EMERY INDUSTRIES v. KOSYDAR

Citation Codes

Equivalent Citations

citation codes

Docket Number

Nos. 74-938 and 74-942

Attorney(S)

Messrs. Taft, Stettinius Hollister, Mr. Stephen M. Nechemias and Mr. James J. Ryan, for Emery Industries. Mr. William J. Brown, attorney general, Mr. John C. Duffy, Jr. and Ms. J. Elaine Bialczak, for the Tax Commissioner.

Judges

Per Curiam.
PAUL W. BROWN, J., dissenting in part.

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Smart Summary

Factual and Procedural Background

Emery Industries, Inc., an Ohio corporation producing organic chemicals, jet lubricant materials, and textile products, uses steam generated by burning oil or pulverized coal in its manufacturing process. During the audit period, the Tax Commissioner examined Emery's steam meter records and determined that approximately 86.3% of the steam was used directly in manufacturing, while the remaining 13.7% was used for heating the plant (2.9%) and driving turbines for boiler fans (10.8%). The Commissioner assessed sales and use tax on 13.7% of Emery's fuel purchases, arguing this portion was not used directly in production. Additionally, the Commissioner assessed tax on certain barrel-filling equipment. The Board of Tax Appeals affirmed the tax on fuel but reversed the assessment on the barrel-filling equipment. Both Emery and the Tax Commissioner appealed to the Supreme Court of Ohio.

Legal Issues Presented

Whether the "primary use" test applies to determine tax exemption for purchases of fuel consumed in producing steam used in manufacturing when some steam is used for non-manufacturing purposes.
Whether the purchases of barrel-filling equipment and cut-off scales qualify as exempt machinery and equipment under R.C. 5739.02(B)(15) for use in packaging tangible personal property for sale.

Arguments of the Parties

Appellant Emery Industries' Arguments

The tax exemption under R.C. 5739.01(E) depends on the "primary use" of purchased items, not on apportionment of use.
Fuel is purchased in bulk and all consumed in steam production; the steam’s incidental non-manufacturing uses do not negate exemption of the entire fuel purchase.
The case is distinguishable from United States Shoe Corp. v. Kosydar because fuel is fungible and not earmarked for non-exempt uses.
Relies on Richardson-Merrell v. Porterfield to support the application of the primary use test to fungible goods such as fuel.

Appellee Tax Commissioner's Arguments

Conceded that about 87% of fuel is used directly in production but argued the primary use test should not apply because fuel uses can be allocated and taxed proportionally.
Maintained that non-excepted uses of steam (heating and driving turbines) are important uses, not incidental, justifying partial taxation of fuel purchases.
Contended that the Board of Tax Appeals' reversal of tax on barrel-filling equipment was unsupported by probative evidence.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
United States Shoe Corp. v. Kosydar, 41 Ohio St.2d 68 (1975)	Application of the "primary use" test where taxpayer’s purpose is unclear due to dual uses.	Referenced to confirm that primary use test governs exceptions under R.C. 5739.01(E) when dual uses exist.
Richardson-Merrell v. Porterfield, 32 Ohio St.2d 281 (1972)	Primary use test applies to fungible goods and controls tax exemption under R.C. 5739.01(E).	Applied to support exemption of entire fuel purchase as fuel was bought for primary use in manufacturing despite incidental non-manufacturing uses.
Mead Corp. v. Glander, 153 Ohio St. 539 (1950)	Established the primary use test for determining tax exemption.	Cited as foundational case for applying primary use test to fungible goods.
Merchants Cold Storage Co. v. Glander, 150 Ohio St. 524 (1948)	Suggested allocation of taxability based on records; emphasized purpose at time of sale as controlling.	Noted by dissent as controlling authority supporting tax on non-excepted portion when clear records exist.
Citizens Financial Corp. v. Porterfield, 25 Ohio St.2d 53 (1971)	Standard for probative evidence supporting Board of Tax Appeals decisions.	Applied to affirm Board’s reversal of tax on barrel-filling equipment due to sufficient probative evidence.
Ace Steel Baling v. Porterfield, 19 Ohio St.2d 137 (1969)	Clarified meaning of "primary use" as primary in utility or essentiality.	Used to reinforce interpretation of primary use test in fungible goods context.

Court's Reasoning and Analysis

The court analyzed the applicability of R.C. 5739.01(E), which exempts sales tax on purchases used directly in manufacturing tangible personal property for sale. The Tax Commissioner conceded that approximately 87% of fuel was used in production. The court applied the "primary use" test, as established in precedent, to determine whether the entire fuel purchase was exempt despite incidental non-manufacturing uses of resulting steam.

The court distinguished this case from United States Shoe Corp. v. Kosydar, where raw materials were earmarked for non-production uses, unlike Emery’s bulk fuel purchase. It found the primary purpose of fuel purchase was to produce steam for manufacturing, with incidental uses not defeating exemption. The court relied on Richardson-Merrell and Mead Corp. to confirm that fungible goods like fuel are exempt if their primary use is in manufacturing, even if some incidental non-excepted use occurs.

