Title: Basic Distrib. Corp. v. Ohio Dept. of Taxation

State: ohio

Issuer: Ohio Supreme Court

Document:

[Cite as Basic Distrib. Corp. v. Ohio Dept. of Taxation, 94 Ohio St.3d 287, 2002-Ohio-794.] 
 
 
BASIC DISTRIBUTION CORPORATION, APPELLEE, v. OHIO DEPARTMENT OF 
TAXATION, APPELLANT. 
[Cite as Basic Distrib. Corp. v. Ohio Dept. of Taxation (2002), 94 Ohio St.3d 
287.] 
Taxation — Tax audit — Taxpayer rights — Exhaustion of administrative 
remedies in R.C. Chapter 5717 is not required to bring an action 
pursuant to R.C. 5703.54 — Court of appeals’ interpretation of what 
types of actions can be redressed under R.C. 5703.54, as well as its 
finding that Ohio Department of Taxation violated R.C. 5703.54, 
reversed. 
(No. 00-1911 — Submitted October 16, 2001 — Decided February 27, 2002.) 
APPEAL from the Court of Appeals for Franklin County, No. 99AP-1309. 
__________________ 
 
LUNDBERG STRATTON, J.  Appellee Basic Distribution Corporation  sells 
and distributes electrical supplies to construction contractors, manufacturers, and 
maintenance firms, for resale or for incorporation into real property.  In April 
1994, Ohio Department of Taxation agent Jenny Gleich telephoned Basic’s vice 
president of finance, Aurel Balcarcel, to inform him that appellant, the Ohio 
Department of Taxation, was going to conduct a tax audit of Basic’s sales and 
purchases for the period from October 1, 1990 to March 31, 1994.1  Due to the 
large number of potentially exempt sales, Gleich told Balcarcel that she believed 
                                                          
 
1. 
A sales and use tax audit provides a review of a taxpayer’s records to determine whether 
the taxpayer is collecting the proper amount of taxes from its customers and is paying the proper 
amount of taxes on purchases that it makes. 
SUPREME COURT OF OHIO 
2 
that a sample method should be used in auditing Basic’s sales.2  However, 
Balcarcel objected to the months that Gleich chose for the sample because Basic’s 
recent conversion to a new computer system would make it more difficult for 
Basic to retrieve records for those months.  Gleich agreed to change the sample 
months.  In contrast to the sample audit of Basic’s sales, the audit of Basic’s 
purchases was comprehensive. 
 
In a letter dated April 18, 1994, the department confirmed that Basic 
would be the subject of an audit and confirmed a May 9, 1994 appointment for 
Gleich to meet with Balcarcel to begin the audit.  Enclosed with the April letter 
was a brochure entitled “Taxpayers’ Bill of Rights.”  The Taxpayers’ Bill of 
Rights briefly explains the audit process and warns that a tax assessment must be 
appealed within thirty days of delivery of the assessment. 
 
At the May 9, 1994 meeting, Basic, through Balcarcel, agreed that the 
department would use September 1992 and March 1993 as representative sample 
months for the audit period.  After the meeting, Gleich began reviewing the 
certificates of exemption that Basic had on file.3  Gleich testified that pursuant to 
department policy, she examined each certificate to determine whether it was the 
correct type of certificate and whether it contained (1) the name of the vendor, (2) 
a signature date, (3) the statutory reason for the exemption, and (4) a signature.  
Depending upon whether the certificate contained the proper information, Gleich 
would then stamp the certificate either “allowed” or “disallowed.”  If the 
certificate was allowed, then the sale was exempt from tax.  Conversely, if the 
                                                          
 
2. 
Use of a sample methodology means that, rather than reviewing all transactions for the 
audit period, a sample period of time is chosen from which transactions are examined and used to 
represent the entire audit period. 
3. 
Initially Gleich began to review the certificates of exemption within the sample months.  
But because this was the first time that Basic had been audited, Balcarcel requested that Gleich 
educate Basic’s staff regarding the information required to complete a valid certificate of 
exemption.  Accordingly, Gleich reviewed all fifteen hundred certificates of exemption that Basic 
had on file for the purpose of educating Basic’s employees.   Only the certificates examined 
January Term, 2002 
3 
certificate was stamped disallowed, then the sale, without subsequent proof to the 
contrary, would be subject to tax. 
 
