Case Title: In re Judicial Campaign Complaint Against Carr

Citation: 1996-Ohio-125

Docket Number: 19951278

State: ohio

Court: Ohio Supreme Court

Date: 1996-08-14T00:00:00Z

Document:
ATS OHIO, INC., f.k.a. GELZER SYSTEMS COMPANY, APPELLANT, V. TRACY, 
TAX COMMR. OF OHIO, APPELLEE. 
[Cite as  ATS Ohio, Inc. v. Tracy (1996), ____ Ohio St.3d ____.] 
Taxation -- Listing personal property by manufacturer -- Inventory in 
the process of manufacture, to the extent of progress payments 
received therefor, is not “owned” by the manufacturer and is not 
taxable to it as Schedule 3 personal property under R.C. 
5711.16, when. 
Inventory in the process of manufacture, to the extent of progress 
payments received therefor, is not “owned” by the manufacturer 
and is not taxable to it as Schedule 3 personal property under 
R.C. 5711.16 when  (1) the property exists and is identifiable, (2) 
the manufacturer collects progress payments from buyer over the 
course of production, and (3) the purchase contract includes an 
explicit agreement between manufacturer and buyer providing that 
title to the goods transfers incrementally to buyer. 
 
(No. 95-1278 -- Submitted May 21, 1996 -- Decided August 14, 
1996.) 
 
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APPEAL from the Board of Tax Appeals, No. 93-K-945. 
 
ATS Ohio, Inc. (“ATS”), f.k.a. Gelzer Systems Company, 
appellant, manufactures custom robotic equipment used by ATS’s 
customers to manufacture their own end products.  ATS determines the 
specifications and designs the equipment, working in conjunction with 
the buyer so that the finished product is best suited to the particular task 
or function required.  Following the design phase, ATS prepares a price 
quotation which is sent to the buyer.  The buyer responds by returning a 
purchase order to ATS, upon receipt of which ATS begins production of 
the equipment.  
 
The manufacturing process typically takes four to five months, and 
sometimes as long as a year.  The average cost of a machine produced 
by ATS is $400,000 to $500,000.  ATS requires its customers to make 
progress payments as work is completed on the project in order to even 
out its cash flow.  The first payment is typically made following the 
 
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design phase, and four more payments are made over the course of the 
production of the machine.  
 
The quotation issued by ATS sets forth a description of the 
equipment and the price and payment terms.  The quotation form is 
fairly standard and normally specifies that progress payments, 
amounting to a percentage of the total purchase price, will be paid to 
ATS at predetermined times during the job. 
 
The purchase orders issued to ATS by its customers are not 
standard and do not contain uniform contractual terms and conditions.  
Some of the purchase orders received by ATS include language 
specifying details of the passage of title and the impact of progress 
payments while others do not.  
 
ATS uses the percentage of completion method of accounting for 
work in progress.  For the 1990 and 1991 tax years at issue, ATS did 
not include the value of machinery in the process of manufacture as 
inventory on its Ohio personal property tax returns.  ATS contends that 
 
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upon receipt of the progress payments, title to the equipment passes to 
the customer. 
 
Upon audit, the agent for the Ohio Department of Taxation 
determined that ATS should have included the value of equipment in the 
process of manufacture on its tax returns and assessed ATS 
accordingly.  ATS appealed the assessments to the Tax Commissioner, 
appellee,  who affirmed the initial determination. 
 
ATS appealed the Tax Commissioner’s decision to the Board of 
Tax Appeals (“BTA”), which affirmed the commissioner.  It is from that 
decision that this appeal of right is taken. 
-------------------------- 
 
Squire Sanders & Dempsey and Ted B. Clevenger, for appellant. 
 
Betty D. Montgomery, Attorney General, and Thelma Thomas 
Price, Assistant Attorney General, for appellee. 
------------------------ 
 
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MOYER, C.J.  The issue before the court is whether equipment 
under production for which progress payments have been received 
constitutes inventory “owned” by the manufacturer for purposes of R.C. 
5711.16 and is subject to inclusion on the manufacturer’s return as 
personal property.  For the reasons that follow, subject to limitations 
discussed infra, we answer the question in the negative, and we reverse 
the decision of the BTA and remand the cause for further factual 
findings. 
 