Regarding the barrel-filling equipment, the court reviewed the record and found sufficient probative evidence supporting the Board of Tax Appeals' conclusion that the equipment qualified as exempt machinery under R.C. 5739.02(B)(15).

The dissent argued that the statute’s focus is the consumer’s purpose at the time of sale, which here included both excepted and non-excepted uses. The dissent maintained that without separating taxable and non-taxable portions, the entire purchase should be taxable, criticizing the majority’s reliance on the primary use test as inconsistent with statutory language and prior controlling precedent.

Holding and Implications

Holding: The court affirmed in part and reversed in part the Board of Tax Appeals’ decisions. Specifically, it reversed the tax assessment on Emery’s fuel purchases, holding that the entire purchase was exempt under the primary use test, and affirmed the Board’s reversal of tax on the barrel-filling equipment.

Implications: The ruling confirms that under Ohio law, when fungible goods such as fuel are purchased primarily for exempt manufacturing use, incidental non-exempt uses of the resulting product (steam) do not negate exemption of the entire purchase. The decision clarifies the application of the primary use test in sales and use tax cases involving fungible goods. No new precedent was established beyond the reaffirmation of existing primary use principles. The decision directly affects the parties by exempting Emery’s fuel purchases from tax and upholding exemption on packaging equipment.

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EMERY INDUSTRIES, INC., APPELLANT, v. KOSYDAR, TAX COMMR., APPELLEE. EMERY INDUSTRIES, INC., APPELLEE,

Taxation — Sales and use tax — Fuel consumed in production of steam for manufacturing — "Primary use" test applicable — Total purchases excepted from taxation.

Per Curiam.

In case No. 74-938, Emery's argument is premised, first, on the exception from the sales tax found in R.C. 5739.01(E), which, in pertinent part, provides:

"(E) `Retail sale' and `sales at retail' include all sales except those in which the purpose of the consumer is:

"* * *

"(2) To incorporate the thing transferred as a material or a part, into tangible personal property to be produced for sale by manufacturing, assembling, processing, or refining, or to use or consume the thing transferred directly in the production of tangible personal property for sale by manufacturing * * *."

Emery then argues that the taxability of a particular purchased items depends upon the "primary use" of the item.

The Tax Commissioner concedes that approximately 87 percent of Emery's fuel consumption is directly used in production, but argues that the "primary use" test should not be used in this case because the uses of fuel can be allocated as to use so that the tax assessed can be based on the allocation. In addition, he argues that the use of the fuel to produce steam for the nonexcepted uses is an important rather than an incidental use.

However, once the Tax Commissioner has conceded that the bulk of the fuel use is covered by the exception found in R.C. 5739.01(E), and he does not question the exception of 87 percent of the fuel, the "primary use" test is applicable. In United States Shoe Corp. v. Kosydar (1975), 41 Ohio St.2d 68, 71, this court provided that:

"* * * Thus, under R.C. 5739.01(E), application of the primary use test is proper in all cases where the `purpose' of the taxpayer is unclear because dual uses exist."

In United States Shoe, the court denied an exception for raw materials used in constructing sample shoes because the raw materials were earmarked when the purchase of those raw materials "* * * was credited into accounts separate from those which contained materials for taxpayers' regular line of shoes." 41 Ohio St.2d 68, 71.

Emery argues that it buys fuel in bulk, all of which is consumed in the production of steam, which is then put to various uses. Emery believes the facts of this case distinguish it from United States Shoe, and that Richardson-Merrell v. Porterfield (1972), 32 Ohio St.2d 281, controls.

We agree. In Richardson-Merrell, the Tax Commissioner assessed sales tax on a calculated portion of Merrell's purchases of raw materials. Since Merrell distributed about 8 percent of its drug products as samples without cost, the Tax Commissioner felt that a portion of the purchased raw materials was taxable since they were not incorporated into products for sale. This court disagreed, applying the "principal and primary use test first announced in Mead Corp. v. Glander (1950), 153 Ohio St. 539.

The Tax Commissioner relies upon Merchants Cold Storage Co. v. Glander (1948), 150 Ohio St. 524. There, the court, two years before Mead Corp. v. Glander, suggested that, with proper records, taxability of fuel might be allocated as to use. However, after 25 years of the "primary use" test, that dictum seems insufficient authority upon which to base this case.

In deciding Richardson-Merrell, the court, at page 285, stated:

"It is quite obvious from our decision in that case [ Ace Steel Baling v. Porterfield (1969), 19 Ohio St.2d 137 — another primary use case] that:

"(1) `Primary use' means primary in utility or essentiality; and

"(2) The `primary use' test is applicable to fungible goods as well as to machinery."

In this case, Emery purchased the fuel (fungible goods) with the primary objective of using the fuel to produce steam for direct use in its production of products for sale. None of the fuel is ever earmarked for nonexcepted uses, and the approximately 13 percent nonproductive use of the resulting steam is merely incidental to the primary use, so that the total purchases of fuel are excepted from taxation.

