Case Name: Anheuser-Busch, Inc., Appellant, v. Tracy, Tax Commr., Appellee
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 1999-05-26
Citations: 85 Ohio St. 3d 514
Docket Number: No. 97-2443
Parties: Anheuser-Busch, Inc., Appellant, v. Tracy, Tax Commr., Appellee.
Judges: Moyer, C.J., Douglas, Resnick and F.E. Sweeney, JJ., concur.
Reporter: Ohio State Reports, Third Service
Volume: 85
Pages: 514–522

Head Matter:
Anheuser-Busch, Inc., Appellant, v. Tracy, Tax Commr., Appellee.
[Cite as Anheuser-Busch, Inc. v. Tracy (1999), 85 Ohio St.3d 514.]
(No. 97-2443
Submitted January 26, 1999
Decided May 26, 1999.)
Squire, Sanders & Dempsey and Ted B. Clevenger, for appellant.
Betty D. Montgomery, Attorney General, and Richard C. Farrin, Assistant Attorney General, for appellee.

Opinion:
Cook, J.
R.C. 5739.02 levies an excise tax on all retail sales made in Ohio. R.C. Chapter 5739 excepts certain sales from the definition of retail sales and exempts certain retail sales from the tax. Furthermore, R.C. 5741.02(C)(2) exempts purchases of items from the use tax when the acquisition, "if made in Ohio, would be a sale not subject to the tax imposed by [R.C. Chapter 5739]."
Anheuser-Busch argues that the purchased machinery in dispute is excepted because it used the equipment directly in manufacturing under former R.C. 5739.01(E)(2) and (R)(l), or primarily in a manufacturing operation under current R:C. 5739.01(E)(9) and (S) and R.C. 5739.011. Alternatively, Anheuser-Busch contends that the disputed equipment purchases qualify for the packaging exemption in former R.C. 5739.02(B)(15). The commissioner responds that Anheuser-Busch used the equipment after manufacturing ended and that Anheuser-Busch did not use the equipment in packaging tangible personal property for sale. It falls upon Anheuser-Busch, then, to affirmatively establish its right to an exemption. Natl. Tube Co. v. Glander (1952), 157 Ohio St. 407, 47 O.O. 313, 105 N.E.2d 648, paragraph two of the syllabus. In determining whether an exemption applies, we must narrowly construe the relevant statutes. Id.
MANUFACTURING
As to the first audit period, Anheuser-Busch claims exemption under the former manufacturing exception for its Videojet coding machines and glue rollers. During that time, R.C. 5739.01(E)(2) provided:
" 'Retail sale' and 'sales at retail' include all sales except those in which the purpose of the consumer is to use or consume the thing transferred directly in the production of tangible personal property for sale by manufacturing [or] processing[.]"
The General Assembly defined "manufacturing" or "processing" in former R.C. 5739.01(R)(1) as:
"[T]he transformation or conversion of material or things into a different state or form from that in which they originally existed. Manufacturing or processing begins at the point where the transformation or conversion commences, or at the point where raw materials are committed to the manufacturing process in a receptacle by being measured, mixed, or blended, whichever occurs first, and ends when the product is completed."
"[D]espite the diverse factual contexts to which R.C. 5739.01(E)(2) has been applied, a synthesis of past decisions reveals a nearly uniform analysis. The central inquiry remains as follows: '[w]hen does the manufacturing or processing activity begin and end, and is the property used or consumed during and in the manufacturing or processing period?' Consequently, tangible personal property which is employed in operations preliminary or preparatory to production of the marketable product, or employed subsequent to completion of the manufacturing process, is not exempt." (Emphasis sic.) (Citations omitted.) Bird & Son, Inc. v. Limbach (1989), 45 Ohio St.3d 76, 79, 543 N.E.2d 1161, 1164-1165.
The BTA correctly decided that "Anheuser-Busch's processing of beer ends at the conclusion of the pasteurization process." This process, which occurs after the beer is bottled and capped but before labeling, kills harmful bacteria and is the final transformation of the ingredients into beer. As the BTA aptly stated, "[t]he beer in the unlabeled bottles is as fit for consumption prior to the application of label as it is afterwards. Consequently, because the labeling of bottles occurs subsequent to processing, and because labels do not alter the state or form of the beer, we find that the manufacturing exception under R.C. 5739.01(E)(2) does not apply to the purchase and installation of the glue rollers on the labelers."
Moreover, the BTA decided that "the [Videojet] coding is used for internal tracking. Like the labeling process for the bottles, the coding does not alter the state or form of the [bottled] beer. Accordingly, we find that R.C. 5739.01(E)(2) does not apply to the Videojet coding system." We agree with the BTA's conclusions.
During the later audit period, pursuant to the redefined rules, the commissioner assessed use tax against the Paxton blower system and Videojet coding machines. The applicable, current version of R.C. 5739.01(E)(9) (formerly numbered [E][10]) states that " '[r]etail sale' and 'sales at retail' include all sales except those in which the purpose of the consumer is [t]o use the thing transferred, as described in section 5739.011 of the Revised Code, primarily in a manufacturing operation to produce tangible personal property for sale."
