Title: East Manufacturing Corp. v. Testa

State: ohio

Issuer: Ohio Supreme Court

Document:

[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.] 
 
 
 
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-2923 
EAST MANUFACTURING CORPORATION, APPELLANT AND CROSS-APPELLEE, v. 
TESTA, TAX COMMR., APPELLEE AND CROSS-APPELLANT. 
[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 R.C. 5739.011(C)(5)’s exception 
for total environmental regulation of a “special and limited area” of the 
facility or for either R.C. 5739.011(B)(4)’s general exemption for items 
used in a manufacturing operation or R.C. 5739.011(B)(8)’s specific 
exemption for gas used in a manufacturing operation—Board of Tax 
Appeals’ decision affirmed. 
(No. 2017-0666—Submitted April 24, 2018—Decided July 26, 2018.) 
APPEAL and CROSS-APPEAL from the Board of Tax Appeals, No. 2015-2111. 
____________________ 
 
 
SUPREME COURT OF OHIO 
 
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DEGENARO, J. 
{¶ 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 
appellant 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 
R.C. 5739.011(B)(4), (B)(8), or (C)(5).  We disagree and affirm the decision of the 
BTA. 
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 commissioner, 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 nonexempt, but it contended that the remaining 
January Term, 2018 
 
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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 specifications the plant adhered to and their importance to the 
solidity of the welds, and he noted that welding at temperatures of 50 degrees or 
higher prevents condensation from accumulating on the aluminum and infecting 
the welds, steadies the hands of the welders, and is important in bending 
aluminum.1 
{¶ 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 
of 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 
                                                 
1 East also contends that maintaining a temperature of at least 50 degrees is necessary for painting 
steel, which it performs in Building D.  The tax commissioner argues that because East mentioned 
only welding in its petition for reassessment and notice of appeal to the BTA, East has waived the 
argument.  Because of our disposition of the appeal, we will not address this issue.   
SUPREME COURT OF OHIO 
 
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limited area’ ” as required for exemption under R.C. 5739.011(C)(5).  BTA No. 
2015-2111, 2017 WL 1443845, *3 (Apr. 17, 2017). 
{¶ 7} With respect to East’s claim that the gas was generally “used during 
the manufacturing operation” under R.C. 5739.011(B)(4) and also qualified under 
the more specific exemption for gas “used in the manufacturing operation” under 
R.C. 5739.011(B)(8), the BTA concluded that the heating constituted a type of 
“quality control function” rather than a necessity for the manufacturing operation.  
2017 WL 1443845 at *4.  The BTA elaborated by stating that instead of being 
“necessary for the * * * continuation of the manufacturing process” under R.C. 
5739.011(B)(4), “some of the issues raised by failure to regulate temperature in the 
manufacturing areas were cosmetic in nature, e.g., trailers were not as ‘shiny’ and 
therefore not as ‘attractive,’ ” a consideration that brought East’s products “ ‘within 
[a] margin of acceptable quality.’ ”  2017 WL 1443845 at *4, quoting the hearing 
transcript. 
{¶ 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.  R.C. 5717.04.  Factual findings will be affirmed if supported by reliable 
and probative evidence, while legal issues will be reviewed de novo.  Accel, Inc. v. 
Testa, 152 Ohio St.3d 262, 2017-Ohio-8798, 95 N.E.3d 345, ¶ 11, 16.  Although 
the BTA recited East’s contentions that temperature maintenance was essential to 
its ability to perform welding and painting operations, the BTA made no finding 
that those assertions were correct.  See id. at ¶ 35-37 (BTA’s recitation of taxpayer’s 
argument did not constitute a finding by the BTA that that argument was correct).  
Instead, the BTA focused on how the relevant statutes and administrative rules 
should be construed and applied assuming that East’s factual contentions were true.  
Thus, this case primarily presents a question of law. 
January Term, 2018 
 
