Opinion
No. 73-885
Decided April 24, 1974.
Taxation — Sales and use taxes — Exceptions — R.C. 5739.01(E)(2) and 5739.01(Q) — Property used directly in rendition of public utility service, when — Test — "Production system," construed — Property essential to continuous production of public utility service — Incorporated into steps in process of generating electricity.
1. Tangible personal property is "used directly in the rendition of a public utility service" when its use conforms to one or more of the three standards set forth in R.C. 5739.01(Q).
2. For the purposes of R.C. 5739.01(Q), the term "production system" includes only those items of tangible personal property which are essential to the continuous production of the public utility service.
APPEAL from the Board of Tax Appeals.
Appellees, the Cincinnati Gas Electric Company, the Columbus and Southern Ohio Electric Company, and the Dayton Power and Light Company, are public utilities engaged in the production, transmission and distribution of electricity to consumers in the state of Ohio.
This case arose when appellant issued a sales and use tax assessment against appellees. The assessment covered purchases of tangible personal property used by appellees at the J.M. Stuart Electric Generating Station located in Adams County, which station is owned by appellees as tenants-in-common. Appellees claimed the purchase and use of such personal property was excepted from sales and use tax by virtue of R.C. 5739.01(E)(2) and (Q), as being used "directly in the rendition of a public utility service."
The tangible personal property in question consisted of coal handling equipment, storage tanks for fuel, water and acid, boiler air preheaters, the equipment comprising the water cooling system, communications equipment, a power plant computer, and various materials incorporated into the coal handling, ash handling, water intake and electrical systems. The manner in which this property is used was summarized by the Board of Tax Appeals:
"The J.M. Stuart Station, when completed, will consist of four 600,000 kilowatt units for a total capacity of 2,400,000 kilowatts. J.M. Stuart Station is known as a thermal electric generating station and uses coal as the primary source of the thermal energy. Coal is received by barges on the Ohio River. The barges are delivered to the site and moored to structural piers. Tugboats move the barges to and from a coal barge unloader, which unloads a barge in about 45 minutes. Each barge contains approximately 1,500 tons of coal. The unloader functions 16 hours a day, seven days a week. The coal is transported from the unloader by conveyor to a stacker tower where the coal is stacked in a ready pile by the hoppers which are located around the stacker tower. Surplus coal is moved from the hopper area to the storage pile by means of automotive power work equipment and is returned to the hopper area or ready pile by the same equipment when needed. The same equipment is used to feed the coal into the hoppers. Coal from the hoppers is moved by conveyors to the crusher tower where the coal is reduced to a maximum size of three quarter inches. Coal dust eliminating equipment is used to suppress dust along the conveyor transfer points to prevent explosions and for health reasons. The coal again is moved by conveyor, chutes and gates to surge bins and then into silos. The movement of coal from the hoppers or ready pile to the burner tips is a continuous process 24 hours a day. This movement of coal is so vital to the operation of the station that duplicate belts are provided. Coal is sample tested to determine the basis of payment and to determine the amount of coal necessary to use in the burning process.
"There are six (6) silos for each unit and each silo feeds a coal pulverizer. The pulverizers grind the coal to the consistency of face powder. Each pulverizer grinds approximately 50 tons of coal per hour. From the pulverizer the coal is blown by means of the primary air fan through pipes to the furnace or boiler where the coal ignites. Fuel oil is also piped to the boiler for ignition fuel for start up and for use during unstable conditions in the furnace.
"The clinker grinder and pyrite removal equipment disposes of slag produced by burning coal in the boiler and pyrite in the coal which cannot be ground up by the pulverizers. Removal of this material is necessary for continuing operation of the boiler and pulverizers.
"The air that is introduced into the boiler to support combustion passes through the boiler air pre-heaters which are a part of the boiler. This process takes waste heat from the hot gases exhausted from the combustion process and puts the heat back into the combustion process by means of the warm air. Without the use of the pre-heaters more coal would be needed in the burning process.
"Steam is produced in the boiler and is piped to drive the turbine. The mechanical energy of the turning turbine is transferred to the generator and electrical energy from the generator goes out over transmission lines to the customers.
"After energy is removed from the steam, the exhaust steam from the turbine must be condensed to water to continue the closed cycle process. This is done by circulating vast quantities of water (cooling water) from the river through thousands of tubes in the condenser where the steam gives up its heat to the water circulating in the tubes. The cooling water is then discharged back into the river. This is a continuous process and if the circulating water system fails, the generating units would be off the line within 60 seconds.
"The storage tanks in issue hold ignition fuel oil, raw well water, acid and caustic to purify the raw well water in the demineralizer for boiler feedwater and pyrites removed from coal before being pumped to the disposal area.
"There are also several cranes and hoists as well as a computer system involved in the assessment. These will be treated at the time of their disposal in this entry."
Appellees appealed the assessment levied by the commissioner to the Board of Tax Appeals. The board found that the property at issue was used directly in the rendition of a public utility service and was within the exception to the sales and use tax provided by R.C. 5739.01(E)(2) and (Q). In modifying the assessment of the commissioner, the board reduced the sales tax levied by $106,156.81 and the use tax levied by $763,323.06, together with the penalties thereon.
The matter is now before us pursuant to the Tax Commissioner's appeal as of right from the board's decision.
