Case Title: Anheuser-Busch, Inc. v. Tracy

Citation: 1999-Ohio-284

Docket Number: 19972443

State: ohio

Court: Ohio Supreme Court

Date: 1999-05-26T00:00:00Z

Document:
[Cite as Anheuser-Busch, Inc. v. Tracy, 85 Ohio St.3d 514, 1999-Ohio-284.] 
 
 
 
 
 
ANHEUSER-BUSCH, INC., APPELLANT, v. TRACY, TAX COMMR., APPELLEE. 
[Cite as Anheuser-Busch, Inc. v. Tracy (1999), 85 Ohio St.3d 514.] 
Taxation — Sales and use taxes — Equipment used by beer brewer which prepares 
bottles and labels for labeling and encodes bottles not exempt from taxation 
under manufacturing or packaging exemptions. 
(No. 97-2443 — Submitted January 26, 1999 — Decided May 26, 1999.) 
APPEAL from the Board of Tax Appeals, Nos. 95-T-922 and 95-T-923. 
 
This case pertains to imposing Ohio’s use tax on the purchases of machinery 
by this taxpayer and whether these purchases are taxable in light of the 
manufacturing exception and packaging exemption. 
 
Appellant, Anheuser-Busch, Inc., brews and bottles beer at its plant in 
Columbus.  Appendix A [Appendix A is not included in the Internet version of 
this case] depicts Anheuser-Busch’s Bottle Line 25.  After it is brewed, the beer is 
dispensed into bottles at a filler station.  The bottles are capped and the beer level 
is measured by the full-bottle-filtec machine.  The filled bottles then pass through 
the pasteurizer, which promotes the product’s shelf life by killing bacteria that 
would spoil it. 
 
The filled bottles are next conveyed to the labeler location.  The bottles first 
pass the Paxton Air Blower Bottle Drying System to remove moisture from the 
exterior surface of the bottle. Once dry, an ink code and labels are applied to the 
bottle.  A Videojet coding machine prints a code on the bottle that details where 
and when Anheuser-Busch produced the bottle of beer.1  Anheuser-Busch then 
applies glue to bottle labels with glue rollers and applies the labels to the bottles. 
 
The Tax Commissioner assessed use tax against the Videojet coding 
machines and the glue rollers purchased by Anheuser-Busch in the audit period 
January 1, 1988 through June 30, 1990.  He also assessed use tax, using the new 
 
 
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statutory manufacturing exception and different applicable rules, against the 
Paxton blower system and the Videojet coding machines in the audit period July 1, 
1990 through December 31, 1992. 
 
On appeal, the BTA affirmed the commissioner’s orders, concluding that 
Anheuser-Busch used these items after manufacturing ended.  The BTA also found 
that these items did not meet the packaging exemption. 
 
This cause is now before the court upon an appeal as of right. 
__________________ 
 
Squire, Sanders & Dempsey and Ted B. Clevenger, for appellant. 
 
Betty D. Montgomery, Attorney General, and Richard C. Farrin, Assistant 
Attorney General, for appellee. 
__________________ 
 
COOK, J.  R.C. 5739.02 levies an excise tax on all retail sales made in Ohio.  
R.C. Chapter 5739 excepts certain sales from the definition of retail sales and 
exempts certain retail sales from the tax.  Furthermore, R.C. 5741.02(C)(2) 
exempts purchases of items from the use tax when the acquisition, “if made in 
Ohio, would be a sale not subject to the tax imposed by [R.C. Chapter 5739].” 
 
Anheuser-Busch argues that the purchased machinery in dispute is excepted 
because it used the equipment directly in manufacturing under former R.C. 
5739.01(E)(2) and (R)(1), or primarily in a manufacturing operation under current 
R.C. 5739.01(E)(9) and (S) and R.C. 5739.011.  Alternatively, Anheuser-Busch 
contends that the disputed equipment purchases qualify for the packaging 
exemption in former R.C. 5739.02(B)(15).  The commissioner responds that 
Anheuser-Busch used the equipment after manufacturing ended and that Anheuser-
Busch did not use the equipment in packaging tangible personal property for sale.  
It falls upon Anheuser-Busch, then, to affirmatively establish its right to an 
exemption.  Natl. Tube Co. v. Glander (1952), 157 Ohio St. 407, 47 O.O. 313, 105 
 
 
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N.E.2d 648, paragraph two of the syllabus.  In determining whether an exemption 
applies, we must narrowly construe the relevant statutes.  Id. 
MANUFACTURING 
 
As to the first audit period, Anheuser-Busch claims exemption under the 
former manufacturing exception for its Videojet coding machines and glue rollers.  
During that time, R.C. 5739.01(E)(2) provided: 
 
“ ‘Retail sale’ and ‘sales at retail’ include all sales except those in which the 
purpose of the consumer is * * * to use or consume the thing transferred directly in 
the production of tangible personal property * * * for sale by manufacturing [or] 
processing[.]” 
 
