Internatl. Thomson Publishing, Inc. v. Tracy - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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INTERNATIONAL THOMSON PUBLISHING, INC., D.B.A. SOUTH-WESTERN PUBLISHING
COMPANY, APPELLANT, V. TRACY, TAX COMMR., APPELLEE.
[Cite as Internatl. Thomson Publishing, Inc. v. Tracy (1997), ___ Ohio St.3d ___.]
Taxation -- Use tax on free textbooks sent to out-of-state teachers and
professors for examination -- Taxable "use," when.

(No. 96-2153 -- Submitted April 23, 1997 -- Decided September 24,
1997.)

APPEAL from the Board of Tax Appeals, Nos. 94-T-1078 and 94-T-1079.

International Thomson Publishing, Inc., d.b.a. South-Western Publishing
Co. ("South-Western"), appellant, purchases and resells textbooks to elementary
schools, secondary schools, and colleges. It orders books from both Ohio and
non-Ohio publishers; twenty-five percent of these books come from Ohio
publishers. South-Western claims exception from the sales tax under the
purchase-for-resale exception of R.C. 5739.01(E)(1) when it orders the books.
South-Western receives the book orders at its Cincinnati warehouse about six
months after it places the orders.

To promote sales, South-Western's field representatives offer free
textbooks, which it calls "exam copies," to teachers and professors so they can
examine the books. The representatives, under the direction of South-Western's
branch managers, and, ultimately, South-Western Cincinnati headquarters, select
who should receive the exam copies.

When South-Western receives the shipment of books, which includes
enough books to fill its expected exam-copy requests, it removes the exam copies
from the inventory and sends them to the teachers. Sometimes, South-Western
receives exam-copy requests after it receives the book order; it fills these requests

in the same manner. South-Western fills the exam-copy requests in approximately
three to ten days.

The Tax Commissioner, appellee, audited South-Western. He did not
dispute the resale-exception claim for books sold to schools. However, he
concluded that South-Western exercised a power incidental to ownership over the
exam copies by removing them from inventory and sending them to teachers.
Consequently, he assessed $117,918.79, plus interest, in use tax against South-
Western for its use of the exam copies, relating to the period of January 1989
through June 1990, and $215,157.32, plus interest, relating to the period of July
1990 through December 1992.

South-Western appealed the commissioner's orders to the Board of Tax
Appeals ("BTA"). However, the BTA affirmed the commissioner's orders. The
BTA found that South-Western used the exam copies in a taxable manner,
resulting, thus, in a taxable event. The BTA reached this conclusion because
South-Western:

"(1) [R]eceived orders for exam copies at its Ohio facility; (2) created and
maintained, in Ohio, a data base specifically for use in distributing exam copies;
(3) centrally ordered books from publishers located both in and outside of Ohio;
(4) received and held the books in its Ohio warehouse; (5) printed labels generated
by its data base; (6) physically removed exam copies from the pallets containing
both exam and inventory books; (7) packaged the exam copies, attaching the
mailing label thereto; and (8) placed the exam copies into the mail. Regardless of
how the books were ordered, stored, or accounted for in the corporate ledger,
South-Western used the exam copies in a manner consistent with the definition of
`use.' Thus a taxable use, and a taxable event, has occurred in Ohio."

2

Next, the BTA determined that the taxes assessed against South-Western
satisfied the four-prong test set forth in Complete Auto Transit, Inc. v. Brady
(1977), 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326. First, the BTA found that
the credit granted for tax paid to other states satisfied the fair-apportionment test.
Next, the BTA ruled that the use tax is not discriminatory under the third prong of
the Complete Auto Transit test because the tax is equivalent to the sales tax,
compensating the state to the same extent as the sales tax in similar in-state
transactions. The BTA also found that the tax is fairly related to the benefits
provided to South-Western by the state because South-Western receives fire and
police protection and benefits from other publicly provided amenities.

Finally, the BTA concluded that the tax has substantial nexus to South-
Western's use of the exam copies in Ohio. According to the BTA, South-Western
controlled the disposition of the exam copies from Ohio. South-Western's
employees in Cincinnati controlled the ordering system for the exam copies, and it
also maintained the data base in Ohio. South-Western centrally ordered the books
from Ohio, received and stored them in Ohio, and removed the exam copies from
the storage pallets. Finally, South-Western packaged the copies and sent them
from Ohio to the selected teachers and professors.

