Title: Stein, Inc. v. Tracy

State: ohio

Issuer: Ohio Supreme Court

Document:

STEIN, INC., APPELLANT, v. TRACY, TAX COMMR., APPELLEE. 
[Cite as Stein, Inc. v. Tracy (1999), 84 Ohio St.3d 501.] 
Taxation — Sales and use taxes on purchase of slag-a-way equipment by steel 
scrap and nonmetallic slag reclamation company using the equipment on 
steelmaker’s premises. 
(No. 97-2520 — Submitted July 30, 1998 — Decided February 24, 1999.) 
APPEAL from the Board of Tax Appeals, No. 92-T-1388. 
 
Appellant, Stein, Inc., reclaims steel scrap and nonmetallic slag.  During the 
sales and use tax audit period, January 1, 1985 through December 31, 1987, Stein 
had two customers in Ohio, the Lorain works of the United States Steel division of 
USX Corporation and the Cleveland works of LTV Steel Company, Inc. 
 
To begin the steelmaking process, the steelmaker combines coke with iron 
ore or iron ore pellets, and limestone or dolomite in a blast furnace.  It heats the 
mixture and transports the resulting molten iron to a basic oxygen furnace 
(“BOF”).  At the BOF, the steelmaker first desulphurizes the iron by introducing a 
catalyst into the mixture, which causes the sulphur impurities to rise to the top.  It 
then pours the desulphurized iron into a vessel with scrap and other alloys and 
injects oxygen into the vessel to heat the mixture.  The steelmaker then treats the 
molten mixture with a lime-based catalyst that causes additional impurities, or slag, 
to float to the surface.  It pours the slag, which also contains some steel, into slag 
pots. 
 
Stein, which operates the reclamation process on the steelmaker’s premises, 
picks up the molten slag and scrap steel mixture in the steelmaker’s plant with a 
special piece of equipment, called a slag-a-way, and transports the mixture to 
Stein’s reclamation area, where the molten mixture is dumped into a pit.  After a 
number of loads of molten slag and scrap have been dumped into the pit, it waters 
the pit and cools it for an eight-hour period. 
 
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Stein primarily separates the metallic and nonmetallic materials.  
Secondarily, Stein sizes the metallic and nonmetallic materials for recycling into 
the iron- and steelmaking process.  Stein owns the equipment it operates in the 
reclamation process. 
 
The steelmaker retains ownership of the slag and scrap while Stein processes 
it.  The steelmaker pays Stein on a tonnage basis for removing the slag and scrap 
mixture and for the reclaimed materials returned to it. 
 
Stein also furnishes heavy equipment, such as cranes and bulldozers, with 
operators to the steel companies for a fee.  Stein employs the persons who operate 
this equipment.  Once they are on the job, however, the steelmaker directs Stein’s 
operators in their work.  While on the work site, the operators are required to 
follow the steelmaker’s safety rules and regulations. 
 
The Tax Commissioner and the Board of Tax Appeals denied exemption 
from sales and use taxes for Stein’s purchases of the slag-a-way equipment and its 
purchase of the equipment that it furnished with operators to the steelmakers. 
 
This cause is now before this court upon an appeal as of right. 
__________________ 
 
Buckingham, Doolittle & Burroughs, L.L.P., Steven A. Dimengo and David 
L. Drechsler, for appellant. 
 
Betty D. Montgomery, Attorney General, and Phyllis J. Shambaugh, 
Assistant Attorney General, for appellee. 
__________________ 
 
Per Curiam.  Stein first contends that purchases of the slag-a-ways, which 
transport molten slag and scrap from the steel companies’ plants to Stein’s 
reclamation area, and of related supplies are exempt under former R.C. 
5739.02(B)(16).  During the audit period in question,1 that statute provided 
exemptions for: 
 
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“Sales to persons engaged in manufacturing, processing, assembling, or 
refining, of handling and transportation equipment * * * used in intraplant or 
interplant transfers or shipments of tangible personal property in the process of 
production for sale by manufacturing, processing, assembling, or refining, where 
the plant or plants within or between which such transfers or shipments occur are 
operated by the same person.”  141 Ohio Laws, Part II, 3289. 
 
Stein also cites former Ohio Adm.Code 5703-9-21(E) and (F), which 
exempted material handling and transportation equipment used to “transport items 
in the process of production for sale by manufacturing [or] processing * * * within 
a plant or between two plants operated by the same person.”  1980-1981 Ohio 
Monthly Record 693. 
 
In Gen. Motors Corp. v. Lindley (1987), 32 Ohio St.3d 158, 512 N.E.2d 660, 
we granted exemption to a handling system that returned metal that had 
overflowed during a casting operation to the beginning of production for reuse.  
Stein asserts that its reclamation process is analogous to the materials handling 
system in Gen. Motors.  Stein contends that, because its plants are located on 
property owned by the steel companies, and because it takes slag and scrap from 
one area of the steel plant and returns a portion of that material to another area of 
the steel plant, it transports the material “within one steel plant.”  We disagree. 
 
Stein overlooks the language contained in both the statute and the Ohio 
Administrative Code.  The transportation must be within or between “plants 
operated by the same person.”  In White Motor Corp. v. Kosydar (1977), 50 Ohio 
St.2d 290, 296, 4 O.O.3d 451, 454, 364 N.E.2d 252, 255-256,  we held that 
transportation between a plant owned by a parent corporation and a plant owned by 
its wholly owned subsidiary was not transportation between plants operated by the 
same person within the meaning of R.C. 5739.02(B)(16). 
 