ATS argues that the equipment at issue is owned by the customer 
because ATS collects progress payments and accounts for the 
payments on a percentage of completion basis.   The commissioner 
argues that  ATS remains the owner of the work in progress and must 
return it as inventory on Schedule 3 of its personal property tax returns.  
The dispute focuses on the meaning of the word “owned” as used in 
R.C. 5711.16.  The statute provides: 
 
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“A person who purchases, receives, or holds personal property for 
the purpose of adding to its value by manufacturing, refining, rectifying 
or combining different materials with a view of making a gain or profit by 
so doing is a manufacturer.  When such person is required to return a 
statement of the amount of his personal property used in business, he 
shall include the average value, estimated as provided in this section, of 
all articles purchased, received, or otherwise held for the purpose of 
being used, in whole or in part, in manufacturing, combining, rectifying, 
or refining, and of all articles which were at any time by him 
manufactured or changed in any way, either by combining, rectifying, 
refining, or adding thereto, which he has had on hand during the year 
ending on the day such property is listed for taxation annually, or the 
part of such year during which he was engaged in business.  He shall 
separately list finished products not kept or stored at the place of 
manufacture or at a warehouse in the same county. 
 
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“The average value of such property shall be ascertained by 
taking the  value of all property subject to be listed on the average 
basis, owned by such manufacturer on the last business day of each 
month the manufacturer was engaged in business during the year, 
adding the monthly values together, and dividing the result by the 
number of months the manufacturer was engaged in such business 
during the year.  The result shall be the average value to be listed.  A 
manufacturer shall also list all engines and machinery, and tools and 
implements, of every kind used, or designed to be used, in refining and 
manufacturing, and owned or used by such manufacturer.”  (Emphasis 
added.) 
 
The first sentence of R.C. 5711.16 defines a “manufacturer” as 
one who “purchases, receives, or holds personal property for the 
purpose of adding to its value.”  ATS clearly meets the definition of a 
manufacturer.  There is nothing in this definition, however, that requires 
the manufacturer to be the owner of the raw materials consumed in the 
 
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manufacturing process.  Indeed the first paragraph of the statute states 
that the manufacturer shall include the “average value” of  “all articles 
purchased, received, or otherwise held” for use in the manufacturing 
process. 
 
The second paragraph of the statute, however, sets out the 
means by which the average value is to be determined.   Property 
subject to inclusion in the manufacturer’s average value determination is 
restricted to property “owned by such manufacturer.” (Emphasis added.) 
 
The final sentence of the second paragraph states the rule for 
treatment of property other than inventory, including engines, 
machinery, tools, and implements on the tax return.  Instead of taxing 
only the items of property from this category that are owned by the 
taxpayer, R.C. 5711.16 provides that tax must be paid on items from the 
category that are “owned or used by such manufacturer.”  The language 
of the statute is precise.  The contrast between the provision that taxes 
engines, machinery, and tools “owned or used” by a manufacturer, and 
 
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the provision that taxes inventory-type property “owned” by the 
manufacturer manifests the intent of the General Assembly to treat the 
property differently.  We conclude, therefore, that manufacturers such 
as ATS must return only the inventory personal property they own. 
 
This application of the statute is consistent with Ohio’s general tax 
scheme.  Ohio appears to have a pattern of taxing property owned by 
the taxpayer as opposed to property that is simply in the taxpayer’s 
possession.  See, e.g., R.C. 5711.01(B) (defining “taxpayer” as “any 
owner of taxable property”); 5711.05 (stating that “[e]ach person shall 
return all the taxable property of which he is the owner”); R.C. 
5709.01(B)(1) (defining all personal property used in business as 
taxable “regardless of the residence of the owners thereof”).  (Emphasis 
added.) 
 
In Consolidated Diesel Elec. Corp. v. Stamford (1968), 156 Conn. 
33, 238 A.2d 410, the Connecticut Supreme Court was to decide 
whether Consolidated, a government contractor operating under a 
 
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contract with a title-vesting provision for progress payments, was an 
“owner” of the property.  The relevant statute stated that the property of 
a manufacturer “shall be assessed in the name of the owner or owners.”  
The contract provision at issue stated, “‘Upon the making of any 
progress payments under this contract, title to all parts, materials, 
inventories, work in [process] and non-durable goods theretofore 
acquired or produced by the Contractor for the performance of this 
contract, and properly chargeable thereto under sound accounting 
practice, shall forthwith vest in the Government ***.’”  Id. at 35, 238 A.2d 
at 411. 
 