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{¶ 10} Under the sales- and use-tax statutes, every sale or use of tangible 
personal property is presumed to be taxable.  R.C. 5739.02(C) (“[A]ll sales made 
in this state are subject to the [sales] tax until the contrary is established”); R.C. 
5741.02(G) (“[I]t shall be presumed that any use * * * of tangible personal property 
in this state is subject to the [use] tax until the contrary is established”).  Thus, East 
bears the burden of proving that it is entitled to an exemption under R.C. 5739.011. 
{¶ 11} R.C. 5739.02(B)(42)(g) states that the use tax does not apply “where 
the purpose of the purchaser 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.” 
{¶ 12} Throughout the proceedings before the tax commissioner, the BTA, 
and this court, East has claimed that it is entitled to the R.C. 5739.011 “thing 
transferred” exemption under three theories.  First, it claims that the natural gas is 
“tangible personal property used during the manufacturing operation that 
control[s], physically support[s], produce[s] power for, lubricate[s], or [is] 
otherwise necessary for the functioning of production machinery and equipment 
and the continuation of the manufacturing operation,” R.C. 5739.011(B)(4); Ohio 
Adm.Code 5703-9-21(C)(4); second, that it is “gas * * * used in the manufacturing 
operation,” R.C. 5739.011(B)(8); Ohio Adm.Code 5703-9-21(C)(8); and third, that 
it is “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,” R.C. 5739.011(C)(5), an exception that applies to a “clean 
room or paint booth,” Ohio Adm.Code 5703-9-21(D)(6). 
{¶ 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 R.C. 5739.011(C)(5).  The statute provides that for purposes of 
R.C. 5739.02(B)(42)(g), the “thing transferred” does not include 
 
SUPREME COURT OF OHIO 
 
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[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.)  R.C. 5739.011(C)(5).  Thus, under R.C. 5739.011(C)(5), gas 
used for temperature regulation generally is not exempt from taxation unless the 
gas qualifies under the “special and limited area” exception. 
{¶ 14} Ohio Adm.Code 5703-9-21(D)(6) elaborates as follows: 
 
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. 
 
January Term, 2018 
 
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(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.  Employees 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. 
 
Ohio Adm.Code 5703-9-21, Example 7. 
SUPREME COURT OF OHIO 
 
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{¶ 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.”  Id.  Conversely, Example 48 posits a 
candy-cane maker that needs to regulate temperature and humidity to fabricate the 
product, but no exemption is available because the regulation occurs throughout the 
factory.  Id., Example 48. 
{¶ 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 “special and limited area” inasmuch as 
only its buildings—not all the contiguous property under East’s ownership that is 
part of the facility—are heated.  But equating “special and limited area” with 
“indoors” would result in the exception swallowing the general rule that the “thing 
transferred” for temperature regulation is taxable and would defeat the restrictive 
effect of the statutory language.  Second, East equates “subareas” in the buildings 
where the manufacturing occurs with “special and limited area.”  This argument 
fails because the heating permeates the entirety of the buildings, even if it is most 
important at particular places within the plant.  Ohio Adm.Code 5703-9-21 
describes a clean room as an area that is physically separated from the rest of the 
facility and where the environmental conditions are more fully regulated than in 
other areas. 
{¶ 20} The stated purpose of R.C. 5739.011(C)(5) is to establish that the 
concept of “use[] in the manufacturing operation” under R.C. 5739.011(B) does not 
extend generally to the function of regulating the environment within which 
manufacturing occurs.  See Ellwood Engineered Castings, 98 Ohio St.3d 424, 
January Term, 2018 
 
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2003-Ohio-1812, 786 N.E.2d 458, at ¶ 35 (the “first part” of R.C. 5739.011(C)(5) 
“specifically exclude[s] as a ‘thing transferred’ * * * tangible personal property 
used for * * * environmental control”).  And the “special and limited area” 
exception of R.C. 5739.011(C)(5) evinces the legislative decision to allow 
exemption in a very limited circumstance.  Ellwood Engineered Castings at ¶ 35 
(the “second part” of R.C. 5739.011(C)(5) “provide[s] a limited exception from the 
general exclusion”); see Ohio Adm.Code 5703-9-21(D)(6).  The legislative 
creation of a narrow scope of exemption for particular items or transactions should 
not be circumvented by an expansive interpretation of other, more general tax 
exemptions.  See Columbus City School Dist. Bd. of Edn. v. Testa, 130 Ohio St.3d 
344, 2011-Ohio-5534, 958 N.E.2d 557, ¶ 28; Innkeeper Ministries, Inc. v. Testa, 
148 Ohio St.3d 43, 2016-Ohio-5104, 68 N.E.3d 765, ¶ 19. 
{¶ 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 Ohio Adm.Code 5703-9-21, Example 7, the record demonstrates that it is the 
equivalent of the candy-cane manufacturer described in Example 48 of that 
provision. 
{¶ 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 used to regulate temperature is specifically excluded from exemption by 
R.C. 5739.011(C)(5), and because of that exclusion, it cannot be deemed to be 
“used in the manufacturing operation” for purposes of applying R.C. 5739.011(B).  
That is the very function of R.C. 5739.011(C)(5) in the legislative scheme.  The 
statute in clear terms requires the distinction between East’s use of natural gas 
directly to operate welding and painting equipment, which was exempted, and its 
SUPREME COURT OF OHIO 
 