The General Assembly defined “manufacturing” or “processing” in former 
R.C. 5739.01(R)(1) as: 
 
“[T]he transformation or conversion of material or things into a different 
state or form from that in which they originally existed.  Manufacturing or 
processing begins at the point where the transformation or conversion commences, 
or at the point where raw materials are committed to the manufacturing process in 
a receptacle by being measured, mixed, or blended, whichever occurs first, and 
ends when the product is completed.” 
 
“[D]espite the diverse factual contexts to which R.C. 5739.01(E)(2) has been 
applied, a synthesis of past decisions reveals a nearly uniform analysis.  The 
central inquiry remains as follows: ‘[w]hen does the manufacturing or processing 
activity begin and end, and is the property used or consumed during and in the 
manufacturing or processing period?’ * * * Consequently, tangible personal 
property which is employed in operations preliminary or preparatory to production 
of the marketable product, * * * or employed subsequent to completion of the 
manufacturing process, * * * is not exempt.”  (Emphasis sic.)  (Citations omitted.) 
 
 
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Bird & Son, Inc. v. Limbach (1989), 45 Ohio St.3d 76, 79, 543 N.E.2d 1161, 1164-
1165. 
 
The BTA correctly decided that “Anheuser-Busch’s processing of beer ends 
at the conclusion of the pasteurization process.”  This process, which occurs after 
the beer is bottled and capped but before labeling, kills harmful bacteria and is the 
final transformation of the ingredients into beer.  As the BTA aptly stated, “[t]he 
beer in the unlabeled bottles is as fit for consumption prior to the application of 
label as it is afterwards.  Consequently, because the labeling of bottles occurs 
subsequent to processing, and because labels do not alter the state or form of the 
beer, we find that the manufacturing exception under R.C. 5739.01(E)(2) does not 
apply to the purchase and installation of the glue rollers on the labelers.” 
 
Moreover, the BTA decided that “the [Videojet] coding is used for internal 
tracking.  * * * Like the labeling process for the bottles, the coding does not alter 
the state or form of the [bottled] beer.  Accordingly, we find that R.C. 
5739.01(E)(2) does not apply to the Videojet coding system.”  We agree with the 
BTA’s conclusions. 
 
During the later audit period, pursuant to the redefined rules, the 
commissioner assessed use tax against the Paxton blower system and Videojet 
coding machines.  The applicable, current version of R.C. 5739.01(E)(9) (formerly 
numbered [E][10]) states that “ ‘[r]etail sale’ and ‘sales at retail’ include all sales 
except those in which the purpose of the consumer is * * * [t]o use the thing 
transferred, as described in section 5739.011 of the Revised Code, primarily in a 
manufacturing operation to produce tangible personal property for sale.” 
 
“[T]he ‘thing transferred’ includes, but is not limited to, any of the 
following: 
 
 
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“(1) Production machinery and equipment that act upon the product or 
machinery and equipment that treat the materials or parts in preparation for the 
manufacturing operation.”  R.C. 5739.011(B)(1). 
 
The manufacturing operation is the “process in which materials are changed, 
converted, or transformed into a different state or form from which they previously 
existed and includes refining materials, assembling parts, and preparing raw 
materials and parts by mixing, measuring, blending, or otherwise committing such 
materials or parts to the manufacturing process.  ‘Manufacturing operation’ does 
not include packaging.”  R.C. 5739.01(S). 
 