The Connecticut court reasoned that when title vested in the 
government, it became the owner, and that title and ownership were the 
same thing.  When title vested in the government, therefore, the 
manufacturer retained only the right to possession under the contract.  
Thus, the court concluded that the manufacturer was no longer the 
owner of the goods and was not subject to tax.  Id. at 37-38, 238 A.2d at 
 
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412.  The state had apparently argued that the title-vesting provision 
served only for security purposes and did not affect the taxability of the 
property. 
 
In Wright Aeronautical Corp. v. Glander (1949), 151 Ohio St. 29, 
38 O.O. 510, 84 N.E.2d 483, the issue whether inventory for which 
progress payments had been received was taxable to the manufacturer 
was presented and, although the case was decided on other grounds, 
we find guidance in the court’s dicta. Wright had contracted with the 
government to build aircraft engines, using language in the contract that 
“title to all property upon which any partial payment is made prior to the 
completion of this contract, shall vest in the government ***.”  Id. at 33, 
38 O.O. at 512, 84 N.E.2d at 486.  Wright argued that after partial 
payment was received, the inventory corresponding to the payment 
belonged to the buyer and was not taxable to Wright.  Because the 
issue had not been raised by Wright in its original return, the court did 
not consider the argument in reaching its judgment. 
 
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The court observed, however, that had Wright presented its claim 
properly, “a different question would be presented to us.”  Id. at 44, 38 
O.O. at 517, 84 N.E.2d at 490.  The court then cited two cases, from 
California and Mississippi, in support of Wright’s position.  In Douglas 
Aircraft Co. v. Byram (1943), 57 Cal. App. 2d 311, 134 P.2d 15, Douglas 
sought a refund of tax assessed on inventory subject to progress 
payments under a contract specifically providing for incremental transfer 
of title corresponding to the receipt of payments.  The court, relying on 
Craig v. Ingalls Shipbldg. Corp. (1942), 192 Miss. 254, 5 So. 2d 676, the 
other case cited in Glander, held that the state’s suggestion that title did 
not pass because possession remained with the manufacturer did not 
withstand analysis.  Both the California and Mississippi courts found that 
the equipment subject to the title-vesting provision had become 
government property, and therefore was not subject to taxation as 
property of the manufacturer. 
 
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We have previously held that title-vesting provisions contained in 
government contracts are valid: “Pursuant to the agreements, the title to 
the tangible personal property which was created automatically vested 
in the government.”  Dresser Industries, Inc. v. Lindley (1984), 12 Ohio 
St.3d 68, 70, 12 OBR 60, 61, 465 N.E.2d 430, 432. 
 
In the case at bar, therefore, the critical question is whether title 
had transferred to the buyer with respect to those contracts under which 
the buyer had made progress payments to ATS during production of the 
purchased equipment. 
 
R.C. 1302.01(A)(8) provides:  “Goods must be both existing and 
identified before any interest in them can pass.  Goods which are not 
both existing and identified are ‘future’ goods.”  At the outset of the 
purchase process, the goods contracted for are future goods since ATS 
has not yet manufactured them.  After production begins, the goods are 
clearly existing, and due to the detailed specifications prepared before 
production, and the unique nature of the product, the goods should be 
 
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easily identifiable.  R.C. 1302.42(A) provides that “title to goods passes 
from the seller to the buyer in any manner and on any conditions 
explicitly agreed on by the parties.”  Thus, if there is a written contract 
between ATS and its customer explicitly providing for transfer of title 
upon receipt of a progress payment, the parties have “explicitly agreed” 
and title passes in accord with R.C. 1302.42(A). 
 
