Procter & Gamble Co. v. Lindley

Wright, J.

The sole issue presented in this appeal is whether appellant’s purchase of artwork from outside artists, which artwork is subsequently transferred to appellant’s packaging or advertising materials suppliers, is exempt from sales and use taxes pursuant to R.C. 5739.01(E)(1) and 5741.02(C)(2). Appellant claims these exemptions on the basis that it “resells” the artwork to its suppliers. For the reasons that follow, this *73court holds that the exemptions set forth in R.C. 5739.01(E)(1) and 5741.02(C)(2) are applicable herein and sales and use taxes were improperly levied on the purchase of this artwork by appellant from outside artists for the calendar years 1974 through 1976.

R.C. 5739.02 imposes an excise tax on each retail sale made in Ohio, with R.C. 5741.02 imposing a complementary excise tax on the use of tangible personal property in Ohio. Pursuant to R.C. 5741.02(C)(2), however, such use tax will not apply where the acquisition of the property is exempt from sales tax. As such, this court need only focus on the relevant sales tax provisions.

Certain items purchased are exempted from sales taxation by virtue of R.C. 5739.01(E)(1), which provides in pertinent part as follows:

“ ‘Retail sale’ and ‘sales at retail’ include all sales except those in which the purpose of the consumer is:
“(1) To resell the thing in the form in which the same is, or is to be, received by him; * * *”

In the instant case, there is no dispute that the artwork received by appellant is transferred in the form in which it was received. The critical inquiry is whether this transfer constituted a “sale” within the meaning of the Sales Tax Act.

R.C. 5739.01(B) defines “ ‘[s]ale’ and ‘selling’ [to] include all transactions by which title or possession, or both, of tangible personal property, is or is to be transferred, or a license to use or consume tangible personal property is or is to be granted * * * for a consideration * * (Emphasis added.)

This court, in Kloepfer’s, Inc. v. Peck (1953), 158 Ohio St. 577, 578 [49 O.O. 483], held that “* * * the mere transfer of possession of property is not, within the meaning of the * * * statutory definition, a sale unless it is a transfer ‘for a consideration.’1 R.C. 5739.01(B) provides the following broad definition of “consideration”: “* * * for a consideration in any manner, whether absolutely or conditionally, whether for a price or rental, in money or by exchange, and by any means whatsoever. * * *”

Case law is in accord, for “consideration” as used in R.C. 5739.01(B) has not been limited solely to monetary consideration. In light of this factor, we believe that our decision in General Motors Corp. v. Kosydar (1974), 37 Ohio St. 2d 138 [66 O.O.2d 304], is dispositive of the present appeal.

In General Motors, we held that the transfer of tooling from General Motors to its suppliers for their exclusive use in the production of automotive parts was supported by consideration and thus constituted a “resale” pursuant to R.C. 5739.01(E)(1). Appellant has carefully delineated the many similarities between General Motors and the case at *74bar.2 These similarities are obvious and compelling, and serve to establish, in each case, sufficient legal detriment necessary to a finding of consideration. In each case, the suppliers must satisfy rigorous qualifying standards. The procedures for the granting of a contract are also comparable in both cases. The suppliers must further agree to meet requirements concerning confidentiality, exclusive use, time, quality, and quantity. In each case, the supplier had possession of, but not title to, the item transferred *75and was required to surrender possession of the item under specified circumstances, such as default, strike, work stoppage, insolvency or inability to perform. The only noteworthy distinction between the two cases makes appellant’s position even stronger. In the case at bar, appellant physically transferred the artwork to its suppliers while the suppliers in General Motors simply retained possession of the tooling.

Furthermore, we note the existence of a bilateral requirements contract in both cases. In assessing this issue in General Motors we stated:

“The contractual agreements between General Motors and its outside suppliers constitute bilateral ‘requirements’ contracts. The agreement calls for a mutual exchange of promises between General Motors and its suppliers. General Motors covenants to the suppliers to grant an exclusive license to use General Motors’ tooling and a promise to pay the suppliers for all General Motors’ requirements of the tooling which the suppliers produce. In return, the suppliers promise to produce all the parts General Motors requires * * *.” Id. at 146.

We also recognized that “* * * the business necessity for, and the legality of, requirements contracts, stating that the mutual promises of the buyer to buy and the seller to sell the requirements of a commodity are consideration one for the other. Likewise, it has been stated another way — that the promise of a seller not to manufacture except for the buyer, or the promise of the buyer not to buy except from a particular seller, is clearly a promise to do something detrimental.” Id. at 147.

Here, as in General Motors, the appellant has effectively granted to each supplier an exclusive license to use the particular artwork specified in the contract between them and has promised to pay the supplier for all of its requirements of the contracted-for packaging materials upon which the artwork is affixed. In return, the supplier has promised to use the artwork exclusively for the appellant and to produce all of the appellant’s requirements of the particular finished packaging materials. With respect to the artwork and packaging materials specified in each individual requirements contract, the supplier has agreed not to manufacture the contracted-for product except for the appellant, and the appellant, in nearly every instance, has agreed not to purchase that particular finished product from any other supplier.3 This clearly is a promise to do something detrimental, and, thus, is sufficient consideration to satisfy the requirements of R.C. 5739.01(B).

The appellee has submitted two cases, Coca-Cola Bottling Corp. v. Kosydar (1975), 43 Ohio St. 2d 186 [72 O.O.2d 104], and General Mills Fun *76Group, Inc. v. Lindley (1982), 1 Ohio St. 3d 27, in support of its position that consideration is lacking under R.C. 5739.01(B) and that the resale exception of R.C. 5739.01(E)(1), therefore, is unavailable. These cases are distinguishable.