The BTA correctly determined that the Paxton blower system and the 
Videojet coding machines function after the conclusion of the manufacturing 
operation.  They play no role in changing, converting, or transforming ingredients 
into beer, the product here. Furthermore, as the BTA determined, these items are 
not production machinery.  This equipment does not “act upon the product” as 
required by R.C. 5739.011. 
PACKAGING 
 
Alternatively, Anheuser-Busch contends that, for both audit periods, the 
disputed items qualify for exemption under former R.C. 5739.02(B)(15), which 
read essentially the same for both audit periods: 
 
“The tax does not apply to the following: 
 
“ * * * 
 
“Sales to persons engaged in any of the activities mentioned in division 
(E)(2) or (10) [now numbered (9)] of section 5739.01 of the Revised Code, of 
packages, including materials and parts therefor [for packages], and of machinery, 
equipment, and material for use * * * in packaging tangible personal property 
produced for sale, * * * or sold at retail.  ‘Packages’ includes bags, baskets, 
 
 
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cartons, crates, boxes, cans, bottles, bindings, wrappings, and other similar devices 
and containers, and ‘packaging’ means placing therein.” 
 
This statute exempts two categories of items — packages and packaging 
equipment.  “Only those items that are essential to the restraining of movement of 
the goods to be sold are exempt from taxation under the packaging exception of 
R.C. 5739.02(B)(15).”  Loctite Corp. v. Tracy (1994), 71 Ohio St.3d 401, 644 
N.E.2d 281, syllabus.  There is no question here that purchases of bottling 
equipment qualify for the packaging exemption. 
 
In Loctite, we refused to except as packages design items used to create a 
prototype package.  After reviewing the definition of “material” set forth in 
Terteling Bros., Inc. v. Glander (1949), 151 Ohio St. 236, 39 O.O. 60, 85 N.E.2d 
379, paragraph three of the syllabus, we concluded that “[t]o be considered a 
‘constituent’ of or from which the tangible personal property is made, the 
purchased item must be ‘an essential part’ that serves to form, compose, or make 
up the property produced.”  Loctite, 71 Ohio St.3d at 403, 644 N.E.2d at 283.  
Coupling this definition with one of the defining characteristics of a package, that 
the package must “restrain [the] movement of the packaged object in more than 
one plane of direction[,]” Custom Beverage Packers v. Kosydar (1973), 33 Ohio 
St.2d 68, 73, 62 O.O.2d  417, 419, 294 N.E.2d 672, 675, we determined only those 
items essential to restraining the movement of the goods to be sold fall within the 
packaging exemption of R.C. 5739.02(B)(15).  Loctite at 403, 644 N.E.2d at 283.  
We concluded that “Loctite’s primary economic purpose for these items was to 
facilitate the marketing of its products, not the packaging of them.”  Id. at 404, 644 
N.E.2d at 284. 
 
Under our Loctite decision, the items at issue are not packages or packaging 
materials.  The Paxton blower system dries the bottle preparatory to coding and 
labeling the bottle.  The glue rollers are used to apply labels, and the Videojet 
 
 
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coding machine inks a code on the bottle.  Because codes and labels are not 
essential in restraining movement, the equipment that prepares the bottle for 
labeling and coding, applies glue to the labels, or codes the bottle does not qualify 
as packages or packaging material under R.C. 5739.02(B)(15). 
 
Furthermore, 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, we held that “[t]o be excepted 
from taxation under R.C. 5739.02(B)(15), machinery or equipment must be used in 
placing tangible personal property produced for sale in packages.”  In that case, 
Hawthorn used a conveyor system that unstacked and cleaned packages (plastic 
and wire milk cases) and then conveyed the packages to another part of the system, 
where the packages were then automatically repacked with filled milk cartons.  We 
exempted the system because it was an integral part of machinery or equipment 
that was used to place in packages the tangible personal property Hawthorn 
produced for sale. 
 
Unlike the conveyor system in Hawthorn Mellody, the equipment Anheuser-
Busch seeks to exempt is not integral to the “packaging,” as we have construed that 
term, of its product.  The disputed equipment prepares bottles and labels for 
labeling, and encodes bottles; without question it is not used to place the beer into 
packages. 
CONCLUSION 
 
Anheuser-Busch did not use the disputed equipment directly in producing, 
by manufacturing or processing, tangible personal property for sale, nor was it 
used primarily in a manufacturing operation.  Moreover, the equipment is not a 
package or packaging material, and it does not meet the definition of packaging 
equipment. 
 
Accordingly, the decision of the BTA, being neither unreasonable nor 
unlawful, is affirmed. 
 
 
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Decision affirmed. 
 
