Court Opinion

ID: 6758962
Source: CourtListenerOpinion
Date Created: 2022-07-21 00:29:45.368069+00
Date Added: 2024-06-11T16:02:32.304290
License: Public Domain

Per Curiam.

The sole issue presented by this case is whether the appellee’s computer hardware qualified for the statutory exemptions from sales and use taxes by virtue of its use in the production of computer software. Although R.C. 5739.02 and 5741.02 respectively impose a sales and use tax on “each retail sale” and the use of “tangible personal property” in this state, the appellee contends that its computer hardware is excepted from sales tax pursuant to R.C. 5739.01(E)(2) and, therefore, from use tax pursuant to R.C. 5741.02(C)(2).1
R.C. 5739.01(E)(2) provides, in relevant part:
“(E) ‘Retail sale’ and ‘sales; at retail’ include all sales except those in which the purpose of the consumer is:
* *
“(2) * * * [T]0 use or consume the thing transferred directly in the production of tangible personal property * * * for sale by manufacturing [or] processing * * (Emphasis added.)
*311Appellee asserts that it qualifies for this exception because its computer hardware is used to “manufacture” computer software. Based upon the definition of “manufacturing,” which was set forth at R.C. 5789.01(S) at the time of the assessment of the disputed tax, we must reject the appellee’s assertion.
R.C. 5739.01(S) provided:
“ ‘Manufacturing’ or ‘processing’ means the transformation or conversion of material or things into a different state or form from that in which they originally existed and, for the purpose of the exceptions contained in division (E)(2) of this section, includes the adjuncts used during and in, and necessary to carry on and continue, production to complete a product at the same location after such transforming or converting has commenced.”
While the appellee produces tangible personal property in the form of encoded magnetic tapes, such production is only in a very narrow sense the result of “manufacturing” or “processing” as those terms were defined by R.C. 5739.01(S). The appellee does not transform or convert “material or things into a different state or form” until it actually begins to encode the magnetic tape with the program that it has previously developed on its computer.2 Prior to encoding the tape, the appellee is dealing with intangibles — ideas, plans, procedures, formulas, etc.; and, although these intangibles are in some respects transformed or converted (or “organized”) into a different state or form, such transformation or conversion is not “manufacturing” because no “material or thing” has been transformed or converted.3
In that the appellee herein did not engage in “manufacturing” (as that term was defined in R.C. 5739.01[S] and applied in R.C. 5739.01[E][2]) until it actually encoded the magnetic tapes with the programs that it had previously developed, we hold that the Board of Tax Appeals erred in modifying the appellant’s final order of assessment to except from sales and use taxes those items of computer hardware that were used by the ap*312pellee in the preparation and development of computer programs. We remand the cause to the Board of Tax Appeals for a determination as to which items of hardware, if any, should be excepted from taxation because they were used directly in the encoding of magnetic tapes for sale to the appellee’s customers.

Judgment accordingly.

Celebrezze, C.J., Sweeney, Locher, Cook and Douglas, JJ., concur.
Douglas, J., concurs separately.
Holmes and Wright, JJ., dissent.
Cook, J., of the Eleventh Appellate District, sitting for C. Brown, J.

 R.C. 5741.02(C)(2) excepts from use tax “[t]angible personal property * * *, the acquisition of which * * * would be a sale not subject to the tax imposed by sections 5739.01 to 5739.31 of the Revised Code.” For appellee’s hardware to be excepted from use tax, therefore, it must be excepted from sales tax pursuant to R.C. 5739.01(E)(2).

 The Board of Tax Appeals, prior to the instant case, has applied this analysis to the production of computer diskettes. In AccuRay Corp. v. Lindley (1981), BTA case No. 80-D-599, the board held that the computer hardware utilized by AccuRay in the development of computer programs was not used in “manufacturing”; but, the board found that the hardware that actually transferred programs onto blank diskettes (thereby transforming the diskettes [tangible “things”] into different states or forms) was used in manufacturing and was, therefore, excepted from sales and use taxes.

 This court has previously addressed the meaning of “manufacturing” as it was set forth in R.C. 5739.01(S). In Canton Malleable Iron Co. v. Porterfield (1972), 30 Ohio St. 2d 163, 173 [59 O.O.2d 178], we stated that “* * * [i]f the primary use or consumption of an item of tangible personal property is made directly in the process of transforming or converting tangible personal property into tangible personal property for sale, then it is excepted from taxation.” (Emphasis added.) This statement, requiring that a tangible “material or thing” be transformed or converted in order for the manufacturing exception to apply, is in accord with the commonly accepted definitions of “material” and “thing.”