Summary
In Custom Beverage, the court justifiably restricted its interpretation as to the nature of a package to prevent an unwarranted expansion to an item that does not truly restrain the packaged item but merely provides a convenient support base for transportation of groups of the packaged items.
Summary of this case from Anheuser-Busch, Inc. v. TracyOpinion
No. 72-451
Decided March 28, 1973.
Taxation — Sales and use tax — Presumption of taxability — Exceptions — Laws relating thereto strictly construed — Pallets and conveyors to transport materials and finished products — Not used or consumed directly in manufacturing or processing for sale — R.C. 5739.01 — Not transporting property in process of production — R.C. 5739.02(B)(16) — Unbound pallets and palletizers — Not excepted "packages," "machinery," or "equipment," when — R.C. 5739.02(B)(15).
1. Pallets and conveyors which are used to transport raw materials to a processing line or facility, and pallets and conveyors which are used to transport finished products from a processing line or facility, are not consumed or used " directly in the production of tangible personal property for sale by manufacturing, [or] processing" (emphasis added) within the meaning of R.C. 5739.01(E)(2), and thus are not excepted from sales and use taxes.
2. Palletizers which place cases on pallets and unbound pallets, are not "packages" or "machinery, equipment, and material for use in packing tangible personal property produced for sale, or sold at retail" within the meaning of R.C. 5739.02(B)(15), and therefore are not excepted from sales and use taxes.
3. Conveyors which are used to transport raw materials to a processing line or to transport finished products from a processing line are not transportation equipment "used in intra or inter plant transfers or shipments of tangible personal property in the process of production for sale" within the meaning of R.C. 5739.02(B)(16), and thus are not excepted from sales and use taxes. (Emphasis added.)
APPEAL from the Board of Tax Appeals.
Appellant, during the audit period January 1, 1967, to December 31, 1969, was engaged in bottling and canning soft drinks for sale to chain store warehouses and wholesale customers under private label and for sale to national beverage accounts such as Pepsi-Cola and Seven-Up.
Appellant receives from a bottle manufacturer truck-trailer loads of new empty bottles, loaded in cases supported on wooden pallets. From the unloading dock, the pallet loads of new bottles are taken by forklift truck to a depalletizer machine, which separates the boxes from the pallets. The cases of bottles proceed by conveyor to an uncaser machine, which removes the bottles from the cases. The bottles then proceed sequentially to an air rinser, a filler, a capper, a bottle warmer, a labeler, and ultimately to a packer where the filled bottles are placed in the same cases in which the empty bottles were delivered. From the packer, the cases of filled bottles are taken by conveyor to a palletizer, which arranges the cases on the same pallets upon which the empty bottles arrived. The loaded pallets are then taken to the shipping dock by forklift truck for shipment to appellant's customers. When the customers receive the shipments of soft drinks, the cases are removed from the pallets and the pallets are returned to the bottle manufacturer. Except in a few instances, not here involved, at no time are the cases banded to the pallets.
The can line operates in essentially the same manner as the bottle line.
The appellee, Tax Commissioner, assessed appellant for sales and use taxes and penalites on its purchases of the above pallets, palletizers, and conveyors. The Board of Tax Appeals affirmed the assessment order, and the cause is now before this court upon an appeal from the decision of the Board of Tax Appeals.
Messrs. Thompson, Hine Flory, Mr. Robert A. Bergquist and Mr. William R. Stewart, for appellant.
Mr. William J. Brown, attorney general, Mr. Dwight C. Pettay, Jr., and Mrs. Maryann Gall, for appellee.
Appellant contends that the pallets are excepted from sales and use taxes by virtue of both R.C. 5739.01(E)(2) and R.C. 5739.02(B)(15). It contends that the palletizers are excepted from sales and use taxes by virtue of R.C. 5739.02(B)(15) and that the conveyors are excepted from sales and use taxes by virtue of both R.C. 5739.01(E) (2) and R.C. 5739.02(B)(16).
The sales exceptions discussed herein are made expressly applicable to the uses of property by R.C. 5741.02(C)(2) and are intended herein to apply to all uses of property as well as sales.
Appellant asserts that these pallets are an integral part of its business. While this may be conceded, it is not dispositive of the question of whether the pallets are subject to sales and use taxes.
In the syllabus of Youngstown Building Material Fuel Co. v. Bowers (1958), 167 Ohio St. 363, 149 N.E.2d 1, this court stated that:
"In determining whether tangible personal property is used or consumed directly in the production of tangible personal property for sale by manufacturing or processing * * * the test is not whether such property is essential to the operation of an `integrated plant,' the test to be applied being, when does the actual manufacturing or processing activity begin and end, and is the property used or consumed during and in the manufacturing or processing period."
In paragraphs one and two of the syllabus in National Tube Co. v. Glander (1952), 157 Ohio St. 407, 105 N.E.2d 648, this court announced the principles for interpretation of sales or use tax statutes: First, that "the presumption obtains that every sale or use of tangible personal property in this state is taxable"; second, that "statutes relating to exemption or exception from taxation are to be strictly construed, and one claiming such exemption or exception must affirmatively establish his right thereto."