Gleich took approximately ten days to review the certificates.  She then 
compared them to Basic’s sales records for the sample months and prepared a 
“challenge list” of sales for which the tax-exempt status was in question.  Gleich 
presented the challenge list and the department’s “Notice of Intention to Levy a 
Sales and Use Tax Assessment” to Balcarcel on June 21, 1994.  The letter 
accompanying the notice explained that Basic had sixty days to establish that the 
sales were exempt from taxation. 
 
Gleich told Basic that it would need a “letter of usage” from the customer 
for each sale on the challenge list.  Gleich explained what information needed to 
be included in the letter of usage.  Gleich provided Balcarcel sample letters 
requesting letters of usage to assist Basic but informed Basic that it would have to 
tailor its letter to its own business.  Using the samples, Basic drafted a letter to its 
customers seeking letters of usage for the sales listed on the challenge list.  The 
first of these letters went out on June 24, 1994.  Shortly thereafter, Basic began 
receiving letters of usage in return, which Gleich examined.  Gleich advised 
Balcarcel that the letters of usage were not providing the proper information.  
Pursuant to advice from Gleich, Basic composed a new letter, which was sent out 
on June 30, 1994. 
 
In a letter dated September 15, 1994, the department notified Basic that it 
could submit any additional records that would be pertinent to the audit.  Basic 
indicated that it had no additional records to submit. 
 
Subsequently, Gleich notified Balcarcel by telephone that an assessment 
would be levied against Basic and set up a meeting for a final review.  Gleich 
testified that at the final review, she (1) explained her calculations, (2) informed 
                                                                                                                                                              
 
during the sample months were held in the audit; the others were merely reviewed for the purpose 
of educating Basic’s staff. 
SUPREME COURT OF OHIO 
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Basic that it could appeal any disputes regarding the tax-exempt status of any 
sales, and (3) notified Balcarcel that Basic would receive a letter that would be a 
“precursor” to the formal notice of assessment.  Gleich testified that she told 
Balcarcel that subsequently Basic would receive a formal notice of the assessment 
by certified mail and that Basic would have thirty days after the receipt of the 
assessment to pay or appeal. 
 
Basic received a letter dated November 14, 1994, entitled “Summary for 
Recommending Assessment.”  The letter read: 
 
“Please note, this does not constitute a formal notice of assessment.  No 
appeal can be made as a result of receipt of this information. 
 
“The Assessment Division will send you a formal notice of assessment.  
The formal notice of assessment will be delivered by certified mail.  * * * No 
appeal can be made until you receive the formal notice of assessment.” (Emphasis 
added.) 
 
On November 17, 1994, Basic received a computer-generated form 
entitled “Sales/Use Tax Assessment.”  This notice of assessment informed Basic 
that it owed $189,730.34 in taxes and that it could file a petition for reassessment. 
 
Basic never filed a petition for reassessment, and paid the assessment.  
However, in a letter dated September 13, 1995, Basic requested a refund.  Gleich 
processed the refund claim.  The Department issued a refund to Basic in the 
amount of $23,181.42. 
 
Basic sought a hearing to contest the amount of the refund.  Basic hired 
the firm of Deloitte & Touche, L.L.P., to represent Basic at the hearing, which 
was held on February 12, 1997.  On July 28, 1997, the department issued its final 
determination, granting Basic an additional refund of $4,055.27, reducing the 
final assessment against Basic to $162,493.65. 
 
On April 13, 1998, Basic filed a complaint against the department in the 
Court of Claims pursuant to R.C. 5703.54, seeking monetary damages, a 
January Term, 2002 
5 
declaratory judgment, and injunctive relief.  The Court of Claims granted 
judgment to the department on two grounds: (1) Basic had failed to exhaust its 
administrative remedies, and (2) Basic had failed to prove by a preponderance of 
the evidence that the department was liable under R.C. 5703.54. 
 
Basic appealed.  The appellate court reversed.  The appellate court held 
that a taxpayer does not have to exhaust administrative remedies before filing an 
action pursuant to R.C. 5703.54.  The appellate court also held that Basic had 
proven that it met the three criteria of R.C. 5703.54(A). 
 
This matter is before the court pursuant to a discretionary appeal. 
 
