[Cite as Rich’s Dept. Stores, Inc. v. Levin, 125 Ohio St.3d 15, 2010-Ohio-957.] 

RICH’S DEPARTMENT STORES, INC., APPELLEE, v. LEVIN,

TAX COMMR., APPELLANT. 

[Cite as Rich’s Dept. Stores, Inc. v. Levin, 125 Ohio St.3d 15, 2010-Ohio-957.] 

Taxation — Ohio Adm.Code 5703-3-17 — Personal-property tax — Average 

inventory value — Vendor markdown allowances — Cost as disclosed by 

the books of the taxpayer. 

(No. 2009-0437 — Submitted December 1, 2009 — Decided March 18, 2010.) 

APPEAL from the Board of Tax Appeals, No. 2005-T-1609. 

__________________ 

MOYER, C.J. 

{¶ 1} Before the court is an appeal from a decision of the Board of Tax 

Appeals (“BTA”) in a personal-property tax case. The BTA ordered the Tax 

Commissioner to reduce the values assigned to merchandise held in inventory by 

Rich’s Department Stores with respect to tax years 2000, 2001, and 2002. 

Specifically, the BTA ordered reductions based upon “vendor markdown 

allowances,” i.e., allowances granted by vendors that supplied merchandise to 

Rich’s, by which those vendors compensated Rich’s for having to mark down the 

merchandise from its expected retail price. 

{¶ 2} On appeal, the commissioner primarily argues that the reductions 

ordered by the BTA violate the plain meaning of the relevant administrative rule, 

Ohio Adm.Code 5703-3-17 (“Administrative Rule 17”). Although the BTA’s 

factual findings generally merit the deference of the court, a careful review of the 

evidence in light of the pertinent statutes and administrative rules shows that the 

BTA did err in construing and applying Administrative Rule 17. We accordingly 

reverse the BTA’s decision and reinstate the final assessment certificates issued 

by the Tax Commissioner. 
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Facts 

Background 

{¶ 3} During the fiscal years at issue, Rich’s used the retail inventory 

method (“retail method”) to account for its merchandise inventory. Rich’s kept 

track, in the aggregate, of costs and expected retail prices for all items held in 

inventory by each retail department of the company. Every addition of new items 

for sale led to a new computation of the cost average and retail average for each 

department. 

{¶ 4} According to Rich’s vice president of divisional accounting, the 

inventory’s value is carried at the end of an accounting period as “ending 

inventory” or “ending inventory at cost” on the books of the company. That 

figure is generated by multiplying the ending retail figure by the cost-to-retail 

ratio. As part of that calculation, markdowns of expected retail price reduce the 

ending retail figure. See Larson & Miller, Fundamental Accounting Principles 

(13th Ed.1993) 502-503. 

{¶ 5} At issue in the present case is the accounting for markdown 

allowances. Like other retailers, Rich’s engages in open-ended relationships with 

its vendors, who have a vested interest in the success of the department store’s 

efforts to sell the wares that they supply, and to do so at the projected profit. The 

store buys items for its inventory from the vendor with a certain “margin 

performance,” or profit expectation, in mind. When items sell for less than the 

expected retail price, they are marked down. In those instances, the vendor will 

often grant Rich’s an allowance, by which the vendor itself contributes to the 

margin performance. The amount of the allowance is typically credited as an 

offset against an amount Rich’s would otherwise owe the vendor. These 

allowances are granted by informal agreements in which Rich’s will request an 

allowance after a disappointing sales period. 
January Term, 2010 

3 

{¶ 6} The record documents two effects of a markdown allowance on 

Rich’s books. First, the allowance affects the balance sheet by reducing the 

company’s liability in the form of accounts payable. Second, the allowance 

affects the income or profit-and-loss statement by reducing the cost of goods sold 

and thereby increasing the profit margin. 

{¶ 7} It must be noted that the cost of goods sold, while significant in 

terms of the profit-and-loss statement, does not constitute the book value of the 

merchandise inventory. In that regard, the testimony of accounting professor Ray 

Stephens specifically addressed the distinction between ending inventory and cost 

of goods sold, asserting that allowances from merchandise vendors “should not 

result in a reduction in ending inventory.” 

