Sims Bros., Inc. v. Tracy - Ohio Supreme Court Opinion - Ohio Supreme Court Decision

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SIMS BROS., INC., APPELLANT, v. TRACY, TAX COMMISSIONER, APPELLEE.
[Cite as Sims Bros., Inc. v. Tracy (1998), ___ Ohio St.3d ___.]
Taxation -- Use tax on cranes used to recycle scrap metals for sale to steel mills
and foundries for melting and reuse -- Former R.C. 5739.01(E)(10) and
R.C. 5739.01(S), construed and followed.
Property used to mix, measure, or blend raw materials is not exempt from use tax as
property used "primarily in a manufacturing operation to produce tangible
personal property for sale," unless the mixing, measuring, or blending is of a
nature that results in the materials or parts becoming committed to the
manufacturing process. (Former R.C. 5739.01[E][10] and 5739.01[S],
construed and followed.)
(No. 97-1328 -- Submitted May 27, 1998 -- Decided September 23, 1998.)
APPEAL from the Board of Tax Appeals, Nos. 95-K-796 and 95-K-797.

Appellant, Sims Bros., Inc. ("Sims"), recycles scrap metals for sale to steel
mills and foundries for melting and reuse. It obtains scrap metals from various
sources, including two major manufacturing suppliers: Honda, which sells Sims
stamping material scrapped from car doors, and Whirlpool, Inc., which sells it scrap
dishwasher racks. Before sale, Sims bales, shears, or blends the material to achieve
the desired chemistry and density as ordered by its customers.

When scrap material is received, Sims's employees either dump it in the areas
of the baling and shearing machines, in a blending area, or in a general sorting area.
At the sorting area, Sims separates the material into various grades, places the
material in front-end loaders, and moves the material to the operating areas. Sims
employs electromagnetic cranes to pick up the scrap metals in all the operations.
Sims interchanges the cranes throughout the operations.

At the baler, Sims separates like material into piles. Sims mixes the materials
for its customers by directing its crane operator to pick up predetermined amounts of
scrap from individual piles, each containing different material, and deposit the scrap
on the ground in front of the baler. The operator then picks up the load and places it
into a metal box attached to the baler, and the baler compresses the material into a
two-foot by two-foot by three-foot bale that weighs approximately one thousand
pounds. Sims places the bales into stockpiles for shipment and selectively loads
bales on trucks for its customers, blending the materials further.

At the shearing machine, Sims performs the same mixing operations on the
ground, picks up the material with the crane, and drops the material either into the
charging box attached to the shearer or onto the shearer table. A ramming device
then pushes the material under a series of blades, which chop the scrap into smaller
sizes. After shearing, Sims picks up the material with cranes and loads it for
shipment.

In blending scrap metal, Sims uses cranes to mix materials from various piles
that have been dumped at the location. The crane operators select materials from the
various piles and place the material on a truck for shipment. Sims does not
compress or shear scrap as part of its blending operation.

The Tax Commissioner audited Sims for purchases of cranes and crane
repairs made from July 1, 1988, through March 31, 1992, but considered Sims's
crane purchases separately for the periods July 1, 1988, through June 30, 1990, and
July 1, 1990, through March 31, 1992. The commissioner divided its auditing
activities into two audit periods in recognition of the enactment of Am.H.B. No.
531, which changed the statutory language of the manufacturing exception, effective
July 1, 1990. (143 Ohio Laws, Part IV, 5570, 5572-5573.)

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Sims contended that its use of cranes was exempt from tax based on the
manufacturing exceptions in effect during each audit period. The commissioner
determined that the cranes did not qualify for exception under either the former or
current versions of the statutory manufacturing exception. As to the first audit
period, the commissioner determined that "[Sims's] use of its cranes to move raw
materials for busheling and for loading its processing machines is not part of
manufacturing because it occurs prior to manufacturing. Therefore, the cranes are
not used directly in manufacturing." As to the second audit period, the
commissioner concluded that "the manufacturing operation begins when the raw
materials are committed to the manufacturing process. * * * Selecting scrap and
moving it from storage piles does not constitute mixing or blending. Instead, the
cranes are being used to move raw material from its initial storage, prior to the point
of commitment," and further concluded that "[Sims's] use of its cranes to move raw
materials for busheling and for loading its processing machines is not part of the
manufacturing operation; it is prior to the point of commitment. Therefore, the
cranes are not used primarily in manufacturing operation."