The only issue raised by the department in its appeal to this court is 
whether its actions give rise to a cause of action for which relief can be granted 
pursuant to R.C. 5703.54.  However, implicit in the issue of determining liability 
under R.C. 5703.54 is the effect of the exhaustion-of-remedies doctrine.  
Therefore, we will also address the issue of exhaustion of remedies to properly 
address the scope of R.C. 5703.54.  See Belvedere Condominium Unit Owners’ 
Assn. v. R.E. Roark Cos., Inc. (1993), 67 Ohio St.3d 274, 279, 617 N.E.2d 1075, 
1079. 
Exhaustion of Administrative Remedies 
 
We agree with the court of appeals that an action pursuant to R.C. 5703.54 
does not require exhaustion of the administrative remedies set forth in R.C. 
Chapter 5717. 
 
Exhaustion of administrative remedies requires a person to exhaust the 
statutory administrative remedies before seeking redress from the judicial system.  
Noernberg v. Brook Park (1980), 63 Ohio St.2d 26, 17 O.O.3d 16, 406 N.E.2d 
1095.  The purpose of the doctrine of exhaustion of administrative remedies is to 
prevent premature interference with the administrative processes.  Nemazee v. Mt. 
Sinai Med. Ctr. (1990), 56 Ohio St.3d 109, 111, 564 N.E.2d 477, 480.  However, 
where there is a judicial remedy that is intended to be separate from the 
SUPREME COURT OF OHIO 
6 
administrative remedy, the requirement of exhaustion of administrative remedies 
does not apply.  See, e.g., Larkins v. G.D. Searle & Co. (1991), 68 Ohio App.3d 
746, 589 N.E.2d 488. 
 
Clearly, the typical avenue to challenge a final assessment is the 
administrative appeal process set forth in the Revised Code.  See R.C. 5717.02 
and 5717.03.  However, in 1989, the General Assembly enacted R.C. 5703.54, 
which provides that a taxpayer may file an action for damages where a 
Department of Taxation employee frivolously disregards a provision of R.C. 
Chapter 5711, 5733, 5739, 5741, or 5747, or a rule of the Tax Commissioner 
adopted under the authority of one of those chapters.  R.C. 5703.54(A)(1).  This 
statute allows redress for actions by a Department of Taxation employee that 
serve merely to harass or are clearly unsupportable by current law. 
 
In comparing the harm that R.C. 5703.54 seeks to address with the 
purpose of the administrative remedies of R.C. Chapter 5717, it is evident that 
each provides a separate action for a taxpayer.  This conclusion is bolstered by the 
absence of language in R.C. 5703.54 requiring a complainant to exhaust 
administrative remedies before filing an action pursuant to R.C. 5703.54.  When 
the General Assembly enacted R.C. 5703.54, it was aware of the administrative 
remedies set out in R.C. Chapter 5717, which had been in existence in one form 
or another for over fifty years.  See, e.g., G.C. 5610 et seq., as amended by 1939 
Am.Sub.S.B. No. 159, 118 Ohio Laws, 344, 353.  Thus, we agree that there is no 
requirement that a taxpayer exhaust administrative remedies set out in R.C. 
Chapter 5717 before filing an action pursuant to R.C. 5703.54. 
 
However, that is not to say that a taxpayer will always have a cause of 
action under R.C. 5703.54 against the department.  While R.C. 5703.54 provides 
a cause of action that is separate from administrative remedies, we must examine 
what types of actions give rise to a claim for which relief can be granted.  Many 
claims must still be addressed on appeal.  Therefore, we must look to what sort of 
January Term, 2002 
7 
action R.C. 5703.54 contemplates.  This is a case of first impression that requires 
us to interpret R.C. 5703.54. 
R.C. 5703.54 
 
In construing a statute, courts have an obligation to give effect to the 
intention of the General Assembly.  Christe v. GMS Mgt. Co. (2000), 88 Ohio 
St.3d 376, 726 N.E.2d 497.  In determining legislative intent, courts must first 
look to the language of the statute.  In re Civ. Serv. Charges & Specs. Against 
Piper (2000), 88 Ohio St.3d 308, 725 N.E.2d 659.  If the language conveys a 
meaning that is clear and unequivocal, interpretation is at an end, and the statute 
must be applied accordingly.  In re Guardianship of Lombardo (1999), 86 Ohio 
St.3d 600, 605, 716 N.E.2d 189, 193-194. 
 