Procedural History 

{¶ 8} In assessing the property for the years at issue, the Tax 

Commissioner applied Administrative Rule 17. That rule addresses how to value 

merchandise inventory when the merchant keeps its books using the retail 

method. The rule states that the starting point for the value of merchandise under 

the statutes “shall prima facie be the ‘average inventory value’ at cost as disclosed 

by the books of the taxpayer.” Under that provision, the commissioner’s 

assessment began with the “average value of inventory” on Rich’s books; ending 

inventory figures were derived from Rich’s books to arrive at an appropriate 12-

month average for the fiscal year. See R.C. 5711.15 (merchant ascertains value of 

inventory by computing 12-month average of inventory on hand). 

{¶ 9} The commissioner next applied the additional language of 

Administrative Rule 17, which allows adjustments based on pertinent factors 

“reflected on the books of the taxpayer for the succeeding three months following 

the close of the annual accounting period of the current tax year.” The 

administrator of the personal property tax division testified at the BTA hearing 

that under this part of the rule, the commissioner reduced the valuation 
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significantly below the inventory figure originally reflected on Rich’s books for 

the period – as much as 20 percent below. But the commissioner denied 

reductions based on markdown allowances and issued final assessment 

certificates accordingly. Rich’s appealed to the BTA. 

{¶ 10} At the BTA hearing, Rich’s presented the testimony of four 

employees and the tax agent who conducted the audit, along with 15 documentary 

exhibits. The commissioner offered the testimony of the administrator of the 

property-tax division and Professor Stephens. In the course of the BTA 

proceedings, Rich’s withdrew all claims except the claim of reduction based on 

vendor markdown allowances. 

{¶ 11} The BTA concluded that reducing the book value of inventory by 

the amount of markdown allowances constituted a valid computation of the “cost 

as disclosed by the books of the taxpayer” under Administrative Rule 17. Rich’s 

Dept. Stores, Inc. v. Wilkins (Feb. 3, 2009), BTA No. 2005-T-1609, at 11, 2009 

WL 294413. The board specifically held that Rich’s claim involved “the factors 

that comprise book value.” Id. at 12. Thus, the BTA did not predicate its 

decision on a finding that Rich’s had rebutted the prima facie validity of book 

value; the BTA instead found that the adjustment Rich’s requested was consistent 

with a proper determination of the prima facie standard: “cost as disclosed by the 

books of the taxpayer” under Administrative Rule 17. 

{¶ 12} Based on this conclusion, the BTA ordered that the commissioner 

grant the requested reductions. The Tax Commissioner has appealed, and we now 

reverse. 

Analysis 

The BTA Misconstrued Administrative Rule 17 

{¶ 13} It is settled that “ ‘[t]he fair market value of property for tax 

purposes is a question of fact, the determination of which is primarily within the 

province of the taxing authorities, and this court will not disturb a decision of the 
January Term, 2010 

5 

Board of Tax Appeals with respect to such valuation unless it affirmatively 

appears from the record that such decision is unreasonable and unlawful.’ ” EOPBP Tower, L.L.C. v. Cuyahoga Cty. Bd. of Revision, 106 Ohio St.3d 1, 2005-

Ohio-3096, 829 N.E.2d 686, ¶ 17, quoting Cuyahoga Cty. Bd. of Revision v. 

Fodor (1968), 15 Ohio St.2d 52, 44 O.O.2d 30, 239 N.E.2d 25, syllabus. On the 

other hand, “ ‘we will not hesitate to reverse a BTA decision that is based on an 

incorrect legal conclusion.’ ” Satullo v. Wilkins, 111 Ohio St.3d 399, 2006-Ohio5856, 856 N.E.2d 954, ¶ 14, quoting Gahanna-Jefferson Local School Dist. Bd. of 

Edn. v. Zaino (2001), 93 Ohio St.3d 231, 232, 754 N.E.2d 789. 

{¶ 14} The Tax Commissioner advances several arguments contending 

that the BTA’s decision is unreasonable and unlawful. We consider one of those 

arguments dispositive, rendering the others moot. 

