Opinion
No. 73-67
Decided July 3, 1974.
Taxation — Sales tax — Transfer of personal property from debtor to creditor — Liability for accrued taxes — R.C. 5739.14 — Transfer pursuant to security agreement default — Bulk sales affidavit — Transaction characterized as a "purchase" — Creditor not liable for delinquent taxes, when.
Where in the course of the transfer of personal property from a debtor to the creditor pursuant to default under a security agreement, a bulk sales affidavit is executed which characterizes the transaction between the parties as a purchase, such affidavit does not alter the nature of the contractual relationship between the parties or convert the foreclosure into a sale so as to subject the foreclosing creditors to liability for payment of delinquent taxes pursuant to R.C. 5739.14.
APPEAL from the Court of Appeals for Lucas County.
The Standard Oil Company, appellee and cross-appellant, and Donald J. Bleim entered into a gasoline service station lease and an authorized dealer agreement in 1967. The authorized dealer agreement granted Standard Oil a security interest in Bleim's inventory, accounts receivable and equipment purchased from Standard to secure payment of any debt owed Standard by Bleim.
A stipulation of facts filed in the trial court explains the business dealings between Standard and Bleim, as follows:
"As of August 31, 1968, Bleim owed Standard Oil $3.255.26, $1,933.53 of which had been due and owing to Standard Oil for more than 30 days, thereby, pursuant to the credit terms of `net 30 days' granted to Bleim, placing Bleim in default of his lease obligation on said date.
"On August 18, 1962, Standard Oil filed in proper form Financing Statements in the office of the Lucas County Recorder and in the office of the Secretary of State concerning `all inventory and equipment purchased by debtor from the secured party' and `all accounts receivable owing to debtor regardless of when or how incurred.' On July 10, 1967, The Standard Oil Company of Ohio effectively continued the 1962 Financing Statement in the office of the Lucas County Recorder and in the office of the Secretary of State. Copies of said Financing Statements and Continuation Statements are attached hereto as Exhibits C and D.
"Donald J. Bleim and The Standard Oil Company terminated business relations on September 9, 1968.
"Standard Oil owned a large portion of the equipment located at the premises leased by Donald J. Bleim from Standard Oil. * * *
"Upon the termination of business relations between Bleim and Standard Oil, Bleim transferred certain inventory and merchandise, including a tire changer, which was Bleim's personal property, to Standard Oil and received credit against Bleim's delinquent account. A schedule of items transferred and amount of credit allowed for each item is set forth below: [Schedule shows total due Standard Oil is $881.60.]
"* * *
"Donald J. Bleim executed a bulk sales affidavit, and other documents as prepared and presented to him by Standard Oil, on September 9, 1968, and the goods set forth in the above schedule were conveyed by Bleim to Standard Oil on said date. * * *
"No cash, check, money order or other negotiable instrument was given to Donald J. Bleim in return for any of the merchandise and inventory transferred by Bleim to Standard Oil.
"As a result of the credits for transferred merchandise granted by Standard Oil to Bleim, Bleim's account was reduced by $881.60 to $2,373.66.
"On March 15, 1967, the state of Ohio filed a tax assessment against Donald J. Bleim in the amount of $664.70, $578 of which was a delinquency charge and $86.70 of which was a penalty. On September 16, 1969, the state of Ohio filed a tax assessment against Donald J. Bleim in the amount of $1,872.35, $1,628.13 of which was due to delinquent sales tax, and $244.22 of which was a penalty. Subsequently, Bleim made a payment to the state of Ohio in the amount of $300, thereby reducing his liability to the state of Ohio to $2,237.05."
The state of Ohio, appellant and cross-appellee, instituted an action in the Court of Common Pleas to enforce the sales tax assessments and penalties against both Bleim and Standard Oil. The trial court granted judgment of $2,237.05 in favor of the state against both defendants.
Standard Oil appealed to the Court of Appeals, which modified the judgment of the trial court by reducing the amount of Standard's liability to $881.60.
The cause is presently before this court pursuant to the allowance of a motion and cross-motion to certify the record.
Mr. William J. Brown, attorney general, Mr. Thomas E. Heydinger and Mr. Norman P. Solz, for appellant and cross-appellee.
Messrs. Squire, Sanders Dempsey, Mr. James A. Smith, Mr. James P. Murphy and Mr. Isaac Schulz, for appellee and cross-appellant.
