Petition for Writ of Certiorari — American Koyo Corp. v. Lindley

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ALEXANDER L. STEVAS.

Supreme Court of the United States———

October Term, 1983

AMERICAN KOYO CORPORATION,

Petitioner,

VS.

EDGAR L. LINDLEY,

Tax Commissioner of Ohio,

Respondent.

PETITION FOR WRIT OF CERTIORARI

To the Supreme Court of Ohio

HERBERT BRUCE GRISWOLD

(Counsel of Record)

Wm. TousLeEy SMITH

FRANK P. NAGORNEY

Marc L. OBERDORFF

CALFEE, HALTER & GRISWOLD

1800 Central National Bank Building

Cleveland, Ohio 44114

(216) 781-2166

Attorneys for Petitioner

American Koyo Corporation

ANTHONY J. CELEBREZZE, JR.

Attorney General

JAMES C. SAUER

Assistant Attorney General

State Office Tower

30 East Broad Street

Columbus, Ohio 43215

(614) 466-5967

Atto;..eys for Respondent

Edgar L. Lindley, Tax

Commissioner of Ohio

THE GATES LEGAL PUBLISHING CO., CLEVELAND, OHIO—TEL, (216) 621-5647

QUESTION PRESENTED FOR REVIEW

Whether goods are “in transit” in interstate commerce

(or foreign commerce) and thereby exempt from Ohio

personal property taxation under the Commerce (and/or

Import-Export) Clause of the United States Constitution

where the goods enter Ohio from an out-of-state supplier

only after having been pre-sold by an Ohio taxpayer to

out-of-state customers, and are temporarily held in Ohio

awaiting delivery to out-of-state customers, and while so

held are identified as the goods to which the out-of-state

customers’ contracts refer.

TABLE OF CONTENTS

Question Presented for Review .2.0..................c..ccccccccccene- I

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Reasons for Granting the Writ .......................-eeeeeeecee seen 6

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Appendix:

Order of the Supreme Court of Ohio Dismissing

Appeal (February 29, 1984) ........................c.ccscseeee Al

Order of the Supreme Court of Ohio Overruling

Motion for Rehearing (February 29, 1984) ........ A2

Journal Entry and Opinion of the Court of Appeals

of Cuyahoga County, Ohio (October 13, 1983) .... A3

Decision and Order of the Board of Tax Appeals

EE TTD tiesistennensamennsnaniintinnninmnnnaananninnnnnenntes A9

Ohio Revised Code:

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TABLE OF AUTHORITIES

Cases

Indiana State Bd. of Tax Com’rs. v. Stanadyne, Inc.

(Ind. App. 1982), 435 N.E.2d 278 ......................... 7,8

Low v. Austin (1872), 13 Wall. 29, 20 L. Ed. 517 ........ 6

Michelin Tire Corp. v. Lindley (1978), 540 Ohio St. 2d

SO esinsasnssessntieticareinsieneenenisesenatieclsasesiaasnaeelaiadaatiiilialenbiianasiisibi 7,8

Michelin Tire Corp. v. Wages (1976), 423 U.S. 276 ......6, 7, 8

Constitutional Provisions and Statutes

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FR eee 2

Ohio Rev. Code § 1302.45(A)(2) (U.C.C. 2-501) ........ 5

Ohio Rev. Code § 5701.01 et seq. ..............-.....-.--2--..00---- an oe

No.

Supreme Court of the United States

October Term, 1983

AMERICAN KOYO CORPORATION,

Petitioner,

vs.

EDGAR L. LINDLEY,

Tax Commissioner of Ohio,

Respondent.

PETITION FOR WRIT OF CERTIORARI

To the Supreme Court of Ohio

The Petitioner, American Koyo Corporation, respect-

fully prays that a writ of certiorari issue to review the

judgment and opinion of the Court of Appeals of Ohio,

Eighth Appellate District, entered in this matter on Octo-

ber 13, 1983. The final orders of the Supreme Court of

Ohio dismissing Petitioner’s appeal and denying Petition-

er’s motion for an order directing the Court of Appeals

to certify its record to the Supreme Court of Ohio were

entered on February 29, 1984. This Petition, therefore,

is filed within Ninety Days of the Supreme Court of Ohio’s

denial of discretionary review.

OPINIONS BELOW

The final orders of the Supreme Court of Ohio are

appended hereto on pages Al and A2 of the Appendix.

