COURT OF APPEALS OF OHIO, EIGHTH DISTRICT COUNTY OF CUYAHOGA NOS. 70078 and 70079 KURTZ BROS., INC. : : : PLAINTIFF-APPELLANT : JOURNAL ENTRY : v. : AND : ROGER W. TRACY, TAX COMMISSIONER : OPINION : : DEFENDANT-APPELLEE : DATE OF ANNOUNCEMENT OF DECISION: JULY 25, 1996 CHARACTER OF PROCEEDING: Administrative appeal from Board of Tax Appeals, Nos. 94-P-614 and 94-P-615. JUDGMENT: AFFIRMED. DATE OF JOURNALIZATION: APPEARANCES: For Plaintiff-Appellant: Charles P. Royer, Esq. Jeffrey A. Huth, Esq. McCarthy, Lebit, Crystal & Haiman 1800 Midland Building 101 Prospect Avenue, West Cleveland, OH 44115 For Defendant-Appellee: James S. Sauer, Esq. Assistant Attorney General of Ohio State Office Tower - 16th Floor 30 East Broad Street Columbus, OH 43215-3428 -2- DAVID T. MATIA, J.: Kurtz Bros., Inc., appellant, appeals the decision and order of the Board of Tax Appeals affirming the decision of Roger W. Tracy, Tax Commissioner of Ohio, appellee. The decision and order exclude certain items purchased from tax exemption. Appellant raises four errors for review. This court, finding no error, affirms the decision of the Board of Tax Appeals. I. STATEMENT OF FACT Kurtz Bros. Inc., appellant, operates a diverse business that provides several kinds of materials and services. Its principal activity is the manufacturing and sale of bulk landscaping materials such as top soil and mulch to home consumer users. Appellant also has a diversified commercial sector. Appellant produces and sells, among other things, special blends of top soil which meet specifications for various golf courses and athletic fields. Appellant also supplies construction support services such as the removal of materials used and discarded in the building demolition process. As a result from an audit concerning the period July 1, 1988 through June 30, 1990 ("First Audit"), appellant was denied claimed exemptions for certain equipment and vehicles used in its business operations and was assessed use taxes in the amount of $188,411.20, interest in the amount of $51,815.21 and penalties. A similar audit for the period July 1, 1990 through March 31, 1992 ("Second Audit") resulted in similar denials of exemptions and assessed use tax of $78,841.57, interest in the amount of -3- $2,009.99 and penalties. Appellant objected to the auditor's determinations and petitioned the Commissioner for reassessment on both audits. A hearing was held on the petitions for reassessment. On May 27, 1994, the Tax Commissioner issued his final determination in which certain objections to the first audit period were allowed, others were denied, and some penalties removed. The assessment for the first audit was reduced to $139,159.98 in tax, $38,270.71 in pre-assessment interest, and $20,874 in penalties. None of appellant's objections to the second audit were allowed, however, some of the penalty was removed. Appellant timely filed two appeals to the Ohio Board of Tax Appeals ("B.T.A") regarding those matters/objections which were denied by the Tax Commissioner. On January 27, 1995, a hearing was held. On December 15, 1995, the B.T.A. issued its "Decision and Order" as to both appeals finding in favor of appellant on some issues and upholding the Tax Commissioner's decisions as to others. On January 9, 1996, appellant timely filed notices of appeal from these decisions. After granting appellant's motion to consolidate, this appeal is properly before this court. II. FIRST ASSIGNMENT OF ERROR Kurtz Bros., Inc., appellant, states as its first assignment of error: I. THE BOARD OF TAX APPEALS ERRED IN DENYING AN EXEMPTION FROM USE TAX FOR A "MAGNET CRANE" USED BY KURTZ BROS., INC. DIRECTLY IN MANUFACTURING, PROCESSING, AND REFINING TANGIBLE PERSONAL PROPERTY FOR SALE. -4- A. ISSUE RAISED: WHETHER THE B.T.A. ERRED IN DENYING A USE TAX EXEMPTION FOR APPELLANT'S MAGNETIC CRANE. Appellant argues the B.T.A. erred in failing to allow an exemption from use tax for a magnet crane. Specifically, appellant argues the magnetic crane is used directly in manufacturing or processing tangible personal property for sale and was therefore exempt from taxation under R.C. 5739.01(E)(2). Moreover, appellant argues the magnetic crane is similarly used in refining and was therefore exempt from taxation under R.C. 5739.01(Q). Appellant's first assignment of error is not well taken. B. STANDARD OF REVIEW: BOARD OF TAX APPEALS. In an appeal from a decision of the Board of Tax Appeals, the court's function "is to review the board's decision to determine if it is reasonable and lawful. *** As long as there is evidence which reasonably supports the conclusion reached by the board, the decision must stand." Highlights for Children, Inc. v. Collins (1977), 50 Ohio St.2d 186, 187-188. See, also, PPG Industries, Inc. v. Kosydar (1981), 65 Ohio St.2d 80; American Steamship Co. v. Limbach (1991), 61 Ohio St.3d 22. The court of appeals is bound by the record that was before the Board of Tax Appeals and may not substitute its judgment for that of the board. Denis Copy Co. v. Limbach (1992), 76 Ohio App.3d 768. Additionally, the Board of Tax Appeals has wide discretion in determining the weight to be given the evidence and the credibility of the witnesses which come before it. Cardinal -5- Fed. S. & L. Assn. v. Cuyahoga Cty. Bd. of Revision (1975), 44 Ohio St.2d 13. Finally, it should be noted that "statutes relating to the exemption from sales or use taxes are to be strictly construed." Philips Industries, Inc. v. Limbach (1988), 37 Ohio St.3d 100, 101. With these principles in mind, we review the B.T.A.'s decision affirming appellee's, Tax Commissioner's, decision to deny an exemption from use tax concerning appellant's magnet crane. C. THE B.T.A. DID NOT ERR IN DENYING A USE TAX EXEMPTION FOR THE MAGNETIC CRANE. At the time of the transaction at issue, R.C. 5739.01(E)(2) provided an exemption for items "use[d] or consume[d] *** directly in the production of tangible personal property *** for 1 sale by manufacturing, processing, refining, or mining ***." The terms "manufacturing" and/or "processing" were defined by R.C. 5739.01(R): (1) the transformation or conversion of material or material or things into a different state or form from that in which they originally existed ***. (2) for purposes of this exception contained in division (E)(2) of this section, things used or consumed directly in manufacturing or processing include the adjuncts used during and in, and necessary to carry on and 1 R.C. 5739.01(E)(2) has been amended effective July 1, 1990. The "use[d] or consume[d] *** directly in manufacturing ***." portion of the exception has been replaced by R.C. 5739.01(E)(9), which provides an exception for items "primarily in a manufacturing operation to produce tangible personal property for sale." -6- continue, production to complete a product at the same location after transforming or converting has commenced and before it has ended ***. Machinery and equipment used before manufacturing begins or after manufacturing ends as described in this division are neither used directly in manufacturing nor as adjuncts. In this case, appellant argues the magnet crane extracts metal materials or "scrap" from a pile of waste and debris. Only when this separation occurs can the scrap be sold and the waste delivered to a different type of landfill than it was originally destined. This, appellant argues, constitutes a transformation in accordance with the statute. We disagree. In Southwestern Portland Cement Co. v. Limbach (1988), 35 Ohio St.3d 196, the Ohio Supreme Court set forth the test to be applied: Thus, to find a manufacturing exception under R.C. 5739.01(E)(2), it must first be determined that manufacturing has occurred (i.e., a transformation or conversion of material or things into a different state or form has taken place). Then, the beginning and end of the manufacturing must be delineated. Finally, it must be decided whether the item under examination was used or consumed directly in manufacturing (i.e., during and in the manufacturing). In Gressel v. Kosydar (1973), 34 Ohio St.2d 206, the court held handling equipment used in the business of cleaning, candling, grading, oiling and packaging eggs for sale did not constitute "manufacturing" or "processing" for purposes of this exception. The court reasoned the operation merely enhances the -7- value of materials, i.e., eggs, and does not accompanying change in the state or form of such property. Id. at 209. Similarly, the magnet crane at issue does not change the state or form of the materials. Rather, the crane merely separates the scrap metal from the waste. This does not constitute "manufacturing" and/or "processing" as defined by R.C. 5739.01(E) and (R). We next address the issue raised by appellee concerning the sufficiency of the notice of appeal to the B.T.A. as it relates to appellant's claim that the Tax Commissioner erred in denying the exemption as applied to the magnet crane under the "refining" exemption of R.C. 5739.01(Q). The error alleged by the notice of appeal respecting this assessment states: (1) That a crane, including parts and repairs thereof, denoted Unit No. 1076, used by Appellant to extract scrap metal from waste material is not being used directly in processing a product for sale, including adjuncts, and is, therefore, exempt under Sections 5741.02(C)(2) and R.C. 5739.01(E)(2). We agree with appellee that as the term "refining" is separate and distinct from that of "processing," as used in the relevant statutes. Therefore, appellant failed to present