R.C. 5703.54 states: 
 
“(A) A taxpayer aggrieved by an action or omission of an officer or 
employee of the department of taxation may bring an action for damages * * * if 
all the following apply: 
 
“(1) In the action or omission the officer or employee frivolously 
disregards a provision of Chapter 5711., 5733., 5739., 5741., or 5747. of the 
Revised Code or a rule of the tax commissioner adopted under the authority of 
one of those chapters; 
 
“(2) The action or omission occurred with respect to an audit or 
assessment and the review and collection proceedings connected with the audit or 
assessment; 
 
“(3) The officer or employee did not act manifestly outside the scope of 
his office or employment and did not act with malicious purpose, in bad faith, or 
in a wanton or reckless manner. 
 
“* * * 
 
“(F) As used in this section, ‘frivolous’ means that the conduct of the 
commissioner * * * satisfies either of the following: 
SUPREME COURT OF OHIO 
8 
 
“(1) It obviously serves merely * * * to harass or maliciously injure the 
taxpayer * * *; 
 
“(2) It is not warranted under existing law and cannot be supported by a 
good faith argument for an extension, modification, or reversal of existing law.” 
(Emphasis added.) 
 
Thus, R.C. 5703.54 requires that a claim must be based upon frivolous 
disregard of certain provisions of the Revised Code or rules of the Tax 
Commissioner.  A word not defined in a statute will be given its common and 
ordinary meaning.  State ex rel. Rose v. Lorain Cty. Bd. of Elections (2000), 90 
Ohio St.3d 229, 736 N.E.2d 886.  The word “disregard” is defined as “to give no 
thought to: pay no attention to.”  Webster’s Third New International Dictionary 
(1986) 655.  The term “frivolous” is defined by R.C. 5703.54 as conduct that 
serves merely to harass or maliciously injure the taxpayer or conduct that is not 
warranted under existing law and cannot be supported by a good faith argument 
for an extension, modification, or reversal of existing law.  Thus, in order for a 
taxpayer’s claim to be actionable under R.C. 5703.54, the department must “pay 
no attention to” a statute or rule, and its disregard must be unsupportable in good 
faith under existing law or must maliciously injure or serve merely to harass the 
taxpayer. 
 
Notably, this definition excludes a merely erroneous interpretation of a 
statute or rule by the department.  Accordingly, if the complaint is in reality 
against the department’s interpretation of a statute, then it is not actionable under 
R.C. 5703.54.  To define the phrase “frivolously disregards” in a more liberal 
manner would muddle the difference between an erroneous interpretation or 
application of a statute, which is properly reviewed in an administrative appeal, 
and the frivolous disregard of a statute or rule, which is properly addressed under 
R.C. 5703.54.  Further, a more liberal interpretation would conflict with the spirit 
of R.C. 5703.54, which is meant to provide a remedy separate from the 
January Term, 2002 
9 
administrative appeal process, but only where the action taken by the department 
frivolously disregards a statute or rule. 
The Appellate Decision 
 
The appellate court held that “the department ‘frivolously disregarded’ 
standard procedures by mandating use of a sample, failing to offer a full audit, 
unreasonably disallowing exemption certificates without identifying those 
disallowed or the reason for their disallowance, projecting a sample result over 
the entire audit period contrary to R.C. 5739.13(A), failing to assist Basic in 
drafting an acceptable letter to request additional information from customers and 
refusing to review 
responses during the statutory period, providing 
misinformation with respect to a taxpayer’s right to appeal, failing to advise Basic 
that it had a right to an additional ninety to one hundred twenty day extension 
beyond the initial sixty-day period, having the same agent review her own work 
when Basic applied for a refund, and providing a reduction in the assessment 
without providing any basis for the reduction.” 
 