The journal entry and opinion of the Court of Appeals for

the Eighth Appellate District of Ohio is printed in the Ap-

pendix at page A3. The journal entry of the Board of Tax

Appeals is printed in the Appendix at page A9.

JURISDICTION

The final orders of the Supreme Court of Ohio were

entered on February 29, 1984. The jurisdiction of this

Court is invoked pursuant to 28 U.S.C. § 1257(3).

CONSTITUTIONAL PROVISIONS

Article I, Section 8, Clause 3 (Commerce Clause) pro-

vides in pertinent part as follows:

The Congress shall have power . . .

To regulate Commerce with foreign Nations, and

among the several States, and with the Indian

Tribes; ....

Article I, Section 10, Clause 2 (Import-Export Clause)

provides as follows:

No State shall, without the Consent of the Congress,

lay any Imposts or Duties on Imports or Exports,

except what may be absolutely necessary for executing

3

its inspection Laws: and the net Produce of all Du-

ties and Imposts, laid by any State on Imports or

Exports, shall be for the Use of the Treasury of the

United States; and all such Laws shall be subject

to the Revision and Control of the Congress.

STATEMENT OF THE CASE

Appelice, the Tax Commissioner of Ohio, seeks to im-

pose a tax pursuant to R.C. 5701.01, et seq., on goods

(roller and ball bearings, referred to herein as “bearings”’)

while they are temporarily held in the Ohio warehouse

of an Ohio Taxpayer, Petitioner American Koyo Corpora-

tion (referred to herein as “Taxpayer”’).

Taxpayer is a United States subsidiary wholly owned

by a Japanese corporation, Koyo Seiko Co., Ltd. (referred

to herein as “Parent”’).*

Taxpayer is in the business of selling throughout the

United States bearings manufactured by its Parent in

Japan and imported into the United States. Taxpayer

stores bearings at four warehouse locations in the United

States, including a warehouse in Westlake, Ohio, but no

manufacturing or processing is performed in this country.

84.3% of all bearings imported into the Ohio warehouse

are shipped on to out-of-state customers. (Indeed, 58.8%

of such bearings are types for which Taxpayer has no

Ohio customers so that they are never shipped intrastate

within Ohio.) The Commissioner seeks to impose a per-

sonal property tax on the 843% of Taxpayer’s bearings

*The following listing is included pursuant to Rule 28.1 of

the Rules of the Supreme Court:

Taxpayer’s Parent: Koyo Seiko Co., Ltd.

Taxpayer's Affiliate: Koyo International Inc. of America.

eee

4

shipped out-of-state, less 19.9% of the bearings shipped

to Taxpayer’s own out-of-state warehouses.

Two critical facts in our case are different from the

facts found in any other decided case:

First, Taxpayer pre-sells the bearings before they

are ordered from the Parent and imported into Ohio;

and

Second, the bearings for each of Taxpayer’s cus-

tomers are separately palletized and shipped by the

Parent to Taxpayer in packaging which identifies the

Taxpayer’s customer by name, identification number,

and/or customer’s part number. (Indeed, Taxpayer

ships the bearings to its customers in their original

packaging and pallets without breaking bulk.)

Thus Taxpayer’s ordinary business procedure is first

to obtain a purchase order from its customer and there-

after to place Taxpayer’s purchase order with the Parent

(which purchase order identifies Taxpayer’s customer).

When the Parent accepts Taxpayer’s purchase order, Tax-

payer provides its acceptance of the customer’s purchase

order, all of which gives rise to an existing sales contract

prior to the bearings being imported into Ohio.

The Parent manufactures the bearings, separately pal-

letizes the bearings for each of Taxpayer’s customers, and

packages the bearings with markings identifying Taxpay-

er’s customer by name, identification number, and/or cus-

tomer part number.

When the bearings enter Ohio to be received and

held temporarily at Taxpayer’s warehouse, they are already

obligated to a specific customer by pre-existing contract

and are marked as the bearings to which the customer’s

contract refers.

)

Taxpayer’s procedures are completed when it com-

pletes shipment of the bearings ot the out-of-state cus-

tomer per the pre-existing contract.

These procedures have substantial legal significance

under the Uniform Commercial Code, since the pre-exis-

tence of a valid sales contract and identification of the

bearings as the bearings referred to by the contract confers

on Taxpayer's out-of-state customer a “special property in-

terest” in the bearings.*

It is Taxpayer’s position on this appeal that its ordi-

nary business procedures should likewise have substantial

tax-law significance, since from the time the bearings enter

Ohio they are committed to an out-of-state customer, and

throughout the time that they are being held in Tax-

payer’s Ohio warehouse, they are subject to the “special

property interest” of the out-of-state customer. As a

consequence, the bearings are—both factually and legally—

“in transit” through Ohio from Taxpayer’s out-of-state sup-

plier in Japan to Taxpayer’s out-of-state customer in the

United States.

