Opinion
Nos. 36366 and 36367
Decided October 19, 1960.
Taxation — Sales and use tax — Manufacture of metal alloys for sale — Equipment and materials used — Weight bins and crane — Chemicals to treat water — Water conditioner — Transformer and transmission lines.
APPEALS from the Court of Appeals for Stark County.
The Tax Commissioner made a final order confirming a sales and use tax assessment against Ohio Ferro-Alloys Corporation, herein referred to as the taxpayer. On appeal to the Board of Tax Appeals, that order was affirmed except as to certain items not in issue in the appeals now before this court.
On appeal to the Court of Appeals for Stark County, the decision of the Board of Tax Appeals was modified in certain respects.
The cause is now before this court on appeal by the Tax Commissioner from that part of the judgment of the Court of Appeals which modified the decision of the Board of Tax Appeals and on an appeal by the taxpayer from that part of that judgment which affirmed that decision, pursuant in both instances to allowances of motions to certify the record.
The Board of Tax Appeals made the following finding:
"The smelting of the raw materials, from which * * * [taxpayer] produces and manufactures the metals and alloys which it sells, takes place in a stationary, open top, continuous electric furnace. The raw materials * * * are charged into the top of the furnace by charging machines. In the presence of the terrific heat supplied by the electrical energy, a chemical reaction takes place and the metal alloys, in molten form, are withdrawn from the bottom of the furnace at regular intervals and cast into molds. * * *
"The raw materials which are used in this operation are received at * * * [taxpayer's] plants in railroad cars, and are unloaded from these cars into storage pits or bins. These pits are underneath a railroad trestle and the cars have bottoms which open to dump the material into the pits. These pits are located in what has been called a raw materials building * * *.
"A crane, consisting of a traveling beam having a 70 foot span, with a clam operated from the cab of the crane, picks up the material from these storage pits and lifts it to the top of a set of metal bins which are designated as `weigh bins' * * *. The bins into which the different ores are so placed are equipped with grills made out of used rails, which collect the large chunks of ore, which are then broken by sledge hammers to permit them to go into the weigh bins. All chunks of ore must be broken into pieces not larger than six inches in diameter for charging into the furnace. However, no mixing of materials takes place in these weigh bins.
"From the weigh bins, the various raw materials are fed by a vibrator into a lorry car or mix car, which moves along the bins and selects from the different bins the proper amount of each material. The vibrators on the bottom of the weigh bins permit the proper amount of material to be placed in the lorry car. The weigh bins store enough material to supply the furnace for approximately four hours of full operation. * * *
"The electric energy for the operation of the furnaces is introduced at 150 volts by means of carbon electrodes, which are suspended over the furnace and are lowered into the metal furnace charge, or raised out of it, by mechanical devices, consisting of various gears and castings, made of metal. Because this suspension equipment is located immediately above molten metal, and must be operated very close to the metal, which reaches temperatures as high as 3,000 degrees fahrenheit, this equipment must be water cooled. The castings therefore have passages for the flow of water through them, and the water is piped in and piped out of these different castings. Without this water cooling, this equipment would probably disintegrate or melt. Water for the cooling system is pumped from wells at * * * [taxpayer's] plant into a recirculating system, from which it is pumped to the furnaces, returned to a hot well, cooled at a water cooling tower, and then pumped back to the furnaces.
"The water in this system is treated with certain chemicals which neutralizes it and prevents calcium and iron particles from being deposited in the castings of the furnace equipment * * *. Certain quantities of chlorine and of chemicals known by trade names, such as `Calgon' and `Oracol,' are continuously injected into the water system for this purpose. * * * If this water was not so treated * * * the furnace castings would be completely filled with mineral deposits in a month and therefore could no longer be operated.
"In addition to the chemical treatment * * * the water in the system is also treated by a device known as a `Packard water conditioner' which contains certain radioactive materials and through which the water passes for further treatment to prevent any deposits in the furnace cooling system. * * *"
It further appears from the record that the taxpayer purchases electric energy at a voltage of 132,000 volts. This is then run through a transformer which reduces it to 11,000 volts and then through a second transformer which reduces it from 11,000 to the 150 volts used in the furnaces.
Messrs. Day, Cope, Ketterer, Raley Wright, Mr. Robert M. Rybolt and Mr. John F. Buchman, III, for Ohio Ferro-Alloys Corporation.
Mr. Mark McElroy, attorney general, and Mr. Joseph D. Karam, for Tax Commissioner.
The questions to be decided are whether, within the meaning of Sections 5739.01 and 5741.01, Revised Code, "the purpose of the" taxpayer was "to use or consume" the following three categories of items "directly in the production of tangible personal property for sale by manufacturing, processing [or] refining":
(1) The so-called "weigh bins" and the crane.
(2) The chemicals used to treat the water and the "Packard water conditioner."
(3) The first transformer and all transmission lines prior to the second transformer.
With respect to the items in the first category, their sale or use should be excepted from taxation unless we can say that the board was unreasonable in finding that manufacturing did not begin with the mere breaking up of the large chunks of ore into pieces not more than six inches in diameter. In our opinion, the board's finding in this respect was neither unreasonable nor unlawful. See V.N. Holderman Paving Co. v. Bowers, Tax Commr., ante, 275.
As to the items in the second category, we believe their sale or use should be excepted from taxation. Union Carbide Carbon Corp. v. Bowers, Tax Commr., 166 Ohio St. 419, 143 N.E.2d 710.
As to the items in the third category, we believe that their sale or use should not be excepted from taxation. General Motors Corp. v. Bowers, Tax Commr., 164 Ohio St. 574, 132 N.E.2d 213.
In so holding, we recognize that it is difficult to logically differentiate the function of the first transformer with respect to electric energy from the function of the items in the second category with respect to water used for cooling. See Union Carbide Carbon Corp. v. Bowers, supra, at 424, 425. However, we believe it desirable to adhere to those decisions as to when manufacturing or processing begins, even though they seem to indicate a rule for treatment of cooling water that is not consistent with a rule for treatment of electric energy.
It follows that the judgment of the Court of Appeals, so far as it reverses the decision of the Board of Tax Appeals with respect to the items in category one, must be reversed and the decision of the Board of Tax Appeals with respect to those items affirmed, and that otherwise that judgment must be affirmed.
Judgments accordingly.
WEYGANDT, C.J., ZIMMERMAN, TAFT, MATTHIAS, BELL, HERBERT and PECK, JJ., concur.