In reaching its decision, BTA found that “the majority of purchase 
orders which are part of the record provide no indication that [ATS’s] 
customers own or have a desire to own, the automated system prior to 
its completed state.”  At least one of the purchase orders at issue does 
state an explicit agreement that the customer owns the partially 
completed equipment to the extent of the value of progress payments 
made:  “Title to the items and materials covered under this Purchase 
Order shall be deemed transferred to Buyer or Buyer’s customer, as 
payments are made, and in the same proportion as the cumulative 
payments bear to this Purchase Order price.  Seller shall also identify 
 
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and segregate such items and materials which are the property of 
Buyer, unless waived in writing by Buyer.”  Westinghouse Electric order 
dated July 24, 1990.  In the absence of a finding by the BTA regarding 
which purchase orders contain explicit agreement on title transfer and 
which do not, we must remand the cause to the BTA to make the factual 
determination on a case-by-case basis. 
 
The BTA observed, “there is no indication that the progress 
payments, which are typically made in five equal installments, 
accurately reflect cost of the inventory at the time such payments are 
made.”  The commissioner argues that the payments therefore do not 
correspond to work actually performed on the project and that we 
should not attribute ownership based upon them.  We conclude that this 
is another factual determination that must be made by the BTA on a 
case-by-case basis.   
 
The record contains documents showing the status of each 
contract on a month-by-month tracking schedule.  Thus, for each 
 
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contract with a title transfer agreement, there is an accounting which 
can be used to determine whether the entire dollar value of the progress 
payments made had actually vested in the buyer. 
 
In conclusion, we hold that inventory in the process of 
manufacture, to the extent of progress payments received therefor, is 
not “owned” by the manufacturer and is not taxable to it as Schedule 3 
personal property under R.C. 5711.16 when  (1) the property exists and 
is identifiable, (2) the manufacturer collects progress payments from 
buyer over the course of production, and (3) the purchase contract 
includes an explicit agreement between manufacturer and buyer 
providing that title to the goods transfers incrementally to buyer. 
 
The decision of the BTA is reversed, and the cause is remanded 
for further determinations consistent with this opinion. 
 
 
 
 
 
 
 
 
Decision reversed  
 
 
 
 
 
 
 
 
and cause remanded. 
 
DOULGAS, F.E. SWEENEY, PFEIFER and STRATTON, JJ., concur. 
 
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RESNICK, J., concurs in the syllabus and judgment. 
 
COOK, J., dissents. 
 
Cook, J., dissenting.   I would affirm the decision of the BTA upholding the 
assessment of the commissioner because the taxpayer has failed to show a clear right to relief.  
Belgrade Gardens v Kosydar (1974), 38 Ohio St. 2d 135, 67 O.O.2d 147, 311 N.E.2d 1. 
 
This inventory “held for the purpose of being used,  in whole or in part, in 
manufacturing” must be listed in a manufacturer’s personal property tax return.  R.C. 
5711.16.  I agree with the BTA that the focus by the parties on the phrase “owned by such 
manufacturer” is misplaced.  The transfer of ownership is inapposite to the reality that this 
assessed property is necessarily “held” to be used by the manufacturer to finish this complex 
automated system. 
 
Even if ownership is the determinative issue, the taxpayer here has not demonstrated 
that a shift in ownership occurs concurrent with its receipt of progress payments (which the 
taxpayer identified as “advances” on its internal balance sheet).  The purchase orders upon 
which the appellant and the majority rely are drafted by the various customers.  Even those 
purchase orders that  include terms as to ownership do not demonstrate the explicit agreement 
necessary to transfer title other than at the time of delivery. R.C. 1302.42(B).  It seems 
unlikely that a customer would contract explicitly to acquire ownership of an incomplete 
complex manufacturing system in twenty-percent increments.  Rather, the payments are, 
 
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normally, just equal installments prepaying the purchase price.  The taxpayer conceded at oral 
argument that no use can be made of a partially completed system.   I also question the 
conclusion by the majority that, prior to completion, these systems are “goods” that are “both 
existing and identified” and thus eligible for legal transfer, because neither party argued or 
briefed this point of law. 
 
Moreover, there is no evidence offered by the taxpayer to relate the five  installment 
payments to the cost of the inventory at the time such payments are made.  
 
Other factors belying the taxpayer’s position are that possession remains with the 
taxpayer until the completed system is delivered; that the taxpayer, at its cost, maintains 
insurance on the entire automated system during its manufacture; and that warranties do not 
begin until the system is delivered to the customer. 
 
I therefore respectfully dissent.