The constitutional question concerning the “in transit”

exemption of goods in interstate or import commerce was

raised (Notice of Appeal, No. 6) and decided by the Ohio

Board of Tax Appeals, was the first of two Assignments

of Error decided by the Ohio Court of Appeals, and

was the first of two grounds presented to the Ohio Su-

preme Court in support of the Motion to Certify.

*See R.C. 1302.45(A) (2) (U.C.C, 2-501):

The buver obtains a special property and an insurable in-

terest in goods by identification of existing goods as goods

to which the contract refers [as follows] ...: if the con-

tract is for the sale of future goods .. ., when goods are

shipped, marked or otherwise designated by the seller as

goods to which the contract refers... .

REASONS FOR GRANTING THE WRIT

A writ of certiorari is sought for the special and im-

portant reason that the facts in this case present an ap-

propriate opportunity for this Court to determine the

viability, if any, of the “in transit’’ exemption of interstate

and import commerce from State taxation.

In Michelin Tire Corp. v. Wages (1976), 423 U.S. 276,

this Court upheld State taxation of import commerce

based on the circumstances of that case, but appeared to

recognize that the Commerce and Import-Export clauses

of the U. S. Constitution “prohibit the assessment of even

nondiscriminatory property taxes on goods which are

merely in transit through the State when the tax is as-

sessed.” 423 U.S. at 290 n.11.

The issue which a case such as ours raises is whether

goods remain “in transit” while in the warehouse, or

whether the goods “come to rest” in warehouse storage

so as no longer to be “in transit.”

Controlling constitutional law prior to the 1976 de-

cision of Michelin Tire Corp. v. Wages, supra, was clear to

the effect that Taxpayer’s bearings would not have been

subject to state taxation while in Taxpayer’s Ohio ware-

house in 1976 and prior years.

See Low v. Austin (1872), 13 Wall. 29, 20 L. Ed.

517 (overruled by Michelin Tire Corp. v.

Wages, supra).

Indeed, the assessment sought by the Commissioner in

this case for the year 197 is the first effort to tax bear-

ings held for out-of-state shipment in Taxpayer’s Ohio

warehouse.

7

The United States Supreme Court’s decision in Michelin

Tire Corp. v. Wages, supra, was followed by the Ohio Su-

preme Court’s decision on the same facts in:

Michelin. Tire Corp. v. Lindley (1978), 540 Ohio

St. 2d 313.

Nevertheless, it cannot be said that on the facts of

our case the controlling constitutional principles are clear

or even that the appropriate constitutional considerations

are apparent. For example, the Commissioner issued a

Bulletin in response to the United States Supreme Court’s

Michelin decision stating that personal property is taxable

only if no longer “in transit” in interstate or foreign com-

merce, yet no interpretation or definition of “in transit”

has ever been provided by the Commissioner or any Ohio

court, including the appeals court below. Indeed, the

decision below conflicts with at least one other determina-

tion of the “in transit” issue by a sister state’s appellate

court.

See Indiana State Bd. of Tax Com’rs. v. Sta-

nadyne, Inc. (Ind. App. 1982), 435 N.E.2d 278,

282.

Moreover, the appeals court below cited only the

Michelin case as supporting its decision that Taxpayer’s

bearings were no longer “in transit”, yet the facts in

Michelin differ from our case in at least four critical

respects:

1. Michelin imported tires into Georgia and held

them there while they were offered for future

sale to customers which were located within

Georgia as well as out-of-state. In contrast, 84.3%

of Taxpayer’s bearings are pre-sold prior to being

imported into Ohio and are warehoused here only

8

as a “break-in transit” from out-of-state supplier

to out-of-state customer.

2. When Michelin’s tires entered Georgia, their sole

destination was Michelin’s place of business. In

contrast, 84.3% of Taxpayer’s bearings enter Ohio

with an out-of-state customer as the ultimate

destination.

3. While in Georgia, Michelin’s tires were not com-

mitted in any way to an out-of-state customer unless

and until such time as they were sold to a customer

located out of state, and until such time they were

subject to sale to a customer within Georgia. In

contrast, 84.3% of Taxpayer’s bearings are com-

mitted to an out-of-state customer throughout the

time they are in Ohio and are at all times even

subject to the out-of-state customer’s “special prop-

erty interest.”

