United States Shoe Corp. v. Kosydar

HeRbeet, J.

The first issue presented herein involves the taxpayers’ contention that materials used to make sample shoes, shells and lasts needed for test-size shoes, and finished shoes and handbags purchased from other manufacturers are excepted from sales taxes under R. C. 5739.01 (E) (1) and (2). (The Vaisey-Bristol case does not, however, contain the question of samples.)

In enacting R. G. 5739.01(E), the General Assembly intended that a sales tax, in most cases, be levied only on the final sale of tangible personal property. To implement this purpose, the General Assembly provided that:

“ (E) ‘Retail sale’ and ‘sales at retail’ include all sales except those in which the purpose of the consumer is:

“(1) To resell the thing transferred in the form in which the same is, or is to be, received by him;

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

There exists in the case at bar, as well as in other decisions involving this section, the problem of determining the “purpose of the consumer” when the retail sale is made. Taxpayers contend that use of the samples to sell *71other shoes is only secondary to their main purpose, that of producing the sample shoes for sales to retailers.

This court, in construing R. C. 5739.01, enunciated the “primary use test” in order to determine how the exception should be applied to purchases of tangible personal property used for both excepted and nonexcepted purposes. Mead Corp. v. Glander (1950), 153 Ohio St. 539, 93 N. E. 2d 19; Ace Steel Baling v. Porterfield (1969), 19 Ohio St. 2d 137, 249 N. E. 2d 892. Thus, as was stated in Weigand v. Bowers (1960), 171 Ohio St. 78, 79, 167 N. E. 2d 772: “The primary use to which the purchased property is put is determinative. An incidental use otherwise will not destroy the status.” However, taxpayers contend that this test is not applicable to claims for exception under the first part of R. C. 5739.01(E)(2), “the incorporation exception.” They also assert that the rule is only utilized in cases where concurrent uses are involved, whereas the instant case involves consecutive uses. We disagree. In Richardson-Merrell v. Porterfield (1972), 32 Ohio St. 2d 281, 291 N. E. 2d 528, the test was applied in a case wherein a taxpayer claimed exception under the “incorporation section.” Also, in Jim White Chevrolet Co. v. Porterfield (1970), 22 Ohio St. 2d 79, 258 N. E. 2d 113, the criterion was employed in a situation where consecutive uses were present. 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 regard to the sample shoes, taxpayers claim that their benefit as a promotional aid was incidental to their main purpose, that of being manufactured for sale to retailers. However, the factual pattern presented to us compels a different conclusion. The purchase of raw materials which were incorporated into the samples for advertising was credited to accounts separate from those which contained materials for taxpayers ’ regular line of shoes. The samples were retained by salesmen for up to four months, and then were returned in a shopworn condition, causing them to be sold at a lower price than the standard shoes. At *72times they were so ragged that they had to be discarded. Furthermore, the samples amounted to only five to seven percent of taxpayers’ production run, and they were the entire means of promoting the remaining 93 to 95 percent of its product. Taken together, this is persuasive evidence that taxpayers’ primary use (and therefore the purpose) of the samples was for advertising, and not as inventory for sale.

In Jim White Chevrolet v. Porterfield, supra (22 Ohio St. 2d 79), taxpayer purchased automobiles that were “assigned to other persons for the purpose of exposure to the public.” The cars were later sold, but at a price below that which would have been charged if they were new. In denying an exception under R. C. 5739.01(E), the court found the primary use to be for advertising. It is our conclusion therefore, that the Board of Tax Appeals erred in determining that the samples were excepted from taxation. We also find that the test-size shoes and finished handbags and shoes were used mainly to stimulate design ideas, to experiment with new materials, or to try new stitching techniques. Therefore, these items are not excepted from taxation by R. C. 5739.01(E), and that part of the Board of Tax Appeals’ decision is reversed.

The second issue presented is whether taxpayers ’ purchases from advertising agencies are excepted from sales taxes under R. C. 5739.01(B), which provides, in part:

“ ‘Sale’ and ‘selling’ include all transactions by which title or possession, or both, of tangible personal property, is or is to be transferred * * *. Other than as provided in this section, ‘sale’ and ‘selling’ do not include professional, insurance, or personal service transactions which involve the transfer of tangible personal property as an inconsequential element, for which no separate charges are made.”

Taxpayers assert that they contracted for the personal services” of the agencies, and the items they received were inconsequential elements of the transaction, thus allowing them an.exception under the above section. Para*73graph one of the syllabus in Koch v. Kosydar (1972), 32 Ohio St. 2d 74, 290 N. E. 2d 847, defines personal service as “an act done personally by an individual; it is, in effect, an economic service involving either the intellectual or manual personal effort of an individual, and is not the sale-able product of his shill.” (Emphasis added.) Thus, if the real object sought by the buyer is property produced by the service, and not the service per se, we must deny the exception. Paragraph two of the syllabus in Accountant’s Computer Services v. Kosydar (1973), 35 Ohio St. 2d 120, 298 N. E. 2d 519. In the instant case, the Board of Tax Appeals found that taxpayers’ main-concern was to acquire possession of the films, commercials, radio tapes, brochures, photographs and annual reports. We agree with that determination. Taxpayers paid the agencies a substantial consideration for their services, and it is unlikely this would have occurred without receipt of the above items. It was their intention to acquire materials to use in advertising, and the personal property purchased was the “real object” sought by the buyers. Furthermore, the main function of the agencies was not to analyse, interpret, and present information to the companies. See Accountant’s Computer Services v. Kosydar, supra (35 Ohio St. 2d 120), at pages 133 and 134. Therefore, that part of the decision of the Board of Tax Appeals which imposed sales and use taxes on the advertising expenses is affirmed.

Decision reversed in part and affirmed in part.

0 ’Neill, C. J., Steen, Celebrezze and W. Brown, JJ., concur. CORRIGAN and P. Brown, JJ., dissent.