The plain language of R.C. 5703.54 requires that an officer or employee of 
the department frivolously disregard a statute or a rule.  Thus, the court of 
appeals misstated the law when it indicated that “ ‘frivolously disregarded’ 
standard procedures” could be the basis for an action under R.C. 5703.54.  We 
address each of the appellate court’s remaining findings and conclusions 
separately below. 
Using a Sample Method/Failing to Offer Full Audit 
 
R.C. 5739.13(A) expressly permits the department to conduct an audit 
using a sample period.  We cannot find any statute or rule that requires that the 
department offer to conduct a full audit.  Moreover, Basic agreed in writing to the 
sample method.  Accordingly, the court of appeals erred in holding that these 
actions gave rise to a cause of action under R.C. 5703.54. 
Disallowing Certificates Without Giving Reasons 
SUPREME COURT OF OHIO 
10 
 
There is no statute or rule that expressly requires the department to inform 
the taxpayer which certificates are disallowed or why.  Furthermore, this 
information was provided in the challenge list given to Basic.  The challenge list 
listed sales that the department determined were not tax exempt because there was 
no valid certificate of exemption for the period in which the sale occurred.  The 
challenge list included Basic’s customers, invoice dates, the sale amount, and the 
type of product sold.  Agent Gleich explained to Balcarcel the need to obtain 
letters of usage from customers regarding the sales on the challenge list in order to 
prove the sales’ exempt status.4  Thus, the department provided Basic with all the 
information that it needed to attempt to attain tax-exempt status for the challenged 
sales. 
 
Accordingly, the court of appeals erred in holding that these actions gave 
rise to a cause of action under R.C. 5703.54. 
Projecting Sample over an Entire Audit Period Contrary to R.C. 5739.13(A) 
 
R.C. 5739.13(A) expressly authorizes the sample method for an audit.  
Thus, the department was expressly authorized to project a sample over the audit 
period in Basic’s audit.  Accordingly, the court of appeals erred in holding that 
these actions gave rise to a cause of action under R.C. 5703.54. 
Failing to Assist Basic in Drafting an Acceptable Letter to Request Additional 
Information from Customers and Refusing to Review Responses During the 
Statutory Period 
 
Again the appellate court failed to cite any statute or rule that requires the 
department to assist the taxpayer in drafting letters to its customers, requesting 
letters of usage, and reviewing the letters of usage it receives in return.  Further, 
despite the lack of any such legal obligation, Gleich did provide sample letters to 
                                                          
 
4. 
A certificate of exemption is the typical method for determining the tax-exempt status of 
a sale of goods.  If a certificate of exemption does not exist or does not contain the required 
information, the taxpayer must request a letter of usage from its customer.  The letter of usage 
gives information to prove that the sale was tax exempt. 
January Term, 2002 
11 
Basic to assist Basic in acquiring letters of usage from its customers.  She also 
reviewed the letters of usage that Basic received from its customers and made 
suggestions to Basic on how to modify its letter so that Basic would receive the 
proper information in return.  The department went beyond what it was required 
to do, and consequently we fail to understand how the appellate court found 
frivolous conduct in this respect.  Further, in addition to the sixty-day period, 
Basic had another opportunity to submit documentation after it petitioned for 
reassessment, but failed to use it.  See R.C. 5739.03(E). 
 
Accordingly, the court of appeals erred in holding that these actions gave 
rise to a cause of action under R.C. 5703.54. 
Providing Misinformation Regarding Taxpayer’s Right to Appeal 
 
The finding by the court of appeals that the department misinformed Basic 
appears to be based upon the court’s determination that the document that 
informed Basic of its right to challenge the assessment was inadequate to achieve 
that purpose.5 
 
The law requires the department to notify a taxpayer of the right to 
challenge an assessment, as well as the method for administrative review.  R.C. 
5703.51(C)(2).  The form notifying Basic of the assessment levied against it 
stated: “Note Important Information on Reverse Side of This Assessment.”  On 
the reverse side the following wording appeared: 
“IMPORTANT INFORMATION-ACT PROMPTLY 
 
“If this assessment is not paid or contested by filing a petition for 
Reassessment in the manner prescribed by law within 30 days after receipt it will 
be certified to the Attorney General for collection * * * 
 
“* * * 
                                                          
 
5. 
The court of appeals even objected to the “flimsy, half page paper” and the size of the 
type.  We have examined the notice and find that these objections are without merit and that the 
notices certainly do not violate any statute or rule. 
SUPREME COURT OF OHIO 
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“WHAT TO DO IF YOU THINK THIS ASSESSMENT IS IN ERROR 
 
“Failure to follow these instructions may result in dismissal of your 
petition. 
 