4. Michelin’s tires shipped out-of-state were shipped

pursuant to a sale made while the goods were in

Georgia, and interstate transit of the tires was

resumed only if an out-of-state sale is made rather

than a sale to a Georgia customer. In contrast,

Taxpayer’s bearings are pre-sold before entering

Ohio and the interstate transit of 84.3% of them

is not dependent on any sales transaction occurring

while they are being held in an Ohio warehouse.

At the very least, it can be said that the Michelin cases

are not compelling authority in our case and that good

grounds exist for distinguishing it as was done in Indiana

State Bd. of Tax Com’rs. v. Stanadyne, Inc. (Ind. App.),

435 N.E.2d 278.

CONCLUSION

Our appeal presents for decision a substantial issue in

an unsettled area of constitutional law which has not been

addressed, much less foreclosed, by any decision of the

United States Supreme Court, and which was decided by

the state appeals court below based on the citation of

distinguishable authority and with a lack of comprehensive |

reasoning.

Respectfully submitted,

HERBERT BRUCE GRISWOLD

(Counsel of Record)

Wo. TousLey SMITH

FRANK P. NAGORNEY

Marc L. OBERDORFF

1800 Central National Bank Building

Cleveland, Ohio 44114

(216) 781-2166

Attorneys for Petitioner American

Koyo Corporation

Of Counsel

CALFEE, HALTER & GRISWOLD

1800 Central National Bank Building

Cleveland, Ohio 44114

(216) 781-2166

Al

APPENDIX

ORDER OF THE SUPREME COURT OF OHIO

DISMISSING THE APPEAL

(Dated February 29, 1984)

No. 83-1940

THE SUPREME COURT OF OHIO

THE STATE OF OHIO, CiTy oF COLUMBUS

AMERICAN KOYO CORP.,

Appellant,

vs.

EDGAR L. LINDLEY, TAX COMMR.,

Appellee.

APPEAL FROM THE Court OF APPEALS

For CuyAHoGA COUNTY

This cause, here on appeal as of right from the Court

of Appeals for Cuyahoga County, was considered in the

manner prescribed by law, and, no motion to dismiss such

appeal having been filed, the Court sua sponte dismisses

the appeal for the reason that no substantial constitutional

question exists herein.

aman i i |

ORDER OF THE SUPREME COURT OF OHIO

OVERRULING MOTION FOR REHEARING

(Dated February 29, 1984)

No. 83-1940

THE SUPREME COURT OF OHIO

THE STATE OF OnI0, Crty oF COLUMBUS

AMERICAN KOYO CORP.,

Appellant,

vs.

EDGAR L. LINDLEY, TAX COMMR.,

Appellee.

MOTION FOR AN ORDER DIRECTING

THE Court oF APPEALS

For CuyAHoGA County To CEertTiFy Its REcorD

It is ordered by the Court that this motion is over-

ruled.

A3

JOURNAL ENTRY AND OPINION OF THE COURT

OF APPEALS OF CUYAHOGA COUNTY, OHIO

(Decided October 13, 1983)

No. 46444

COURT OF APPEALS OF OHiO

EIGHTH DISTRICT

County oF CUYAHOGA

AMERICAN KOYO CORPORATION,

Plaintiff-Appellant,

vs

EDGAR L. LINDLEY,

Defendant-Appellee.

Crvit APPEAL FROM THE BoarpD or Tax

AppegEALs, CasE No. 80-E-452

AFFIRMED

JOURNAL ENTRY AND OPINION

STILLMAN, P.J.:

The appellant, American Koyo Corporation, is appeal-

ing from a decision of the Board of Tax Appeals of the

State of Ohio sustaining the assessment of personal prop-

erty taxes for the return year of 1977.

———e

A4

Two assignments of error are presented by the appel-

lant.

“A. ALL BEARINGS RECEIVED FOR TEM-

PORARY STORAGE IN OHIO BY TAXPAYER,

PENDING DELIVERY OUT OF STATE, ARE ‘IN

TRANSIT’ TO SPECIFIC CUSTOMERS AND ARE

ACCORDINGLY EXEMPT FROM TAXATION UN-

DER THE IMPORT-EXPORT AND COMMERCE

CLAUSES OF THE U.S. CONSTITUTION AND THE

CORRESPONDING ‘IN TRANSIT’ EXEMPTION

RECOGNIZED BY THE COMMISSIONER.

