Case Title: Lafarge North America, Inc. v. Testa

Citation: 2018-Ohio-2047

Docket Number: 2016-1074

State: ohio

Court: Ohio Supreme Court

Date: 2018-05-31T00:00:00Z

Document:
[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as 
Lafarge N. Am., Inc. v. Testa, Slip Opinion No. 2018-Ohio-2047.] 
 
 
 
NOTICE 
This slip opinion is subject to formal revision before it is published in an 
advance sheet of the Ohio Official Reports.  Readers are requested to 
promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65 
South Front Street, Columbus, Ohio 43215, of any typographical or other 
formal errors in the opinion, in order that corrections may be made before 
the opinion is published. 
 
 
SLIP OPINION NO. 2018-OHIO-2047 
LAFARGE NORTH AMERICA, INC., APPELLANT, v. TESTA, TAX COMMR., 
APPELLEE. 
[Until this opinion appears in the Ohio Official Reports advance sheets, it 
may be cited as Lafarge N. Am., Inc. v. Testa, Slip Opinion No.  
2018-Ohio-2047.] 
Use tax—Pelletized-slag manufacturer’s breaking up and transport of solidified 
slag 
are 
part 
of 
its 
“manufacturing 
operation” 
under 
R.C. 
5739.02(B)(42)(g) such that use tax applies to its purchases of fuel and 
repair parts for its equipment used primarily to break up and transport 
slag—Board of Tax Appeals’ decision reversed and cause remanded for it 
to determine extent to which fuel and repair parts are used in slag 
manufacturing for purposes of R.C. 5739.011(D) and to determine extent to 
which penalty must be abated. 
(No. 2016-1074—Submitted April 10, 2018—Decided May 31, 2018.) 
APPEAL from the Board of Tax Appeals, No. 2015-763. 
_______________________ 
SUPREME COURT OF OHIO 
 
 
2
Per Curiam. 
{¶ 1} This case involves slag, a by-product that separates from molten ore 
during steelmaking.  Once separated from the ore, molten slag cools and solidifies 
into a stony substance.  From there, it may be crushed into different sizes and used 
in construction applications, often as a base for roads. 
{¶ 2} The Ohio operations of appellant, Lafarge North America, Inc., 
include manufacturing pelletized slag at a facility in Lordstown.  At issue here is 
whether the Ohio use tax applies to Lafarge’s purchases of fuel and repair parts for 
equipment used to break up and transport solidified slag from what the parties refer 
to as the “slag mountain,” a large slag mass that numerous steel mills created over 
several decades.  Whether the tax applies depends on whether the activity is part of 
Lafarge’s “manufacturing operation” under R.C. 5739.02(B)(42)(g). 
{¶ 3} After an audit, the Ohio Department of Taxation assessed the use tax, 
interest, and a penalty against Lafarge for purchases for the equipment in question.  
Lafarge challenged the assessment, and appellee, the tax commissioner, determined 
that the breaking up and transport of slag from the slag mountain precedes 
Lafarge’s manufacturing operation.  The commissioner concluded that Lafarge’s 
manufacturing operation does not begin until the slag reaches equipment that 
screens and sorts it by size.  The Board of Tax Appeals (“BTA”) affirmed the 
commissioner’s final determination. 
{¶ 4} Lafarge appealed to this court.  Because the BTA misapplied the law 
to the undisputed facts, we reverse the BTA’s decision and remand the case to the 
BTA for further proceedings consistent with this opinion. 
Facts and Procedural History 
{¶ 5} In 1926, steel mills near Youngstown began dumping slag at a single 
waste site.  Over the years, the discarded slag accumulated, forming the slag 
mountain.  From this mass, Lafarge manufactures various sizes of pelletized slag, 
which it sells for use in road construction. 
January Term, 2018 
 
