of the capsules ranges from 7,500 to 34,000 pounds.
The interiors of the capsules are comprised of varying quantities, depending primarily on capsule size, of stalls and/or pens positioned on open-slatted floors approximately 30 inches above the base of the structure. The area below the floor is used for waste accumulation. The capsules are specially designed to provide optimum environmental control during the nurturing process and may be equipped with a number of devices for that purpose.
In view of the special design and construction of the capsules conversion of these facilities to any other use, as a practical as well as economic matter, would be infeasible.
A farmer desiring to purchase a capsule begins the process by completing a purchase order form supplied by appellee and presenting 10 percent of the purchase price to appellee as a down-payment. Appellee, who purchases the capsules from a manufacturer in Indiana, then fills out an order form supplied by that manufacturer and forwards the order along with 10 percent of its cost to the manufacturer.
Pertinent to this cause, appellee purchased the capsules from January 25, 1975 through March 31, 1977 from the Star Agri Products Corp. in Goshen, Indiana. In July 1976, however, appellee began implementing a change to capsules manufactured by the Ag Best Corp. of Nappanee, Indiana.
Upon confirmation the manufacturer constructs the capsule in its entirety according to the designated specifications. When a "double-wide" has been ordered the capsule is constructed in two sections for purposes of transportation to the appropriate site.
While construction is underway, the farmer, at his own expense, prepares the site by causing a concrete pad to be poured and having the necessary utility lines run to the appropriate locations. Appellee's employees check on completion of such responsibilities prior to confirming a definite delivery date.
Thereafter, the manufacturer delivers the capsule on the flat bed of a tractor-trailer truck directly to the farmer's property. One or two of appellee's employees are present at the site to assist in causing the capsule to become operational.
This process is initiated by positioning the trailer, on which the capsule is sitting, over the concrete pad. Next, appellee's employees raise the capsule off the trailer, which is driven away. The capsule then is lowered to the pad. Finally, appellee's employees connect the necessary utilities, except gas, and make any necessary repairs to insure that the capsule is operational at that time.
Regarding "double-wides," after lowering the two sections to the pad appellee's employees push the sections together, bolt the roof and apply a liquid sealer to the area where the sections join.
Additional functions with respect to the double-wide capsules include the installing of vents and the hanging of fans and fan panels on brackets located on the outside of the capsule. The fans and panels are shipped inside the unit to avoid excessive load width during transportation.
The capsules are not attached to the pad in any manner. In fact, a significant aspect of the marketability of these structures is their portability. They may be moved with a minimum of effort and no damage to the capsule or the pad.
The portability of the capsules is an especially attractive feature to tenant farmers as well as those farmers who intend to raise livestock for a relatively brief period of time. The capsules are readily transported to and displayed at fairs and agricultural shows. The portability of the capsules is evidenced as well by the willingness of dealers to accept trade-ins and by the market for used capsules.
Appellee purchased from the manufacturer and sold to Ohio farmers a considerable number of capsules since the initiation, prior to January 1975, of its marketing efforts regarding these structures.
Pursuant to an audit covering the period from January 1, 1975 through December 31, 1977 the Tax Commissioner of Ohio, appellant, assessed against appellee a sales tax of $203.26, a use tax of $37,304.55 and 15 percent penalty on each of these sums, resulting in a total assessment of $43,133.98. All but $162.10 of the use tax was attributable to the purchase and resale of the livestock capsules.
Appellee filed a petition for reassessment in September 1978, specifically objecting to the use tax on the purchases of the capsules and requesting a remission of all penalties.
However, upon reconsideration, while reducing the penalties from 15 to 5 percent, appellant left the use tax unchanged.
In October 1979, appellee filed a notice of appeal to the Board of Tax Appeals reiterating the objection to the use tax on the livestock capsules. Appellee also argued that appellant abused his discretion in failing to remit the penalties entirely.
The board found the imposition of a use tax inappropriate in this matter and reversed appellant's determination.
The cause is now before this court upon appeal as of right.
Garmhausen, Kerrigan, Elsass Co., L.P.A., Mr. Eugene P. Elsass, Mr. James R. Shenk and Mr. Ralph F. Keister, for appellee.
Mr. William J. Brown, attorney general, and Mr. Charles M. Steines, for appellant.
The sole issue in this cause is whether appellee is a construction contractor with respect to the sales of livestock capsules.
R.C. 5741.02(A) imposes an excise tax "on the storage, use or other consumption in this state of tangible personal property." However, pursuant to R.C. 5741.02(C)(2), this tax is not applicable to property, the acquisition of which, if made in this state, would not be subject to the tax levied upon retail sales under R.C. Chapter 5739.
Generally, as provided by R.C. 5739.01(E), those sales in which the consumer's purpose is to "resell the thing transferred in the form in which the same is, or is to be, received by him" are excluded from the definition of "retail sale."