"[T]he 'thing transferred' includes, but is not limited to, any of the following:
"(1) Production machinery and equipment that act upon the product or machinery and equipment that treat the materials or parts in preparation for the manufacturing operation." R.C. 5739.011(B)(1).
The manufacturing operation is the "process in which materials are changed, converted, or transformed into a different state or form from which they previously existed and includes refining materiáls, assembling parts, and preparing raw materials and parts by mixing, measuring, blending, or otherwise committing such materials or parts to the manufacturing process. 'Manufacturing operation' does not include packaging." R.C. 5739.01(S).
The BTA correctly determined that the Paxton blower system and the Videojet coding machines function after the conclusion of the manufacturing operation. They play no role in changing, converting, or transforming ingredients into beer, the product here. Furthermore, as the BTA determined, these items are not production machinery. This equipment does not "act upon the product" as required by R.C. 5739.011.
PACKAGING
Alternatively, Anheuser-Busch contends that, for both audit periods, the disputed items qualify for exemption under former R.C. 5739.02(B)(15), which read essentially the same for both audit periods:
"The tax does not apply to the following:
a
"Sales to persons engaged in any of the activities mentioned in division (E)(2) or (10) [now numbered (9) ] of section 5739.01 of the Revised Code, of packages, including materials and parts therefor [for packages], and of machinery, equipment, and material for use in packaging tangible personal property produced for sale, or sold at retail. 'Packages' includes bags, baskets, cartons, crates, boxes, cans, bottles, bindings, wrappings, and other similar devices and containers, and 'packaging' means placing therein."
This statute exempts two categories of items — packages and packaging equipment. "Only those items that are essential to the restraining of movement of the goods to be sold are exempt from taxation under the packaging exception of R.C. 5739.02(B)(15)." Loctite Corp. v. Tracy (1994), 71 Ohio St.3d 401, 644 N.E.2d 281, syllabus. There is no question here that purchases of bottling equipment qualify for the packaging exemption.
In Loctite, we refused to except as packages design items used to create a prototype package. After reviewing the definition of "material" set forth in Terteling Bros., Inc. v. Glander (1949), 151 Ohio St. 236, 39 O.O. 60, 85 N.E.2d 379, paragraph three of the syllabus, we concluded that "[t]o be considered a 'constituent' of or from which the tangible personal property is made, the purchased item must be 'an essential part' that serves to form, compose, or make up the property produced." Loctite, 71 Ohio St.3d at 403, 644 N.E.2d at 283. Coupling this definition with one of the defining characteristics of a package, that the package must "restrain [the] movement of the packaged object in more than one plane of direction[,]" Custom Beverage Packers v. Kosydar (1973), 33 Ohio St.2d 68, 73, 62 O.O.2d 417, 419, 294 N.E.2d 672, 675, we determined only those items essential to restraining the movement of the goods to be sold fall within the packaging exemption of R.C. 5739.02(B)(15). Loctite at 403, 644 N.E.2d at 283. We concluded that "Loctite's primary economic purpose for these items was tó facilitate the marketing of its products, not the packaging of them." Id. at 404, 644 N.E.2d at 284.
Under our Loctite decision, the items at issue are not packages or packaging materials. The Paxton blower system dries the bottle preparatory to coding and labeling the bottle. The glue rollers are used to apply labels, and the Videojet coding machine inks a code on the bottle. Because codes and labels are not essential in restraining movement, the equipment that prepares the bottle for labeling and coding, applies glue to the labels, or codes the bottle does not qualify as packages or packaging material under R.C. 5739.02(B)(15).
Furthermore, in Hawthorn Mellody, Inc. v. Lindley (1981), 65 Ohio St.2d 47, 52, 19 O.O.3d 234, 238, 417 N.E.2d 1257, 1261, we held that "[t]o be excepted from taxation under R.C. 5739.02(B)(15), machinery or equipment must be used in placing tangible personal property produced for sale in packages." In that case, Hawthorn used a conveyor system that unstacked and cleaned packages (plastic and wire milk cases) and then conveyed the packages to another part of the system, where the packages were then automatically repacked with filled milk cartons. We exempted the system because it was an integral part of machinery or equipment that was used to place in packages the tangible personal property Hawthorn produced for sale.
Unlike the conveyor system in Hawthorn Mellody, the equipment AnheuserBusch seeks to exempt is not integral to the "packaging," as we have construed that term, of its product. The disputed equipment prepares bottles and labels for labeling, and encodes bottles; without question it is not used to place the beer into packages.
CONCLUSION
Anheuser-Busch did not use the disputed equipment directly in producing, by manufacturing or processing, tangible personal property for sale, nor was it used primarily in a manufacturing operation. Moreover, the equipment is not a package or packaging material, and it does not meet the definition of packaging equipment.
Accordingly, the decision of the BTA, being neither unreasonable nor unlawful, is affirmed.
Decision affirmed.
Moyer, C.J., Douglas, Resnick and F.E. Sweeney, JJ., concur.
Pfeifer, J., dissents.
Lundberg Stratton, J., dissents^_