3
{¶ 6} Lafarge’s manager of the Lordstown facility, Timothy Wirtz, 
explained in his testimony before the BTA that the slag mountain does not consist 
of “manageable size pieces” that can be easily removed for processing.  So to 
transform the slag mountain into marketable slag, Lafarge undertakes three basic 
steps that involve (1) a bulldozer, (2) front-end loaders and dump trucks, and (3) a 
screening plant. 
{¶ 7} The bulldozer, fitted with a large steel tooth at its rear, rips the slag in 
a grid pattern, breaking up a section of the slag mountain.  The bulldozer then drives 
back and forth over the broken slag, crushing it into smaller pieces.  Next, the 
bulldozer pushes the broken slag to a “surge pile.”  From there, front-end loaders 
transfer the slag to dump trucks that take the material to a screening plant, also at 
the Lordstown facility.  There, the material is placed into a “grizzly” or “vibratory” 
feeder that separates oversized pieces, removes pieces of iron, and funnels the 
remaining slag to a conveyor belt that leads to screens that sort the material by size.  
Once the slag is screened and sorted, the process is finished and the product is ready 
to be sold.  The finished product varies in size from as large as eight inches in 
diameter to as small as dust. 
{¶ 8} The Department of Taxation audited all of Lafarge’s Ohio operations, 
covering the period April 2009 through March 2013.  As a result of the audit, the 
department assessed a use tax of $656,871.14, plus a 15 percent penalty of 
$98,530.28 and interest totaling $59,895.12.  Lafarge paid a substantial portion of 
these amounts ($698,979.15 in total) but challenged the assessment, interest, and 
penalty associated with its Lordstown slag-manufacturing operation.  The 
department had found that the bulldozer, two front-end loaders, and three dump 
trucks Lafarge uses to remove slag from the slag mountain and transport it to the 
screening plant are not part of the manufacturing operation and that purchases of 
fuel and repair parts for that equipment are therefore taxable.  Lafarge disagreed, 
SUPREME COURT OF OHIO 
 
 
4
claiming that under R.C. 5739.02(B)(42)(g), the use tax does not apply because the 
equipment is used to manufacture slag. 
{¶ 9} The tax commissioner denied Lafarge’s objection, finding that the 
“items at issue are used to excavate slag from the slag pile prior to the start of the 
manufacturing process.  This is analogous to a manufacturer removing a raw 
material from initial storage.  Equipment used to move raw materials prior to the 
start of the manufacturing process is taxable.”  The commissioner also denied 
Lafarge’s request for abatement of the penalty. 
{¶ 10} Lafarge appealed to the BTA, which found that “the cutting and 
crushing of the slag, and the slag’s transport to the mill, are not part of the 
manufacturing process.”  BTA No. 2015-763, 2016 WL 3469366, *4 (June 21, 
2016).  Continuing, the BTA stated that “Lafarge is simply moving raw material 
from a pre-production point of storage, not ‘continuing’ a manufacturing operation. 
* * * We agree with the commissioner that the time at which the slag is committed 
to ‘processing,’ and manufacturing begins, is * * * when the slag pieces arrive at 
the mill.”  Id.  The BTA thus affirmed the tax assessment and the penalty. 
{¶ 11} Lafarge appealed to this court as a matter of right. 
Analysis 
When the manufacturing operation begins 
{¶ 12} Ohio’s use tax does not apply to the purchase of an item intended for 
use “primarily in a manufacturing operation to produce tangible personal property 
for sale.”  R.C. 5739.02(B)(42)(g); see also R.C. 5741.02(C)(2).  The tax 
commissioner concedes that Lafarge’s production of pelletized slag is a 
manufacturing operation within the meaning of R.C. 5739.02(B)(42)(g), but he 
rejects Lafarge’s argument as to when its manufacturing operation begins.  He says 
that Lafarge’s activities at the slag mountain involve merely the excavation and 
transportation of raw material from storage and that Lafarge’s manufacturing 
operation does not begin until the slag reaches the screening plant.  Lafarge 
January Term, 2018 
 