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use of gas to control the environment within which the manufacturing operation 
occurs, which R.C. 5739.011(C)(5) excludes from exemption.  Thus, the BTA’s 
rejection of East’s “clean room” arguments under R.C. 5739.011(C)(5) was 
reasonable and lawful. 
{¶ 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 
R.C. 5739.011(B)(4), which generally exempts items used in a manufacturing 
operation, and under R.C. 5739.011(B)(8), which specifically exempts gas that is 
used in a manufacturing operation. 
{¶ 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 R.C. 5739.011(C)(5).  As a result, gas 
used for heating cannot also qualify as being “used in the manufacturing operation” 
for purposes of R.C. 5739.011(B)(4) and (B)(8).  R.C. 5739.011(C)(5) is a more 
specific provision that excludes from exempt status those items that are used for 
temperature control, even if those items would otherwise fall under the more 
general exempting language of R.C. 5739.011(B). 
{¶ 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 specific 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 
R.C. 1.51.  Just as the more specific exclusion of pension income controlled over a 
more general definition of taxable income in MacDonald, the more specific 
exclusion of temperature regulation from the manufacturing exemption controls 
here. 
{¶ 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 
January Term, 2018 
 
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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 R.C. 5739.011(B)(4), despite the fact that the goggles also 
functioned as safety equipment, which is explicitly excluded from exemption by 
R.C. 5739.011(C)(6). 
{¶ 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 R.C. 
5739.011(C)(5).  By contrast, the goggles in Q3 performed two distinct functions: 
protecting the welder’s eyes—a safety, nonexempt function—and allowing the 
welder to see and perform welding tasks, thus being used in the manufacturing 
operation, an exempt function.  Id. at 496.  Here, East argues only that the heating 
function itself, which is nonexempt, is important to manufacturing.  Q3 is therefore 
inapposite. 
{¶ 28} Although the BTA rejected East’s claims under R.C. 5739.011(B) 
on different grounds than we apply here, the tax commissioner’s cross-appeal 
explicitly places the statutory-construction point—namely, that the more specific 
statutory provision in R.C. 5739.011(C)(5) controls over the more general statutory 
provisions described in R.C. 5739.011(B)(4) and (B)(8)—at issue.  See Internatl. 
Paper Co. v. Testa, 150 Ohio St.3d 348, 2016-Ohio-7454, 81 N.E.3d 1225, ¶ 30-
34 (discussing circumstances under which a protective cross-appeal must be filed 
in order to preserve an issue).  We are free to consider that point first, and because 
it is dispositive, we need not consider the validity of the other grounds relied on by 
the BTA when it rejected East’s claims under R.C. 5739.011(B), especially because 
the failure to satisfy any of the three prongs of the Ellwood test defeats the 
exemption claim.  See Ellwood Engineered Castings, 98 Ohio St.3d 424, 2003-
Ohio-1812, 786 N.E.2d 458, at ¶ 36. 
SUPREME COURT OF OHIO 
 
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{¶ 29} Thus, the BTA’s rejection of East’s arguments under R.C. 
5739.011(B)(4) and (B)(8) was reasonable and lawful for the reasons we articulate 
here rather than the finding relied upon by the BTA. 
{¶ 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 R.C. 
5739.011(C)(5)’s exception for total environmental regulation of a “special and 
limited area” of the facility.  The BTA also correctly determined that East does not 
qualify for R.C. 5739.011(B)(4)’s general exemption for items used in a 
manufacturing operation or for R.C. 5739.011(B)(8)’s specific exemption for gas 
used in a manufacturing operation, although for the reasons stated herein rather than 
the BTA’s rationale.  For the foregoing reasons, we affirm the decision of the BTA. 
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. 
 
Michael DeWine, Attorney General, and Sophia Hussain, Assistant 
Attorney General, for appellee and cross-appellant. 
_________________