Further, R.C. 5739.02(B)(17) provides that the excise tax on retail sales does not apply to:
"Sales to persons engaged in farming, agriculture, horticulture, or floriculture, of tangible personal property for use or consumption directly in the production by farming, agriculture, horticulture, or floriculture of other tangible personal property for use or consumption directly in the production of tangible personal property for sale by farming, agriculture, horticulture, or floriculture; or material and parts for incorporation into any such tangible personal property for use or consumption in production; and of tangible personal property for such use or consumption in the conditioning or holding of products produced by and for such use, consumption, or sale by persons engaged in farming, agriculture, horticulture, or floriculture except where such property is incorporated into real property."
However, R.C. 5739.01(B) establishes in pertinent part that:
"* * *a construction contract pursuant to which tangible personal property is or is to be incorporated into a structure or improvement on and becoming a part of real property is not a sale of such tangible personal property, and the construction contractor is the consumer thereof."
Ohio Adm. Code 5703-9-14, adopted under the authority granted to the Tax Commissioner under R.C. 5703.05(M), provides a further explanation of the definition of construction contract as follows:
"A construction contract is any agreement, written or oral, whether on a time and material basis or lump sum basis, pursuant to which tangible personal property is or is to be incorporated into a structure or improvement to real property so as to become a part thereof without regard to whether it is new construction, maintenance, or repair. A construction contractor is any person who performs such agreement, whether as a prime or a subcontractor.
"In determining when the improvement into which tangible personal property is incorporated constitutes real property it shall be considered that improvements devoted to the general use of the land or buildings thereon are real property and improvements devoted principally to a business function or use shall be considered as personal property. ***"
As applied to the present cause, clearly, the concrete pad constituted "a structure or improvement on and becoming part of real property." Thus, we must consider whether the contracts between appellee and the farmers were construction contracts pursuant to which the livestock capsules were incorporated into the concrete pad.
Appellant insists that this cause is controlled by R.C. 5701.02, which provides:
"As used in Title LVII of the Revised Code, `real property' and `land' include land itself, *** all growing crops ***, and unless otherwise specified, all buildings, structures, improvements, and fixtures of whatever kind on the land, and all rights and privileges belonging or appertaining thereto." (Emphasis added.)
G.C. 5322, the predecessor of R.C. 5701.02, was considered by this court in Reed v. Bd. of Revision (1949), 152 Ohio St. 207 [40 O.O. 217]. Therein, the owners of certain cottages erected on land leased from the state contended that the cottages wrongfully had been classified as real property by a county auditor. However, this court determined:
"Even if a structure or building located on land is personal property, such structure or building will, for purposes of taxation, be included within the definition of `real property' as that term is defined in Section 5322, General Code, unless the General Assembly has otherwise specified." Reed, supra, at paragraph three of the syllabus.
Further, in Shutter Bug, Inc. v. Kosydar (1974), 40 Ohio St.2d 99 [69 O.O.2d 487], the Tax Commissioner contested a finding by the Board of Tax Appeals that small buildings located on shopping center or bowling alley parking lots from which the owners conducted the business of selling and merchandising photographic film, equipment and processing services were taxable to the owners as real property. Approving and following the rationale of Reed, this court affirmed the board's order that the buildings be deleted from a personal property tax assessment against the owners thereof. See Bobb Brothers v. Bd. of Revision (1976), 45 Ohio St.2d 81 [74 O.O.2d 195].
In Bobb Brothers, supra, certain silos, a grain elevator and other items, which did constitute personal property, were treated as real property for purposes of taxation against the owners of the property, pursuant to R.C. 5701.02. Therein, this court rejected the contention that such facilities were machines or implements used in manufacturing so as to be "otherwise specified" under R.C. 5711.22(E).
In the present case, the board determined that the capsules as located on a farmer's property, under the reasoning of Shutter Bug, must be considered real property. However, the board reasoned that the services performed by appellee upon delivery of a capsule were insufficient to classify appellee as a construction contractor nor did the evidence establish the agreements between appellee and the farmers constituted construction contracts.
In view of the fact that the capsules must be treated as real property while on the pad, appellant maintains that appellee contracts to incorporate the capsules into an improvement to real property, i.e., the concrete pad.
We disagree. Incorporation requires more than mere presence on real property. This court previously has held that the term "incorporation," as used in R.C. 5739.02(B)(13), requires physical affixation to the relevant improvement. Al Johnson Constr. Co. v. Kosydar (1975), 42 Ohio St.2d 29 [71 O.O.2d 16]; Wantz Construction Co. v. Kosydar (1974), 38 Ohio St.2d 277 [67 O.O.2d 346]. We perceive no basis for excluding such requirement from the term "incorporated" as used in the construction contract provision found in R.C. 5739.01(B).
Clearly, the capsules in the present cause were not affixed to the concrete pad. Physical affixation contemplates more than the connection of utility lines. Therefore, we hold that the livestock capsules sold by appellee were not incorporated into the concrete pad. Appellee cannot be considered the consumer with respect to these structures.
Accordingly, the decision of the board is neither unreasonable nor unlawful and must be affirmed.
Decision affirmed.
CELEBREZZE, C.J., W. BROWN, SWEENEY, VICTOR, HOLMES and KRUPANSKY, JJ., concur.
VICTOR, J., of the Ninth Appellate District, sitting for LOCHER, J.
BROGAN, J., of the Second Appellate District, sitting for C. BROWN, J.