this claim with sufficient specificity to apprise the B.T.A. of the nature and extent of the alleged error. See R.C. 5717.02. Accordingly, appellant cannot now raise the issue on appeal to this court. Cf. General Mills, Inc. v. Limbach (1992), 63 Ohio St.3d 273. Appellant's first assignment of error is not well taken. -8- III. SECOND ASSIGNMENT OF ERROR Kurtz Bros., Inc., appellant, states as its second assignment of error: II. THE BOARD OF TAX APPEALS ERRED IN DENYING AN EXEMPTION FROM USE TAX FOR TRUCKS USED BY KURTZ BROS., INC. DIRECTLY IN MAKING RETAIN SALES. A. ISSUE RAISED: WHETHER THE B.T.A. ERRED WHEN IT DENIED A USE TAX EXEMPTION FOR PERCENTAGE OF APPELLANT'S TRUCKS. Appellant argues the B.T.A. erred in denying a use tax exemption for its fleet of trucks. Specifically, appellant argues the evidence presented before the board clearly overcomes the presumption that its sales are made at its place of business. Since the truck drivers are not allowed to leave the product unless payment is not made, there can be no transfer of title until payment is made. As such, appellant argues, it is entitled to a sales tax exemption under R.C. 5739.01(E)(2) for the percentage of trucks used on cash delivery basis since those trucks are used in directly making retail sales as defined by R.C. 5739.01(O). B. STANDARD OF REVIEW: BOARD OF TAX APPEALS. In an appeal from a decision of the Board of Tax Appeals, this court's function is to review the board's decision to determine if it is reasonable and lawful. As long as there is evidence which reasonably supports the conclusion reached by the board, the decision must stand. Highlights for Children, Inc., supra. -9- C. THE B.T.A. DID NOT ERR IN DENYING APPELLANT A TAX EXEMPTION FOR A PERCENTAGE OF ITS TRUCKING FLEET. Appellant argues R.C. 5739.01(O) does not exclude from the definition of making a retail sale all deliveries. It only excludes from tax exemption delivery which occurs after the sale is made. Appellant argues delivery made prior to, or incidental to, or as part of the sale is not excluded from the "making retail sales" as defined. R.C. 5739.01(O) states: "Making retail sales" means the effecting of transactions wherein one party is obligated to provide a service or transfer of title to or possession of the item sold. "Making retail sales" does not include the preliminary acts of promoting or soliciting the retail sales, other than the distribution of printed matter which displays or describes and prices the item offered for sale, nor does it include delivery of a predetermined quantity of tangible personal property or transportation of property or personnel to or from a place where a service is performed, regardless of whether the vendor is a delivery vendor. It is well established that the the trucks primary use is determinative of taxability, and incidental uses are not controlling. See Mead v. Glander (1950), 153 Ohio St. 539. Additionally, we note that the burden of demonstrating that the determination is unlawful and unreasonable falls upon the appellant. R.C. 5717.04; Hatchadorian v. Lindley (1986), 21 Ohio St.3d 66. In this case, appellant failed to properly support its position that the delivery of materials was primarily a function -10- of sales as opposed to merely a delivery of goods. In fact, we find there was sufficient evidence before the B.T.A. from which to conclude that the primary purpose of the trucks in question was to deliver the goods sold. Orders for the goods were placed in advance by phone. The trucks were then used to make the specific order delivery. The truck drivers did not solicit any sales in any manner. See, also, Co-operative Pure Milk Assn. v. Kosydar (1976), 45 Ohio St.2d 23. Appellant's second assignment of error is not well taken. IV. THIRD AND FOURTH ASSIGNMENTS OF ERROR Since Kurtz Bros., Inc.'s, appellant's, third and fourth assignments of error contain similar issues and analysis, we will consider them concurrently: III. THE BOARD OF TAX APPEALS ERRED IN DENYING AN EXEMPTION FROM USE TAX FOR A MOBILE LABORATORY TRAILER USED BY KURTZ BROS., INC. DIRECTLY IN MANUFACTURING AND/OR PROCESSING TANGIBLE PERSONAL PROPERTY FOR SALE. IV. KURTZ IS ENTITLED TO AN EXEMPTION UNDER OHIO REVISED CODE R.C. 5739.02(E)(2) FOR THE PAN USED AT ITS BRIDGEVIEW FACILITY. A. ISSUE RAISED: WHETHER THE B.T.A. ERRED IN DENYING TAX EXEMPTION FOR APPELLANT'S LABORATORY TRAILER AND PAN USED AT THE BRIDGEVIEW FACILITY. Appellant argues the trial court erred when it denied tax exemption for its laboratory trailer used to test specifically blended top soil for golf courses. Appellant also argues the B.T.A. erred in denying a tax exemption for the pan it uses at its Bridgeview facility. -11- Specifically, appellant argues testing equipment is attached to