Rowe-Reilly Corp. v. Tracy

[This opinion has been published in Ohio Official Reports at 85 Ohio St.3d 625.]

ROWE-REILLY CORPORATION, D.B.A. ROUGH BROTHERS, APPELLANT, v.

TRACY, TAX COMMR., APPELLEE.

[Cite as Rowe-Reilly Corp. v. Tracy, 1999-Ohio-326.]

Taxation—Personal property tax on inventory of corporation engaged in the

business of selling various items to be used in the installation, operation,

and maintenance of greenhouses—Board of Tax Appeals’ decision

affirming assessments by Tax Commissioner that taxed as personal

property certain items of inventory is contrary to law and not supported by

the record, when.

(No. 98-1013—Submitted March 30, 1999—Decided June 16, 1999.)

APPEAL from the Board of Tax Appeals, Nos. 96-K-460, 96-K-461 and 96-K-462.

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{¶ 1} Appellant, Rough Brothers,1 is a corporation with its principal place

of business in Cincinnati, Ohio. Appellant is engaged in the business of selling

various items to be used in the installation, operation, and maintenance of

greenhouses. Many of appellant’s customers are engaged in the growing of plants

and flowers in greenhouses. Appellant’s customers have also included retail

establishments such as Home Depot, as well as a pharmaceutical company and a

shopping mall.

{¶ 2} Appellant’s business consists of purchasing inventory items from

third-party suppliers. The inventory that appellant obtains includes items that form

the greenhouse structure, equipment that controls the growing environment of the

greenhouse, and benches used to set and irrigate plants and flowers. Appellant

1. During part of the assessment period in the instant matter, appellant’s corporate name was Rowe-

Reilly Corporation and it conducted business under the name of “Rough Brothers.” However, in

1991, appellant changed its corporate name to Rough Brothers, Inc.

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maintains an inventory of certain of these items in its warehouse, and the inventory

items are listed for sale in appellant’s “Greenhouse Supply Catalogue.” In essence,

appellant uses its inventory to design greenhouse structures to meet the needs and

specifications of its customers.

{¶ 3} Typically, appellant will receive an order from a customer through

one of appellant’s sales personnel. After receiving certain information from a

salesperson, appellant engineers and designs the ordered enclosure to meet the

customer’s specifications. Appellant then determines what equipment is needed

for the greenhouse design, calculates the costs for the order, pulls the needed items

from its inventory, and delivers the order to the customer’s job site. On occasion,

appellant orders items from a supplier and has those items shipped directly to a job

site. In order to meet a customer’s particular specifications, it may be necessary for

appellant to modify certain inventory items. Upon request, appellant will aid its

customers, as well as facilitate its own inventory sales, by providing construction

services.

{¶ 4} For tax years 1988 through 1993, appellant reported, for tax purposes,

its entire inventory as “agricultural merchandise.” Pursuant to former and current

R.C. 5701.08, appellant claimed an exemption from the personal property tax by

identifying itself as a merchant and listing all of the items in its inventory as

machinery and equipment designed and built for agricultural use. The Tax

Commissioner, appellee, however, found that appellant’s inventory did not qualify

as agricultural merchandise and therefore was not exempt from taxation as personal

property. The Tax Commissioner, therefore, entered assessments against appellant.

{¶ 5} On appeal, the Board of Tax Appeals (“BTA”) affirmed the Tax

Commissioner’s order. The BTA determined that appellant was a merchant but

found that the contested items in appellant’s inventory were not machinery and

equipment. Further, the BTA found that there was no evidence in the record to

indicate that the inventory items in question were necessarily designed and built for

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agricultural use. The BTA also held that appellant did not qualify for the personal

property exemption because appellant failed to comply with Ohio Adm.Code 5703-

3-30, in that it failed to segregate items in its inventory that qualified for the

exemption from those items that did not.

{¶ 6} Chairman Kiehner Johnson of the BTA dissented. Johnson agreed

with the majority opinion that appellant is a merchant, but disagreed with the

majority in that the chairman determined that appellant’s inventory did qualify as

machinery and equipment designed and built for agricultural use. Johnson also

concluded that appellant properly listed its inventory pursuant to Ohio Adm.Code

5703-3-30 as exempt agricultural property.

