Chicago Pacific Corp. v. Limbach - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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OPINIONS OF THE SUPREME COURT OF OHIO
The full texts of the opinions of the Supreme Court of
Ohio are being transmitted electronically beginning May 27,
1992, pursuant to a pilot project implemented by Chief Justice
Thomas J. Moyer.
Please call any errors to the attention of the Reporter's
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Chicago Pacific Corporation, Appellant, v. Limbach, Tax
Commr., Appellee.
[Cite as Chicago Pacific Corp. v. Limbach (1992), Ohio
St.3d .]
Taxation -- Personal property tax -- R.C. 5711.15 -- Valuation
of merchandise offered for sale -- Inventory totals must
be divided by the number of months that taxpayer operated
in Ohio as a merchant -- State has a legitimate interest
in levying a tax on average business inventory and
avoiding the inequality of fluctuating inventories.
(No. 92-473 -- Submitted October 21, 1992 -- Decided
December 11, 1992.)
Appeal from the Board of Tax Appeals, No. 89-A-1021.
Chicago Pacific Corporation ("CPC"), appellant, challenges
the Tax Commissioner's, appellee's, valuation of its inventory
for the 1988 personal property tax. It charges that the
commissioner did not follow the statute and, alternatively,
that the commissioner violated CPC's right to equal protection.
CPC performed a manufacturing management service activity
in Ohio. It wholly owned the Hoover Company and Rowenta, Inc.,
which both operated in Ohio. CPC decided what these
subsidiaries' operations were to be. For this service, CPC
received management fees from Hoover and Rowenta. For tax year
1987, CPC filed an informational personal property tax return,
but it paid no tax.
Hoover manufactured, sold, and serviced electrical
appliances in Ohio. On December 31, 1987, tax listing day for
the 1988 personal property tax, Hoover was not manufacturing in
Ohio because it was shut down for the holidays. Rowenta
warehoused in Ohio household appliances it had manufactured
elsewhere; it did not manufacture any products in Ohio.
Effective December 31, 1987, CPC merged Hoover and Rowenta
into itself, they became divisions of CPC, and CPC became a
"manufacturer" or "merchant" for purposes of the personal
property tax. Thus, CPC held inventory for one day, on tax
listing day for tax year 1988. In valuing this inventory on a
monthly average basis, it divided the one-month amount it held
in December 1987 by twelve, the number of months that CPC had

been in business as a manufacturing management consultant in
Ohio in 1987.
The commissioner audited this return. She divided the one
month inventory total by one, the number of months that CPC had
been in business in Ohio as a manufacturer or a merchant. On
appeal, the Board of Tax Appeals ("BTA") agreed with the
commissioner and affirmed her order. The BTA also declined to
discuss the equal protection question raised by CPC, citing
Cleveland Gear Co. v. Limbach (1988), 35 Ohio St.3d 229, 520
N.E.2d 188, which declares the BTA's statutory inability to
decide constitutional questions.
The cause is before this court upon an appeal as of right.

Jones, Day, Reavis & Pogue and John C. Duffy, Jr., for
appellant.
Lee I. Fisher, Attorney General, and James C. Sauer,
Assistant Attorney General, for appellee.

Per Curiam. R.C. 5711.15 provides:
"A merchant in estimating the value of the personal
property held for sale in the course of his business shall take
as the criterion the average value of such property, as
provided in this section of the Revised Code, which he has had
in his business or under his control during the year ending on
the day such property is listed for taxation, or the part of
such year during which he was engaged in business. Such
average shall be ascertained by taking the amount in value on
hand, as nearly as possible, in each month of such year in
which he has been engaged in business, adding together such
amounts, and dividing the aggregate amount by the number of
months that he has been in business during such year.
"As used in this section a 'merchant' is a person who owns
or has in possession or subject to his control personal
property within this state with the authority to sell it, which
has been purchased either in or out of this state, with a view
to being sold at an advanced price or profit, or which has been
consigned to him from a place out of this state for the purpose
of being sold at a place within the state."
CPC concedes that the commissioner valued the
manufacturing inventory according to statute and case law.
However, CPC interprets R.C. 5711.15 to permit it to divide the
finished goods inventory totals by the number of months it
operated any business in Ohio. This would include the months
it operated as a manufacturing management consultant and the
month it operated as a merchant. CPC contends that R.C.
5711.15 is not clear on whether the average value of
merchandising inventory is to be determined by dividing by the
number of months a taxpayer was actually engaged in business as
a merchant. Consequently, it argues, we should adopt an
interpretation favorable to it under Gulf Oil Corp. v. Kosydar
(1975), 44 Ohio St.2d 208, 73 O.O.2d 507, 339 N.E.2d 820,
paragraph one of the syllabus.
The commissioner, on the other hand, maintains that the
second paragraph of R.C. 5711.15 defines the business of
"merchant" that the first paragraph alludes to. Thus, she
argues that the inventory totals must be divided by the number
of months that the taxpayer operated in Ohio as a merchant.

