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East Manufacturing Corp. v. Testa

Supreme Court of Ohio

July 26, 2018

East Manufacturing Corporation, Appellant and Cross-Appellee,
v.
Testa, Tax Commr., Appellee and Cross-Appellant.

          Submitted April 24, 2018

          Appeal and Cross-Appeal from the Board of Tax Appeals, No. 2015-2111.

          Buckingham, Doolittle & Burroughs, L.L.C., Steven A. Dimengo, Matthew R. Duncan, and Richard B. Fry III, for appellant and cross-appellee.

          Michael DeWine, Attorney General, and Sophia Hussain, Assistant Attorney General, for appellee and cross-appellant.

          DEGENARO, J.

         {¶ 1} In this direct appeal, we consider whether the Board of Tax Appeals ("BTA") correctly upheld a use-tax assessment on the natural-gas purchases of appellant and cross-appellee, East Manufacturing Corporation ("East"). East contends that the ambient heat provided by the natural gas was necessary for its manufacturing process and that the BTA erred by not granting an exemption under R.C. 5739.011(B)(4), (B)(8), or (C)(5). We disagree and affirm the decision of the BTA.

         Relevant Facts and Procedural History

         {¶ 2} East manufactures custom aluminum truck trailers. The trailers are fabricated in six buildings, some of which are devoted to specialized steps in the manufacturing process. Only Building A has interior walls; administrative offices are separated by a wall from manufacturing areas. The other five buildings have open internal spaces to better accommodate the large truck attachments being fabricated and facilitate movement from station to station during the manufacturing process.

         {¶ 3} Appellee and cross-appellant, tax commissioner, audited East's purchases for the period January 1, 2003, through December 31, 2006. Neither of East's two natural-gas suppliers collected use tax during this period. On February 27, 2009, the commissioner issued a use-tax assessment for East's natural-gas purchases during the audit period, exempting only the portion of natural gas used in painting operations, which took place in Building D, and welding systems. The remaining natural gas was deemed to have been used to heat the plant's six buildings, which together total roughly 382, 240 square feet. This portion of East's natural gas, the commissioner determined, was taxable. East appealed to the BTA.

{¶ 4} At the hearing before the BTA, East conceded that the natural gas used to heat the administrative areas in Building A, which comprised 8.11 percent of the assessed natural gas, was nonexempt, but it contended that the remaining 91.89 percent of the assessed natural gas was exempt because maintaining the temperature at 50 degrees Fahrenheit or higher in the plant's buildings was essential to its manufacturing process. Emphasizing the extensive use of welding in its manufacturing process, East's manager for research and development testified about the high specifications the plant adhered to and their importance to the solidity of the welds, and he noted that welding at temperatures of 50 degrees or higher prevents condensation from accumulating on the aluminum and infecting the welds, steadies the hands of the welders, and is important in bending aluminum.[1]

         {¶ 5} Citing the manual that East uses as a guide for aluminum welding, the tax commissioner countered in the BTA that condensation arises as a result of three interacting factors: ambient air temperature, relative humidity, and temperature of the metal to be processed. According to the manual (which was admitted into evidence at the BTA hearing), depending on the relative humidity, a difference of a certain number of degrees between the ambient air temperature and the temperature of the aluminum may result in condensation. But, so long as the aluminum temperature matches the ambient air temperature, condensation will not occur at any humidity level. The commissioner contends that this evidence negated East's argument and showed that no particular ambient temperature__such as 50 degrees__is required by industrial needs.

         {¶ 6} The BTA affirmed the tax commissioner's assessment on the portion of the natural gas that East used to heat the plant. The BTA held that "East has failed to establish how the affected manufacturing area, which consists of all or portions of all of the buildings within the facility, could qualify as a 'special and limited area'" as required for exemption under R.C. 5739.011(C)(5). BTA No. 2015-2111, 2017 WL 1443845, *3 (Apr. 17, 2017).

         {¶ 7} With respect to East's claim that the gas was generally "used during the manufacturing operation" under R.C. 5739.011(B)(4) and also qualified under the more specific exemption for gas "used in the manufacturing operation" under R.C. 5739.011(B)(8), the BTA concluded that the heating constituted a type of "quality control function" rather than a necessity for the manufacturing operation. 2017 WL 1443845 at *4. The BTA elaborated by stating that instead of being "necessary for the * * * continuation of the manufacturing process" under R.C. 5739.011(B)(4), "some of the issues raised by failure to regulate temperature in the manufacturing areas were cosmetic in nature, e.g., trailers were not as 'shiny' and therefore not as 'attractive, '" a consideration that brought East's products" 'within [a] margin of acceptable quality.'" 2017 WL 1443845 at *4, quoting the hearing transcript.

         {¶ 8} The BTA denied East's claim for exemption in its entirety. East has appealed, and the tax commissioner has cross-appealed.

         "Thing Transferred" Exemption

         {¶ 9} We review BTA decisions to determine whether they are reasonable and lawful. R.C. 5717.04. Factual findings will be affirmed if supported by reliable and probative evidence, while legal issues will be reviewed de novo. Accel, Inc. v. Testa,152 Ohio St.3d 262, 2017-Ohio-8798, 95 N.E.3d 345, ¶ 11, 16. Although the BTA recited East's contentions that temperature maintenance was essential to its ability to perform welding and painting operations, the BTA made no finding that those assertions were correct. See id. at ΒΆ 35-37 (BTA's recitation of taxpayer's argument did not constitute a finding by the BTA that that argument was correct). Instead, the BTA focused on how ...


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