{¶ 7} Appellant has appealed the decision and order of the BTA to this

court. The cause is now before us upon an appeal as a matter of right.

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Kegler, Brown, Hill & Ritter, Paul D. Ritter, Jr., Melvin D. Weinstein and

Lynda G. Loomis, for appellant.

Betty D. Montgomery, Attorney General, and Duane M. White, Assistant

Attorney General, for appellee.

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DOUGLAS, J.

{¶ 8} This is an appeal from a decision of the BTA wherein the BTA

affirmed assessments by the Tax Commissioner that taxed as personal property

certain items of inventory owned by the appellant. The assessments levied against

the appellant were for tax years 1988 through 1993.2

2. The Tax Commissioner made three final determinations affirming preliminary assessments for

tax years 1988 and 1989, 1990 and 1991, and 1992 and 1993, respectfully. Appellant filed three

separate appeals with the BTA, case Nos. 96-K-460, 96-K-461, and 96-K-462. The BTA

consolidated the appeals for hearing, post-hearing briefing, and final determination.

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{¶ 9} During the tax years in question in this matter, R.C. 5709.01(B)

provided in pertinent part that unless otherwise expressly exempted from taxation:

“(1) All personal property located and used in business in this state * * *

[is] subject to taxation * * *.”

{¶ 10} For tax years 1988 to mid-1991, R.C. 5701.08 provided in pertinent

part:

“(A) Personal property is ‘used’ within the meaning of ‘used in business’

when employed or utilized in connection with ordinary or special operations, when

acquired or held as means or instruments for carrying on the business, * * * or when

stored or kept on hand as material, parts, products, or merchandise. * * * Leased

property used by the lessee exclusively for agricultural purposes and new or used

machinery and equipment and accessories therefor that are designed and built for

agricultural use and owned by a merchant as defined in section 5711.15 of the

Revised Code are not considered to be ‘used’ within the meaning of ‘used in

business.’ ” (140 Ohio Laws, Part II, 3173.)

{¶ 11} R.C. 5701.08, as amended by Am.Sub.H.B. No. 298, effective July

26, 1991, provides in pertinent part:

“(A) Personal property is ‘used’ within the meaning of ‘used in business’ *

* *.

“***

“(C) Leased property used by the lessee exclusively for agricultural

purposes and new or used machinery and equipment and accessories therefor that

are designed and built for agricultural use and owned by a merchant as defined in

section 5711.15 of the Revised Code are not considered to be ‘used’ within the

meaning of ‘used in business.’ ” (144 Ohio Laws, Part III, 4408-4409.)

{¶ 12} The Tax Commissioner promulgated a rule found in Ohio

Adm.Code 5703-3-30 that sets forth the criteria needed to qualify for the personal

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property tax exemption under the provisions of R.C. 5701.08. Ohio Adm.Code

5703-3-30 provides:

“Pursuant to division (A)[C] of section 5701.08 of the Revised Code * * *

new or used machinery and equipment and accessories therefor which are designed

and built for agricultural use and owned by a merchant, as defined in section

5711.15 of the Revised Code, are not considered ‘used in business’ and, therefore,

not subject to personal property tax under the provisions of division (B)(1) of

section 5709.01 of the Revised Code.

“To qualify for this exception such property must meet all of the following

conditions:

“(A) It must be owned by a merchant. Property consigned to a merchant

does not qualify. Also, a manufacturer is not a merchant with regard to property he

manufacturers.

“(B) It must be machinery and equipment, or accessories therefor. Tools

and implements do not qualify. Qualifying accessories are those that are usable

only when attached to or coupled with qualifying machinery and equipment.

“(C) It must be designed and built for agricultural use. Typical qualifying

items include balers, combines, cultivators, driers, feed grinders, harrows, rotary

hoes, mills, pickers, planters, plows, shellers, and silo fillers. Also qualifying are

farm-type loaders, spreaders, tillers, tractors, and wagons. However, neither home

lawn and garden-type items, nor general-use items such as bulldozers, graders,

trenchers, and trucks, shall be considered as designed and built for agricultural use.”