Buckeye Furnace Pipe Co. v. Peck (1953), 159 Ohio St. 535,
537, 50 O.O. 440, 112 N.E.2d 649, 650, explains why Ohio values
inventory on an average basis. According to the decision, this
process avoids "the obvious inequity which would result from
valuation as of any particular tax listing day during the
year." This evens for the year the fluctuation of monthly
inventory quantities which a business normally experiences.
Averaging also removes the influence over business decisions
the tax might have since a business might unburden itself of
inventory to have as little as possible on a specific tax
listing day, if it had to list inventory only as of such date.
In U.S. Nuclear Corp. v. Lindley (1980), 61 Ohio St.2d
339, 15 O.O.3d 428, 402 N.E.2d 1178, we decided a case with
similar facts but under R.C. 5711.16, which describes how a
manufacturer is to determine its inventory's average monthly
value. In concurring, Justice William B. Brown pointed out
that R.C. Chapter 5711 requires listing the average value of
manufacturing inventory. According to Justice Brown, the
method proposed by the taxpayer in that case, which is similar
to the argument posited in the instant case, does not yield an
average because the numerator has a number corresponding to one
entry and the denominator has a number corresponding to twelve
entries. The taxpayer's result there represented one-twelfth
of the value of the property, not its average value.
Today, we find critical the commissioner's adoption of
Ohio Adm. Code 5703-3-16, which provides:
"The value of an inventory required to be listed on the
average basis by a taxpayer in the course of his business shall
be determined as provided by Revised Code 5711.15 and 5711.16,
by considering the number of months of the year ending on the
day such property is required to be listed for taxation that
such taxpayer has been engaged in business in Ohio either as a
merchant or manufacturer, respectively."
This rule requires a merchant to divide its month-end
"merchant" inventory total by the number of months that it was
engaged in business in Ohio as a merchant, and requires a
manufacturer to do likewise with its manufacturing inventory.
A properly promulgated administrative rule has the force and
effect of law unless it is in clear conflict with the statute
or is unreasonable. Kroger Grocery & Baking Co. v. Glander
(1948), 149 Ohio St. 120, 125, 36 O.O. 471, 474, 77 N.E.2d 921,
924; Doyle v. Ohio Bur. of Motor Vehicles (1990), 51 Ohio St.3d
46, 554 N.E.2d 97.
In the instant case, R.C. 5711.09 authorizes the
commissioner to administer the personal property tax and to
"adopt and promulgate rules not inconsistent with sections
5711.01 to 5711.36 of the Revised Code, so that all taxable
property shall be listed and assessed for taxation."
Thus, Ohio Adm.Code 5703-3-16, promulgated under R.C.
5711.09, clarifies R.C. 5711.15. It is not in conflict with
the statute since it provides a reasonable, supportable
interpretation of R.C 5711.15. That is, R.C. Chapter 5711
calls for listing a merchant's average value of its inventory.
We have previously interpreted R.C. 5711.16 to require a
manufacturer to divide month-end inventory totals by the number
of months the manufacturer was in business as a manufacturer.
Requiring the same procedure for merchants is reasonable.

