Am. Cyanamid Co. v. Tracy - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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1 American Cyanamid Company, Appellant, v. Tracy, Tax Commr., Appellee.
2 [Cite as Am. Cyanamid Co. v. Tracy (1996), _____ Ohio St.3d _____.]
3 Taxation -- Free drug samples distributed to physicians in Ohio by
4
New Jersey drug company's field representatives -- Use tax
5
assessed, when -- R.C. 5739.02(B)(18), applied.
6
(No. 94-1869--Submitted November 8, 1995--Decided February 7,
7 1996.)
8 Appeal from the Board of Tax Appeals, No. 92-G-1380.
9
American Cyanamid Company ("Cyanamid"), through its Lederle
10 Laboratories Division in Wayne, New Jersey, is a manufacturer and
11 distributor of prescription pharmaceuticals. The Tax Commissioner
12 assessed a use tax against Cyanamid for samples of prescription drugs
13 which it manufactured outside Ohio and sent to its field representatives for
14 free distribution to Ohio physicians. The audit period for the assessment
15 was January 1, 1987 through December 31, 1989.
16

Cyanamid appealed the commissioner's assessment to the
17 Board of Tax Appeals ("BTA"), which affirmed the assessment. The only
18 witness presented by Cyanamid at the hearing before the BTA was its
19 manager of sales and use taxes, Edward McMillian. He testified that about

1 eight percent of the total drugs manufactured by Cyanamid were allocated
2 for distribution as free drug samples. The use tax assessment was based on
3 the full absorption cost of the drugs involved, which included the cost of
4 material, labor, and all overhead. McMillian estimated that the cost of the
5 materials was forty-one percent of the manufactured cost of the drugs.
6
This cause is before this court upon an appeal as of right.
7
Baker & Hostetler, Edward J. Bernert and George H. Boerger, for
8 appellant.
9
Betty D. Montgomery, Attorney General, and Janyce C. Katz,
10 Assistant Attorney General, for appellee.
11
Per Curiam. R.C. 5741.02(A) levies an excise tax (use tax) upon the
12 "storage, use, or other consumption in this state of tangible personal
13 property ***." "Use" is defined by R.C. 5741.01(C) to mean "the exercise
14 of any right or power incidental to the ownership of the thing used."
15 In
Woman's Internatl. Bowling Congress, Inc. v. Porterfield (1971),
16 25 Ohio St.2d 271, 54 O.O.2d 383, 267 N.E.2d 781, a taxpayer received
17 emblems and awards from out-of-state suppliers which it sorted and
18 repackaged and mailed to various members. We held that the taxpayer

2

1 "used" the emblems and awards purchased by it. Recently, in Cent.
2 Transport, Inc. v. Tracy (1995), 72 Ohio St.3d 296, 649 N.E.2d 1210, we
3 affirmed a use tax assessment against a taxpayer that purchased equipment
4 for its own use from suppliers both inside and outside Ohio. When the
5 equipment was delivered and unloaded at the taxpayer's truck dock in Ohio,
6 it was unwrapped, as necessary, inspected and moved to appropriate trucks
7 to be delivered to locations outside Ohio. We determined that the
8 taxpayer's actions represented an exercise of rights of ownership in Ohio,
9 and affirmed the assessment.
10
Cyanamid's use of the drug samples in this case is analogous to those
11 uses by the taxpayers described in the cases cited above. Cyanamid shipped
12 the drug samples to its field representatives in Ohio, who determined to
13 which physicians they were to be distributed. The receipt and distribution
14 of the drug samples by Cyanamid's field representatives clearly represented
15 an exercise of a right or power incidental to the ownership of the personal
16 property. Unless one of the exemptions set forth in R.C. 5741.02(C) is
17 applicable to the drug samples, the samples clearly are subject to the Ohio
18 use tax.

3

1
Cyanamid contends that "when the purchase or use of an item
2 remains exempt from the Ohio sales tax, the use of that item is also exempt
3 from the use tax." Cyanamid's contends that because the raw materials that
4 were purchased to make the drug samples would have been exempted from
5 taxation, under R.C. 5739.01(E)(2), if purchased in Ohio, the use of the
6 finished product should also be exempt. We disagree.
7 Cyanamid
cites
Richardson-Merrell, Inc. v. Porterfield (1972), 32
8 Ohio St.2d 281, 61 O.O.2d 501, 291 N.E.2d 528, in support of its
9 contention. In Richardson-Merrell we exempted from sales and use taxes
10 the purchase of raw materials that were used in manufacturing drug
11 samples. Hoewever, we need not further review the Richardson-Merrell
12 decision, because the tax status of the raw materials that went into the drug
13 samples is not an issue in this case. We understand Cyanamid's argument to
14 be that, if a manufacturer produced an item in Michigan and brought the
15 product into Ohio for use by the manufacturer, then the product should not
16 be subject to the use tax because the raw materials that went into the product
17 would have been exempted if they had been purchased in Ohio.