“B. TAXPAYER’S BEARINGS TEMPORARILY

STORED IN OHIO PENDING DELIVERY OUT-OF-

STATE PURSUANT TO PRE-EXISTING ORDERS

ARE NOT ‘USED IN BUSINESS’ IN OHIO, AS IS

REQUIRED BY SECTION 5709.01 O.R.C. FOR

PROPERTY TO BE TAXABLE.”

The taxpayer is an Ohio corporation, wholly owned

by Koyo, Seiko Co., Ltd., a Japanese corporation. Its busi-

ness consists of selling and delivering industrial bearings

manufactured by the Japanese parent company to customers

throughout the United States. While awaiting delivery

these bearings are held in warehouses operated by the

taxpayer in Westlake, Ohio; St. Louis, Missouri; Seattle,

Washington; and Compton, California.

All of the bearings held in Westlake are ordered for

delivery to a predetermined customer and are sent to the

taxpayer through the port of Baltimore, Maryland, for

transshipment to Westlake, Ohio. These deliveries are

made in unbroken, pallet-sized containers but are occasion-

ally sent on from the warehouse in installments to ac-

commodate the customer’s needs. Accordingly, some bear-

ings were [2] stored for several months. 15.7% of this

icenieeieeiieemaaiemammeaaiaiaasiial

A5

merchandise was sent on to Ohio customers during the tax

year here at issue and 84.3% was delivered outside of

Ohio. The Tax Commissioner refused to exempt the latter

items from taxation and the Board of Tax Appeals agreed.

Assignment of Error A:

“ALL BEARINGS RECEIVED FOR TEMPORARY

STORAGE IN OHIO BY TAXPAYER, PENDING DE-

LIVERY OUT OF STATE, ARE ‘IN TRANSIT’ TO

SPECIFIC CUSTOMERS AND ARE ACCORDINGLY

EXEMPT FROM TAXATION UNDER THE IMPORT-

EXPORT AND COMMERCE CLAUSES OF THE US.

CONSTITUTION AND THE CORRESPONDING ‘IN

TRANSIT’ EXEMPTION RECOGNIZED BY THE

COMMISSIONERS.”

This assignment of error asserts that the Constitution

of the United States has been violated by the action of the

Tax Commissioner because the assessed property was “in

transit” in interstate commerce and therefore exempt from

taxation under Article I, Sections 8 aiid 10 of the Federal

Constitution.

Both the appellant and the appellee cite Michelin Tire

Co. v. Wages (1976), 423 U.S. 276, 96 S.Ct. 535, as authority

for their conflicting views. In Michelin, the Court con-

sidered a distribution warehouse maintained by the tax-

payer which delivered tires to its franchises upon order.

The Court held that “a state’s assessment of a nondis-

criminatory ad valorem property tax against imported

goods included in the importer’s inventory at its whole-

sale distribution warehouse in the state and no longer in

import transit does not violate the prohibition of the

import-export clause of the Federal Constitution (Art. I,

Sec. 10, Cl. 2) against state imports or duties on imports,

regardless of whether the goods have lost their status as

A6

imports by being mingled with other goods of the im-

porter.” (Emphasis added. )

[3] The Supreme Court noted also that “there is no

reason why local taxpayers should subsidize the services

used by the importers; ultimate consumers should pay for

such services as police and fire protection accorded the

goods just as much as they should pay transportation costs

associated with those goods.” Michelin, supra at 289.

In this context it should be noted that the Assistant

Secretary in Administrative Management of the Taxpayer

testified before the Board of Tax Appeals that the bear-

ings in question were “purchased from Koyo or related

companies around the world” for “sale here in the United

States.” (Board of Tax Appeals Transcript p. 13.)

We find, therefore, that the property at issue is not

“in transit” within the meaning of the Constitution and

overrule the first assignment of error.

Assigninent of Error B:

“TAXPAYER'S BEARINGS TEMPORARILY

STORED IN OHIO PENDING DELIVERY OUT-OF-

STATE PURSUANT TO PRE-EXISTING ORDERS

ARE NOT ‘USED IN BUSINESS’ IN OHIO, AS IS

REQUIRED BY SECTION 5709.01 O.R.C. FOR PROP-

ERTY TO BE TAXABLE,”

This assignment of error challenges the application of

R.C. 5701.08 to the property of the taxpayer.

“As used in Title LVII [57] of the Revised Code:

“(A) Personal property is ‘used’ within the mean-

ing of ‘used in business’ when employed or utilized in

connection with ordinary or special operations, when

acquired or held as means or instruments for carry-

'

l\

|!