Sims appealed the commissioner's orders to the Board of Tax Appeals
("BTA").

The BTA affirmed the commissioner's orders. The BTA concluded that
"retrieving scrap materials from piles, placing them into the baler or shearer and
loading finished product onto trucks for delivery, does not constitute a use within
the manufacturing process." Thus, according to the BTA, moving the scrap material
around Sims's scrap yard was not manufacturing.

The cause is now before this court upon an appeal as of right.
__________________

Squire, Sanders & Dempsey and Ted B. Clevenger, for appellant.

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Betty D. Montgomery, Attorney General, and Richard C. Farrin, Assistant
Attorney General, for appellee.
__________________

MOYER, C.J. R.C. 5739.01(E) provides an exception to the sales and use tax.
During the first audit period, the exception applied to property purchased by the
consumer with the intent to "use or consume the thing transferred directly in the
production of tangible personal property * * * for sale by manufacturing, [or]
processing * * *." Former R.C. 5739.01(E)(2). During the second audit period, the
exception applied to property purchased by the consumer with the intent to "use the
thing transferred * * * primarily in a manufacturing operation to produce tangible
personal property for sale." Former R.C. 5739.01(E)(10), now renumbered R.C.
5739.01(E)(9).

Sims argues that the cranes and crane repairs at issue qualify for exemption
under both the current and former versions of the manufacturing exception. Sims
argues that its mixing, blending, and sorting of scrap to meet its customers' desires
as to density and chemistry of the final product constitute manufacturing. The
commissioner asserts that these operations are not manufacturing.

We reject Sims's arguments and affirm the Board of Tax Appeals.

Second Audit Period. We first review the commissioner's order as to the July
1, 1990 to March 31, 1992 audit period, during which the current version of the
statutory manufacturing exception was in effect. Current R.C. 5739.01(S) defines
"manufacturing operation" as "a process in which materials are changed, converted,
or transformed into a different state or form from which they previously existed and
includes refining materials, assembling parts, and preparing raw materials and
parts by mixing, measuring, blending, or otherwise committing such materials or
parts to the manufacturing process. * * *" (Emphasis added.)

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Sims argues that it uses the cranes to "mix" or "blend" the scrap metal in
preparation for baling and sale. However, we do not accept Sims's implied
contention that any mixing or blending that occurs in connection with
manufacturing falls within the current statutory definition of a "manufacturing
operation."

The statute does not provide that a manufacturing operation includes the
preparation of raw materials by "mixing, measuring, blending, or committing such
materials or parts to the manufacturing process." Rather, the statute reads "mixing,
measuring, blending, or otherwise committing such materials or parts to the
manufacturing process." (Emphasis added.) Substituting a dictionary definition of
the word "otherwise" for the word itself, the statute may be read: " `Manufacturing
operation' means a process in which materials are changed, converted, or
transformed into a different state or form from which they previously existed and
includes * * * preparing raw materials and parts by mixing, measuring, blending or
[in a different way or manner, under other conditions, or under different
circumstances] committing such materials or parts to the manufacturing process."
(Emphasis added.) Webster's Third New International Dictionary (1986) 1598.
Inclusion of the phrase "or otherwise" thus modifies and limits the types of mixing,
measuring, and blending to be included in the definition of "manufacturing
operation."

We therefore hold that property used to mix, measure, or blend raw materials
is not exempt from use tax as property used "primarily in a manufacturing operation
to produce tangible personal property for sale," unless the mixing, measuring, or
blending is of a nature which results in the materials or parts becoming committed to
the manufacturing process.

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The word "commit" in the statute reflects a legislative intent that materials be
deemed part of the manufacturing process only at that point in time at which
constituent materials are changed in such a manner that their original form is altered,
such as when a liquid and solid are mixed to create a solution. At that point, the
individual components are no longer distinct entities and, for purposes of the
statutory exemption, have been "committed" to the process of becoming a new
manufactured good.