{¶ 15} The commissioner asserts that the BTA “misinterprets and 

misapplies the presumptively valid methodology for determining the true value 

set forth in [Administrative Rule 17].” The rule, which prescribes the method for 

determining the value of merchandise inventory when a taxpayer uses the retail 

method of accounting, provides as follows: 

{¶ 16} “The true ‘average inventory value of merchandise’ to be 

estimated for taxation shall prima facie be the ‘average inventory value’ at cost as 

disclosed by the books of the taxpayer, after making proper adjustments for cash 

discounts and merchandise shrinkage, less the aggregate net markdowns, at cost, 

(taking into consideration markdown cancellations and additional mark-ups at 

cost) which are reflected on the books of the taxpayer for the succeeding three 

months following the close of the annual accounting period of the current tax 

year.” Ohio Adm.Code 5703-3-17. 

{¶ 17} The BTA specifically held that subtracting markdown allowances 

constituted a valid part of determining “cost as disclosed by the books of the 

taxpayer,” treating markdown allowances as one of the factors that comprise book 
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value under the rule. The BTA plainly misconstrued the phrase “cost as disclosed 

by the books of the taxpayer” in Administrative Rule 17. That rule was 

promulgated to effectuate the general mandate that “depreciated book value shall 

be taken as the true value of such property, unless the assessor finds that such 

depreciated book value is greater or less than the then true value of such property 

in money.” R.C. 5711.18. It follows that any cost factor under the rule must 

relate to how the inventory is carried as a value on the books of the company 

following proper accounting principles and methods. See Hoffman v. State Med. 

Bd. of Ohio, 113 Ohio St.3d 376, 2007-Ohio-2201, 865 N.E.2d 1259, ¶ 17, citing 

Carroll v. Dept. of Adm. Servs. (1983), 10 Ohio App.3d 108, 110, 10 OBR 132, 

460 N.E.2d 704 (“Administrative rules are designed to accomplish the ends 

sought by the legislation enacted by the General Assembly”); accord Chicago 

Pacific Corp. v. Limbach (1992), 65 Ohio St.3d 432, 435, 605 N.E.2d 8 

(administrative rule does not conflict with a statute to the extent that it provides a 

reasonable, supportable interpretation of it). 

{¶ 18} The BTA’s decision violates this plain intent. As noted above, the 

record shows that “ending inventory” or “ending inventory at cost” is the 

accounting category that pertains to carrying the value of inventory on the books. 

Rich’s evidence demonstrates that markdown allowances should be subtracted 

when computing the “cost of goods sold” on the profit-and-loss statement. But 

the evidence is uncontroverted that, as Professor Stephens adamantly stated, 

allowances from merchandise vendors “should not result in a reduction in the 

ending inventory.” 

{¶ 19} The testimony confirms that markdown allowances offset the 

amount of net markdowns, which, under the rule, are themselves subtracted from 

the retail figure when the value of inventory is computed. Professor Stephens 

testified that a markdown allowance “really should be a reduction in the net 

markdowns in order to value inventory.” Rich’s vice-president for divisional 
January Term, 2010 

7 

accounting likewise testified that a markdown allowance leads Rich’s to “record a 

markdown cancellation” and “a markdown cancellation, in essence, is [an] 

addition to retail.” At oral argument, Rich’s counsel acknowledged that the 

markdown reductions explicitly authorized under the rule involved net 

markdowns, i.e., markdowns reduced by the amount of markdown cancellations, 

including cancellations attributable to markdown allowances. The reduction that 

Rich’s requested and the BTA granted is thus not one that properly relates to 

carrying the inventory at its value under generally accepted accounting principles. 

{¶ 20} The BTA nonetheless construed Administrative Rule 17 to 

encompass the adjustment proposed by Rich’s. In doing so, the board mistakenly 

construed the phrase “cost as disclosed by the books of the taxpayer” as requiring 

a cost determination that would include adjustments to the “cost of goods sold” on 

the profit-and-loss statement. The proper construction of the rule ties the prima 

facie standard to the “book value” mandated by R.C. 5711.18. As a result, the 

phrase “ ‘average inventory value’ at cost as disclosed by the books of the 

taxpayer” encompasses only those adjustments that relate to the computation of 

“ending inventory.” 

