EAST MANUFACTURING CORPORATION, APPELLANT AND CROSS-APPELLEE, v. TESTA, TAX COMMR., APPELLEE AND CROSS-APPELLANT.
Slip Opinion No. 2018-Ohio-2923
SUPREME COURT OF OHIO
Decided July 26, 2018
No. 2017-0666—Submitted April 24, 2018. APPEAL and CROSS-APPEAL from the Board of Tax Appeals, No. 2015-2111.
NOTICE
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SLIP OPINION NO. 2018-OHIO-2923
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as E. Mfg. Corp. v. Testa, Slip Opinion No. 2018-Ohio-2923.]
Use tax—Board of Tax Appeals correctly determined that manufacturer does not qualify for exemption from use tax under
{¶ 1} In this direct appeal, we consider whether the Board of Tax Appeals (“BTA”) correctly upheld a use-tax assessment on the natural-gas purchases of appеllant and cross-appellee, East Manufacturing Corporation (“East”). East contends that the ambient heat provided by the natural gas was necessary for its manufacturing process and that the BTA erred by not granting an exemption under
Relevant Facts and Procedural History
{¶ 2} East manufactures custom aluminum truck trailers. The trailers are fabricated in six buildings, some of which are devoted to specialized steps in the manufacturing process. Only Building A has interior walls; administrative offices are separated by a wall from manufacturing areas. The other five buildings have open internal spaces to better accommodate the large truck attachments being fabricated and facilitate movement from station to station during the manufacturing process.
{¶ 3} Appellee and cross-appellant, tax cоmmissioner, audited East’s purchases for the period January 1, 2003, through December 31, 2006. Neither of East’s two natural-gas suppliers collected use tax during this period. On February 27, 2009, the commissioner issued a use-tax assessment for East’s natural-gas purchases during the audit period, exempting only the portion of natural gas used in painting operations, which took place in Building D, and welding systems. The remaining natural gas was deemed to have been used to heat the plant’s six buildings, which together total roughly 382,240 square feet. This portion of East’s natural gas, the commissioner determined, was taxable. East appealed to the BTA.
{¶ 4} At the hearing before the BTA, East conceded that the natural gas used to heat the administrative areas in Building A, which comprised 8.11 percent of the assessed natural gas, was nоnexempt, but it contended that the remaining 91.89 percent of the assessed natural gas was exempt because maintaining the temperature at 50 degrees Fahrenheit or higher in the plant’s buildings was essential to its manufacturing process. Emphasizing the extensive use of welding in its manufacturing process, East’s manager for research and development testified about the high specificatiоns the plant adhered to and their
{¶ 5} Citing the manual that East uses as a guide for aluminum welding, the tax commissioner countered in the BTA that condensation arises as a result of three interacting factors: ambient air temperature, relative humidity, and temperature of the metal to be processed. According to the manual (which was admitted into evidence at the BTA hearing), depending on the relative humidity, a difference of a certain number of degrees between the ambient air temperature and the temperature of the aluminum may result in condensation. But, so long as the aluminum temperature matches the ambient air temperature, condensation will not occur at any humidity level. The commissioner contends that this evidence negated East’s argument and showed that no particular ambient temperature—such as 50 degrees—is required by industrial needs.
{¶ 6} The BTA affirmed the tax commissioner’s assessment on the portion оf the natural gas that East used to heat the plant. The BTA held that “East has failed to establish how the affected manufacturing area, which consists of all or portions of all of the buildings within the facility, could qualify as a ‘special and limited area’ ” as required for exemption under
{¶ 7} With respect to East’s claim that the gas was generally “used during the manufacturing operation” under
{¶ 8} The BTA denied East’s claim for exemption in its entirety. East has appealed, and the tax commissioner has cross-appealed.
“Thing Transferred” Exemption
{¶ 9} We review BTA decisions to determine whether they are reasonable and lawful.
{¶ 10} Under the sales- and use-tax statutes, every sale or use of tаngible personal property is presumed to be taxable.
{¶ 11}
{¶ 12} Throughout the proceedings before the tax commissioner, the BTA, and this court, East has claimed that it is entitled to the
{¶ 13} East’s first two propositions of law assert that it is entitled to an exemption because the gas is used for regulating the environment in a special and limited area under
[m]achinery, equipment and other tangible personal property used for ventilation, dust or gas collection, humidity or temperature regulation, or similar environmental control, except machinery, equipment, and other tangible personal property that totally regulates the environment in a special and limited area of the manufacturing facility where the regulation is essential for production to occur.
(Emphasis added.)
{¶ 14}
All equipment and supplies that monitor, regulate, or improve the environmental conditions in the manufacturing facility are taxable. This includes all lighting, heaters, air conditioning equipment, fans, heat exhaust equipment, air make up equipment, dust control or collection equipment, and gas detection, collection, and exhaust equipment.