Our conclusion is reinforced by the first phrase of the statutory definition,
which refers to "manufacturing operation" as a "process in which materials are
changed, converted, or transformed into a different state or form from which they
previously existed." R.C. 5739.01(S). We do not accept the contention that mixing
or blending alone satisfies the statutory definition, as to do so would be to disregard
this earlier part of the statutory definition, and would be in violation of our duty to
give meaning to all portions of a statute.

In applying this holding to the case before us, we conclude that Sims's use of
cranes did not involve activities in which mixing, measuring, or blending resulted in
raw materials becoming committed to the manufacturing process, nor were they
used in processes in which materials were "changed, converted, or transformed into
a different state or form from which they previously existed." R.C. 5739.01(S). We
agree with the commissioner's conclusion (based on the holding in Warren Scrap
Co. v. Limbach [July 10, 1992], Trumbull App. No. 91-T-4571, unreported, 1992
WL 165128) that, in the scrap metal business, the manufacturing process includes
processes such as actual compression, crushing, baling, and torching. In addition,
Sims's actual shearing activities would appear to be a manufacturing process. But
Sims's use of cranes to load and unload its baling and shearing machines does not
involve such a change, conversion, or transformation and constitutes uses prior to

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and subsequent to manufacturing. Rather, the record supports the conclusion that
the scrap metal could have been retrieved and resorted at any point prior to actual
operation of the baling and shearing machines. Therefore, use of the cranes to sort
and load materials into those machines does not qualify for exemption. See, also,
Scholz Homes, Inc. v. Porterfield (1971), 25 Ohio St.2d 67, 54 O.O.2d 199, 266
N.E.2d 834.

First Audit Period. Similarly, during the first audit period, former R.C.
5739.01(R)(1) required a "commitment" of raw materials to manufacturing in order
to trigger the exception. That statute defined "manufacturing" or "processing" as
"the transformation or conversion of materials or things into a different state or form
from that in which they originally existed. Manufacturing or processing begins at
the point where the transformation or conversion commences, or at the point where
raw materials are committed to the manufacturing process in a receptacle by being
measured, mixed, or blended, whichever occurs first, and it ends when the product is
completed." (Emphasis added.) Because the cranes at issue were used prior to such
a commitment and after conclusion of the manufacturing process, the cranes were
not used directly in the production of tangible personal property for sale, and were
not exempt from tax.

Moreover, former R.C. 5739.01(R)(1), in effect during the first audit period,
provided that manufacturing or processing begins "where raw materials are
committed to the manufacturing process in a receptacle by being measured, mixed,
or blended." (Emphasis added.) Here, Sims mixed the raw materials for baling and
shearing on the ground at the machine where transformation or conversion occurred.
Sims did not mix the materials "in a receptacle," thus providing an additional
reason why Sims's use of the cranes did not fall within the manufacturing exception
during the first audit period.

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"Materials Handling Equipment" Exemption. We reject as well Sims's final
contention of exemption, under former R.C. 5739.02(B)(16) or current R.C.
5739.011(B)(2), as materials handling equipment. The exemption under these
statutes applies to equipment that moves the product through a continuous
manufacturing operation. However, the instant equipment mixes raw materials prior
to insertion into the actual transformation operation. The cranes do not, however,
move the product through a continuous manufacturing operation. After baling or
shearing, the cranes move the finished products further; however, this is after
manufacturing has ended. Consequently, the materials handling exemption does not
apply.

The decision of the Board of Tax Appeals is reasonable and lawful and is
therefore affirmed.
Decision affirmed.

DOUGLAS, RESNICK, F.E. SWEENEY and COOK, JJ., concur.

PFEIFER and LUNDBERG STRATTON, JJ., dissent.
__________________

PFEIFER, J., dissenting. The cranes used by Sims Bros. to sort and mix
scrap metal are an integral part of Sims's manufacturing operation. While the
preparation and consolidation of scrap metals is not an entirely complex form of
manufacturing, the majority does not dispute that it is indeed manufacturing. That
process begins when Sims, through use of its cranes, mixes and blends the
assorted metals into piles containing metals of similar composition. This is the
most important part of Sims's manufacturing process. It is, indeed, most of the
process. It is the beginning and the sine qua non of the manufacturing Sims does.
The work the cranes do commits the metal to the manufacturing process. The
cranes therefore meet the statutory exemption from use tax.

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LUNDBERG STRATTON, J., concurs in the foregoing dissenting opinion.

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