Title: Am. Cyanamid Co. v. Tracy

State: ohio

Issuer: Ohio Supreme Court

Document:

American Cyanamid Company, Appellant, v. Tracy, Tax Commr., Appellee. 
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[Cite as Am. Cyanamid Co. v. Tracy (1996), _____ Ohio St.3d _____.] 
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Taxation -- Free drug samples distributed to physicians in Ohio by 
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New Jersey drug company’s field representatives -- Use tax 
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assessed, when -- R.C. 5739.02(B)(18), applied. 
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(No. 94-1869--Submitted November 8, 1995--Decided February 7, 
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1996.) 
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Appeal from the Board of Tax Appeals, No. 92-G-1380. 
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American Cyanamid Company (“Cyanamid”), through its Lederle 
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Laboratories Division in Wayne, New Jersey, is a manufacturer and 
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distributor of prescription pharmaceuticals.  The Tax Commissioner 
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assessed a use tax against Cyanamid for samples of prescription drugs 
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which it manufactured outside Ohio and sent to its field representatives for 
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free distribution to Ohio physicians.  The audit period for the assessment 
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was January 1, 1987 through December 31, 1989. 
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Cyanamid appealed the commissioner’s assessment to the 
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Board of Tax Appeals (“BTA”), which affirmed the assessment.  The only 
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witness presented by Cyanamid at the hearing before the BTA was its 
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manager of sales and use taxes, Edward McMillian.  He testified that about 
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eight percent of the total drugs manufactured by Cyanamid were allocated 
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for distribution as free drug samples.  The use tax assessment was based on 
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the full absorption cost of the drugs involved, which included the cost of 
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material, labor, and all overhead.  McMillian estimated that the cost of the 
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materials was forty-one percent of the manufactured cost of the drugs. 
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This cause is before this court upon an appeal as of right. 
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Baker & Hostetler, Edward J. Bernert and George H. Boerger, for 
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appellant. 
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Betty D. Montgomery, Attorney General, and Janyce C. Katz, 
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Assistant Attorney General, for appellee. 
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Per Curiam.  R.C. 5741.02(A) levies an excise tax (use tax) upon the 
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“storage, use, or other consumption in this state of tangible personal 
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property ***.”  “Use” is defined by R.C. 5741.01(C) to mean “the exercise 
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of any right or power incidental to the ownership of the thing used.” 
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In Woman’s Internatl. Bowling Congress, Inc. v. Porterfield (1971), 
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25 Ohio St.2d 271, 54 O.O.2d 383, 267 N.E.2d 781, a taxpayer received 
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emblems and awards from out-of-state suppliers which it sorted and 
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repackaged and mailed to various members.  We held that the taxpayer 
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“used” the emblems and awards purchased by it.  Recently, in Cent. 
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Transport, Inc. v. Tracy (1995), 72 Ohio St.3d 296, 649 N.E.2d 1210, we 
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affirmed a use tax assessment against a taxpayer that purchased equipment 
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for its own use from suppliers both inside and outside Ohio.  When the 
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equipment was delivered and unloaded at the taxpayer’s truck dock in Ohio, 
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it was unwrapped, as necessary, inspected and moved to appropriate trucks 
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to be delivered to locations outside Ohio.  We determined that the 
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taxpayer’s actions represented an exercise of rights of ownership in Ohio, 
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and affirmed the assessment. 
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Cyanamid’s use of the drug samples in this case is analogous to those 
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uses by the taxpayers described in the cases cited above.  Cyanamid shipped 
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the drug samples to its field representatives in Ohio, who determined to 
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which physicians they were to be distributed.  The receipt and distribution 
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of the drug samples by Cyanamid’s field representatives clearly represented 
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an exercise of a right or power incidental to the ownership of the personal 
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property.  Unless one of the exemptions set forth in R.C. 5741.02(C) is 
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applicable to the drug samples, the samples clearly are subject to the Ohio 
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use tax. 
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Cyanamid contends that “when the purchase or use of an item 
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remains exempt from the Ohio sales tax, the use of that item is also exempt 
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from the use tax.”  Cyanamid’s contends that because the raw materials that 
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were purchased to make the drug samples would have been exempted from 
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taxation, under R.C. 5739.01(E)(2), if purchased in Ohio, the use of the 
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finished product should also be exempt.  We disagree. 
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Cyanamid cites Richardson-Merrell, Inc. v. Porterfield (1972), 32 
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Ohio St.2d 281, 61 O.O.2d 501, 291 N.E.2d 528, in support of its 
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contention.  In Richardson-Merrell we exempted from sales and use taxes 
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the purchase of raw materials that were used in manufacturing drug 
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samples.  Hoewever, we need not further review the Richardson-Merrell 
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decision, because the tax status of the raw materials that went into the drug 
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samples is not an issue in this case.  We understand Cyanamid’s argument to 
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be that, if a manufacturer produced an item in Michigan and brought the 
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product into Ohio for use by the manufacturer, then the product should not 
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be subject to the use tax because the raw materials that went into the product 
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would have been exempted if they had been purchased in Ohio. 
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The commissioner has not attempted to assess the purchase of the raw 
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materials that went into the drug samples; the commissioner’s assessment 
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was made against the use of the finished personal property after it was 
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brought into Ohio. 
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The Ohio use tax is imposed against the “consumer,” which is defined 
