The Ohio Supreme Court today rejected a Portage County company’s exemption from paying use taxes on natural gas to heat the six buildings where custom aluminum truck trailers are made.

The Supreme Court affirmed an Ohio Board of Tax Appeals (BTA) decision upholding the Ohio tax commissioner’s 2009 assessment of East Manufacturing Corp. The tax commissioner audited the company for a three-year period starting in 2003, and found its natural gas suppliers never collected use taxes. The company conceded that about 8 percent of its six buildings were used for administrative purposes and the gas for that area should be taxed. But it maintained that the rest of the 382,240 square feet of indoor manufacturing space should be exempt.

Writing for the Court majority, Justice Mary DeGenaro ruled East could not claim the exemption for gas used to regulate the environment in a “special and limited area” for its entire manufacturing space, or seek the exemption for gas “used in the manufacturing operation” for most of the facility.

Chief Justice Maureen O’Connor and Justices Terrence O’Donnell, Sharon L. Kennedy, Judith L. French, and R. Patrick DeWine joined the opinion. Justice Patrick F. Fischer concurred in judgment only.

Temperature Regulation Essential, Company Argued
Only one of East’s six manufacturing buildings had interior walls. One wall separated the administrative offices from the assembly area. The company used the open internal spaces to better accommodate the movement of the large truck attachments it fabricates.

While the company did not have use taxes withheld and remitted by its natural gas suppliers, the tax commissioner’s audit found that only two portions of the gas, used for painting operations and welding systems, could be exempt. East appealed the decision to the BTA.

At the BTA, the company argued that about 92 percent of the natural gas assessment should be exempt because it was essential to maintain the temperature of the buildings at 50 degrees or higher. The company explained the high amount of welding that takes place in the manufacturing process and that maintaining that temperature was necessary to prevent condensation, which could harm the welds.

The tax commissioner cited the guide for aluminum welding that East used and pointed to material in the guide contradicting East’s argument that a 50-degree temperature is needed to meet industrial needs. The BTA affirmed the assessment and found that the company failed to establish how the disputed natural gas use could qualify for an exemption. East appealed the decision to the Ohio Supreme Court, which at the time was required to hear the case.

Tax Applies, Court Ruled
The majority opinion states that under R.C. 5739.02 every sale or use of “tangible personal property” is presumably taxable. The law provides several exemptions, and East presented three theories as to why its gas use was entitled to an exemption.

The company argued that under R.C. 5739.02(B)(42)(g) the tax does not apply to the “use of things transferred” that are primarily used in the manufacturing operation to produce personal property for sale. One of East’s arguments was that natural gas supply qualified under R.C. 5739.011(C)(5) because the gas was a thing transferred “that totally regulates the environment in a special and limited area of the manufacturing facility where the regulation is essential for the production to occur.”

The Court noted that, under R.C. 5739.011(C)(5), the exemption is generally not permitted for gas used to regulate temperature and cited state tax rules that explain the only exception is for areas such as clean rooms and paint booths where specific environmental conditions are essential for production. The BTA determined that heating the entire plant is not a temperature control focused on a special and limited area and thus does not meet that exception. Among other reasons, the company argued it regulated a special and limited area because only its manufacturing buildings, and not its entire property including the outdoor area, are heated with gas and kept at an expected temperature.

“But equating ‘special and limited area’ with ‘indoors’ would result in the exception swallowing the general rule that the ‘thing transferred’ for temperature regulation is taxable and would defeat the restrictive effect of the statutory language,” the opinion stated.

The Court stated the exemption specifically excludes property to regulate temperature and cannot be considered “used in the manufacturing operation.”

Because the natural gas was specifically excluded from the exemption under R.C. 5739.011(C)(5), the Court rejected alternative arguments East made related to the use of gas in the manufacturing process and found the BTA’s position to be “lawful and reasonable.”

2017-0666. E. Mfg. Corp. v. Testa, Slip Opinion No. 2018-Ohio-2923.

View oral argument video of this case.

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