This should not be read to change the traditional classification of real and personal property. The only exception to the taxing of these items is equipment which totally regulates the environment in a special and limited area of the facility, such as a clean room or paint booth, where such total regulation is essential for production to occur. Even in such a special area, things that do not provide essential environmental regulation, such as safety or communication equipment, are taxable.
See examples 7, 47, 48, and 49.
(Emphasis added.)
{¶ 15} To qualify for an exemption under this exception, East must satisfy a three-prong test: “(1) the * * * tangible personal property must be used to totally regulate the environment, (2) the regulation must be in a special and limited area of the manufacturing facility, and (3) the regulation must be essential for production to occur.” Ellwood Engineered Castings Co. v. Zaino, 98 Ohio St.3d 424, 2003-Ohio-1812, 786 N.E.2d 458, ¶ 36. The failure to satisfy any prong of the test defeats the exemption claim.
{¶ 16} The meaning of a “clean room or paint booth” is explained by Example 7, which discusses the process of applying coating on specialized paper for full-color photocopying. The process must be done in a dust- and pollution-free environment separated from the rest of the plant. The example further explains:
Three of the walls and the ceiling are free standing and not part of the walls and ceiling of the building itself; the fourth wall, however, is a section of a wall of the larger structure. Emplоyees can only enter the clean room through two airlocks, which prevent dirty air from entering. All air is filtered and regulated as to temperature and humidity by heat pumps, electric heaters, dehumidifiers, and exhaust fans that serve only the clean room and maintain a positive air pressure in the room. This equipment is automatically controlled by a small computer using data from air monitoring sensors in the room. Employees must wear disposable paper coveralls, overshoes, and caps. The room has an intercom to minimize personnel traffic in and out of the room. Lighting in the room is by normal fluorescent fixtures attached to the ceiling.
{¶ 17} Under this scenario, “[s]ince the clean room provides environmental regulation in a special and limited area, and such regulation is essential for the manufacturing to occur, it is not taxable.”
{¶ 18} The BTA concluded that because East’s entire plant is heated, the temperature control is not focused on a “special and limited area.” 2017 WL 1443845 at *3. The BTA then deemed it unnecessary to consider the other prongs of the test for applying the “special and limited area” exception because East’s failure to satisfy the second prong defeated its exemption claim.
{¶ 19} East advances two contentions in challenging the BTA’s conclusion. First, it argues that its natural gas heats a
{¶ 20} The stated purpose of
{¶ 21} Here, the only way the disputed 91.89 percent of the assessed natural gas could arguably contribute to the manufacturing process is by regulating the environment of East’s entire plant. Thus, while East in essence likens its facility’s configuration and use of the natural gas to the color-paper manufacturer described in
{¶ 22} East’s argument in support of a more expansive interpretation of the “special and limited area” exception is contrary to the strict construction we must apply when considering exemption statutes and regulations generally. Personal property usеd to regulate temperature is specifically excluded from exemption by
{¶ 23} We turn next to East’s third proposition of law, which asserts that its purchase of natural gas is exempt because it qualifies as a “thing transferred” under
{¶ 24} As noted, because heating East’s buildings constitutes “temperature regulation,” it falls within the items excluded from the definition of “thing transferred” for use in manufacturing under
{¶ 25} This reading relies on the “familiar rule of statutory construction that when there is a conflict between a general provision and a more specific provision in a statute, the specifiс provision controls.” MacDonald v. Cleveland Income Tax Bd. of Rev., 151 Ohio St.3d 114, 2017-Ohio-7798, 86 N.E.3d 314, ¶ 27, citing Scalia & Garner, Reading Law: The Interpretation of Legal Texts 183 (2012) and
{¶ 26} East directs our attention to Q3 Stamped Metal, Inc. v. Zaino, 92 Ohio St.3d 493, 751 N.E.2d 1001 (2001), but that case is inapposite. In Q3, we affirmed a finding by the BTA that goggles worn by welders while they worked were exempt from the use tax because the goggles were “used in the manufacturing operation” pursuant to
{¶ 27} Here, there is only one function that the assessed natural gas performs: controlling the manufacturing environment by heating it, a function that is fully removed from the division (B) exemptions pursuant to
{¶ 28} Although the BTA rejected East’s claims under
{¶ 30} In light of our disposition of East’s propositions of law, the arguments raised in the tax commissioner’s six propositions of law to defend the decision of the BTA are rendered moot.
Conclusion
{¶ 31} The BTA’s decision is reasonable and lawful. The BTA correctly determined that East does not qualify for an exemption from the use tax under
Decision affirmed.
O’CONNOR, C.J., and O’DONNELL, KENNEDY, FRENCH, and DEWINE, JJ., concur.
FISCHER, J., concurs in judgment only.
Buckingham, Doolittle & Burroughs, L.L.C., Steven A. Dimengo, Matthew R. Duncan, and Richard B. Fry III, for appellant and cross-appellee.
Miсhael DeWine, Attorney General, and Sophia Hussain, Assistant Attorney General, for appellee and cross-appellant.