The issue presented in these appeals is whether Standard Oil is liable under R.C. 5739.14 for the unpaid sales taxes accuring during the operation of the service station by Bleim.
R.C. 5739.14 provides:
"If any person liable for taxes levied by or pursuant to Sections 5739.01 to 5739.31, inclusive, of the Revised Code, sells his business or stock of merchandise, or quits his business, the taxes and interest or penalty imposed by or pursuant to such sections on sales made prior to that time shall become due and payable immediately, and such person shall make a final return within fifteen days after the date of selling or quitting business. His successor shall withhold a sufficient amount of the purchase money to cover the amount of such taxes, interest, and penalties due and unpaid until the former owner produces a receipt from the Tax Commissioner showing that the taxes, interest, and penalties have been paid, or a certificate indicating that no taxes are due. If the purchaser of the business or stock of goods fails to withhold purchase money, he shall be personally liable for the payment of the taxes, interest, and penalties accrued and unpaid during the operation of the business by the former owner."
The syllabus in State v. Sloan (1956), 164 Ohio St. 579, 132 N.E.2d 460, reads:
"1. Section 5739.14, Revised Code, imposes a duty upon the purchaser of a business to determine * * * that either the seller owes no accrued sales taxes, or, if such taxes are owed, the amount thereof, and, if the latter, to withhold from the purchase price the amount owed until the seller produces a receipt from the Tax Commissioner showing that the taxes have been paid or a certificate indicating that no taxes are due.
"2. The purchaser of a business who fails to make such a determination and to withhold any amount owed becomes personally liable for the taxes accrued during the operation of the business by the seller * * *."
Since R.C. 5739.14 applies only where a sale of a "business or stock of merchandise" occurs, the disposition issue here is whether the transaction between Standard Oil and the station operator, whereby their business relationship was terminated and the inventory and merchandise were transferred to Standard Oil, constituted a sale.
It is the position of Standard Oil that the transaction by which it recovered the inventory and merchandise was a foreclosure and that "foreclosure of a defaulting debtor's property by a creditor holding a perfected security interest in such property does not constitute a `sale' within the meaning of Section 5739.14, Revised Code."
The Court of Appeals, noting that Standard Oil, "in taking possession of the inventory and merchandise * * * elected to obtain an affidavit as required under the Ohio Uniform Commercial Code Section 1306.03, and * * * that * * * [Standard Oil] prepared the affidavit in which it stated specifically that a stock of merchandise and certain fixtures * * * was being purchased from the owner * * * and * * * that no such affidavit is required for a transfer in settlement or realization of a lien or other security interest * * * and * * * that * * * [Standard Oil] did not indicate in any way that it was proceeding under Section 1319.07, R.C., to foreclose any chattel mortgage * * *," concluded that "the trial court did not err in considering the transaction involved to be a sale rather than a foreclosure."
The Court of Appeals thus looked only to the form of the transaction by which Standard Oil took possession of the inventory and merchandise in determining that a sale had occurred.
It is appropriate to note here that it is the substance of the transaction between Standard Oil and the station operator rather than its form which is significant. "We are interested in the obligations and rights arising from the transaction, not the form of the transaction." Mohawk Utilities v. Pub. Util. Comm. (1974), 37 Ohio St.2d 47, 51, 307 N.E.2d 261. Thus, "* * * this court examines this transaction, not for what it purports to be, but for what, in essence, it is," State, ex rel. Kitchen, v. Christman (1972), 31 Ohio St.2d 64, 67, 285 N.E.2d 362.
Consideration of the totality of the business dealings and contractual relationship between Standard Oil and the station operator, however, leads to the conclusion that the execution of the bulk transfer affidavit constituted, in effect, the exercise by Standard of its rights under the security agreement. The fact that Standard Oil "elected to obtain an affidavit under the Ohio Uniform Commercial Code Section 1306.03 * * * and * * * did not indicate in any way that it was proceeding * * * to foreclose any chattel mortgage" is not sufficient, in the opinion of this court, to transform the transaction from a foreclosure under a security agreement to a sale. The use by Standard Oil of an inappropriate form to enforce its rights under the security agreement did not alter the basic character of the contractual relationship between Standard Oil and the station operator and thereby convert a foreclosure into a sale.
Accordingly, the judgment of the Court of Appeals is reversed and final judgment is rendered for the appellee and cross-appellant, Standard Oil Company.
Judgment reversed.
HERBERT, CORRIGAN, STERN, CELEBREZZE, W. BROWN and P. BROWN, JJ., concur.