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Hawthorn Mellody, Inc. v. Lindley, 65 Ohio St.2d 47, 417 N.E.2d 1257, 19 O.O.3d 234

Facts

The Tax Commissioner assessed sales tax on purchases made by Hawthorn Mellody, Inc. and its subsidiaries, which included a refrigerant tank, two Muller tanks, and a portion of a conveyor system. The Board of Tax Appeals determined that these items were exempt from sales tax as they were used directly in the production of tangible personal property. Additionally, the Tax Commissioner argued that intercorporate transfers of equipment between the parent company and its subsidiaries were taxable, while the Board ruled they were not.

During their respective audit periods, appellees, inter alia, purchased a refrigerant tank which stored ammonia; two 'Muller' tanks which stored ice cream flavoring; and a certain portion of a case conveyor system which unstacked and cleaned milk cases returned from customers.

Issue

Whether the purchases of certain equipment by Hawthorn Mellody, Inc. and its subsidiaries were exempt from sales tax, and whether intercorporate transfers of equipment were subject to sales tax.

The Tax Commissioner, in his order of November 30, 1977, ruled that the above transactions were subject to the sales tax, and assessed appellees accordingly.

Rule

Under R.C. 5739.01(E)(2) and 5739.01(S), items used directly in the production of tangible personal property may be exempt from sales tax. Additionally, R.C. 5739.01(B) defines 'sale' and 'selling' to include all transactions involving the transfer of title or possession for consideration.

R.C. 5739.02 levies an excise tax on 'each retail sale made in this state.' R.C. 5739.01, in part, provides: '(E) 'Retail sale' * * * include(s) all sales except those in which the purpose of the consumer is: * * * (2) * * * to use or consume the thing transferred directly in the production of tangible personal property * * * for sale by * * * processing * * *.'

Analysis

The court analyzed the Board's findings that the refrigerant tank and Muller tanks were adjuncts to the production process, affirming that they were essential to preventing spoilage and transforming raw materials. The court also found that the portion of the conveyor system was integral to the packaging process, thus qualifying for the tax exemption. However, the court disagreed with the Board's ruling on intercorporate transfers, stating that these transactions involved consideration and were therefore taxable.

Based upon record evidence, the board found that the processing of both the milk and ice cream commenced at a considerably early point in time, i.e., when raw milk was pumped from transportation vehicles (tankers) through a clarifier which separated dirt and other foreign particles from the raw milk.

Conclusion

The court affirmed the Board's decision regarding the tax exemptions for the refrigerant tank, Muller tanks, and conveyor system, but reversed the decision concerning the intercorporate transfers, ruling that they were subject to sales tax.

Therefore, we affirm the board's decision that the purchases of the refrigerant tank and the two Muller tanks are excepted from sales taxation under R.C. 5739.01(E)(2) and 5739.01(S).

Who won?

Hawthorn Mellody, Inc. and its subsidiaries prevailed in part because the court upheld the Board's decision to exempt certain purchases from sales tax, recognizing their integral role in production.

The Tax Commissioner herein appeals a number of the board's determinations. For reasons set forth, we affirm in part and reverse in part.

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