A7

ing on the business, when kept and maintained as

a part of a plant capable of operation, whether ac-

tually in operation or [4] not, or when stored or kept

on hand as material, parts, products, or merchandise.

Machinery and equipment classifiable upon comple-

tion as personal property while under construction or

installation to become part of a new or existing plant

or other facility is not considered to be ‘used’ by the

owner of such plant or other facility within the mean-

ing of ‘used in business’ until such machinery and

equipment is installed and in operation or capable of

operation in the business for which acquired. Agri-

cultural products in storage in a grain elevator, a ware-

house, or a place of storage which products are subject

to control of the United States government and are to

be shipped on order of the United States govern-

ment, and merchandise or agricultural products

shipped from outside of this state and held in this

state in a warehouse or a place of storage for storage

only and for shipment outside of this state are not

used in business in this state. Moneys, deposits, in-

vestments, accounts receivable, and prepaid items, and

other taxable intangibles are ‘used’ when they or the

avails thereof are being applied, or are intended to

be applied, in the conduct of the business, whether

in this state or elsewhere.

“(B) ‘Business’ includes all enterprises, except

agriculture, conducted for gain, profit, or income and

extends to personal service occupations.”

The thesis advocated by the appellant that the bear-

ings imported from Japan are in storage only and not used

in business is not in harmony with Joslyn Mfg. Co. v. Bow-

ers (1960), 170 Ohio St. 575.

A8

The Ohio Supreme Court held in Joslyn that “Personal

property held in Ohio pending shipment directly to cus-

tomers is not held ‘for storage only’ within the meaning

of Section 5701.08 Revised Code, and is subject to taxa-

tion as property used in business in Ohio regardless of

whether such shipment upon order by customers is to

points inside or outside Ohio.”

[5] More recently, in Michelin Tire Corporation v.

Lindley (1978), 54 Ohio St. 2d 313, the Ohio Supreme Court

reached an identical conclusion in following Michelin Tire

Corp. v. Wages, supra.

We, therefore overrule the second assignment of er-

ror and affirm the decision of the Board of Tax Appeals.

{6] It is ordered that appellee recover of appellant

his costs herein taxed.

The Court finds there were reasonable grounds for this

appeal.

It is ordered t! at a special mandate issue out of this

Court directing the Board of Tax Appeals Court to carry

this judgment into execution.

A certified copy of this entry shall constitute the

mandate pursuant to Rule 27 of the Rules of Appellate Pro-

cedure. Exceptions.

DaHLineG,* P.J,,

Grey,* J., concur.

/s/ Saut G. STILLMAN*

Judge

*“SITTING BY ASSIGNMENT:

Judge Saul G. Stillman, Retired, of the Eighth Appellate District;

Judge Alfred E. Dahling, of the Eleventh Appellate District; and

Judge Lawrence Grey of the Fourth Appellate District.

AS

DECISION AND ORDER OF THE BOARD

OF TAX APPEALS

(Dated January 6, 1983)

Case No. 80-E-452

BOARD OF TAX APPEALS

STATE OF OHIO

AMERICAN KOYO CORPORATION,

Appellant,

VS.

EDGAR L. LINDLEY,

Tax Commissioner of Ohio,

Appellee.

DECISION AND ORDER

(Personal Property Tax)

This cause and matter came on to be considered by

the Board of Tax Appeals upon a notice of appeal [2]

filed herein under date of November 5, 1980, by the appel-

lant above named. This appeal is from a final assessment

certificate of valuation of the Tax Commissioner dated

October 9, 1980, wherein said official assessed additional

personal property for return year 1977.

The appellant’s notice of appeal reads, in pertinent

part, as follows:

“3. Appellant contends that said Assessment of

the Tax Commissioner is erroneous, unreasonable and

unlawful, both in law and in fact, in the following

respects:

Al0

“4. The Tax Commissioner erred in the assess-

ment of tangible personal property not previously as-

sessed in that the assessed property is not used in

business in Ohio but is held for storage only in Ohio

and is exempt from personal property tax under Sec-

tion 5701.08 of the Ohio Revised Code and Rule 5703-

3-21. The assessed property is imported from outside

of Ohio and is shipped to points outside of Ohio.

“5. The Tax Commissioner erred in the assess-

ment of tangible personal property not previously as-

sessed in that the Appellant’s shipments of such tan-

gible personal property are in transit in interstate

commerce and therefore exempt under the Tax Com-

missioner’s Bulletin No. 244.

