Welcome to the new Ohio State Sales Tax Blog! I look forward to discussing many Ohio sales tax issues in these posts. I may select topics that are particularly timely or challenging – or simply an item that I find particularly fascinating. However in some cases – I’ll also write on topics suggested by readers – so please let me know if there are particular Ohio sales or use tax issues that you’d like addressed.
For this first post I’ve decided to discuss Ohio’s manufacturing sales and use tax exemption. Manufacturing is a capital intensive industry, and given about 17% of Ohio's economy is tied to manufacturing (vs. 12% nationwide), the exemption is a very important topic.Ohio exempts from sales and use tax purchases of property used primarily in a manufacturing operation to produce tangible personal property. Property eligible for the exemption includes production machinery and equipment that make the product, materials handling equipment (i.e. forklifts, cranes) which move the product through a continuous production process, catalysts, solvents and other consumables that interact with the product and are integral to the manufacturing operation, Fuel, power, electricity consumed to power manufacturing equipment, and equipment and other property used to manufacture production equipment.
In order to demonstrate the complexities associated with these exemptions – I’d like to review the Todd Perren decision issued by the Ohio Board of Tax Appeals ("B.T.A.") on 8/29/2014. This case resulted from the assessment by the Ohio Tax Commissioner ("Commissioner") on the purchase of a "caustic" solution applied to dies after a manufacturing run.
The Ohio Revised Code ("O.R.C.") uses a unique term for this property, calling it "the thing transferred". Another section of the O.R.C. defines the term for purposes of the exemption, both in terms of what qualifies and what does not qualify. A lengthy administrative ruling attempts to provide further clarification by providing more than 60 examples describing what types of purchases are exempt and what types of purchases are taxable.
Under the facts in the case, the solution is applied to the dies after the manufacturing runs for the day to prepare it for the following day’s runs, or if there is a quality control issue i.e. the die is not operating to produce a product to required specifications or if there is a mechanical problem. The solution removed excess aluminum residue from the die that would otherwise negatively impact the product being produced. The Taxpayer's position was that the caustic solution was exempt from tax as a purchase of "machinery, equipment, and other tangible personal property used during the manufacturing operation that control, physically support, produce power for, lubricate, or are otherwise necessary for the functioning of production machinery and equipment and the continuation of the manufacturing operation." Meanwhile the Commissioner's position was the solution was taxable as the purchase of "tools, equipment, and supplies made or purchased by the manufacturer for use in maintaining, installing, repairing, or cleaning its property, real or personal".
Analysis of the Decision
My first observation of the decision notes Mr. Perren is the controller of Extrudex Aluminum ("Taxpayer"), a manufacturer of quality aluminum extrusion products, with facilities in Ohio, Ontario and Quebec, Canada. Mr. Perren appears to have been the only representative of the Taxpayer in the B.T.A. proceedings, and it's hard for me to think this did not have any bearing on the outcome.
The decision held the caustic solution did not qualify for exemption from tax. The B.T.A. reasoned the solution was used to maintain and clean the dies and was not used in a continuous manufacturing process. Two fatal flaws led to this outcome: 1. in order to apply the solution to the dies, it was necessary to remove the dies from the machines; meaning the manufacturing process halted. Indeed this fact is similar to a 2001 Ohio Supreme Court case holding a forklift used to remove and replace dies from a press was subject to tax since the manufacturing process halted when the forklift was used to remove and replace dies, weighing anywhere from a few hundred pounds to as much as seventy thousand pounds. And 2. In testimony as well as the Taxpayer's appeal, the process of applying the solution to the dies was described as a "repair operation". Repair of tangible personal property is subject to sales and use tax in Ohio.
While property used in a manufacturing plant may very well be necessary for the manufacturing process to function properly, it does not follow under Ohio law that it qualifies for exemption from sales tax. If use of the property causes the manufacturing process to halt, notwithstanding its proximity or importance to the manufacturing process, it will likely be deemed ineligible for the manufacturing exemption. It seems rather harsh; however it is what the statute and case law hold. Compare the result in this decision to example 49 in the regulation where washing equipment used to clean overspray is treated as exempt. The difference is the seemingly continuous use of the washing equipment during the manufacturing process which itself is not halted while the washing equipment is in use.
How one describes a process is very important in determining the effect of a purchase under the sales and use tax law. The description of the application of the solution to the dies as a "repair process" by the Taxpayer required the B.T.A. to judge the purchase taxable as a repair of tangible property. Accordingly, a complete analysis of the process by an independent advisor is most valuable in ferreting out these issues and resolving them early on before an audit brings a nasty surprise.
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Other recent “Ohio (OH)” posts by Guy Nevers, CPA, MT:
- Tax on Temporary Labor in Ohio; A Not So Temporary Headache!
- Ohio Sales Tax: Amazon Law Bill Introduced
- Ohio Sales Tax: County "Add-On" Rules & Tools
- Ohio Sales Tax: Exemptions Outside the Tax Code
- Ohio Sales Tax: Business Fixtures or Real Property? (3 Key Questions)