Tested against these principles, appellant's argument for tax exception of the pallets and conveyors under R.C. 5739.01(E)(2) fails.
Appellant does not consume the pallets during processing, as these pallets are later used to ship the encased bottles and cans of soft drinks to customers. Nor are these pallets used directly in the processing of appellant's product for sale.
Appellant's product is a case of bottled or canned soft drinks. The pallets are used merely to facilitate the transportation of raw materials to, and the removal of finished products from, the processing lines. They are never directly involved in the bottling or canning and casing of soft drinks. Likewise, the two conveyors for which exception is sought merely transport items to and from the processing lines and are not directly involved in the production of cases of bottled or canned soft drinks.
Appellant relies upon Northwestern Ohio Poultry Assn. v. Schneider (1965), 2 Ohio St.2d 34, 205 N.E.2d 905, to support its claimed right to exception under R.C. 5739.01(E) (2). That case is distinguishable in that the "filler-flats," which were held excepted from sales and use taxes, actually proceeded through the taxpayer's processing lines and were used directly in the processing of taxpayer's product. Furthermore, the court, in Northwestern Ohio Poultry Assn., relied upon Kroger Grocery Baking Co. v. Glander (1948), 149 Ohio St. 120, 77 N.E.2d 921, and France Co. v. Evatt (1944), 143 Ohio St. 455, 55 N.E.2d 652. In Kroger Grocery Baking Co., at page 129, this court applied the view, subsequently repudiated in National Tube Co., supra ( 157 Ohio St. 407), that a sales tax exception statute "must be given a liberal construction in favor of the taxpayer."
France Co., supra, is distinguishable on its facts from the present case. There, the stone hauling equipment was found to have been used to transport an unfinished product between stages of production. Here, the transportation equipment was used to transport materials to, and the finished products from, the processing line.
Appellant contends also that the pallets and the palletizers are excepted from sales and use taxes under R.C. 5739.02(B)(15). That section, in pertinent part, provides that sales and use taxes do not apply to the following:
"(15) Sales to persons engaged in any of the activities mentioned in division (E)(2) of Section 5739.01 of the Revised Code, of packages, including material and parts therefor, and of machinery, equipment, and material for use in packaging tangible personal property produced for sale, or sold at retail. Packages include bags, baskets, cartons, crates, boxes, cans, bottles, bindings, wrappings, and other similar devices and containers, and `packaging' means placing therein."
This court has not previously construed R.C. 5739.02 (B)(15). Since this section provides a sales and use tax exception, however, the principles of construction announced in the National Tube Co. case apply.
An examination of that statute reveals that, in order to qualify for tax exception, the taxpayer must be engaged in an enterprise described in R.C. 5739.01(E)(2). Second, the item for which exception is sought must meet the definition of "packages" contained in R.C. 5739.02(B) (15), within that section, or must be equipment which operates on such an item.
While it may be conceded that appellant is engaged in an enterprise described in R.C. 5739.01(E)(2), its contention that pallets fit within the definition of "packages" is not as readily adopted.
The statute provides examples of packages, viz., "bags, baskets, cartons, crates, boxes, cans, bottles, bindings, wrappings, and other similar devices." It is noted that all the above items are items which circumscribe and contain whatever is packaged. These items may not necessarily fully enclose, but they do restrain movement of the packaged object in more than one plane of direction. Many are complete enclosures or restraints; however, none of such items would permit movement in more than a single plane of direction. For example, a basket would, ordinarily, permit movement of its contents only in an upward direction, but may also prohibit that movement.
Applied against this test, it is readily apparent that appellant's unbound pallets do not qualify. These prohibit or restrain movement of cases of soft drinks only in one direction — downward. Otherwise, the cases may freely be moved in any direction without harm to the device. The unbound pallets are, therefore, not packages within the meaning of R.C. 5937.02(B)(15).
We do not here decide whether pallets to which cases or other objects are bound are tax exempt.
It follows, that if the unbound pallets are not "packages," within the meaning of the applicable statute, the palletizers, which merely stack cases upon the pallets, are not "machinery" or "equipment" for use in "packaging."
Finally, appellant contends that the conveyors are excepted from sales and use taxes under R.C. 5739.02(B)(16) which provides exception for:
"Sales to persons engaged in manufacturing, processing, assembling, or refining, of handling and transportation equipment, except motor vehicles licensed to operate on the public highways, used in intra or inter plant transfers or shipments of tangible personal property in the process of production for sale * * *." (Emphasis added.)
From the previous discussion relating to the claimed exception for pallets and conveyors under R.C. 5739.01(E)(2), it is readily apparent that the conveyors do not qualify for exception under R.C. 5937.02(B)(16). As previously noted, these conveyors merely transport raw materials to a processing line and transport finished products from a processing line. These conveyors are, therefore, not transporting "property in the process of production."
The decision of the Board of Tax Appeals, being neither unlawful nor unreasonable, is affirmed.
Decision affirmed.
HERBERT, CORRIGAN, STERN, CELEBREZZE, W. BROWN and P. BROWN, JJ., concur.