Summary
In Eastern Machinery Co., after explaining that statutes relating to the personal property tax broadened the definition of manufacturing, we stated that the statutes do not require that the articles be used or consumed "directly" in the production of property, as in the sales tax.
Summary of this case from Stoneco, Inc. v. LimbachOpinion
No. 33403
Decided July 8, 1953.
Taxation — Listing personal property — Person purchasing used but unusable machine tools, reconditioning and reselling same — A "manufacturer" — Listing at 50 per cent of value — Sections 5385, 5386 and 5388, General Code.
A person, who is engaged in the business of purchasing used but unusable machine tools which he rebuilds or reconditions for service by supplying needed parts and resells to the trade generally, is a manufacturer of such tools within the purview of Sections 5385, 5386 and 5388, General Code, and is entitled to have such tools as are on hand listed for taxation at 50 per cent of their average value.
APPEAL from the Board of Tax Appeals.
This appeal presents a question as to the validity of the Tax Commissioner's tax assessment on tangible and intangible personal property of the Eastern Machinery Company, hereinafter designated Eastern, for its fiscal years of 1947 and 1948.
It was stipulated that the following statements, among others, are true:
"2. Eastern buys and sells used machine tools: i. e. power driven tools used for working metal by turning, grinding, shaping, boring, planing, etc. Depending upon size, such tools are used to manufacture products ranging in size and weight from the smallest gear or other part of a watch or scientific instrument to the largest parts of locomotives, turbines, steam engines, etc. They are also used to manufacture other machine tools.
"3. Eastern owns and occupies a plant located at 1000 Tennessee avenue, Cincinnati, Ohio. The site consists of 11 acres of land and the structure contains 135,000 square feet of floor space. * * *
"4. Eastern purchases machine tools of every type and in every condition. Some are comparatively new, others very old, and practically all are unusable when purchased. Many have broken parts, others are badly worn in all parts and some are obsolete; the principal reason that most of them are sold by their owners to Eastern is that the machines will no longer work with the high degree of precision required of machine tools, whose work must often be done within tolerances of tenths of thousandths of an inch. Eastern does its buying in every section of the United States and in foreign countries. All machine tools purchased are shipped to its plant in Cincinnati, where they are kept on hand, in the same condition as when received, until sold. * * *
"5. Eastern's sales of machine tools amounted to $1,010,657 for its fiscal year ending September 30, 1947, and to $1,323,324 for its fiscal year ending September 30, 1948: Eastern paid $643,520 for the machine tools sold in the former fiscal year and $558,836 for those sold in the latter fiscal year. Approximately five per cent of sales in both years resulted from sales of machines directly from stock `as is.' All other machines sold in said years (approximately 95 per cent of sales) were completely disassembled after orders were received for them, all worn or broken parts repaired or replaced, and flat bearing surfaces (such as bases, beds, carriages, knees, saddles, rails, etc.) machined to the extent necessary to secure a smooth surface. Some (approximately 35 per cent of sales) were redesigned and rebuilt to perform different operations than they were originally intended to perform, and/or modernized by the installation of (a) self-contained motor drive arrangements to replace belt drive arrangements, and/or (b) hydraulic feeds and speeds to replace mechanical movements, necessitating in most cases the designing and installation of anti-friction bearings and new oil systems. Other (approximately 60 per cent of sales) were restored to original condition. In all cases, delicate readjustments were made to allow for the machining of flat bearing surfaces and all component parts were refitted and realigned within .001 of an inch. All machines were also cleaned, scraped and repainted, inside and out, and unconditionally guaranteed for 30 days from delivery.