4

1
The commissioner has not attempted to assess the purchase of the raw
2 materials that went into the drug samples; the commissioner's assessment
3 was made against the use of the finished personal property after it was
4 brought into Ohio.
5
The Ohio use tax is imposed against the "consumer," which is defined
6 in R.C. 5741.01(F) as "any person who has purchased tangible personal
7 property *** for *** use *** in this state." Former R.C. 5741.01(D)
8 defined "purchase" to mean "production, even though the article produced
9 *** was used, stored, or consumed by the producer." By production and
10 use of the drug samples, Cyanamid became the "consumer" of the finished
11 personal property which it produced and brought into and used in Ohio.
12
In the alternative, Cyanamid contends that the drug samples are
13 exempted from the use tax by R.C. 5739.02(B)(18). This statute provides
14 that the sales tax does not apply to "[s]ales of drugs dispensed by a
15 registered pharmacist upon the order of a practitioner licensed to prescribe,
16 dispense, and administer drugs to a human being in the course of his
17 professional practice ***." This provision clearly sets forth three elements
18 that must be present for the exemption to be applicable: first, there must be

5

1 a sale of drugs; second, the drugs must be dispensed by a registered
2 pharmacist; and third, the drugs must be dispensed upon the order of a
3 licensed practitioner.
4
However, the drug samples were transferred to the physicians,
5 without consideration; therefore, there was no sale of the drug samples.
6 Kloepfer's, Inc. v. Peck (1958), 158 Ohio St. 577, 49 O.O. 483, 110 N.E.2d
7 560. Furthermore, the drug samples were distributed by Cyanamid's field
8 representatives, not by a registered pharmacist. Finally, the drug samples
9 were distributed by the field representatives without any prescriptions or
10 orders being written by the physicians who received the samples. Thus,
11 none of the three elements required for the exemption contained in R.C.
12 5739.02 (B)(18) is present in this case.
13
Although the facts of this case do not meet the requirements of R.C.
14 5739.02(B)(18), Cyanamid contends that the exemption is applicable to the
15 drug samples because the language contained in R.C. 5739.02(B)(18)
16 provides a status exemption for all prescription drugs. Cyanamid would
17 have us exempt all prescription drugs from taxation, thereby disregarding
18 the requirements set forth in R.C. 5739.02(B)(18).

6

1
To accept Cyanamid's contention that prescription drugs should have
2 a status exemption would require us to disregard the clear and specific
3 requirements which the General Assembly has set forth in R.C.
4 5739.02(B)(18); we cannot do that. Exemptions or exceptions from taxation
5 are to be strictly construed. Natl. Tube Co. v. Glander (1952), 157 Ohio St.
6 407, 47 O.O. 313, 105 N.E.2d 648. When the General Assembly has spoken
7 as clearly as it has in R.C. 5739.02(B)(18) regarding prescription drugs,
8 there is no room for interpretation. In Slingluff v. Weaver (1902), 66 Ohio
9 St. 621, 628, 64 N.E.2d 574, 576, we stated, "The question is not so much
10 what did the legislature intend to enact, as what did it mean by what it did
11 enact." In this case, the exemption for prescription drugs set forth in R.C.
12 5739.02(B)(18) clearly and specifically states what is required for the
13 exemption to be applicable. If, as Cyanamid contends, the exemption is a
14 status exemption for prescription drugs, the language of the statute does not
15 express that intention. We do not find the exemption from taxation set forth
16 in R.C. 5739.02(B)(18) applicable to Cyanamid's use of the drug samples.
17
Cyanamid contends that, if the samples are taxed, the tax should be
18 imposed only against the cost of the raw materials and packaging, and

7

1 should not include the labor or overhead charges. The amount of the use tax
2 to be imposed against a consumer is measured by the price (R.C. 5739.025).
3 R.C. 5741.01(G)(1) defines "price," in pertinent part as follows: "If a
4 consumer produces the tangible personal property used by him, the price is
5 the produced cost of such tangible personal property."
6
In this case, it is undisputed that the assessment was based on a
7 "price" that included labor and overhead. The term "produced cost,"
8 contained within the definition of "price" in R.C. 5741.01(G)(1), was added
9 in 1959. (128 Ohio Laws 421.) Prior to the 1959 amendment, the definition
10 had provided that "[i]f a consumer produces the tangible personal property
11 used by him, the price is the usual and ordinary consideration paid for such
12 tangible personal property." (127 Ohio Laws 134.) By changing the term
13 "usual and ordinary consideration" to "produced cost," the General
14 Assembly eliminated any profit or markup that might have been included in
15 the "usual and ordinary consideration." However, there is no indication that
16 the General Assembly meant to limit "produced cost" to raw materials. We
17 find that the term "produced cost" includes both labor and overhead.

8

1
Accordingly, we affirm the decision of the Board of Tax Appeals as
2 reasonable and lawful.
3
Decision affirmed.
4
MOYER, C.J., DOUGLAS, RESNICK, F.E. SWEENEY and COOK, JJ.,
5 concur.
6
WRIGHT and PFEIFER, JJ., dissent.
7
PFEIFER, J., dissenting. I would reverse. If you sell it, we don't tax it;
8 if you give it away, we do?
9
WRIGHT, J., concurs in the foregoing dissenting opinion.
10

9