5
disagrees, emphasizing that it breaks up the slag to marketable sizes almost entirely 
at the slag mountain—before the slag reaches the screening plant. 
{¶ 13} We must determine whether the BTA’s decision is “reasonable and 
lawful.”  R.C. 5717.04.  In doing so, we must defer to the BTA’s factual findings, 
so long as they are supported by “ ‘reliable and probative’ ” evidence in the record.  
Satullo v. Wilkins, 111 Ohio St.3d 399, 2006-Ohio-5856, 856 N.E.2d 954, ¶ 14, 
quoting Am. Natl. Can Co. v. Tracy, 72 Ohio St.3d 150, 152, 648 N.E.2d 483 
(1995).  But we must review legal issues de novo.  Crown Communication, Inc. v. 
Testa, 136 Ohio St.3d 209, 2013-Ohio-3126, 992 N.E.2d 1135, ¶ 16.  Because the 
issue presented involves an application of the law to largely undisputed facts, we 
review the issue de novo.  Cincinnati v. Testa, 143 Ohio St.3d 371, 2015-Ohio-
1775, 38 N.E.3d 847, ¶ 15. 
{¶ 14} The use tax does not apply to a purchase when “the purpose of the 
purchaser is * * * [t]o use the thing transferred, as described in [R.C.] 5739.011  
* * *, primarily in a manufacturing operation to produce tangible personal property 
for sale.”  R.C. 5739.02(B)(42)(g).  The tax commissioner does not dispute that 
“thing transferred” includes fuel and repair parts for equipment used in a 
manufacturing operation.  See R.C. 5739.011(B)(1), (2), and (11); Ohio Adm.Code 
5703-9-21(C)(5).  “Manufacturing operation” is defined in R.C. 5739.01(S) and 
Ohio Adm.Code 5703-9-21(B)(1). 
{¶ 15} R.C. 5739.01(S) defines “manufacturing operation” as “a 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.”  The operative language of this definition is its first clause—“a process 
in which materials are changed, converted, or transformed into a different state or 
form from which they previously existed.”  The second clause, which lists activities 
SUPREME COURT OF OHIO 
 
 
6
“include[d]” within the primary definition, merely illustrates types of actions that 
constitute a manufacturing operation.  See Trans Rail Am., Inc. v. Enyeart, 123 
Ohio St.3d 1, 2009-Ohio-3624, 913 N.E.2d 948, ¶ 28. 
{¶ 16} After repeating the language of R.C. 5739.01(S), Ohio Adm.Code 
5703-9-21(B)(1) further defines when a manufacturing operation begins:  
 
The manufacturing operation begins when the raw materials 
or parts are committed to the manufacturing process.  If the raw 
materials or parts are stored after being received at the 
manufacturing facility, the raw materials or parts are not committed 
until after they are removed from such initial storage.  The point of 
commitment is where the materials handling from such initial 
storage has ceased or the point where the materials or parts have 
been mixed, measured, blended, heated, cleaned, or otherwise 
treated or prepared for the manufacturing process, whichever first 
occurs.  If the raw materials or parts are not stored, they are 
committed at the point where materials handling from the place of 
receipt ceases or where they are mixed, measured, blended, heated, 
cleaned, or otherwise treated or prepared for the manufacturing 
process, whichever first occurs.  The commitment of the materials 
or parts need not be irrevocable, but they must have reached the 
point, after materials handling from initial storage has ceased, where 
they normally will be utilized within a short period of time.  The 
point of commitment frequently will be different for particular 
materials and parts, since they are introduced at different times in 
the manufacturing operation. 
Things used in any activity, including movement or storage 
of the materials of parts before they are committed are taxable. 
January Term, 2018 
 
7
 
Here, the operative language is: “The manufacturing operation begins when the raw 
materials or parts are committed to the manufacturing process.”  What follows that 
sentence is conditional; whether the text following that sentence is applicable to a 
manufacturing operation depends on the nature of the operation and whether the 
material is “stored after being received.” 
{¶ 17} Thus, 
to 
determine 
whether 
Lafarge’s 
Lordstown 
slag-
manufacturing operation begins at the slag mountain, we must answer two 
questions: When is the slag “changed, converted, or transformed into a different 
state or form from which [it] previously existed”?  And when is the slag “committed 
to the manufacturing process”?   
{¶ 18} To answer these questions, it is important to understand that the 
object of Lafarge’s manufacturing operation is to reduce the slag mountain to 
smaller, marketable pieces of slag.  To get there, Lafarge simply breaks up the 
material and crushes it.  Its process never involves mixing or blending in other 
materials, adding chemicals, heating, cooling, or otherwise treating the slag. 
{¶ 19} The BTA found that “the cutting and crushing of the slag, and the 
slag’s transport to the mill [i.e., the screening plant], are not part of the 
manufacturing process.”  2016 WL 3469366 at *4.  It characterized Lafarge’s 
activity before the slag arrives at the screening plant as “simply moving raw 
material from a pre-production point of storage, not ‘continuing’ a manufacturing 
operation.”  Id.  In defense of these findings, the tax commissioner points to 
evidence showing that Lafarge’s activity at the slag mountain facilitates 
transportation of the slag to the screening plant.  He emphasizes Wirtz’s testimony 
that the bulldozer breaks up the slag “a little bit” into “manageable size pieces” that 
can be picked up by a front-end loader.  Wirtz also characterized the slag mountain 
as “a storage pile.”  This evidence, the tax commissioner argues, shows that Lafarge 
SUPREME COURT OF OHIO 
 
