Title: Lyden Co. v. Tracy

State: ohio

Issuer: Ohio Supreme Court

Document:

Lyden Company, Appellant, v. Tracy, Tax Commr., Appellee. 
[Cite as Lyden Co. v. Tracy (1996), ______ Ohio St. 3d ________.] 
Taxation -- Sales tax -- Fuel dispensing equipment exempt, when -- 
For purposes of R.C. 5739.16(B), an administrative rule adopted 
by Tax Commissioner remains “in full force and effect” until 
commissioner rescinds it or a court specifically declares it invalid. 
For purposes of R.C.  5739.16(B),  an administrative  rule adopted by the  
Tax Commissioner remains “in full force and effect” until 
the commissioner rescinds it or a court specifically 
declares it invalid as being contrary to statute or 
unreasonable. (R.C. 5739.16[B], construed; Youngstown 
Sheet & Tube Co. v. Lindley [1988], 38 Ohio St.3d 232, 
527 N.E.2d 828, affirmed and followed.) 
 
(No. 94-2724 -- Submitted April 16, 1996 -- Decided July 17, 1996.) 
 
Appeal from the Board of Tax Appeals,  No. 92-X-490. 
 
Appellant Lyden Co. sells gasoline and other products at wholesale 
and retail in independently owned gasoline service stations and 
connected convenience food stores.  It owns and operates its own stores, 
2 
and consigns gasoline to dealer-operated stores, which it also owns.  It 
installs its own gasoline dispensing equipment at both types of locations. 
 
During 1987 through 1990, Lyden purchased material for, and 
installed, underground tanks and pumps at various locations.  It 
excavated the sites and set tanks in the excavated cavities.  Lyden 
placed a submersible pump in each tank, laid piping from the submersible 
pump to the gasoline dispensing islands, and connected the piping to the 
gasoline dispensing equipment at the islands.  Lyden ran electrical wiring 
through conduit, backfilled with sand or pea gravel, and, finally, covered 
the site with concrete or blacktop.  Lyden’s customer then could pump 
gasoline from the underground tank through the dispenser at the island.  
 
In early 1991, the commissioner, acting through a tax agent, began 
a sales and use tax audit of Lyden’s business covering the period July 1, 
1987 through June 30, 1990.  The agent originally determined that the 
fuel dispensing equipment purchased by Lyden remained tangible 
personal property for Ohio sales and use tax purposes even after its 
3 
installation.  This determination was important because the exemption 
that Lyden claimed, for property purchased to be used directly in making 
retail sales, was not available for property to be incorporated into real 
property.  Former R.C. 5739.01(E)(2), Am.Sub.H.B.No. 54, 141 Ohio 
Laws, Part I, 1214.  The agent’s determination was consistent with 
various policy statements and administrative rules previously adopted by 
the commissioner, pursuant to which fuel dispensing equipment was 
classified as personal property.  Specifically, Ohio Adm. Code 5703-9-
14(A) (dealing with the sales tax consequences of materials purchased 
for use in construction contracts) provided: 
 
"In determining when the improvement into which tangible personal 
property is incorporated constitutes real property it shall be considered 
that improvements devoted to the general use of the land or buildings 
thereon are real property and improvements devoted principally to a 
business function or use shall be considered as personal property.  * * *  
Determinations of the status of improvements shall be consistent with 
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classifications made under rules 5703-3-01 and 5703-3-02 of the 
Administrative Code. * * *”  (Emphasis added.)  1982-1983 Ohio Monthly 
Record 498, eff. Oct. 18, 1982. 
 
Ohio Adm. Code 5703-3-01(A) provides: 
 
“For the purpose of classifying property for taxation, items of 
property devoted primarily to the general use of the land or buildings 
thereon are to be considered as real property and all other items of 
property including their foundations and all things accessory thereto 
which are devoted primarily to the business conducted on the premises 
are to be considered as personal property.”  
 
In 1991 we decided E. Ohio Gas Co. v. Limbach (1991), 61 Ohio 
St.3d 363, 575 N.E.2d 132, and held that pumps attached to concrete 
pads and underground gasoline tanks were real, rather than personal, 
property.  Subsequent to announcement of E. Ohio Gas Co. the 
commissioner rejected the position set forth in the above-quoted rules in 
favor of deeming any installer of fuel tanks to be a "construction 
5 
contractor," liable for payment of sales tax at the time it purchases the 
materials to be installed.  R.C. 5739.01(B)(5).  
 
Accordingly, in September 1991, the tax agent received 
correspondence from his superiors instructing him to treat fuel tank 
installations as real property and advising him that "it is policy that 
persons who install below ground tanks, pumps and pads are 
construction contractors.  Especially affected by the decision and policy 
are companies that engage in this business for retail petroleum 
marketers.  Instead of being vendors to other vendors, they become 
consumers."  
 