the trailer. Since the mixing and blending must be performed at the golf courses, the mobile laboratory is used directly in the manufacturing process necessary to meet the tight specifications of the various grades of top soil. As such, it is entitled to exemption under R.C. 5739.01(E)(2). Regarding the heavy earth moving piece of machinery known as the "pan" used at the Bridgeview facility, appellant argues the pan provides an immediate supply of raw materials to machinery employed directly in the production of tangible personal property. Accordingly, appellant argues it is exempt from taxation under R.C. 3739.01(E)(2) pertaining to items used in mining and/or R.C. 5739.01(E)(10) relating to items used primarily in the manufacturing operation to produce tangible personal property. Appellant's third and fourth assignments of error is not well taken. B. STANDARD OF REVIEW: BOARD OF TAX APPEALS As previously stated, in an appeal from a decision of the Board of Tax Appeals, this court's function is to review the board's decision to determine if it is reasonable and lawful. As long as there is evidence which reasonably supports the conclusion reached by the board, the decision must stand. Highlights for Children, Inc., supra. C. THE B.T.A. DID NOT ERR IN DENYING A TAX EXEMPTION FOR APPELLANT'S MOBILE LABORATORY AND "PAN." -12- It is well established that when equipment is easily divisible into units having distinct and separate functions, it is necessary to consider the function of each piece of equipment individually to determine whether it qualifies for exception. See, e.g., Southwestern Portland Cement Co. v. Lindley (1981), 67 Ohio St.2d 417. In the case sub judice, we agree with appellee that while items such as the sieve shaker (with screens) may individually be tax exempt as being used in the processing of materials for sale, it cannot be held that the entire trailer qualifies for exemption. From a review of the evidence submitted, the primary purpose of the trailer was to transport testing equipment to the site of manufacturing/processing. It was not, in itself, used as laboratory equipment. Regarding the piece of equipment known as the "pan," the evidence submitted establishes the primary use of the pan was to move material from the stockpile area to the mixing area. Furthermore, we agree with the B.T.A. when it states that appellant has failed to sufficiently describe the actual process involved in the manufacturing. As previously stated, the burden of demonstrating that the determination is unlawful and unreasonable falls upon the appellant. R.C. 5717.04; Hatchadorian, supra. In Powhatan Mining Co. v. Peck (1953), 160 Ohio St. 389, syllabus, the Supreme Court held: -13- [W]here the principal use of property claimed to be used "directly" in a particular activity is in transportation to or from that activity, as distinguished from transportation which is a part of that activity or between essential steps of that activity, such use is not used "directly in" such activity within the meaning of Sections 5546-1 and 5546-25, General Code (analogous to R.C. 5739.01(E)(2)). Similarly, in Bird & Son, Inc. v. Limbach (1989), 45 Ohio St.3d 76, the Supreme Court held in paragraph one of its syllabus: Equipment utilized for the storage and delivery of raw materials prior to the transformation thereof into a finished product is not used or consumed directly in the production of tangible personal property and thus is not subject to exemption from sales and use taxation pursuant to R.C. 5739.01(E)(2) and R.C. 5741.02(C)(2), respectively. After a review of the entire record we find the inspection trailer and the "pan" were used primarily for the purpose of either transporting testing equipment to an inspection site or transporting raw materials to the point of manufacturing and/or processing. Accordingly, both of these functions fall outside the manufacturing process and are therefore not exempt from taxation. Appellant's third and fourth assignments of error are not well taken. Judgment affirmed. -14- It is ordered that appellee recover of appellant its costs herein taxed. The court finds there were reasonable grounds for this appeal. It is ordered that a special mandate issue out of this court directing the Board of Tax Appeals to carry this judgment into execution. A certified copy of this entry shall constitute the mandate pursuant to Rule 27 of the Rules of Appellate Procedure. SARA J. HARPER, P.J., CONCURS; and TIMOTHY J. McMONAGLE, J., CONCURS IN JUDGMENT ONLY. DAVID T. MATIA JUDGE N.B. This entry is made pursuant to the third sentence of Rule 22(D), Ohio Rules of Appellate Procedure. This is an announcement of decision (see Rule 26). Ten (10) days from the date hereof this document will be stamped to indicate .