American National Can Co. v. Tracy

Wright, J.,

concurring in part and dissenting in part. I concur in the court’s conclusion that the water cooling system is exempt from taxation. I dissent to the conclusion that the machine hoppers, case erectors, and electrical transformer are not similarly exempt.

I

The majority relies upon an erroneous interpretation of Ball Corp. v. Limbach (1992), 62 Ohio St.3d 474, 584 N.E.2d 679, to reach the conclusion that the machine hoppers do not qualify for the adjunct exemption. In fact, the taxability of machine hoppers was not before this court in Ball.

*154In Ball, the Board of Tax Appeals (“BTA”) determined that manufacturing began at the co-extrusion machines and that the hoppers were exempt as adjunct to the co-extrusion machines. The BTA then denied an exemption for the raw material handling system, which included vacuum tubes, silos and storage bins, because the system was both preliminary to manufacturing and not adjunct to machinery “directly used” in manufacturing. Only the BTA’s decision denying an exemption for the raw material handling system was appealed by Ball Corp., and this court affirmed: “With regard to the appeal of Ball Corp., the decision of the BTA which denied exception for the raw material handling and processing system is reasonable and lawful and is affirmed.” Id. at 479, 584 N.E.2d at 683. The decision of the BTA granting an exemption for the machine hoppers was left undisturbed, and properly so.

Our cases have consistently held that machinery, similar to the machine hoppers at issue in this case, which directly feeds manufacturing equipment is adjunct to that equipment and therefore exempt from sales and use taxes. In Bird & Son, Inc. v. Limbach (1989), 45 Ohio St.3d 76, 82, 543 N.E.2d 1161, 1167, we held: “Inasmuch as the machine bins supply the blender box with granules, it would appear that such items are ‘adjuncts’ to a direct use as contemplated by former R.C. 5739.01(S) and our decision^] in Canton Malleable and Hawthorn Mellody, supra. Accordingly, it is our further determination that equipment utilized to provide an immediate supply of raw materials to machinery employed directly in the production of tangible personal property is an adjunct used during and in the production of a product and necessary to carry on and continue that production. Such equipment is therefore subject to exemption from sales and use taxation pursuant to former R.C. 5739.01(S).”

Even though the machine hoppers are “preliminary” to the manufacturing process, in that they feed raw material to the extruders where the manufacturing process actually begins, they may still qualify for the adjunct exception under R.C. 5739.01(R). That was the exact result reached in OAMCO v. Lindley (1986), 24 Ohio St.3d 124, 125, 24 OBR 347, 348, 493 N.E.2d 1345, 1347: “A precise mixing system composed of various small conveyor belts regulates the flow of aggregates from the bins. The result is a uniform size and weight of aggregate, which is essential to the required standardization of product. * * * Without these pieces of equipment, there could be no mix specifications, nor constancy of finished product. Without doubt, they are ‘adjuncts used during and in, and necessary to carry on and continue, production.’ ”

The testimony before the BTA revealed that the machine hoppers performed the necessary task of carefully controlling the flow of resin into the extruders so that the extruders operated properly in creating a salable product. This testimony, combined with our decisions in Bird & Son, supra, and OAMCO, supra, leads *155to the conclusion that the machine hoppers qualify for the adjunct exemption under R.C. 5739.01(R).

II

The majority also errs in finding that the case erectors do not qualify for an exemption under R.C. 5739.02(B)(15). Specifically, the majority reads our opinion in Ball, supra, as requiring that a packaging line must be fully automated, with no manual placement of products into the prepared packages, to qualify for an exemption under R.C. 5739.02(B)(15). That interpretation is not only inconsistent with our previous cases, but it will also have the anomalous result of providing a disincentive for Ohio manufacturers to employ Ohio workers in the packaging process.

R.C. 5739.02(B)(15) provides an exemption for “machinery, equipment, and material for use in packaging tangible personal property produced for sale * * *, or sold at retail.” As defined by the statute, “packaging” involves placing items in packages. Id. However, we have interpreted the “for use in packaging” language broadly to include any equipment that is an “integral part” of the packaging process. For example, in Hawthorn Mellody, Inc. v. Lindley (1981), 65 Ohio St.2d 47, 52, 19 O.O.3d 234, 238, 417 N.E.2d 1257, 1261-1262, and Kroger Co. v. Limbach (1990), 53 Ohio St.3d 245, 246-247, 560 N.E.2d 192, 194, we held that conveyor systems which moved products to the packaging area qualified for the packaging exemption.

In this case, the BTA made the appropriate finding that the case erectors are “an integral and essential part of a continuous packaging operation.” The only question that remains is whether the case erectors do not qualify for the exemption solely because a portion of American National Can’s packaging system is manual. Consistent with the language of the statute and our reasoning in Hawthorn Mellody, supra, and Kroger Co., supra, I believe that the exemption includes any equipment which is an “integral part” of the packaging process, regardless of whether the system is fully automated or not. As a result, I believe that the case erectors at issue are entitled to an exemption pursuant to R.C. 5739.02(B)(15).

Ill

The last matter to which I dissent is the denial of an exemption for the electrical transformer. The applicable statute provides: “[A] construction contract pursuant to which tangible personal property is or is to be incorporated into a structure or improvement on and becoming part of real property is not a sale of such tangible personal property.” R.C. 5739.01(B)(5). “Real property” is de*156fined, in part, as: “all buildings, structures, improvements, and fixtures of whatever kind on the land.” R.C. 5701.02(A).

The majority misapplies a previous decision of this court when it concludes that because the transformer, which weighs 34,500 pounds, was not bolted to the property it did not meet the definition of “real property” set forth in R.C. 5701.02(A). The majority derives the “physical affixation” requirement from Botkins Grain & Feed Co. v. Lindley (1982), 1 Ohio St.3d 64, 1 OBR 105, 437 N.E.2d 1182. However, that case concerned livestock capsules which, as we noted, were highly portable: “In fact, a significant aspect of the marketability of these structures is their portability. They may be moved with a minimum amount of effort and no damage to the capsule or the pad.” Id. at 65, 1 OBR at 106, 437 N.E.2d at 1183-1184. We also noted the potentially temporary, versus permanent, nature of the capsules: “The portability of the capsules is an especially attractive feature to tenant farmers as well as those farmers who intend to raise livestock for a relatively brief time.” Id. at 65, 1 OBR at 106, 437 N.E.2d at 1184, fn. 4. Consistent with the temporary nature of the capsules, this court found that without physical affixation they could not qualify as real property. Id. at 68, 1 OBR at 108, 437 N.E.2d at 1186.

The electrical transformer, unlike the livestock capsules, is more like a permanent improvement to American National Can’s facility. In fact, it serves the necessary function of reducing the voltage received from an outside provider. The very nature of the transformer as a permanent and necessary element of American National Can’s facility distinguishes it from the capsules at issue in Botkins, supra. See Masheter v. Boehm (1974), 37 Ohio St.2d 68, 66 O.O.2d 183, 307 N.E.2d 533, paragraph two of the syllabus. Furthermore, it would be elevating form over substance to require a 34,500 pound piece of equipment to be bolted to its concrete pad in order to qualify as “real property” for purposes of R.C. 5739.01(B)(5). The mere weight and permanent nature of the transformer make it so that it is at least “constructively affixed” and therefore qualifies as “real property.” This conclusion is consistent with our decision in PittsburghDes Moines Steel Co. v. Lindley (1982), 1 Ohio St.3d 15, 1 OBR 39, 437 N.E.2d 302, where we held that storage tanks which were similarly merely resting on foundations qualified as real property.

For the foregoing reasons, I respectfully dissent.