On October 4, 1991 the appellee's tax agent issued his audit report 
in which he concluded that the fuel equipment used by Lyden in its 
underground fueling installations "were items of a taxable nature on which 
the proper tax was not charged or self assessed."  In justifying this 
conclusion, the agent explained that "[d]ue to the recent East Ohio Gas 
Court Case, the tanks and gas pump equipment have been deemed to be 
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real property when installed, and covered by a construction contract.  
Since The Lyden Company installed these items themselves, they are the 
consumer and these items are therefore taxable to them when 
purchased."   
 
Approximately two weeks later the commissioner rescinded this 
version of Ohio Adm. Code 5703-9-14.    
 
On October 24, 1991 Lyden was assessed sales taxes in 
accordance with the tax agent’s report.  Lyden remitted payment of sales 
taxes based on its purchase of fuel dispensing materials during the audit 
period.  In January 1992 Lyden filed a sales and use tax refund claim, 
which was denied by the commissioner.  The Board of Tax Appeals 
("BTA") affirmed the commissioner's denial of Lyden's refund application. 
 
The cause is now before this court upon an appeal as of right. 
 
Vorys, Sater, Seymour & Pease, Raymond D. Anderson, Anthony 
L. Ehler and Kevin M. Czerwonka, for appellant.  
7 
 
Betty D. Montgomery, Attorney General, and Thelma Thomas 
Price, Assistant Attorney General, for appellee.  
 
Kristen E. Manos; Vorys, Sater, Seymour & Pease and Gary J. 
Saalman, urging reversal for amicus curiae Ohio Petroleum Marketers 
Association. 
 
Hak K. Dickenson and Richard Molina, Jr., urging reversal for 
amicus curiae Emro Marketing Company. 
 
 
Moyer, C.J.     Pursuant to the Tax Commissioner's rules, bulletins, 
and actual practice in effect during the 1987-1990 audit period, the 
commissioner did not consider property installed and used as Lyden’s 
pumps and tanks were to be property incorporated into real property.  
Purchase of those materials was therefore eligible for the exemption for 
personal property purchased to be used directly in making retail sales, 
pursuant to former R.C. 5739.01(E)(2).  Lyden argues that the 
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commissioner is thus precluded by R.C. 5739.16(B) from assessing sales 
taxes on the purchases.  R.C. 5739.16(B) provides: 
 
"No assessment shall be made or issued against a vendor or 
consumer for any tax imposed by or pursuant to section 5739.02, 
5739.021, 5739.023, 5739.026, or 5739.10 of the Revised Code for any 
period during which there was in full force and effect a rule of the tax 
commissioner under or by virtue of which the collection or payment of any 
such tax was not required. ***"   
 
The commissioner claims that R.C. 5739.16(B) does not apply 
because Ohio Adm. Code 5703-9-14 and 5703-3-01 were not "in full 
force and effect" as that phrase is set forth in R.C. 5739.16(B).  The 
commissioner contends that his rules were invalidated by this court in E. 
Ohio Gas Co. and Thomas Steel Strip Corp. v. Limbach (1991), 61 Ohio 
St.3d 340, 575 N.E.2d 114, and that our decision should be retroactively 
applied so as to make taxable Lyden's transactions that predate the 
9 
announcement 
of 
those 
decisions. 
 
The 
BTA 
accepted 
the 
commissioner's arguments.  We reverse. 
 
 In Youngstown Sheet & Tube Co. v. Lindley (1988), 38 Ohio St.3d 
232, 527 N.E.2d 828, this court, for the first time, reviewed R.C. 
5739.16(B). In Youngstown, the General Assembly had, by statute, 
repealed an exemption that was also recognized by rule of the 
commissioner.  The rule, however, was not rescinded by the 
commissioner, even though the statute it implemented had been 
repealed.  The taxpayer admitted that the commissioner’s rule authorizing 
the exemption was inconsistent with the governing statute in effect 
throughout the audit period.  We nevertheless held that, pursuant to R.C. 
5739.16(B), the commissioner was precluded from acting in contradiction 
to its own rule by assessing tax, even though the tax would otherwise 
have been due, stating: 
 
“R.C. 5739.16(B) is clear:  The commissioner may not issue 
an assessment under R.C. 5739.02 against a vendor or consumer 
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for any period during which a rule of the commissioner did not 
require the payment of the tax.  R.C. 5739.16(B) effectively 
validates a rule that, contrary to statute, exempted an item from the 
tax.  If Youngstown may claim exemption for this equipment under 
the rule, it is exempted by virtue of this rule and R.C. 5739.16(B)."  
Youngstown, 38 Ohio St.3d at 234, 527 N.E.2d at 830. 
 