In case No. 74-942, the Board of Tax Appeals reversed the Tax Commissioner's assessment of sales and use taxes on barrel-filling equipment and cut-off scales because they were excepted by R.C. 5739.02(B) (15) as "* * * machinery, equipment, and material for use in packaging tangible personal property for sale * * *."

The Tax Commissioner argues that the board's decision is not supported by any probative evidence of record.

The court has examined the record before the Board of Tax Appeals, and determines that there was probative evidence in the record to support the board's decision sufficient to satisfy the limitations of Citizens Financial Corp. v. Porterfield (1971), 25 Ohio St.2d 53.

For the foregoing reasons, in case No. 74-942, the decision of the Board of Tax Appeals is affirmed in part, and, in case No. 74-938, the decision of the board is reversed in part.

Decision affirmed in part and reversed in part.

O'NEILL, C.J., HERBERT, STERN, CELEBREZZE and W. BROWN, JJ., concur.

CORRIGAN and P. BROWN, JJ., dissent.

PAUL W. BROWN, J., dissenting in part.

In my opinion, R.C. 5739.01(E) is dispositive of the issues in case No. 74-938. It requires a tax to be paid on that part of the coal with respect to which the purpose of the consumer at the time of the sale was not "to use or consume the thing transferred directly in the production of tangible personal property for sale by manufacturing." The quoted portion of the statute makes the purpose at the time of sale dispositive of the question of taxability. The admitted purpose of the taxpayer herein at the time of the sale was to use part of the coal for the excepted purpose of producing steam to run productive manufacturing machinery, and to use part of the coal for the nonexcepted purpose of heating its building. Not only was this the taxpayer's purpose at the time of the sale, but that was its actual use of the coal thereafter. Additionally, the taxpayer monitored its coal use in a sophisticated way, so that excellent records of the amount of coal used for each purpose were available and used by the Tax Commissioner in making the assessment. One claiming that a purchase is excepted from sales taxation must assert and prove the applicability of the exception to its particular transaction.

Merchants Cold Storage Co. v. Glander (1948), 150 Ohio St. 524, which the Tax Commissioner argues is dispositive of this case, states that where the purpose of the taxpayer at the time of purchase is to use part of the purchase for a tax-excepted purpose, and part for a taxable purpose, and the taxpayer has failed to introduce evidence by which taxable and nontaxable purchases could be separated in a satisfactory manner, an assessment of the total purchases as taxable will not be disturbed. To so hold is to also hold that clear evidence permitting separation in a satisfactory manner authorizes a tax only upon the nonexcepted portion.

The so-called primary-use test can have no applicability in such a case. The statute does not say that where the purpose at the time of purchase is mixed, i. e., excepted and nonexcepted purposes, the consumer may fail to separate and thereafter rely upon his primary use of the items for tax exception thereafter. But this is the effect of the holding of the majority opinion, which cites United States Shoe Corp. v. Kosydar (1975), 41 Ohio St.2d 68, and Richardson-Merrell v. Porterfield (1972), 32 Ohio St.2d 281, as its authority.

It must be admitted that there are generalizations in each of those cases which so hold. In Richardson, the syllabus states:

"In determining whether a manufacturer's purchases of raw materials and packaging items are excepted from sales and use taxes [under 5739.01 (E) ], the primary use which the manufacturer makes of such materials and items is the controlling factor."

Although one can agree with the judgment in Richardson, the syllabus is so apparently erroneous that it should be overruled. The real holding of the case, in light of the court's statement in the body of the opinion that it is in agreement with a finding of the Board of Tax Appeals that "* * * Merrell's objective [purpose] in purchasing fungible raw materials and packaging items is to manufacture products for sale," is that evidence of an incidental use of fungible goods for a nonexcepted purpose, after the date of the sale, is not, standing alone, destructive of the exception, nor does such evidence impose upon the taxpayer the necessity of presenting evidence by which the materials used for taxable and tax excepted purposes can be separated. Merchants Cold Storage Co. v. Glander, supra ( 150 Ohio St. 524).

To say this is also not to say, as was stated in United States Shoe Corp. v. Kosydar ( 41 Ohio St.2d 71), that in determining whether a manufacturer's purchases of raw materials and other items are excepted from sales taxes by R. C. 5739.01(E), the primary use which the purchaser makes of such materials and items is the controlling factor. That this statement is not true is demonstrated by the fact that the statutory exception turns upon purpose at the time of sale, and by the fact that if it were true, Emery Industries could by this principle clearly avoid a tax required by the statute to be paid under the admitted facts of case No. 74-938.

The decision of the Board of Tax Appeals should be affirmed, and the syllabus in Richardson-Merrell v. Porterfield, supra ( 32 Ohio St.2d 281), overruled.

CORRIGAN, J., concurs in the foregoing dissenting opinion.