Further, the commissioner offers a reasonable interpretation of
R.C. 5711.15, that it defines a merchant's business and that
this definition should be incorporated into the process of
valuing personal property held for sale "in the course of his
business." Consequently, the rule controls in this case and
directs CPC to divide its month-end merchant inventory total by
one, the number of months it operated in Ohio as a merchant.
Next, CPC contends that this treatment for manufacturing
and merchant inventories denies it equal protection. According
to the testimony of the assistant administrator of the
commissioner's personal property tax division, if another
taxpayer had been in business in Ohio as a merchant or a
manufacturer for the full twelve months in 1987 and had merged
Hoover and Rowenta into itself, that taxpayer would be able to
divide the acquired inventory by twelve, the number of months
it had been in business as a merchant or manufacturer. Thus,
the same inventory would be valued differently, depending on
the business circumstances of the taxpayers. According to CPC,
this results in disparate treatment for it and denies it equal
protection.
According to Nordlinger v. Hahn (1992), 505 U.S. , ,
112 S.Ct. 2326, 2331-2332, 120 L.Ed.2d 1, 12:
"The Equal Protection Clause of the Fourteenth Amendment,
{1, commands that no State shall 'deny to any person within its
jurisdiction the equal protection of the laws.' Of course,
most laws differentiate in some fashion between classes of
persons. The Equal Protection Clause does not forbid
classifications. It simply keeps governmental decisionmakers
from treating differently persons who are in all relevant
respects alike. F.S. Royster Guano Co. v. Virginia, 253 U.S.
412, 415 [40 S.Ct. 560, 561, 64 L.Ed. 989, 990-991] (1920).
"As a general rule, 'legislatures are presumed to have
acted within their constitutional power despite the fact that,
in practice, their laws result in some inequality.' McGowan v.
Maryland, 366 U.S. 420, 425-426 [81 S.Ct. 1101, 1105, 6 L.Ed.2d
393, 398-399] (1961). Accordingly, this Court's cases are
clear that, unless a classification warrants some form of
heightened review because it jeopardizes exercise of a
fundamental right or categorizes on the basis of an inherently
suspect characteristic, the Equal Protection Clause requires
only that the classification rationally further a legitimate
state interest. See, e.g., Cleburn v. Cleburn Living Center,
Inc., 473 U.S. 432, 439-441 [105 S.Ct. 3249, 3254-3255, 87
L.Ed. 2d 313, 320-321] (1985); New Orleans v. Dukes, 427 U.S.
297, 303 [96 S.Ct. 2513, 2517, 49 L.Ed.2d 511, 517] (1976)."
In Nordlinger, the court approved unequal treatment for
two classes of real estate taxpayers, new owners and long-time
owners. In California, real property is valued at its
transaction price with some incremental increases, resulting,
in some instances, in dramatically lower values for property
transferred in earlier years. The court ascertained at least
two rational considerations to justify denying the new owner
the benefits of the prior owner's lower assessments. First,
the state had a legitimate interest in local neighborhood
preservation, continuity, and stability. As to this interest,
the court said that the state could decide to structure its
taxes to discourage rapid turnover in ownership.

Second, the state legitimately could conclude that a new
owner at the time of acquiring this property did not have the
same reliance interest warranting protection against higher
taxes as does an existing owner. As to this interest, the
court stated that the new owner had full information about the
scope of future tax liability before acquiring the property and
could decide not to complete the purchase at all. "By
contrast, the existing owner, already saddled with his
purchase, does not have the option of deciding not to buy his
home if taxes become prohibitively high. To meet his tax
obligations, he might be forced to sell his home or to divert
his income away from the purchase of food, clothing, or other
necessities. In short, the State may decide that it is worse
to have owned and lost, than never to have owned at all." Id.,
505 U.S. at , 112 S.Ct. at 2333, 120 L.Ed.2d at 14.
Since CPC does not contend that the classification
jeopardizes the exercise of a fundamental right or categorizes
on the basis of an inherently suspect characteristic, we must
decide, in this case, whether the classification rationally
furthers a legitimate state interest.
We rule that the state has a legitimate interest in
levying a tax on average business inventory and avoiding the
inequality of fluctuating inventories, as discussed in Buckeye
Furnace Pipe Co. v. Peck, supra. This averaging method,
requiring a taxpayer to divide the month-end inventory totals
by the number of months a taxpayer operated as a merchant or
manufacturer in Ohio, recognizes that this denominator
represents the period of time the taxpayer held inventory in
Ohio. This system levels the inventory fluctuations based on
the time a taxpayer was a merchant or manufacturer holding
inventory in Ohio. This interest provides a rational basis for
the treatment CPC receives under R.C. 5711.15.
We also note that Rowenta and Hoover disappeared from the
tax rolls for tax year 1988, since they no longer existed after
the merger. Other than the inventory transferred on December
31, the inventory they held throughout 1987 was not included in
any calculations to determine anyone's average monthly value of
inventory for tax year 1988. Thus, as another rational basis,
this system also encourages taxpayers to continue in existence
to the end of the tax year, paying tax on their inventory, and
discourages strategic mergers to avoid personal property tax.
CPC cites Boothe Financial Corp. v. Lindley (1983), 6 Ohio
St.3d 247, 6 OBR 315, 452 N.E.2d 1295, for support. In Boothe,
we found an equal protection denial for a purchasor-lessor.
That taxpayer was required to value equipment it leased to
others on its higher acquisition cost vis-a-vis the
manufacturer-lessor, which valued its equipment on its lower
manufacturing cost. We ruled that the gross undervaluation was
not justified by the different acquisition costs for the two
taxpayers. According to our decision, the tax is assessed on a
property's market value, not its acquisition cost.
However, we do not face a similar question here. The
acquisition cost here is the same for both taxpayers. The
difference arises from how that acquisition cost is averaged by
the two taxpayers, one already in business as a merchant or
manufacturer, the other new to each particular business. Under
Nordlinger, the state is able to tax old and new property

owners differently and constitutionally if the classification
rationally furthers a legitimate state interest, which we have
found exists in this case.
Accordingly, we affirm the decision of the BTA because it
is reasonable and lawful.
Decision affirmed.
Moyer, C.J., Sweeney, Holmes, Douglas, Wright, H. Brown
and Resnick, JJ., concur.