This cause is now before this court upon an appeal as a matter of right.
__________________

Morrison & Foerster, L.L.P., Hollis L.. Hyans and Michael A. Pearl; Baker
& Hostetler, L.L.P., Christopher J. Swift and George H. Boerger, for appellant.

Betty D. Montgomery, Attorney General, and Barton A. Hubbard, Assistant
Attorney General, for appellee.
__________________

3

Per Curiam. We find the BTA's decision is reasonable and lawful and,
thus, affirm it.

South-Western first argues that no taxable event occurs when it withdraws
the exam copies from its resale inventory and gives them to out-of-state recipients.
Nevertheless, we agree with the commissioner that South-Western's handling of
these books in Ohio constituted a taxable event.
In
Norandex, Inc. v. Limbach (1994), 69 Ohio St.3d 26, 29-30, 630 N.E.2d
329, 332, we held, for cases involving the dormant Commerce Clause, that:

"[W]e must find a taxable event, in this case a use of the property, and apply
the Complete Auto Transit test. D.H. Holmes Co., Ltd. v. McNamara (1988), 486
U.S. 24, 31, 108 S.Ct. 1619, 1623, 100 L.Ed.2d 21, 27.

"R.C. 5741.02(A) levies `an excise tax * * * on the storage, use, or other
consumption in this state of tangible personal property or the benefit realized in
the state of any service provided.' R.C. 5741.01(C) defines: `use' as `the exercise
of any right or power incidental to the ownership of the thing used.'"

As the BTA found, a taxable event occurred here. Probative evidence
supports the BTA's findings that South-Western received orders for exam copies
in Ohio. In fact, it controlled the ordering of exam copies from Ohio. It
established a data base with which to distribute the exam copies, and it centrally
ordered books from Ohio. South-Western received and held the books in its Ohio
warehouse and distributed the books to the recipients. To distribute them it
removed the books from storage, printed labels, affixed the labels to packages
containing the exam copies, and arranged for the delivery of the packaged books
to the recipients.

These activities mirror what Norandex did with its sample cases. In
Norandex, branch employees requested the Ohio headquarters to purchase sample

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cases, and Norandex purchased the cases centrally from its Ohio office.
"Norandex held the sample cases, decided the sequence in which the branches
would receive the cases, removed the cases from the pallets to place on trucks, and
directed a carrier to deliver the cases to the branch offices." 69 Ohio St.3d at 30,
630 N.E. 2d at 333.

As we found in Norandex, South-Western exercised rights or powers
incidental to ownership of the exam copies in Ohio and occasioned a taxable event
in Ohio.

Moreover, we have held these types of activities subject to the use tax since
Women's Internatl. Bowling Congress, Inc. v. Porterfield (1971), 25 Ohio St.2d
271, 54 O.O.2d 383, 267 N.E.2d 781, paragraph three of the syllabus. Thus, the
commissioner, contrary to South-Western's contention, could assess tax against
the use of these books without further authority from amendments to R.C.
5741.01(C) or 5741.02(D). See Midwest Foundation Indep. Physicians Assn. v.
Tracy (1996), 74 Ohio St.3d 221, 658 N.E.2d 263.

We also reject South-Western's argument that R.C. 5741.01(G)(4) provides
an alternate purchase price for the use of these copies. This provision states that
the price for an item, held in inventory in Ohio for sale or lease that is temporarily
stored, used, or otherwise consumed in a taxable manner, is the value of the
temporary use. Here, though, the use of the books is not temporary; the use is
permanent, since South-Western has relinquished ownership over the copies by
giving them to teachers and professors.

Next, South-Western argues that the tax fails the substantial nexus, the non-
discrimination, and the fair-apportionment branches of the Complete Auto Transit
test. We disagree.

5

In
Complete Auto Transit, Inc. v. Brady, 430 U.S. at 279, 97 S.Ct. at 1079,
51 L.Ed.2d at 331, the United States Supreme Court declared that it has "sustained
a tax against Commerce Clause challenge when the tax is applied to an activity
with a substantial nexus with the taxing State, is fairly apportioned, does not
discriminate against interstate commerce, and is fairly related to the services
provided by the State."
Under
Norandex, the taxed activity in this case, the use of the exam copies
in Ohio, has a substantial nexus with Ohio. South-Western, as the BTA found,
established the ordering system and controlled it from Ohio, centrally ordered the
books in issue, received and stored them in Ohio, removed them from inventory,
and arranged to deliver them inside and outside Ohio. These taxed activities are
economically significant activities, they occurred in Ohio, and they satisfy the
substantial nexus prong.