“You wish to protest amounts assessed as tax * * *: If you disagree with 
this assessment you may file a Petition for Reassessment.  The petition must be in 
writing, specify the items objected to and the reasons for those objections, and 
must be filed within thirty days of the receipt of the assessment.” 
 
The third page of this assessment form is entitled “Petition for 
Reassessment.”  It is a form that requires the taxpayer to explain the reasons for 
its objection to the assessment, provides an opportunity for the taxpayer to seek a 
hearing, and provides the address where the petition for reassessment must be 
sent.  This language was more than adequate for the task of informing Basic of its 
right to challenge the assessment. 
 
Moreover, the mere fact that this document notified Basic that it was being 
assessed more than $180,000 ought to have demanded scrutiny of the entire 
document by Basic.  Yet Balcarcel admitted that he had failed to read beyond the 
first page of this document.  Had he done so, he would have read the instructions 
regarding the filing of a petition for reassessment. 
 
Accordingly, the court of appeals erred in holding that the notice of 
assessment gave rise to a cause of action under R.C. 5703.54. 
Failing to Advise Basic that It Had Additional Time to Prove Exemptions 
 
The appellate court is correct that Ohio law allows a taxpayer who files a 
petition for reassessment additional time to document exemptions beyond the 
sixty-day period.  See R.C. 5739.03(E) and Ohio Adm.Code 5703-9-45(A).  
However, there is no affirmative duty on the department to inform the taxpayer of 
this additional time.  Accordingly, the court of appeals erred in holding that this 
action gave rise to a cause of action under R.C. 5703.54. 
January Term, 2002 
13 
Having the Same Agent Review Her Own Work When Basic Applied for a Refund 
and Reducing the Assessment Without Stating any Reasons 
 
Again the appellate court failed to cite any statutory authority that would 
prevent an agent who conducts an audit from reviewing a refund claim on that 
audit or that a refund must be accompanied by the department’s reasoning.  
Further, Basic never alleged that any prejudice resulted from Gleich’s review of 
Basic’s refund claim.  In fact, Gleich testified that she said that if Basic sent the 
audit claim to her attention, she would expedite it.  Accordingly, the court of 
appeals erred in holding that these actions gave rise to a cause of action under 
R.C. 5703.54. 
Basic’s Allegations 
 
In its brief, Basic makes additional arguments that the department 
frivolously disregarded certain statutes and or rules.  We will address each of 
these arguments below. 
Adequacy of Exemption Certificate Information 
 
Basic argues that a “certificate need not meet overly-technical 
requirements, but is sufficient so long as the stated basis ‘reasonably apprise[s] 
the tax commissioner’ of the exemption claimed.”  Basic cites numerous instances 
in which it claims that the department was overly technical in rejecting 
certificates.  While these allegations may or may not be valid, they do not set 
forth a claim for which relief can be granted under R.C. 5703.54. 
 
Determining whether the department erred in rejecting certificates due to 
technicalities is a matter of interpretation of statutes or rules, which is properly 
addressed in an appeal, not in an action for frivolous disregard of a statute or rule 
under R.C. 5703.54. 
Direct Pay Permits 
 
Basic claims that the department frivolously ignored R.C. 5739.031(F) 
when it disallowed certificates because Gleich determined that the direct payment 
SUPREME COURT OF OHIO 
14 
numbers were invalid.  R.C. 5739.031(F) provides that if a buyer notifies a seller 
of the buyer’s direct payment permit number and that the tax is being paid directly 
to the state, the seller is absolved of all duties and liabilities imposed by R.C. 
5739.03 or 5741.04. 
 
There is nothing in R.C. 5739.031, or in any statute or rule cited that 
addresses what occurs if a taxpayer receives an improper direct payment permit 
number.  Again, this is an issue of interpretation as to whether a taxpayer is 
relieved of liability under R.C. 5739.031(F) if the permit number it receives is 
incorrect.  Thus, it is an issue for an appeal. 
Proof of Exemption 
 
Basic asserts that Gleich indicated that only a letter of usage could be used 
to prove tax-exempt status.  Citing Union Metal Mfg. Co. v. Kosydar (1974), 38 
Ohio St.2d 53, 56, 67 O.O.2d 72, 73, 310 N.E.2d 249, 251, fn. 3, Basic claims 
that taxpayers may submit other evidence to prove exemption by other means, 
such as affidavits, depositions, etc. 
 