MOYER, C.J., DOUGLAS, RESNICK and F.E. SWEENEY, JJ., concur. 
 
PFEIFER, J., dissents. 
 
LUNDBERG STRATTON, J., dissents. 
FOOTNOTE: 
1. 
The BTA found that the Videojet coding machine was used during, but not 
in, the manufacturing process on the can line, and Anheuser-Busch argues that the 
Videojet coding machine attached to the can line is excepted. However, according 
to Anheuser-Busch’s witness and its Exhibit B, only the Videojet coding machines 
attached to the bottle line are currently in dispute. 
__________________ 
 
PFEIFER, J., dissenting.  The Tax Commissioner contends that equipment 
used to affix labels on beer bottles doesn’t fit within the manufacturing or 
packaging exception.  Apparently it’s not enough to tax the end-user.  Now the Tax 
Commissioner wants to find every interstitial fissure within a manufacturing 
process that doesn’t exactly and precisely fit an exception and tax that too. 
 
I believe that such a stance undermines the clear intent of the General 
Assembly.  The General Assembly can, of course, enact another exception to cover 
can and bottle labeling machines.  It shouldn’t have to.  Such specific exceptions 
make the Tax Code unnecessarily complex.  It wouldn’t have to if the Tax 
Commissioner didn’t interpret the code unreasonably. 
 
Unfortunately, while Anheuser-Busch loses this case, the real burden of the 
Tax Commissioner’s policy falls on small businesses that lack the resources to 
challenge the Tax Code.  The Tax Code and its application should be logical and 
consistent.  Sadly, the Tax Commissioner’s stance on this and similar issues 
requires businesses to churn more paper, hire more lawyers, and waste more 
 
 
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resources in a quixotic effort to comply with the Tax Commissioner’s ever so 
tortured code interpretation and enforcement.  I dissent. 
__________________ 
 
LUNDBERG STRATTON, J., dissenting.  I believe that the bottle drying 
system, Videojet coder, and the glue labelers are exempt under the packaging 
exception of former R.C. 5739.02(B)(15). 
 
The majority holds that the bottle drying system, glue rollers, and the 
Videojet coding system are not subject to the packaging exemption because (1) 
these pieces of equipment are not packages or packing material and (2) none of this 
equipment places the beer into the bottles.  I believe that this interpretation is not 
supported by the language of former R.C. 5739.02(B)(15).  I also believe that the 
majority’s holding continues the artificial and unreasonable conclusion that  
labeling falls into a “no man’s land” that is neither packaging nor manufacturing.  
Certainly this was not the intent of the General Assembly in enacting the 
manufacturing and packaging tax exemption statutes. 
Labels are a Material that Constitutes Part of a Package 
 
In support of its holding that these pieces of equipment are not packages or 
packaging material, the majority relies primarily upon Loctite Corp. v. Tracy 
(1994), 71 Ohio St.3d 401, 644 N.E.2d 281.  In Loctite, this court held that color 
separation negatives and chromolin proofs were not exempt under the packaging 
exemption because neither the negatives nor the chromolin proofs were part of the 
material that restrained the movement of the packaged goods.  Id. at 403, 644 
N.E.2d at 283. 
 
The restraint requirement for the packaging exemption was originally 
formulated in Custom Beverage Packers, Inc. v. Kosydar (1973), 33 Ohio St.2d 68, 
62 O.O.2d 417, 294 N.E.2d 672.  In Custom Beverage, the issue was whether 
unbound pallets were packages as defined in former R.C. 5739.02(B)(15).  The 
 
 
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court determined that the packages listed in former R.C. 5739.02(B)(15) restrained 
the packaged object in more than one direction.  Custom Beverage at 73, 62 
O.O.2d at 419, 294 N.E.2d at 675.  Under this test, the court determined that 
unbound pallets were not packages because they restrained movement of cases of 
soft drinks in only one direction — down. 
 
In Custom Beverage, the court justifiably restricted its interpretation as to 
the nature of a package to prevent an unwarranted expansion to an item that does 
not truly restrain the packaged item but merely provides a convenient support base 
for transportation of groups of the packaged items.  I agree with this definition as 
to the general nature and purpose of a “package.”  However, I believe that the court 
in Loctite, and now the majority in this case, have taken the restraint requirement 
from Custom Beverage too far in holding that only materials incorporated into the 
package that also restrain the packaged product are exempt.  More importantly, I 
believe that the court in Loctite misinterpreted former R.C. 5739.02(B)(15). 
 