 
8
uses the equipment at issue only to transport raw material to the actual 
manufacturing operation. 
{¶ 20} But when viewed as a whole, the evidence shows that the equipment 
is not merely facilitating the transportation of slag from “initial storage” to the 
screening plant.  It is undisputed that after separating slag from the mountain, the 
bulldozer drives over it, crushing it in the process.  To be sure, this action allows 
the front-end loaders to pick up the slag for transport, but the evidence does not 
support the conclusion that that is the bulldozer’s only purpose. 
{¶ 21} No evidence shows that the slag undergoes any significant 
transformation in form once it reaches the screening plant.  To the contrary, Wirtz 
explained that the slag has “already been broken up” by the time the bulldozer has 
pushed it into a surge pile.  When the slag reaches the screening plant, the vibratory 
feeder removes slag pieces that are “still too oversized to fit through the mill,” and 
then it is mostly just a matter of sorting by size. 
{¶ 22} The undisputed evidence shows that once it arrives at the screening 
plant, the slag does not undergo any additional material “change[], conver[sion], or 
transform[ation] into a different state or form from which [it] previously existed,” 
R.C. 5739.01(S).  That is because the real change has already taken place at the slag 
mountain.  It follows that the act of cutting slag from the mountain “commit[s] [the 
material] to the manufacturing process,” Ohio Adm.Code 5703-9-21(B)(1).  Once 
it has begun, the manufacturing operation continues until Lafarge has completed its 
manufacture of pelletized slag.  See R.C. 5739.011(A)(6) (defining “continuous 
manufacturing operation” as “the process in which raw materials or components 
are moved through the steps whereby manufacturing occurs”).  Therefore, the 
manufacturing operation begins once Lafarge cuts slag from the mountain, and the 
manufacturing operation continues as the bulldozer crushes the material, the front-
end loaders place it in dump trucks, and the trucks transport it to the screening plant. 
January Term, 2018 
 
9
{¶ 23} The only remaining question is whether the fuel and repair parts 
Lafarge purchased for the equipment at issue are used “primarily” in Lafarge’s 
manufacturing operation.  See R.C. 5739.02(B)(42)(g).  Regarding the primary-use 
question, R.C. 5739.011(D) provides that 
 
if the “thing transferred” is a machine used by a manufacturer in 
both a taxable and an exempt manner, it shall be totally taxable or 
totally exempt from taxation based upon its quantified primary use.  
If the “things transferred” are fungibles, they shall be taxed based 
upon the proportion of the fungibles used in a taxable manner. 
 
{¶ 24} The main issue here is the extent to which the fuel and repair parts 
are used in slag manufacturing, as opposed to a landfill operation that Lafarge also 
operates at the same site.  On remand, with the guidance of R.C. 5739.011(D), the 
BTA shall determine on the existing record the extent to which the use tax applies 
to the fuel and repair-part purchases that Lafarge made for the six pieces of 
equipment it uses for slag manufacturing at its Lordstown facility. 
The penalty 
{¶ 25} Lafarge also argues that we should abate the 15 percent penalty 
imposed by the Department of Taxation.  Lafarge will not owe penalty attributable 
to any portion of the tax that was erroneously assessed.  Therefore, on remand, the 
BTA also shall determine the extent to which the previously assessed penalty must 
be abated. 
Conclusion 
{¶ 26} For the foregoing reasons, we reverse the BTA’s decision and 
remand the case to the BTA for further proceedings consistent with this opinion. 
Decision reversed 
and cause remanded. 
SUPREME COURT OF OHIO 
 
 
10 
O’CONNOR, C.J., and O’DONNELL, KENNEDY, FRENCH, FISCHER, DEWINE, 
and DEGENARO, JJ., concur. 
_________________ 
Bingham Greenebaum Doll, L.L.P., and Mark A. Loyd, for appellant. 
Michael DeWine, Attorney General, and Daniel G. Kim and Raina Nahra 
Boulos, Assistant Attorneys General, for appellee. 
_________________