In Coca-Cola we held there was no consideration for the taxpayer’s transfer of equipment to its customers for their use in dispensing beverages when there was no direct charge for the use of the equipment. Unlike the present case, Coca-Cola involves neither a requirements contract nór an exclusive dealing arrangement. Thus, the finding of no consideration was based upon factors entirely different from those existing in the situation at hand. Furthermore, the loaned equipment in Coca-Cola (soft-drink dispensing equipment, beverage coolers, concession stands) was simply a promotional “aid”; unlike the artwork, it was not essential to the supplier’s conformity with contractual performance provisions. In fact, Coca-Cola’s distinction of General Motors provides for the resolution of the issues presented herein:

“The General Motors decision is clearly distinguishable from the case at bar. In the General Motors case, the ‘customer’ of General Motors, the outside supplier, agreed, in a mutually bargained-for exchange, to supply all of General Motors’ requirements of certain automotive parts, according to the time, quality and quantity specifications which General Motors established and in return General Motors agreed to grant an exclusive license to use General Motors’ tooling to the suppliers and to pay the suppliers for all General Motors’ requirements of the tooling which the supplier produced. The supplier, in that case, has committed itself to manufacture General Motors’ requirements of parts. It is this anticipated performance which supplies consideration for the license to use General Motors’ tooling.” Coca-Cola, supra, at 193. This quoted segment reaffirms the applicability of General Motors to the present case.

General Mills Fun Group, supra, though similar in that it involves the transfer of artwork to suppliers for packaging purposes, is also distinguishable. The agreements in General Mills Fun Group do not fall within the scope of a bilateral requirements contract nor is there mention of specified quantity or quality standards. In that case, it does not appear that the suppliers were subject to any legal detriment whatsoever.

Based on the foregoing, it is clear that our decision in General Motors, supra, is controlling. Under the standard set forth in General Motors, there is sufficient legal detriment to constitute adequate consideration in the case at bar. Thus, we hold that when a taxpayer purchases artwork which it transfers, pursuant to bilateral requirements contracts, to outside suppliers for their use in preparing materials for the taxpayer, and the suppliers must satisfy rigorous qualifying standards and must further agree to meet requirements concerning confidentiality, exclusive use, time, quality and quantity, and to surrender possession of the artwork upon default, work stoppage, insolvency, or inability to perform, there is *77sufficient legal detriment suffered by the outside suppliers in connection with the use of the artwork to constitute the consideration necessary for a “sale” pursuant to R.C. 5739.01(B), which therefore excepts the transfer from Ohio sales and use taxes by virtue of the “resale” provision of R.C. 5739.01(E)(1).

To hold otherwise could only serve to punish appellant’s careful reliance on established precedent. In light of our holding today, and in the interests of fairness and justice, we find that the decision of the Board of Tax Appeals was unreasonable and unlawful. That decision, therefore, is reversed.

Decision reversed.

Celebrezze, C.J., Sweeney, Holmes and C. Brown, JJ., concur. Locher and Douglas, JJ., dissent.

This court was construing the predecessor to R.C. 5739.01(B), G.C. 5546-1.

The following is a complete list of factors, as noted by appellant, which are common to both General Motors, supra, and the case at bar and which evidence the element of consideration:

1. A series of transactions with outside suppliers.

2. As a part of a contract for the production of items.

3. A specific quality.

4. Stated unit prices.

5. ■ Specific delivery schedules.

6. Title to the product (i.e., tooling or artwork) in the manufacturer (i.e., General Motors or Procter & Gamble).

7. Possession of the product remains in the outside suppliers.

8. Such possession is for the suppliers’ exclusive use in the production of the item.

9. Mutual exchange of detrimental promises.

10. The manufacturer identifies the need for a particular product.

11. Continuing evaluation and qualification of outside suppliers upon the basis of their facilities, equipment, processing capabilities and quality control habits.

12. Maintenance of a list of outside suppliers which are capable of performing up to the requisite quality and production standards.

13. Annual determination of volume requirements of a particular item for a particular annual production year.

14. Preparation of competitive inquiry that is sent to outside suppliers.

15. Suppliers respond to the inquiry.

16. Examination of supplier responses and determination as to the best economic package on each particular item needed.

17. Manufacturer takes title to the product for two reasons:

A. The product is proprietary in nature.

B. Ownership by the manufacturer allows it to remove the product in the case of a strike, work stoppage or other inability to meet production schedules.

18. Award to an outside supplier is conditioned upon maintenance of standards for quality and production.

19. Continuing surveillance and monitoring of a supplier’s production.

20. Right to remove the product if there are problems in meeting maintenance standards.

21. Contracts between the manufacturer and its suppliers constitute bilateral requirements contracts.

22. Mutual exchange of promises:

A. The manufacturer agrees to grant an exclusive license for use of the product and promises to pay for all of its requirements for a particular item.

B. The suppliers promise to produce all of the items the manufacturer needs and to maintain the time, quality and quantity specifications of the manufacturer and to produce these products exclusively for the manufacturer.

23. The transfer of possession of the product was not gratuitous as the suppliers were bound to supply all of the manufacturer’s requirements and to meet the manufacturer’s time and quality control standards.

In a small number of cases, appellant purchased its requirements of the same finished packaging materials from more than one supplier. This does not necessarily destroy the requirements nature of each contract because the supplier, individually, may have been able to fulfill appellant’s total requirements for only one of its many plant locations, although producing and providing the materials to appellant at a capacity rate. In effect, each supplier of the same product may have been operating under a requirements contract with appellant.