“6. The Tax Commissioner erred in applying to

the facts of this case a rule of analysis with regard

to the ‘in transit’ doctrine which violates the Consti-

tution of the United States, specifically those clauses

pertaining to Commerce, to Imports, and to the right

to Due Process.

[3] “7. The Tax Commissioner erred in applying

to the facts of this case a rule of analvsis with regard

to the ‘in transit’ doctrine which was adopted in viola-

tion of the taxpayer’s right to Due Process as guar-

anteed under the Constitution of the United States,

and which was adopted in violation of the rules of

administrative procedure set forth at Section 119.01

et. seq. of the Ohio Revised Code.

“8. The Tax Commissioner erred by his disallow-

ance of the percentage method for determining ‘in

transit’ status which was used by the Appellant when

the same method is approved for determining ‘held

ee nee POOL BO Ca Rl eT I RCL cit EE

0 pdicn tre mtn

All

for storage only’ status under Rule 5703-3-21, thus

violating the Equal Protection Clause of the Constitu-

tion of the United States.

“9. The Tax Commissioner, as an agent and of-

ficer of the State of Ohio, is estopped from collecting

the taxes assessed against the Appellant because rep-

resentations previously made to the Appellant by

agents and officers of the State of Ohio induced rea-

sonable reliance on the part of the Appellant to the

Appellant’s detriment.

“WHEREFORE, Apnellant prays that the Tax

Commissioner, pursuant to Section 5717.02, Ohio Re-

vised Code, certify to the Board of Tax Appeals a

transcript of the proceedings before him together with

all evidence considered by him in connection there-

with; that the Board of Tax Appeals hear Appellant’s

evidence establishing its objections to the assess-

ment; that any penalty be remitted in full; and that

the Appellant be afforded any and all other relief

from the aforesaid Assessment of the Tax Commis-

sioner to which Appellant may be entitled.”

[4] The matter was submitted to the Board of Tax

Appeals upon the notice of appeal, the statutory transcript

certified by the Tax Commissioner, the testimony and other

evidence received at a record hearing, and the briefs sup-

plied by counsel for the parties.

The appellant, American Koyo Corporation, is an Ohio

corporation which is a subsidiary of Koyo Seiko Co., Ltd.,

a Japanese corporation. The appellant purchases industrial

bearings from Koyo Seiko and imports them to the United

States. The appellant has warehouses in Saint Louis,

Missouri, Seattle, Washington, Compton, Ca ifornia and

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Westlake, Ohio. No manufacturing or processing is per-

formed by the appellant in Ohio.

The appellant sells industrial bearings to original

equipment manufacturers located throughout the United

States. Only after the appellant receives an order from

a customer is an order placed upon the factory in Japan.

Generally, the customers order a years supply of a particu-

lar bearing. Equal monthly deliveries are anticipated.

However, the customer’s actual production schedule

usually requires a different delivery schedule than initially

anticipated. For [5] example, the appellant received a

purchase order from International Harvester for 10,000

bearings. About that time, the parties agreed that 833

bearings would be delivered each month beginning in Jan-

uary. However, the amount actually delivered each month

was substantially different. In fact, the delivery require-

ments changed many times during the year (Ex. 5). Thus,

the bearings are held in storage at the appellant’s ware-

house pending delivery to a specific customer according

to that customers production schedule.

The appellant places the orders with Koyo Seiko, the

manufacturer, twice a year, even though its customers

usually order a years supply. At the factory, the bearings

are packed in cartons which indicate the purchase order

number. The carton may also be marked with the cus-

tomer’s part number. These cartons are then banded and

palletized. The bearings are imported through the port

of Baltimore and arrive at the warehouse for distribution

to the customer.

The Tax Commissioney determined that only 19.9% of

the bearings stored in Ohio were not subject to the per-

sonal property tax, since these bearings were shipped to

the appellant’s warehouses located in other [6] states. The

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appellant claims that 84.3% of the bearings are not sub-

ject to the Ohio personal property tax because these bear-

ings are shipped to customers located outside of Ohio. In

other words, the appellant is claiming that most of the

bearings received at its Westlake warehouse are held for

storage only and are still “in transit” to a particular

customer.