"6. All new parts and pieces used in said machines were manufactured by Eastern in its plant, except anti-friction bearings, motors, accessories, fittings, and a relatively small quantity of parts purchased from the original manufacturers of the machines. Eastern purchased raw stocks of steel, cast iron, bronze, brass, aluminum and other materials, and castings of all sorts (many of which it designed) from which it made said parts and pieces when and as needed for use in a particular machine. The cost of said raw stocks, castings, bearings, motors, and the parts purchased from the manufacturers of the machines, amounted to approximately $56,000 in the fiscal year ended September 30, 1947 and $94,000 in the fiscal year ended September 30, 1948, of which amounts approximately 7 1/2 per cent was paid for parts purchased from the manufacturers of the machines, approximately 15 per cent for bearings, motors, and other accessories and fittings, and approximately 77 1/2 per cent for raw stocks of metal and castings."
In making such parts and pieces and in repairing and altering parts of the machine tools sold by it, Eastern used the following machine tools: Planers, engine lathes, milling machines, gear cutting machines, radial drill presses, upright drill presses, planer type surface grinder, horizontal precision boring machine, universal cylindrical grinder and metal shaping machine, together with a large volume of hand tools and precision measuring instruments. These machines are highly complicated and the bulk of the work which they do must be performed with the greatest care and precision. Only experienced and highly skilled mechanics can operate the machines and perform the other work involved in reassembling and rebuilding machine tools. Eastern employed 36 such mechanics and four other persons to make the parts and to do all the work on the machines sold in the years in question.
The Tax Commissioner found that the rebuilding of the machine tools constituted repairing, not manufacturing, and assessed such as were held for rebuilding at 70 per cent of their average value instead of 50 per cent as returned by Eastern.
On appeal, the Board of Tax Appeals affirmed the order of the Tax Commissioner.
The cause is now in this court on appeal from the decision of that board.
Messrs. Dargusch, Caren, Greek King, for appellant.
Mr. C. William O'Neill, attorney general, and Mr. hugh A. Sherer, for appellee.
The question chiefly presented is whether, for the purpose of determining the basis of taxation, the rebuilding of such machine tools constituted manufacturing or repairing. In each of the tax returns in question, Eastern listed all its machine tools on hand during the preceding fiscal years, which had not been rebuilt but were being held for that purpose, at 50 per cent of their true value. It claims that such listing was in accord with the provisions of subparagraph (2) of Section 5388, General Code, which authorizes a 50 per cent value listing "of all articles purchased, received or otherwise held by a manufacturer for the purpose of being used, in whole or in part, in manufacturing, [or] combining * * *; [and] the average value of all articles which were at any time by him manufactured or changed in any way, either by combining * * * or adding thereto."
The Tax Commissioner concedes that Eastern was a "manufacturer" within the purview of Section 5385, General Code, so far as it made the parts used to replace worn and broken ones, but was a "repairer" in performing the other operations involved in rebuilding the machines.
The question, therefore, is what is the percentage of value at which machine tools held for rebuilding should be listed for tax purposes. The answer depends upon whether Eastern, in carrying on the business above described, was engaged in manufacturing within the purview of Sections 5385 and 5388, General Code.
Section 5385, General Code, defines, for tax purposes, a manufacturer as follows:
"A person who purchases, receives or holds personal property * * * for the purpose of adding to the value thereof by manufacturing * * * or by the combination of different materials with a view of making a gain or profit by so doing, is a manufacturer * * *."
The Board of Tax Appeals proceeded on the assumption that, since the General Assembly, in enacting the statutes, granted manufacturers a "preferential tax base" amounting to a partial tax exemption, the statutes should be strictly construed against the claim of a manufacturer or one engaged in manufacturing seeking the 50 per cent property valuation as a tax base. However, a study of the legislative history of these statutes tends to dispel that assumption and conclusion. These statutes were amended by the Eighty-ninth General Assembly by the enactment of Amended Senate Bill No. 323, pursuant to the recommendation of a committee expressly stating the purpose of the amendment to be "to equalize the taxes of manufacture and agriculture, so that additional wealth may be developed in this state," and to that end "all appraisals [of tangible personal property] are to be made at seventy per cent of such value, except in the case of tools and machinery used in manufacturing and agriculture, in which case, to assist Ohio business in competition with other states, the rate is to be fifty per cent of such value."