In the case at bar, the record supports the conclusion that, 
consistent with the rules recognized by the commissioner during the audit 
period, and but for our decision in E. Ohio Gas Co. and Thomas Strip 
Steel, the commissioner would have deemed at least some of Lyden’s 
purchases of fuel dispensing equipment to have been exempt purchases 
of personal property.  The commissioner, however, claims that 
Youngstown applies only to rules which conflict with statutes, and not to 
rules which conflict with decisions of this court.  The commissioner further 
argues that he must apply E. Ohio Gas Co. retroactively.  We disagree. 
11 
 
In answer to the first contention, we have previously acknowledged 
that “[a]dministrative regulations issued pursuant to statutory authority 
have the force and effect of law; consequently, administrative agencies 
are bound by their own rules until those rules are duly changed."  State 
ex rel. Cuyahoga Cty. Hosp. v. Bur. of Workers’ Comp. (1986), 27 Ohio 
St.3d 25, 28, 27 OBR 442, 444, 500 N.E.2d 1370, 1372.  See, also, 
Parfitt v. Columbus Correctional Facility (1980), 62 Ohio St.2d 434, 
436,16 O.O.3d 455, 456, 406 N.E.2d 528, 530. Thus, for purposes of 
R.C. 5739.16(B) a rule is "in full force and effect" until the commissioner 
rescinds it or a court specifically declares it invalid as being contrary to 
statute or unreasonable.  Kroger Grocery & Baking Co. v. Glander 
(1948), 149 Ohio St. 120, 126 , 36 O.O. 471, 474,  77 N.E. 2d 921, 924. 
 
Although application of our holding in E. Ohio Gas may result in a 
different determination of tax liability in connection with fuel tank 
installations from those made under the commissioner’s rules, we did not 
specifically invalidate Ohio Adm. Code 5703-3-01 or 5703-9-14 in that 
12 
case.  Moreover, even if the court had expressly invalidated the rules in 
E. Ohio Gas on August 14, 1991, that decision was issued subsequent to 
the audit period, which ended a full year earlier, in June 1990.   
 
We note that R.C. 5739.16(A) sets forth a four-year statute of 
limitations as to tax assessments, which prevents the commissioner from 
assessing taxes on stale transactions, even if a timely assessment would 
have been in accordance with law.  We believe that R.C. 5739.16(B) is 
similar, barring assessments by the commissioner contrary to official 
statements of tax policy, based on a determination of the General 
Assembly that taxpayers should be entitled to rely on official statements 
and policies issued by the commissioner at the time they conduct their 
business affairs, even if those statements and policies are thereafter 
deemed to be legally flawed.    
 
We find to be misplaced the commissioner’s argument that 
Youngstown applies only where rules conflict with statute, as opposed to 
judicial decisions.  In Youngstown, the court indeed found a rule of the 
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commissioner purporting to grant a tax exemption to conflict with a 
statute.  Nevertheless, we reject the commissioner’s implicit contention 
that statutory enactments possess a force of law of different degree than 
do decisions of a court.  Close examination of Youngstown and the case 
at bar does not justify the distinction argued by the commissioner.  
 
We similarly reject the commissioner’s argument that the court 
must apply E. Ohio Gas Co. retroactively.  Although we did not expressly 
provide that our holding in that case be applied prospectively only, in this 
case, R.C. 5739.16(B) blocks retroactive application of the decision.  
Where a decision of this court arguably invalidates a rule of the Tax 
Commissioner under which the collection or payment of sales or use tax 
is not required, the Tax Commissioner is precluded by R.C. 5739.16(B) 
from assessing taxes in contravention of its rule on transactions which 
occurred prior to the issuance of the court’s decision.  For purposes of 
R.C. 5739.16(B), an administrative rule adopted by the Tax 
Commissioner remains “in full force and effect” until the commissioner 
14 
rescinds it or a court specifically declares it invalid as being contrary to 
statute or unreasonable.  Therefore, pursuant to R.C. 5739.16(B), Lyden 
is entitled to a refund because “under or by virtue of [the commissioner’s 
rules] the collection or payment of [the sales tax] was not required.” 
 
We find our precedent in Youngstown applicable to this case.  The 
decision of the BTA is reversed. 
 
Before the BTA, the commissioner argued that equipment installed 
at dealer-operated stations was used directly in making retail sales not by 
Lyden but by the dealer-operators.  Therefore, the commissioner argued, 
even if this equipment were considered to have remained personal 
property, Lyden would still not be entitled to the exemption.  Because the 
BTA found that R.C. 5739.16(B) did not apply and that all the equipment 
at all stations had been incorporated into real property, it did not consider 
this argument.  We remand to the BTA for determination of this issue. 
Decision reversed 
and cause remanded.  
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DOUGLAS, RESNICK, F.E. SWEENEY, PFEIFER, COOK and STRATTON, 
JJ., concur.