{¶ 13} We note preliminarily that we agree with the BTA’s determination

that appellant is a “merchant” as that term is defined by R.C. 5711.15. However,

we do not agree with the remainder of the majority decision of the BTA in this

cause. For the following reasons, we reverse the decision of the BTA and remand

this cause for further proceedings consistent with this opinion.

I

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{¶ 14} Appellant argues that its inventory, items that are sold to its

customers to construct, operate, and maintain greenhouses that are used in the

growing of plants and flowers, is machinery and equipment designed and built for

agricultural use and, thus, is exempt from personal property taxation pursuant to

R.C. 5701.08. Appellant contends that the BTA erred when it concluded that the

inventory items were not machinery and equipment. Appellant further contends

that the BTA improperly held that there was no evidence in the record that

appellant’s inventory was designed or built for agricultural use.

{¶ 15} The BTA held that “[b]ased upon the evidence and testimony

presented, we find that the items under consideration do not meet the second and

third criteria [of Ohio Adm.Code 5703-3-30]. Specifically, the contested items

herein are not machinery or equipment, but are inventory; they are parts, which in

combination, can be used to construct a structure, which, if a customer so chooses,

will be utilized in the growing of plants. [Footnote omitted.] Further, there is no

evidence in the record to indicate that any of the inventory items in question are

necessarily designed or built for agricultural pursuits. The inventory parts, as listed,

are used by appellant’s customers for the construction of greenhouses and

sometimes, other structures not related to agriculture. However, there is no

evidence in the record to indicate that this inventory was specifically built and

designed for use in agriculture, and arguably, the items could be used for other

pursuits, unrelated to agriculture * * *.” (Emphasis sic.)

{¶ 16} This court has previously determined that it will not reverse a

decision of the BTA that is reasonable and lawful based upon the record and

evidence submitted. See SFZ Transp., Inc. v. Limbach (1993), 66 Ohio St.3d 602,

613 N.E.2d 1037. “A review as to the reasonableness and lawfulness of the agency

decision necessarily includes an examination of the record ‘to examine the evidence

and determine as to the ultimate facts established by it, and whether such ultimate

facts furnished sufficient legal predicate upon which to base the order complained

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of.’ * * * ‘The fact that a question of law involves a consideration of the facts or

the evidence, does not turn it into a question of fact or raise a factual issue; nor does

that consideration involve the court in weighing the evidence or passing upon its

credibility.’ ” (Citations omitted.) Id. at 605, 613 N.E.2d at 1040. In SFZ

Transportation, the court concluded that the BTA’s rejection of “uncontradicted

data * * * is not the sort of weighing of evidence or determination of credibility to

which we must defer.” Id.

{¶ 17} The BTA concluded that there was no evidence in the record before

the board that appellant’s inventory was necessarily designed and built for

agricultural use. The BTA also determined that items in appellant’s inventory could

be used in pursuits unrelated to agriculture. We disagree.

{¶ 18} In Benken v. Porterfield (1969), 18 Ohio St.2d 133, 47 O.O.2d 287,

247 N.E.2d 749, syllabus, the court held that the growing and selling of plants in

greenhouses is agriculture. In the case now before us, appellant’s president, Albert

Reilly, was the sole witness before the BTA. Reilly repeatedly testified that

appellant’s inventory included items that are used in the construction and repair of

greenhouses as well as equipment intended to control the growing environment

inside the greenhouse. Reilly further testified that appellant’s inventory was

purchased from third-party suppliers and was held for sale to customers engaged in

the business of “[g]rowing, maintaining or selling horticultural products.” Reilly

indicated that, during the tax years in question, appellant’s inventory sales did not

reflect any sales to customers other than those engaged in the growing of plants and

flowers. Moreover, appellant’s sales catalogues clearly indicate that the inventory

items in question were intended to be used in the construction, operation, and repair

of greenhouses.

{¶ 19} A majority of the BTA apparently rejected or ignored what we

believe to be uncontroverted evidence regarding the intended and subsequent use

of appellant’s inventory items. As we admonished in SFZ Transportation, the court

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will not defer to such determinations by the BTA. SFZ Transp., Inc. v. Limbach,

66 Ohio St.3d at 605, 613 N.E.2d at 1040.

{¶ 20} Reilly did testify that appellant’s inventory items could be used for

other purposes, e.g., a swimming pool cover. However, for the tax years at issue,

we have found no direct evidence in the record that would lead us to conclude

appellant’s inventory items were used for purposes other than in the construction,

operation, and maintenance of greenhouses. We therefore find that the evidence

submitted to the BTA overwhelmingly established that appellant’s inventory during

the time in question was designed and built for agricultural use and ultimately used

for such purposes, and that the BTA erred in holding otherwise.

{¶ 21} The BTA also determined that the contested items in appellant’s

inventory are not machinery or equipment pursuant to the provisions of R.C.

5701.08 and Ohio Adm.Code 5703-3-30. However, in Benken v. Porterfield, 18

Ohio St.2d at 138, 47 O.O.2d at 289, 247 N.E.2d at 753, the court found some

property, similar to certain items at issue in this case, to be equipment and

machinery used in agriculture. Among those items included were lath houses,

plumbing and heating equipment, planting benches, and fans. See Benken v.

Porterfield (July 9, 1968), BTA No. 66931, unreported. In fact, the BTA indicated

that some of appellant’s inventory, specifically heating, ventilation, and shading

equipment, may qualify as “equipment” if the evidence established that it was

designed and built for agriculture. We have already deemed that there is sufficient

evidence in the record to conclude that appellant’s inventory for the years in

question was designed and built for agricultural use. Thus, the only question that

remains is to determine specifically those items included in appellant’s inventory

that qualify as “machinery and equipment,” in order for those items to be statutorily

exempt from personal property tax pursuant to R.C. 5701.08. We therefore remand

this question to the BTA for consideration and determination whether any of the

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items in appellant’s inventory qualify as “machinery and equipment, or [and]

accessories therefor,” pursuant to R.C. 5701.08 and Ohio Adm.Code 5703-3-30.

II

{¶ 22} In a secondary holding, the BTA determined that appellant could not

qualify for the agricultural-use-personal-property exemption, since it failed to

properly list its property in accordance with Ohio Adm.Code 5703-3-30. Ohio

Adm.Code 5703-3-30 provides:

“A merchant shall be required to disclose in his personal property tax return

all property held for sale, segregating property qualifying for this exception from

non-qualifying property, and list the monthly-ending values of all non-qualifying

property in ‘Schedule 3A.’ ”

{¶ 23} Appellee argues, and the BTA agreed, that appellant may not claim

an exemption for property that it fails to properly list on its personal property tax

return. In contrast, appellant contends that it fully complied with Ohio Adm.Code

5703-3-30 because it listed its entire inventory on its balance sheets as qualifying

for the R.C. 5701.08 exemption. In other words, appellant argues that since none

of the items in its inventory was “non-qualifying,” it was not required to list any

non-qualifying property in Schedule 3A.

{¶ 24} We find that appellant properly complied with the listing

requirements of Ohio Adm.Code 5703-3-30. Ohio Adm.Code 5703-3-30 requires

a merchant to segregate property qualifying for the agricultural-use-personal-

property exemption from non-qualifying property and list the month-ending values

of the non-qualifying property in Schedule 3A. Since appellant claimed that its

entire inventory qualified for the exemption, it obviously follows that there was no

property remaining to list as non-qualifying. It would be nonsensical to hold that

appellant failed to comply with the listing requirements of Ohio Adm.Code 5703-

3-30 before the taxability of said property has been determined by the Tax

Commissioner. Any conclusion to the contrary is unreasonable and unlawful. See

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First Banc Group of Ohio v. Lindley (1981), 68 Ohio St.2d 81, 22 O.O.3d 297, 428

N.E.2d 427.

III

{¶ 25} Accordingly, we find that the BTA’s conclusions in this matter are

contrary to law and not supported by the record before this court. We therefore

reverse the decision of the BTA and remand this matter to it for final determination

consistent with this opinion.

Decision reversed

and cause remanded.

MOYER, C.J., RESNICK, F.E. SWEENEY, PFEIFER, COOK and LUNDBERG

STRATTON, JJ., concur.

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