As bearing upon statutory construction applicable to such cases, this court, in the case of Mutual Building Investment Co. v. Efros, 152 Ohio St. 369, 373, 89 N.E.2d 648, held:
"Language employed in a statute should be accorded its common, ordinary and usually accepted meaning in the connection in which it is used, and statutory provisions should be given a fair and reasonable construction in conformity to their general object in order to effectuate such object and purpose."
In addition to the statutory definition above quoted, these statutes, as related to the subject of taxation, tend to broaden the traditional definition of "manufacturer" or "manufacturing." Under Section 5385, General Code, one is deemed a "manufacturer" if he purchases, receives or holds personal property of any description for the purpose of adding to the value thereof by refining, rectifying or combining different materials. The statute applies to personal property "of any description" processed for the purpose of adding to its value by manufacturing, and to articles changed in any way by adding thereto.
Under Section 5388, General Code, it is not required that articles purchased be "consumed directly" in the production of property for sale by manufacturing, as is required under Section 5546-1, General Code, relating to exceptions from sales taxes, but articles which are manufactured or changed in any way either by combining them or adding thereto are entitled to enjoy the status of a preferential tax base.
The Board of Tax Appeals concedes that Eastern was engaged in manufacturing so far as it made new parts but holds that it was a mere repairer when it engaged in the rebuilding of machine tools, basing its holding on the theory that the restoration of a commodity to its original condition is repairing, not manufacturing, and giving as illustrations the operations by which office equipment, kitchen appliances, furniture, radio and television sets, watches, shoes, automobile tires, antiques and automobiles are restored to their original condition. In the view of this court, the operations carried on by Eastern as a business were not comparable to such relatively simple repair jobs, but in the main comprehended the rebuilding of a machine, so as to serve a different purpose or the same purpose in a better or different manner, as a commercial or business enterprise.
In the case of Miller v. Peck, Tax Commr., 158 Ohio St. 17, 106 N.E.2d 776, in which the operative scope of Section 5388, General Code, was under consideration, the writer of this opinion said:
"The term, `manufacturing,' is otherwise defined as the production of articles for use from raw or prepared materials by giving to these materials new forms, qualities, properties, or combinations, whether by hand labor or by machinery. * * *
"Usually, where, through the use of tools and machinery, commodities or items of personal property are by special treatment or processing transformed into other more valuable items of personal property as a commercial business, the operation is that of manufacturing."
In the case of Broad Motors Co. v. Smith, 86 F. Supp., 4, the rebuilding of automobile motors was held to be manufacturing. The taxpayer was engaged in the business of purchasing, rebuilding and selling Ford motors on an exchange basis. Purchasers of the rebuilt motors exchanged their used motors for rebuilt ones, paying the difference in price therefor. The rebuilding operations of the taxpayer consisted of replacing worn and broken parts with new ones purchased from the original manufacturers of the motors, and with used parts salvaged from other motors on hand. In the operations some machining and cleaning were done on the used parts before they were assembled as parts of the rebuilt motors.
The question for determination was the liability of the taxpayer for taxes imposed by Section 3403 (c) of the Internal Revenue Code on a "manufacturer or producer," defined in treasury regulations as "a person who * * * produced a taxable article by combining or assembling two or more articles." The court, holding that the rebuilding of the motors was "manufacturing," said:
"* * * the excise tax paid by the taxpayer was solely on a taxable article, namely, the rebuilt motor which was manufactured, produced and sold by the taxpayer. The used parts utilized by the taxpayer had lost their identities as such parts for commercial as well as for practical usage purposes. Cadwalader v. Jessup Moore Paper Co., 149 U.S. 350, 354, 37 L. Ed., 764, 13 S. Ct., 875. It was necessary to remake them into useful articles so as to enter into the flow of commerce. It was the machining and cleaning operations which made the `used' parts useful. The machining of the old parts coupled with the production and sale of rebuilt motors in which `new' and `used' parts were combined resulted in the levying of the excise taxes involved in this action. The rebuilt motor was a new article, something entirely different from the worn out motor turned in, and made up of component parts which, because of the machining and cleaning done on them, were different from the used parts salvaged from the turned-in motors."
