Ohio exempts from sales and use tax purchases of property used primarily in a manufacturing operation to produce tangible personal property. To understand the complexities associated with these exemptions, consider the Todd Perren decision issued by the Ohio Board of Tax Appeals (BTA) on August 29th, 2014. This case resulted from the assessment by the Ohio Tax Commissioner on the purchase of a “caustic” solution applied to dies after a manufacturing run.
Under the facts in the case, the solution is applied to the dies after the manufacturing runs for the day to prepare it for the following day’s runs, or if there is a quality control issue (i.e. the die is not operating to produce a product to required specifications) or if there is a mechanical problem. The solution removed excess aluminum residue from the die that would otherwise negatively impact the product being produced.
The Taxpayer’s position was that the caustic solution was exempt from tax as a purchase of “machinery, equipment, and other tangible personal property used during the manufacturing operation that control, physically support, produce power for, lubricate, or are otherwise necessary for the functioning of production machinery and equipment and the continuation of the manufacturing operation.”
Meanwhile the Commissioner’s position was the solution was taxable as the purchase of “tools, equipment, and supplies made or purchased by the manufacturer for use in maintaining, installing, repairing, or cleaning its property, real or personal”.
Analysis of the Decision
The decision held the caustic solution did not qualify for exemption from tax. The BTA reasoned the solution was used to maintain and clean the dies and was not used in a continuous manufacturing process.
Two fatal flaws led to this outcome. First, in order to apply the solution to the dies, it was necessary to remove the dies from the machines; meaning the manufacturing process halted. Indeed this fact is similar to a 2001 Ohio Supreme Court case holding a forklift used to remove and replace dies from a press was subject to tax since the manufacturing process halted when the forklift was used to remove and replace dies, weighing anywhere from a few hundred pounds to as much as seventy thousand pounds. Second, in testimony as well as the Taxpayer’s appeal, the process of applying the solution to the dies was described as a “repair operation.” Repair of tangible personal property is subject to sales and use tax in Ohio.
While property used in a manufacturing plant may very well be necessary for the manufacturing process to function properly, it does not follow under Ohio law that it qualifies for exemption from sales tax. If use of the property causes the manufacturing process to halt, notwithstanding its proximity or importance to the manufacturing process, it will likely be deemed ineligible for the manufacturing exemption.
This seems rather harsh; however it is what the statute and case law hold. Compare the result in this decision to example 49 in the regulation where washing equipment used to clean overspray is treated as exempt. The difference is the seemingly continuous use of the washing equipment during the manufacturing process which itself is not halted while the washing equipment is in use.
How one describes a process is very important in determining the effect of a purchase under the sales and use tax law. The description of the application of the solution to the dies as a “repair process” by the Taxpayer required the BTA to judge the purchase taxable as a repair of tangible property.
Have you misjudged your purchases as exempt? A CSH advisor can help you determine that.
Further resources for understanding the Ohio manufacturers’ sales and use tax exemption: