The company that chops up a more than 90-year-old “slag mountain” near Youngstown into road-building material is entitled to a reduction in the state taxes paid for the operation’s equipment repair and fuel costs, the Ohio Supreme Court ruled today.

In a unanimous per curiam decision, the Supreme Court determined the Ohio tax commissioner wrongly assessed the state’s use tax on purchases of repair parts and fuel for the machinery Lafarge North America uses to break off slag from a waste site. The slage is  transported to the company’s pelletized slag facility in Lordstown.

Slag is a byproduct of the steel-making process. Once thought useless, the material today is crushed and used in construction applications, particularly as the base for roads.

The decision reversed the Ohio Board of Tax Appeals (BTA) ruling, which sided with the tax commissioner. The state found the slag mountain was a type of storage facility and concluded that the state use tax can be applied to certain purchases related to the transport of materials from storage. Lafarge had appealed the ruling, contending the operations at the slag mountain were in essence the beginning of the “manufacturing operation” and exempt from tax.

Audit Finds Company Did Not Pay Tax on Repair Parts, Fuel
Beginning in 1926, Youngstown-area steel mills began dumping slag at a single waste site. Over the years it accumulated into what observers called the “slag mountain.” Lafarge manufacturers various sizes of pelletized slag, which it sells.

At a BTA hearing, Lafarge’s Lordstown facility manager testified that the slag mountain does not consist of pieces of slag that can easily be removed for processing. The company uses a bulldozer to rip the slag from a section of the mountain and then drives the bulldozer over the section to crush the slag into smaller pieces. The bulldozer pushes the broken slag into a “surge pile.” Front-end loaders transfer the broken slag from the surge pile into dump trucks that take it to Lafarge’s screening plant. There, the materials are vibrated, separated, and sorted. The process is finished when the products are sorted by size, ranging from piece as large as 8 inches in diameter to as small as dust, the manager explained.

The Ohio Department of Taxation audited Lafarge’s operations for a period covering April 2009 through March 2013. It found that the bulldozer, two front-end loaders, and three dump trucks used to break up the slag mountain and transport materials to the screening plant are not part of the manufacturing operation and that purchases of repair parts and fuel for the equipment are taxable. Lafarge challenged the assessment, penalties, and interest assessed by the tax department, claiming that under R.C. 5739.02(B)(42)(g) the use tax does not apply to the equipment.

The commissioner argued that under state law, equipment used to move raw material to the start of a manufacturing process are taxable, and that Lafarge’s manufacturing process starts at the screening plant. The BTA found that Lafarge was moving raw material from a pre-production point of storage to the plant, and that the pre-production process was not part of a “continuing” manufacturing operation. Lafarge appealed the decision to the Supreme Court, which was required to hear the case.

Court Determines When Manufacturing Operation Begins
The opinion noted that 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.” The Court stated that Ohio tax rules further define when a manufacturing operation begins by stating it “begins when the raw materials or parts are committed to the manufacturing process.”

The Court wrote that to determine if the manufacturing operation begins at the slag mountain, it had to examine the law and the rule. The Court had to establish when is the slag “changed, converted or transformed into a different state” and when is the slag “committed to the manufacturing process,” the opinion stated.

The Court found the processing of the slag begins when Lafarge breaks it up at the mountain. The manufacturing operation does not involve other processing such as adding chemicals to, heating, cooling, or treating the slag, which is different than many other manufacturing operations. The opinion stated that Lafarge is not merely facilitating the transportation of a raw material from its initial storage place at the slag mountain to the screening plant. The Court found the real “change” of the slag takes place at the mountain.

“It follows that the act of cutting slag from the mountain ‘commit[s] [the material] to the manufacturing process,’” the Court wrote. “Once it has begun, the manufacturing operation continues until Lafarge has completed its manufacture of pelletized slag.”

Court Asked if Equipment Mostly Used for Manufacturing
While the Court found the equipment was used in the manufacturing operation, it also found Lafarge can avoid the tax only if the equipment is “primarily” used in the manufacturing operation. The Court noted Lafarge also operates a landfill at the site. It remanded the case to the BTA to determine the extent to which the fuel and repair parts are used in slag manufacturing, as opposed to the landfill operation.

2016-1074. Lafarge N. Am. v. Testa, Slip Opinion No. 2018-Ohio-2047.

Hear oral argument audio of this case.

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