4
 
The location of Stein’s plants on property owned by the steel companies is 
irrelevant.  Stein and the steel companies are separate entities, and Stein’s plants 
are separate from those of the steel companies.  Thus, transportation between the 
steel companies’ plants and Stein’s plants is not transportation within one plant 
operated by the same person. 
 
As to the equipment it purchases and provides with operators to steel 
companies, Stein presents two alternate claims.  First, Stein contends that it resells 
this equipment to the steel companies and the equipment is, therefore, exempt 
under the sale-for-resale exemption.  Alternatively, Stein contends that the steel 
companies use its equipment and operators in manufacturing steel for sale. 
 
R.C. 5739.01(E)(1) provides an exception from the sales tax where the 
purpose of the consumer is “[t]o resell the thing transferred * * * in the form in 
which the same is, or is to be, received by him.”  In turn, the definition of “sale” 
contained in R.C. 5739.01(B)(1) includes “[a]ll transactions by which title or 
possession, or both, of tangible personal property, is or is to be transferred, or a 
license to use or consume tangible personal property is or is to be granted.”  Stein 
contends that it transfers possession of the equipment and operators to the steel 
companies for a fee.  We disagree. 
 
Stein’s employees operate the equipment in question.  Operators of the 
equipment in question always remain Stein employees.  Thus, the equipment 
remains under the control and possession of a Stein employee.  The steel 
companies may direct when and where the equipment and operators are used, but 
Stein’s employees remained in actual possession of the equipment, and Stein did 
not transfer possession of the equipment to the steel companies. 
 
Stein also contends that its purchases of the equipment it furnishes to the 
steel company with operators are exempt as used directly in manufacturing steel 
for sale.  With this we agree. 
 
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R.C. 5739.01(E) excepted from the definition of “taxable sales” those for 
which “the purpose of the consumer is:  * * * (2) * * * to use or consume the thing 
transferred directly in the production of tangible personal property  * * * for sale 
by manufacturing.”  141 Ohio Laws, Part II, 3281. 
 
In Apex Powder Corp. v. Peck (1954), 162 Ohio St. 189, 55 O.O. 95, 122 
N.E.2d 693, the contractor-taxpayer purchased drilling and blasting equipment that 
it used to drill and blast in mines operated by others.  The commissioner argued 
that since the contractor did not sell the minerals which it drilled and blasted, its 
purchases of  equipment were taxable.  The parties in Apex stipulated that the 
owners of the minerals sold the minerals that were drilled and blasted by Apex. 
 
On the other hand, Apex argued that its equipment was used directly in the 
production of tangible personal property for sale by mining.  Apex further 
contended that the statute did not require that the tangible property produced must 
be sold by the consumer. 
 
We agreed with Apex.  We ruled that the statute requires only that the 
consumer have the purpose to use the thing transferred directly in the production of 
tangible personal property for sale.  Otherwise, “we would be reading into the 
statute words which the General Assembly did not put into the statute.”  Id. at 192, 
55 O.O. at 97, 122 N.E.2d at 694.  We further stated, “We do not  believe that the 
words which the General Assembly used can justify an inference that it intended 
that the ‘production * * * for sale’ should describe only a production for sale by 
the consumer whose ‘purpose’ is involved.”  Id.  We see no difference between 
Apex and the factual situation in the present case. 
 
The Tax Commissioner argues that our decision in Gen. Motors Corp. v. 
Kosydar (1974), 37 Ohio St.2d 138, 66 O.O.2d 304, 310 N.E.2d 154, which cites 
Apex, should control our decision here.  However Gen. Motors Corp. is factually 
different.  In Gen. Motors Corp., the purchased equipment at issue was being used 
 
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by an outside supplier,  not by the consumer, General Motors.  We recognized this 
distinction in Gen. Motors Corp., stating that “the word ‘directly’ can only be 
interpreted as requiring a direct use or consumption by the consumer of the 
transferred property.”  Id. at 145, 66 O.O.2d at 308, 310 N.E.2d at 158.  The BTA 
decision on this issue is unlawful and is therefore reversed. 
 
For all the foregoing reasons, the decision of the Board of Tax Appeals is 
affirmed in part and reversed in part. 
Decision affirmed in part 
and reversed in part. 
 
MOYER, C.J., RESNICK, F.E. SWEENEY, COOK and LUNDBERG STRATTON, JJ., 
concur. 
 
PFEIFER, J., concurs in part and dissents in part. 
 
DOUGLAS, J., dissents. 
FOOTNOTE: 
1. 
Although the Tax Commissioner assessed both sales and use taxes against 
Stein, we will discuss only the sales tax exemptions.  See R.C. 5741.02(C)(2). 
__________________ 
 
PFEIFER, J., concurring in part and dissenting in part.  I concur with the 
majority’s determination that the equipment that Stein furnishes to the steel 
companies along with operators is exempt from tax under former R.C. 5739.01(E). 
 
The majority also determines that the slag-a-ways and related supplies are 
not exempt from tax under former R.C. 5739.02(B)(16).  If the slag-a-ways were 
owned by the steel companies and operated exactly as they are now, they would be 
exempt from tax.  There is no sensible reason for this distinction.  To the extent the 
statute requires the answer the commissioner gives, which the majority affirms, I 
would sever the clause “where the plant or plants within or between which such 
transfers or shipments occur are operated by the same person” from the statute as a 
 
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violation of equal protection.  Is there any other way to treat a situation where the 
same equipment is operated on the same property in the same manner for the same 
purpose and yet is subject to tax based on who owns it?  I dissent from this portion 
of the majority opinion.