In the case of Clawson Bals, Inc., v. Harrison, Collector of Internal Revenue, 108 F.2d 991 (certiorari denied, 309 U.S. 685, 84 L. Ed., 1028, 60 S. Ct., 808), involving liability for taxes levied under the same federal statute, it was held that the rebuilding of automobile connecting rods constituted manufacturing and not repairing. The taxpayer bought used connecting rods which it rebuilt and sold. The rebuilding process required grinding and machining operations and the replacement of worn out parts with new ones. The court said:
"The situation here seems to be much like the situation in the worn-out tire case. ( Biltrite Tire Co. v. The King, 1937 Canada Law Rep., 364). These worn-out connecting rods undoubtedly look like connecting rods, and one can recognize that they have been connecting rods, just as one can by looking at a worn-out tire recognize the fact that it has been a tire. But in each case, the articles are worn out. A manufacturing process is, in the opinion of the court, required to make a serviceable product; and in the case of the connecting rod, the plaintiff carries on that manufacturing process."
In response to the contention that the taxpayer was engaged in repairing, the court further held:
"There is obvious difficulty in treating the taxpayer as a repairer in view of the normal concept of the relation of a repairer to the repaired article. Ordinarily the repairer furnishes labor and material to the owner of some article for the purpose of restoring the article to its normal condition. The article remains the property of the one for whom the service is performed. If this taxpayer is a repairer it is a repairer of its own property, not for the purpose of restoring its own property for efficient use in the ordinary operations of the taxpayer's business, but for the purpose of preparing the property for sale in the trade. In the transactions between the taxpayer and its vendees the connecting rods, whether prepared from new forgings or from old connecting rods, are treated as newly and freshly produced automobile accessories. Neither taxpayer nor the trade recognizes that the finished connecting rods are repaired rods. Looked at from the standpoint of production and distribution in the trade the taxpayer is performing the function of a manufacturer rather than a repairer. The taxpayer is producing connecting rods for the trade in a very true sense and not repairing old connecting rods for owners or users."
The same result was reached in the case of United States v. Armature Exchange, Inc., 116 F.2d 969, 971, involving the rebuilding and sale of armatures. The court said:
"We cannot find any justification for reading into the statute involved here, as taxpayer would have us do, the qualification that the articles `manufactured or produced' must have been manufactured or produced entirely from new or virgin raw materials. * * *
"The government contends, and we think correctly, that the discarded armatures purchased by the taxpayer, having lost their function as a useful article as well as their commercial value as such, when acquired for use in the manufacturing and production of an article of commerce, bear the same relation to the completed armature as the purchase of unused materials would bear to the completed article. See Cadwalader v. Jessup Moore Paper Co., 149 U.S. 350, 13 S. Ct., 875, 37 L. Ed., 764. The article resulting from the use of the discarded core with new materials, and through the employment of skill, labor and machinery, is, as it seems to us, a manufactured and produced article of commerce." See, also, United States v. J. Leslie Morris Co., Inc., 124 F.2d 371.
It is true that in each of the federal cases here cited, the court sustained a tax against a manufacturer in favor of the federal taxing authority, but this court does not see any difference in principle, as applied to the facts, where, as here, the policy of the General Assembly expressed through the applicable statutes is to place manufacturing on a more favorable tax basis.
The decision of the Board of Tax Appeals is reversed and the Tax Commissioner is directed to make an appraisal of the property in question in accordance with the views herein expressed.
Decision reversed.
MIDDLETON, TAFT, MATTHIAS and STEWART, JJ., concur.