{¶ 21} Rich’s offers an additional reason why it may import a cost-ofgoods-sold adjustment into the balance sheet: the agents of the Tax 

Commissioner on audit sometimes do the same thing. But a review of the 

testimony on this point persuades us that the type of adjustments described by the 

commissioner’s agent involves standardizing the accounting between taxpayers 

within the confines of accepted accounting principles. Accord R.H. Macy Co., 

Inc. v. Schneider (1964), 176 Ohio St. 94, 26 O.O.2d 440, 197 N.E.2d 807 (tax 

assessor’s substitution of retail inventory method for last-in, first-out method of 

accounting to determine the value of inventory was affirmed on appeal). For 

example, one of the Tax Commissioner’s agents testified that expenditures related 

to transporting inventory might be expensed by one taxpayer on the income 
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statement but included in the cost of inventory by another taxpayer on the balance 

sheet. In the former circumstance, the tax agent would apply the transportation 

expenditure to increase the cost of inventory on the balance sheet in order to treat 

the taxpayers equally. Nothing in the record suggests that this adjustment strays 

outside accepted accounting principles; by contrast, subtracting markdown 

allowances from ending inventory plainly does. 

{¶ 22} By ordering the reduction that Rich’s had requested, the BTA 

erroneously construed the cost concept embodied in Administrative Rule 17 and 

thereby misapplied the rule. Because of this legal error, we must reverse the 

decision of the BTA. 

Rich’s evidence fails to rebut the prima facie standard for value 

set forth in Administrative Rule 17 

{¶ 23} Rich’s points out that under the statutes and our case law, book 

value has only a prima facie validity as establishing true value, and other factors 

may indicate a higher or lower value than book value. See R.C. 5711.18 (in 

valuing property used in business, book value is taken to be true value “unless the 

assessor finds that such depreciated book value is greater or less than the then true 

value of such property in money”); R.H. Macy Co., 176 Ohio St. 94, 26 O.O.2d 

440, 197 N.E.2d 807, paragraph two of the syllabus; PPG Industries, Inc. v. 

Kosydar (1981), 65 Ohio St.2d 80, 19 O.O.3d 268, 417 N.E.2d 1385, paragraph 

one of the syllabus. Rich’s then urges that the evidence of the effect of markdown 

allowances on cost constitutes evidence that the true value of its merchandise 

inventory was less than the properly computed book value of that asset. 

Accordingly, the BTA’s reliance on that evidence as rebutting the prima facie 

standard would merit the deference of this court. 

{¶ 24} We disagree. While the BTA’s factual findings merit utmost 

deference when supported by the record, Rich’s is asking that we defer to a 

finding that the BTA did not make. As discussed, the BTA held that subtracting 
January Term, 2010 

9 

markdown allowances constituted a valid adjustment in arriving at the prima facie 

standard articulated by Administrative Rule 17. Because of that holding, the BTA 

had no need to address whether the prima facie standard had been rebutted, and it 

did not do so.

{¶ 25} Our disposition of this appeal contrary to the BTA’s holding raises 

the question of whether the case should be remanded to afford the BTA the 

opportunity to determine whether Rich’s has rebutted the prima facie standard. 

We hold that the present record does not justify a remand. The evidence that 

Rich’s presented related to the effect of markdown allowances on the cost of 

merchandise for accounting purposes. While the concept of cost, properly 

construed, does relate to the manner in which inventory value is accounted for on 

the company’s books, Rich’s offers no reason why the evidence that it 

presented—the testimony and documentation that markdown allowances led to a 

reduction of cost of goods sold on the profit-and-loss statement—constitutes 

evidence of value apart from its significance under accounting principles. 

{¶ 26} This contrasts sharply with cases in which the court has held that a 

presumptive valuation has been rebutted. In some cases, a recent arm’s-length 

sale furnishes a direct indication of value that rebuts the depreciated book value. 