Mr. William E. Herron, Mrs. Joan S. Ehas, Messrs. Porter, Stanley, Platt Arthur and Mr. Edmund D. Doyle, for appellees.
Mr. William J. Brown, attorney general, and Mr. Dwight C. Pettay, Jr., for appellant.
Under R.C. 5739.02, an excise tax is levied on all retail sales made in this state. Similarly, R.C. 5741.02 imposes an excise tax upon the storage, use or other consumption of tangible personal property within the state. The use tax, however, is not so levied if the acquisition of such property, if made in Ohio, would be a sale not subject to the retail sales tax levied by R.C. 5739.01 to R.C. 5739.31, inclusive. R.C. 5741.02(C)(2).
R.C. 5739.01 operates to except a number of transactions from the levy of the sales tax. R.C. 5739.01(E)(2) provides, in part:
"(E) `Retail sale' and `sales at retail' include all sales except those in which the purpose of the consumer is:
"(2) * * * to use or consume the thing transferred * * * directly in the rendition of a public utility service."
The phrase "used directly in the rendition of a public utility service" is further defined in R.C. 5739.01(Q):
"(Q) `Used directly in the rendition of a public utility service' means that property which is to be incorporated into and will become a part of the consumer's production, transmission, transportation, or distribution system and which retains its classification as tangible personal property after such incorporation; fuel or power used in the production, transmission, transportation, or distribution; and tangible personal property used in the repair and maintenance of the production, transmission, transportation, or distribution system, including only such motor vehicles as are specially designed and equipped for such use."
The question presented is whether the equipment heretofore described is excepted from the retail sales and use taxes by reason of R.C. 5739.01(E)(2) and 5739.01(Q).
Prior to the addition of subsection (Q) to R.C. 5739.01 on September 1, 1967, the scope of the public utility exception was delineated by the pronouncements of this court in Athens Home Telephone Co. v. Peck (1953), 158 Ohio St. 557, 110 N.E.2d 571; Erie Rd. Co. v. Peck (1953), 160 Ohio St. 322, 116 N.E.2d 304; and Warren Telephone Co. v. Bowers (1962), 173 Ohio St. 164, 180 N.E.2d 595. The test propounded by these cases was, "whether the purchased items were essential or indispensable in keeping the utility in continuous operation for the provision of service to the public." Ohio Edison Co. v. Porterfield (1971), 28 Ohio St.2d 150, 277 N.E.2d 195.
As to acquisitions of property occurring after September 1, 1967, the test for determining whether such acquisitions are within the public utility exception of R.C. 5739.01(E)(2) is a statutory one. The question is whether the property acquired is to be "used directly in the rendition of a public utility service," as that phrase is defined in R.C. 5739.01(Q).
The commissioner contends that by reading R.C. 5739.01(E)(2) and (Q) together, these sections provide that the exception from taxation is available only where the tangible personal property is directly used in the production, transmission, transporting or distribution system of the public utility. Stated another way, the commissioner urges that only property which is directly involved with the actual production of a flow of electricity is excepted from taxation; he argues that property which is incorporated into the production system, but that is concerned with steps preparatory to the actual production of electricity, is not excepted.
The commissioner places principal reliance upon Canton Malleable Iron Co. v. Porterfield (1972), 30 Ohio St.2d 163, 283 N.E.2d 434. Canton Malleable was concerned with the "direct use in manufacturing" exception to sales tax, also provided by R.C. 5739.01(E)(2), and the effect upon that exception of the addition of R.C. 5739.01(S), enacted at the same time as subsection (Q). Reading R.C. 5739.01(E)(2) and (S) in a complementary fashion, the court concluded that those sections established dual standards for coming within the direct use in manufacturing exception, both of which had to be met before acquisitions of property were excepted from the sales tax.
However, the commissioner's argument ignores the differences in the language of subsections (Q) and (S), and in the wording of R.C. 5739.01(E)(2) establishing the manufacturing and public utility exceptions. R.C. 5739.01(S) simply defines two of the terms used to delineate the direct use in manufacturing exception, otherwise leaving the original language of R.C. 5739.01(E)(2) as it existed prior to the adoption of subsection (S). R.C. 5739.01(Q), on the other hand, defines the entire basis for the public utility exception of R.C. 5739.01(E)(2).
Thus, when determining whether the acquisition or use of property is excepted from the retail sales or use taxes as property "used directly in the rendition of a public utility service," the determination depends upon whether the property satisfies one of the three standards of R.C. 5739.01(Q).
In this context, the term "production system" is comprised of those items of tangible personal property, and only those items, which are essential to the continuous production of the public utility service.
The instant record establishes that the property involved has been incorporated into steps in the process of generating electricity, and that the property is essential to the continuous production of that public utility service. It is uncontroverted that it has retained its classification as tangible personal property. Therefore, all the necessary requirements for exception imposed by R.C. 5739.01(Q) have been met. Similarly, it was established that the cranes and hoists were tangible personalty which performed necessary repair and maintenance work on property which has been incorporated into the production system.
In view of the foregoing, the decision of the Board of Tax Appeals is neither unreasonable nor unlawful and is affirmed.
Decision affirmed.
O'NEILL, C.J., CORRIGAN, STERN, CELEBREZZE, W. BROWN and P. BROWN, JJ., concur.