The suggestion that the department might accept other evidence to prove 
exemption is found in a footnote in Union Metal. However, the court did not 
affirmatively hold that other evidence could be submitted as a matter of law.  
Thus, Union Metal does not require that other evidence must be considered in 
determining exempt status. 
 
Further, in a letter dated September 15, 1994, the department notified 
Basic that it could submit any additional records that would be pertinent to the 
audit.  Basic indicated that it had no additional records to submit.  Thus, there is 
no basis for an action under R.C. 5703.54. 
Method of Calculating the Sample 
 
Basic alleges that nothing allows the department to unilaterally dictate the 
manner of calculating a sample.  Basic is referring to its attempt to supplement 
documentation of exempt cash sales.  However, Gleich did examine the submitted 
January Term, 2002 
15 
documentation but determined that it could not substitute for letters of usage.  
Further, Basic fails to indicate what statute or rule the department ignored when it 
determined that it would not accept Basic’s proposal.  Thus, this issue could have 
been raised only in an appeal. 
Construction Contracts 
 
Basic alleges that the department frivolously disregarded the construction 
contract provisions set out in R.C. 5739.01(B)(5) and Ohio Adm.Code 5703-9-14.  
In essence these provisions state that when tangible personal property is 
purchased pursuant to a construction contract and is or is to be incorporated into a 
structure or on and becomes part of real property, the purchasing contractor is 
responsible for the tax on that sale. 
 
Failure to furnish a certificate of exemption results in a presumption that 
the tax applies.  R.C. 5739.03(B).  The taxpayer can overcome this presumption 
with a satisfactory letter of usage.  Id. 
 
There was no frivolous disregard of R.C. 5739.01(B)(5) and Ohio 
Adm.Code 5703-9-14, but rather a determination by the department that Basic 
failed to submit sufficient evidence that sales were exempt.  Review of the 
sufficiency of the evidence is an issue addressed in an appeal. 
Bad-Debt Provisions 
 
Basic alleges that Gleich frivolously disregarded the bad-debt write-off 
provisions of R.C. 5739.121, which in effect permit a seller to recover taxes paid 
on sales to customers who fail to pay their bills. 
 
Gleich testified that she did not apply the bad-debt provisions in Basic’s 
audit because, of the bad-debt sales that she audited, no taxes had been paid.  The 
bad-debt provision allows a deduction only for bad debts for sales on which taxes 
were paid in the proceeding tax period.  R.C. 5739.121.  Thus, whether Gleich 
properly applied this rule was an issue for appeal. 
Conclusion 
SUPREME COURT OF OHIO 
16 
 
In essence, Basic fails to prove that the Department of Taxation engaged 
in any frivolous conduct for which R.C. 5703.54 provides a remedy.  The trial 
court correctly analyzed these issues and applied R.C. 5703.54 to the facts of this 
case.  The court of appeals erred in its application of R.C. 5703.54 and in 
substituting its own interpretation of the facts, which was not only contrary to the 
findings of the trial court, but also clearly contrary to the evidence in the record.  
In addition, the author of the court of appeals decision made several opinionated 
legal conclusions that have no basis in the law.  While we agree that R.C. 5703.54 
does not require exhaustion of administrative remedies, this case clearly presents 
issues that should have been addressed in an appeal and did not rise to the level of 
frivolous disregard of any statute or rule.  In fact, it appears that the Department 
of Taxation went beyond its statutorily imposed duties in assisting Basic.  
Accordingly, we reverse the judgment of the court of appeals. 
Judgment reversed. 
 
MOYER, C.J., RESNICK, F.E. SWEENEY and PFEIFER, JJ., concur. 
 
DOUGLAS and COOK, JJ., concur in judgment. 
__________________ 
 
Bricker & Eckler, L.L.P., Mark A. Engel and Luther L. Liggett, Jr., for 
appellee. 
 
Betty D. Montgomery, Attorney General, Michael J. Valentine, Richard C. 
Farrin and James P. Dinsmore, Assistant Attorneys General, for appellant. 
 
Blaugrund, Herbert & Martin, Inc., Steven A. Martin and Teri G. 
Rasmussen, urging affirmance for amicus curiae, Ohio Society of Certified Public 
Accountants. 
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