It is elemental that “[t]he best evidence of true value of tangible personal property 

is an arm’s-length transaction.” Shiloh Automotive, Inc. v. Levin, 117 Ohio St.3d 

4, 2008-Ohio-68, 881 N.E.2d 227, ¶ 20, citing Tele-Media Co. of Addil v. Lindley

(1982), 70 Ohio St.2d 284, 24 O.O.3d 367, 436 N.E.2d 1362, syllabus. E.g., 

Grabler Mfg. Co. v. Kosydar (1975), 43 Ohio St.2d 75, 72 O.O.2d 42, 330 N.E.2d 

924 (sale price constituted value of personalty). In the present case, Rich’s does 

not offer evidence of a recent bulk sale of inventory. 

{¶ 27} In cases in which a sales price has not been offered as best 

evidence of value, other evidence might rebut the prima facie validity of book 

value. For example, in Willard Storage Battery Co. v. Peck (1954), 161 Ohio St. 
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197, 53 O.O. 89, 118 N.E.2d 514, a manufacturer sought a reduction of the value 

assigned to its inventory of lead. The court acknowledged that a month-by-month 

analysis of market prices for the commodity could rebut the value as carried on 

the company’s books. Id. at 201. And in other cases, taxpayers have presented 

evidence of the specific nature of a manufacturing business to rebut the Tax 

Commissioner’s decision to add plant depreciation into the value of 

manufacturing inventory. See PPG Industries, Inc., 65 Ohio St.2d 80, 19 O.O.3d 

268, 417 N.E.2d 1385; Youngstown Sheet & Tube Co. v. Kosydar (1975), 44 Ohio 

St.2d 96, 73 O.O.2d 353, 338 N.E.2d 366. The evidence in these types of cases 

bears no similarity to that offered by Rich’s here. 

{¶ 28} In essence, Rich’s has proven nothing more than that its enjoyment 

of vendor markdown allowances entails a reduction of the cost of goods sold for 

accounting purposes and, more generally, can be viewed as an after-the-fact offset 

against the original acquisition cost of the merchandise. The former does not, as 

already discussed, justify an adjustment to book value; nor does the latter more 

directly establish true value than do the accounting methods. That is so because a 

more precise computation of the acquisition cost does not, by itself, establish what 

Rich’s can receive by selling the merchandise, which is the relevant figure for 

applying the retail inventory method of accounting. 

{¶ 29} Rich’s argument in effect claims that it should pay less tax, 

through a reduction in the value of its inventory, because it has received a benefit

from its vendors in the form of a credit against monies owed. The inventory itself 

and the expected retail price thereof do not change merely because Rich’s has 

been granted a markdown allowance. While the need to mark down merchandise 

may indicate a reduced value for some items still held in inventory, the retail 

inventory method properly establishes a conservative valuation overall by stating 

the value of merchandise inventory at cost rather than at expected profit. And 

while markdowns by themselves reduce profitability and thereby indicate a lower 
January Term, 2010 

11 

value of merchandise to the merchant, the grant of markdown allowances supports 

profitability; as a result, the expectation of receiving allowances stabilizes rather 

than reduces the value of the merchandise inventory. Put in this light, the logical 

fallacy of Rich’s argument is exposed. 

{¶ 30} We hold that the record furnishes no factual basis upon which the 

BTA could predicate a reduction from book value in the amount of markdown 

allowances. It follows that there is no need for a remand. 

Conclusion 

{¶ 31} The foregoing analysis causes us to conclude that the BTA erred in 

its construction and application of Administrative Rule 17, and our resolution of 

that issue renders the commissioner’s other arguments moot. We therefore 

reverse the BTA’s decision and reinstate the Tax Commissioner’s final 

assessment certificates as issued. 

Decision reversed. 

 O’CONNOR, LANZINGER, and CUPP, JJ., concur. 

 PFEIFER, LUNDBERG STRATTON, and O’DONNELL, JJ., dissent. 

__________________ 

O’DONNELL, J., dissenting. 

{¶ 32} I respectfully dissent. 

