Summary
In McWood Corp. v. Porterfield (1968), 13 Ohio St.2d 143, 42 O.O. 2d 368, 235 N.E.2d 236, it affirmed a decision of the BTA which denied exception to transportation equipment that conveyed natural gas from various oil wells to the processing plant.
Summary of this case from Kilbarger Constr., Inc. v. LimbachOpinion
No. 41241
Decided March 20, 1968.
Taxation — Sales and use taxes — Exceptions — Section 5739.01 (E) (2), Revised Code — Property not used "directly in" production of property for sale, when — Processing plant to purify natural gas for sale — Materials used in transporting gas to processing plant — Purchases not exempt.
APPEAL from the Board of Tax Appeals.
Appellant herein is a foreign corporation authorized to do business in Ohio. In March of 1964, it applied for and received an order from the Public Utilities Commission of Ohio determining that it was not a natural gas company or a public utility under the laws of Ohio. The Public Utilities Commission of Ohio specifically found that the proposed construction and operation of a large natural gas processing plant in Morrow County, Ohio, to purify natural gas for exclusive sale to the Ohio Fuel Gas Company did not qualify appellant as a public utility company or a natural gas company within the definitions of Section 4905.03, Revised Code.
Subsequent to this determination appellant constructed its proposed plant in Morrow County out of materials purchased both within and outside Ohio. On July 14, 1966, from an audit made covering the period from January 1, 1964, to December 31, 1965, the Tax Commissioner issued an assessment, assessing sales and use taxes, plus penalties, against appellant in the sum total of $24,309.50. On August 12, 1966, appellant filed a petition for reassessment on the ground that appellant "made the purchases which constitute the basis of the assessment for the purpose of using or consuming the things transferred directly in the production of tangible personal property (natural gas and its dervatives [ sic]) for sale by refining and is a person engaged in rendering services in the exploration for, and production of natural gas for others, defined in Section 5739.01 (E) (2) of the Revised Code." A hearing was had upon this petition, and on February 8, 1967, the Tax Commissioner remitted the penalty but confirmed the previous finding against appellant, determining that the purchases in issue were of materials used in transporting the natural gas to the processing plant from various oil wells, and therefore were used only indirectly in the production of natural gas for others.
Upon appeal to the Board of Tax Appeals the final order of the Tax Commissioner was modified by $732.93 in favor of appellant, and affirmed as modified.
Messrs. Laylin Shawan and Mr. Edward H. Laylin, for appellant.
Mr. William B. Saxbe, attorney general, and Mr. Edgar L. Lindley, for appellee.
The only question before this court is whether the Board of Tax Appeals acted unreasonably and unlawfully in refusing to find the purchases at issue excepted under the provisions of Section 5739.01 (E) (2), Revised Code.
Section 5739.01 (E) (2), Revised Code, provides, among others, the following exception:
"(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 production of tangible personal property for sale by manufacturing, processing * * * including without limitation * * * production of crude oil and natural gas * * * and persons engaged in rendering * * * services in the * * * production of, crude oil and natural gas, for others are deemed engaged directly in * * * production of, crude oil and natural gas * * *."
The Board of Tax Appeals specifically found that appellant's purpose in constructing its facility was to "produce natural gas for others" within the meaning of Section 5739.01 (E) (2), Revised Code, but nevertheless found the purchases at issue to be taxable, because the things transferred were not used directly in the processing phase of appellant's operation, but only indirectly in that they formed a system to transport the natural gas from the various oil wells to the processing plant.
What the board said, in effect, was that the statutory requirements of Section 5739.01 (E) (2), Revised Code, for excepting the property transferred are not met merely by virtue of the fact that the consumer is a person "engaged directly in * * * production of * * * natural gas," but that there is a further requirement that the things transferred be used directly in the "production of * * * natural gas" and that such further requirement is lacking on the basis of the evidence in this cause. The board based its determination upon this court's decision in the case of Powhatan Mining Co. v. Peck, 160 Ohio St. 389. We think that the board correctly applied the principle of that case, as stated in the first paragraph of the syllabus which reads:
"Where the principal use of property claimed to be used `directly in' a particular activity is in transportation to or from that activity, as distinguished from transportation which is a part of that activity or between essential steps of that activity, such use is not `directly in' such activity within the meaning of Sections 5546-1 and 5546-25, General Code [Sections 5739.01 and 5741.01, Revised Code]." (Emphasis added.)
The board, relying further upon the case of Youngstown Building Material Fuel Co. v. Bowers, 167 Ohio St. 363, also rejected a Section 5739.01 (E) (2), Revised Code, exception predicated upon the appellant's claim that its natural gas processing facility was a "unitary" or "integrated" facility. In this determination, also, the board acted properly.
The only other contention of appellant before this court is that the board acted arbitrarily, unreasonably and unlawfully in determining that a 10' x 40' tank, costing $2,262.50, was not a part of the processing facility when in fact it was, and that the board erred in refusing to modify the assessment accordingly. On the basis of the record we do not find this contention of appellant to be well founded.
The decision of the Board of Tax Appeals is, therefore, affirmed.
Decision affirmed.
TAFT, C.J., ZIMMERMAN, MATTHIAS, DUFFY, HERBERT, SCHNEIDER and BROWN, JJ., concur.
DUFFY, J., of the Tenth Appellate District, sitting for O'NEILL, J.