Former R.C. 5739.02(B)(15) exempted “packages, including material and 
parts therefor.”  (Emphasis added.)  In Loctite, the majority held that the language 
of R.C. 5739.02(B)(15) meant that “[o]nly those items that are essential to the 
restraining of movement of the goods to be sold are exempt from taxation under 
the packaging exception of R.C. 5739.02(B)(15).”  Loctite at the syllabus.  The 
court in Loctite reasoned that “the last sentence of the statute [R.C. 
5739.02(B)(15)], which cites examples of packages, indicates that only material 
and parts that serve the essential purpose of the package [restraining movement of 
the packaged product] are exempt.”  Id. at 403, 644 N.E.2d at 283.  I disagree. 
 
The last sentence of former R.C. 5739.02(B)(15) states that “ ‘[p]ackages’ 
includes bags, baskets, cartons, crates, boxes, cans, bottles, bindings, wrappings, 
and other similar devices and containers, and ‘packaging’ means placing therein.”  
This sentence gives a nonexhaustive list of examples of packages, but in no way 
 
 
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restricts the material or parts used to create a package to only those materials or 
parts that actually restrain the packaged product.  Thus, I believe that the court in 
Loctite misinterpreted R.C. 5739.02(B)(15) in an overly restrictive fashion with 
regard to what materials that make up a package are exempt from taxation. 
 
The language of R.C. 5739.02(B)(15) is unqualified by any limiting 
language as to the definition of materials and parts that make up a package. 
Further, common sense dictates that this description was intended to be broad and 
inclusive.  Accordingly, I would hold that the plain language of former R.C. 
5739.02(B)(15) indicates that all material and parts incorporated into the package 
are exempt from taxation, regardless of whether the particular material restrains 
movement of the packaged product. 
 
I find this interpretation particularly compelling when the relationship 
between a package and a label are considered.  In today’s society, a label is an 
absolute requirement to every commercially created package, and probably most 
non-commercial packages also. 
 
Further, both packaging and labeling serve equally compelling purposes.  
Practically speaking, packaging is necessary primarily to protect and restrain the 
packaged product for shipping.  Labeling on the package, although not helpful in 
restraining a product, is just as essential for the purpose of informing the recipient 
of the nature, quantity, components, features, etc. of the packaged product.  A 
product simply would not be marketable without a label.  No one would purchase a 
bottle of beer without a means to determine its contents or manufacturer.  Without 
a label, the packaged product may be useless or even dangerous to the ultimate 
consumer.  Thus, I would find that common usage of the word “package” also 
includes its “label.” 
 
Because of the plain language of R.C. 5739.02(B)(15) and the symbiotic 
relationship between packages and labels, I would hold that a label is part of the 
 
 
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material that constitutes a package even though a label does not restrain the 
packaged product.  Consequently, I would also modify Loctite to hold that while a 
package by nature must restrain the packaged product, no such limitation is placed 
on the material that is incorporated into the package.  In other words, I would hold 
that all materials, specifically including labels, that are incorporated into or onto a 
package are exempt from taxation pursuant to R.C. 5739.02(B)(15). 
 
The Bottle Dryer, Glue Rollers, and Videojet Coder are Equipment or 
Machines that Package Tangible Personal Property 
 
The majority also holds that the bottle dryer, glue rollers, and the Videojet 
coder are not machines that are integral to packaging the beer because none of 
these machines places the beer into bottles.  I disagree.  In light of my 
aforementioned definition that a label is part of the material that constitutes a 
package, I would also hold that any machine or piece of equipment that applies or 
facilitates the application of a label onto a package is a machine or piece of 
equipment “for use * * * in packaging tangible personal property” pursuant to R.C. 
5739.02(B)(15). 
 
In this case, the bottle dryer dries the bottle in preparation to accept a label, 
the glue roller distributes glue on the label so it can be affixed to the bottle, and the 
Videojet coder applies a code (label) to the bottle.  Therefore, I would find that 
each of these machines “packages” beer in bottles as the term is defined in R.C. 
5739.02(B)(15).  Accordingly, I would hold that the glue rollers, bottle dryer, and 
Videojet coder are exempt from taxation pursuant to R.C. 5739.02(B)(15).  
Accordingly, I dissent.