{¶ 33} It is difficult to comprehend how a vendor markdown allowance on 

merchandise delivered to a store for retail sale does not reduce the inventory cost 

of that merchandise, and thus that reduced inventory cost should be recognized 

for purposes of assessing personal property tax. Every company assesses a 

certain cost to its inventory; when at some point subsequent to that assessment the 

retailer is afforded a markdown allowance on the inventory, retailers treat that as a 

reduction in the cost of inventory. 

{¶ 34} In R.H. Macy Co., Inc. v. Schneider (1964), 176 Ohio St. 94, 96, 

26 O.O.2d 440, 197 N.E.2d 807, we stated that “[t]he assessment of personal 
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property requires the assessor to consider the book value as stated by the taxpayer, 

together with other statements of the taxpayer and other available evidence, and 

apply the applicable rules of valuation to arrive at the ultimate goal of the 

assessment, a determination of the true value of the property.” 

{¶ 35} With respect to merchandise in inventory, Ohio Adm.Code 5703-

3-17 (“Administrative Rule 17”) provides, “The true ‘average inventory value of 

merchandise’ to be estimated for taxation shall prima facie be the ‘average 

inventory value’ at cost as disclosed by the books of the taxpayer, after making 

proper adjustments for cash discounts and merchandise shrinkage, less the 

aggregate net markdowns, at cost, * * * which are reflected on the books of the 

taxpayer for the succeeding three months following the close of the annual 

accounting period of the current tax year.” 

{¶ 36} As stated by the Board of Tax Appeals, “Once cost is determined 

on the books of the taxpayer, [Administrative Rule 17] permits additional 

adjustments for cash discounts, merchandise shrinkage and net markdowns. 

These adjustments are made only after the cost of the inventory is determined. As 

we have previously discussed, cost, as disclosed on Rich’s books, includes 

[markdown allowances].” Rich’s Dept. Stores, Inc. v. Wilkins (Feb. 3, 2009), 

BTA No. 2005-T-1609, at 11, 2009 WL 294413. 

{¶ 37} The board found, “Here, Rich’s provided through numerous 

witnesses and documents evidence indicating the amount of MDAs applied, how 

the MDAs are tracked through its accounts payable system, how the MDAs are 

applied to reduce cost, how that reduction in cost is shown on its profit and loss 

statements, and how margin is tracked on Rich’s ledgers. Various documents 

have been submitted showing both the MDA information and its impact on cost.” 

Id. at 14-15. 

{¶ 38} After considering the foregoing evidence and other evidence that 

was competent and probative, including expert witness testimony in support of the 
January Term, 2010 

13 

Tax Commissioner, the board held that markdown allowances “are indeed a 

reduction in inventory cost” and that subtracting such allowances from inventory 

value constituted a valid adjustment in arriving at the prima facie book value of 

inventory pursuant to Administrative Rule 17. Id. at 8, 11. Consequently, the 

board ordered the Tax Commissioner to grant Rich’s requested claim for a 

reduction in its 2000, 2001, and 2002 inventory value. 

{¶ 39} This is compelling analysis in my view. “ ‘ The fair market value 

of property for tax purposes is a question of fact, the determination of which is 

primarily within the province of the taxing authorities, and this court will not 

disturb a decision of the Board of Tax Appeals with respect to such valuation 

unless it affirmatively appears from the record that such decision is unreasonable 

and unlawful.’ ” EOP-BP Tower, L.L.C. v. Cuyahoga Cty. Bd. of Revision, 106 

Ohio St.3d 1, 2005-Ohio-3096, 829 N.E.2d 686, ¶ 17, quoting Cuyahoga Bd. of 

Revision v. Fodor (1968), 15 Ohio St.2d 52, 44 O.O.2d 30, 239 N.E.2d 25, 

syllabus. Accordingly, I respectfully dissent and would affirm the decision of the 

Board of Tax Appeals in this instance. 

 PFEIFER and LUNDBERG STRATTON, JJ., concur in the foregoing opinion. 

__________________ 

 Bricker & Eckler, L.L.P., and Mark A. Engel, for appellee. 

 Richard Cordray, Attorney General, and Barton A. Hubbard, Assistant 

Attorney General, for appellant. 

______________________