Under the non-discrimination branch, South-Western argues that the
purchase of Ohio-produced exam copies would be exempt from the sales tax under
R.C. 5739.02(B)(21), and hence the use tax under R.C. 5741.02(C)(2), and that to
fail to exempt purchases of exam copies produced by non-Ohio publishers
discriminates against these latter purchases. R.C. 5739.02(B)(21) states:

"The tax does not apply to the following:

"* * *

"(21) Sales of tangible personal property, manufactured in this state, if sold
by the manufacturer in this state to a retailer for use in his retail business outside
of the state and if possession is taken from the manufacturer by the purchaser
within this state for the sole purpose of immediately removing the same from this
state in a vehicle owned by the purchaser[.]"

6

This exemption does not describe South-Western's operations. South-
Western purchases books and stores them in Ohio pending distribution. It does
not immediately remove them from Ohio in its vehicles. Thus, the tax does not
discriminate on this basis.

Finally, as to the fair-apportionment prong, Oklahoma Tax Comm. v.
Jefferson Lines, Inc. (1995), 514 U.S. 175, 185, 115 S.Ct. 1331, 1338, 131
L.Ed.2d 261, 271-272, explained the required inquiry in some detail:

"[The court assesses] any threat of malapportionment by asking whether the
tax is `internally consistent' and, if so, whether it is `externally consistent' as well.
* * * Internal consistency is preserved when the imposition of a tax identical to the
one in question by every other State would add no burden to interstate commerce
that intrastate commerce would not also bear. This test asks nothing more about
the degree of economic reality reflected by the tax, but simply looks to the
structure of the tax at issue to see whether its identical application by every State
in the union would place interstate commerce at a disadvantage as compared with
commerce intrastate. A failure of internal consistency shows as a matter of law
that a State that is attempting to take more than its fair share of taxes from the
interstate transaction, since allowing such a tax in one State would place interstate
commerce at the mercy of those remaining States that might impose an identical
tax. * * *

"External consistency, on the other hand, looks not to the logical
consequences of cloning, but to the economic justification for the State's claim
upon the value taxed, to discover whether a State's tax reaches beyond that portion
of value that is fairly attributable to economic activity within the taxing State. * *
* Here, the threat of real multiple taxation (though not by literally identical
statutes) may indicate a State's impermissible overreaching. * * *"

7

As to internal consistency of the tax in the instant case, if every state were to
impose a tax identical to the instant tax on this activity, a person exercising a
power over property in giving the property away, only one tax would be imposed.
South-Western can exercise this power only once; it has no power over property it
has already given away. Thus, the instant tax survives the internal consistency
test.

As to the external consistency test, Jefferson Lines continues:

"A sale of goods is most readily viewed as a discrete event facilitated by the
laws and amenities of the place of sale, and the transaction itself does not readily
reveal the extent to which completed or anticipated interstate activity affects the
value on which a buyer is taxed. We have therefore consistently approved
taxation of sales without any division of the tax base among different States, and
have instead held such taxes properly measurable by the gross charge for the
purchase, regardless of any activity outside a taxing district that might have
preceded the sale or might occur in the future." Id. at 186, 115 S.Ct. at 1339, 131
L.Ed.2d at 272-273.

We have consistently ruled the use tax to be externally consistent, and, thus,
fairly apportioned, because R.C. 5741.02(C)(5) provides a credit for taxes paid to
another jurisdiction. Quotron Systems, Inc. v. Limbach (1992), 62 Ohio St.3d 447,
449, 584 N.E.2d 658, 660; PPG Industries, Inc. v. Tracy (1996), 74 Ohio St.3d
449, 452, 659 N.E.2d 1250, 1251-1252. We rule so again.

Accordingly, we affirm the BTA's decision because it is reasonable and
lawful.
Decision affirmed.

MOYER, C.J., DOUGLAS, RESNICK, F.E. SWEENEY, PFEIFER, COOK and
LUNDBERG STRATTON, JJ., concur.

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