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in R.C. 5741.01(F) as “any person who has purchased tangible personal 
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property *** for *** use *** in this state.”  Former R.C. 5741.01(D) 
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defined “purchase” to mean “production, even though the article produced 
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*** was used, stored, or consumed by the producer.”  By production and 
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use of the drug samples, Cyanamid became the “consumer” of the finished 
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personal property which it produced and brought into and used in Ohio. 
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In the alternative, Cyanamid contends that the drug samples are 
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exempted from the use tax by R.C. 5739.02(B)(18).  This statute provides 
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that the sales tax does not apply to “[s]ales of drugs dispensed by a 
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registered pharmacist upon the order of a practitioner licensed to prescribe, 
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dispense, and administer drugs to a human being in the course of his 
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professional practice ***.”  This provision clearly sets forth three elements 
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that must be present for the exemption to be applicable:  first, there must be 
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a sale of drugs; second, the drugs must be dispensed by a registered 
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pharmacist; and third, the drugs must be dispensed upon the order of a 
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licensed practitioner. 
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However, the drug samples were transferred to the physicians, 
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without consideration; therefore, there was no sale of the drug samples.  
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Kloepfer’s, Inc. v. Peck (1958), 158 Ohio St. 577, 49 O.O. 483, 110 N.E.2d 
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560.  Furthermore, the drug samples were distributed by Cyanamid’s field 
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representatives, not by a registered pharmacist.  Finally, the drug samples 
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were distributed by the field representatives without any prescriptions or 
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orders being written by the physicians who received the samples.  Thus, 
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none of the three elements required for the exemption contained in R.C. 
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5739.02 (B)(18) is present in this case. 
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Although the facts of this case do not meet the requirements of R.C. 
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5739.02(B)(18), Cyanamid contends that the exemption is applicable to the 
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drug samples because the language contained in R.C. 5739.02(B)(18) 
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provides a status exemption for all prescription drugs.  Cyanamid would 
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have us exempt all prescription drugs from taxation, thereby disregarding 
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the requirements set forth in R.C. 5739.02(B)(18). 
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To accept Cyanamid’s contention that prescription drugs should have 
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a status exemption would require us to disregard the clear and specific 
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requirements which the General Assembly has set forth in R.C. 
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5739.02(B)(18); we cannot do that.  Exemptions or exceptions from taxation 
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are to be strictly construed.  Natl. Tube Co. v. Glander (1952), 157 Ohio St. 
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407, 47 O.O. 313, 105 N.E.2d 648.  When the General Assembly has spoken 
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as clearly as it has in R.C. 5739.02(B)(18) regarding prescription drugs, 
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there is no room for interpretation.  In Slingluff v. Weaver (1902), 66 Ohio 
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St. 621, 628, 64 N.E.2d 574, 576, we stated, “The question is not so much 
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what did the legislature intend to enact, as what did it mean by what it did 
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enact.”  In this case, the exemption for prescription drugs set forth in R.C. 
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5739.02(B)(18) clearly and specifically states what is required for the 
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exemption to be applicable.  If, as Cyanamid contends, the exemption is a 
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status exemption for prescription drugs, the language of the statute does not 
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express that intention.  We do not find the exemption from taxation set forth 
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in R.C. 5739.02(B)(18) applicable to Cyanamid’s use of the drug samples. 
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Cyanamid contends that, if the samples are taxed, the tax should be 
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imposed only against the cost of the raw materials and packaging, and 
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should not include the labor or overhead charges.  The amount of the use tax 
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to be imposed against a consumer is measured by the price (R.C. 5739.025).  
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R.C. 5741.01(G)(1) defines “price,” in pertinent part as follows:  “If a 
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consumer produces the tangible personal property used by him, the price is 
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the produced cost of such tangible personal property.” 
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In this case, it is undisputed that the assessment was based on a 
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“price” that included labor and overhead.  The term “produced cost,” 
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contained within the definition of “price” in R.C. 5741.01(G)(1), was added 
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in 1959.  (128 Ohio Laws 421.)  Prior to the 1959 amendment, the definition 
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had provided that “[i]f a consumer produces the tangible personal property 
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used by him, the price is the usual and ordinary consideration paid for such 
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tangible personal property.”  (127 Ohio Laws 134.)  By changing the term 
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“usual and ordinary consideration” to “produced cost,” the General 
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Assembly eliminated any profit or markup that might have been included in 
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the “usual and ordinary consideration.”  However, there is no indication that 
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the General Assembly meant to limit “produced cost” to raw materials.  We 
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find that the term “produced cost” includes both labor and overhead. 
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Accordingly, we affirm the decision of the Board of Tax Appeals as 
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reasonable and lawful. 
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Decision affirmed. 
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MOYER, C.J., DOUGLAS, RESNICK, F.E. SWEENEY and COOK, JJ., 
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concur. 
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WRIGHT and PFEIFER, JJ., dissent. 
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PFEIFER, J., dissenting.  I would reverse.  If you sell it, we don’t tax it; 
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if you give it away, we do? 
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WRIGHT, J., concurs in the foregoing dissenting opinion. 
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