R. C. 5709.01 provides, in pertinent part, that:

“All personal property located and used in business

in this state, and all domestic animals kept in this

state and not used in agriculture, except unmanufac-

tured tobacco which shall be exempt from taxation for

state purposes to the extent of the value, or amounts,

of any unpaid nonrecourse loan or loans thereon

granted by the United States government or any

agency thereof, are subject to taxation, regardless of the

residence of the owners thereof.” (Emphasis Added)

R. C. 5701.03 defines “personal property” as follows:

“As used in Title LVII [57] of the Revised Code,

‘personal property’ includes every tangible thing which

is the subject of ownership, whether animate or in-

animate, other than patterns, jigs, dies, or drawings,

which are held for use and not for sale in the or-

dinary course of business, money, and motor vehicles

registered by the owner thereof, [7] and not forming

part of a parcel of real property, as defined in section

5701.02 of the Revised Code; also every share, portion,

right, or interest, either legal or equitable, in and

to every ship, vessel, or boat, used or designed to be

used in business either exclusively or partially in

navigating any of the waters within or bordering on

this state, whether such ship, vessel, or boat is within

the jurisdiction of this state or elsewhere.”

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The term “used in business” is defined for purposes of

taxation in R. C. 5701.08:

“(A) Persona! property is ‘used’ within the

meaning of ‘used in business’ when employed or util-

ized in connection with ordinary or special operations,

when acquired or held as means or instruments for

carrying on the business, when kept and maintained

as a part of a plant capable of operation, whether ac-

tually in operation or not, or when stored or kept

on hold as material, parts, products, or merchandise.

Machinery and equipment classifiable upon completion

as personal property while under construction or instal-

lation to become part of a new or existing plant or

other facility is not considered to be ‘used’ by the

owner of such plant or other facility within the mean-

ing of ‘used in business’ until such machinery and

equipment is installed and in operation or capable of

operation in the business for which acquired. Agri-

cultural products in storage in a grain elevator, a

warehouse, or a place of storage which products are

subject to control of the United States government and

are to be shipped on order of the United States gov-

ernment, and merchandise or agricultural [8] products

shipped from outside of this state and held in this state

in a warehouse or a place of storage for storage only

and for shipment outside of this state are not used in

business in this state. Moneys, deposits, investments,

accounts receivable, and prepaid items, and other tax-

able intangibles are ‘used’ when they or the avails

thereof are being applied, or are intended to be applied,

in the conduct of the business, whether in this state

or elsewhere.” (Emphasis Added)

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The Tax Commissioner has duly promulgated a

rule to determine whether personal property has a tan-

gible situs in Ohio. O.A.C. 5703-3-21 reads:

“Personal property belonging to either a resident

or nonresident of this State, will not be considered

as being ‘used in business’ in this State, within the

meaning of said phrase as defined in Revised Code

5701.08 only it all of the following conditions exist:

“(A) The property involved is either ‘agricul-

tural products’ or ‘merchandise.’

“ ‘Merchandise’ includes all items of property in

saleable form

“(B) The property invelved is shipped into Ohio

from points outside this State

“(C) The property involved is held in Ohio in

a ‘warehouse or a place of storage’

“(D) The property involved, while in storage in

Ohio, is held for ‘storage only’ and for ‘shipment out-

side of this State’

[9] “Property will be considered as being so

held if:

“(1) It is to be shipped, without processing, to

the taxpayer or persons other than ‘customers’ at io-

cations outside this State for use, processing, or sale, or,

“(2) It is located in public or private warehous-

ing facilities which are not subject to the control of

or under the supervision of the taxpayer or manned

by its employees from which it is to be shipped to

persons outside the State of Ohio

“‘Customers’ as used herein includes all persons

with whom a taxpayer normally and usually deals

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as a matter of established business practice or policy.

The term, however, does not include consignees or

bailees

“The provisions of Revised Code 5701.08 re-

lating to merchandise or agricuitural products in stor-

age shall not have application to any items of personal

property which are shipped into this State for pur-

poses of manufacturing or further processing herein.

Natural aging and preventive measures taken to insure

the preservation of property items while in storage

are not considered as steps in the manufacturing or

processing of the property.”

In Michelin Tire Corp. v. Wages, 424 U.S. 935 (1976),

the United States Supreme Court held that a nondis-

criminatory property tax could be validly applied to im-

ports. The Court stated:

“Petitioner’s tires in this case were no longer in transit.

They were stored in a distribution warehouse from

which petitioner conducted a wholesale operation, tak-

ing orders from franchised dealers and filling them

from a [10] constantly replenished inventory. The

warehouse was operated no differently than would be

a dist-ibution warehouse utilized by a wholesaler deal-

ing so:ely in domestic goods, and we therefore hold

that the nondiscriminatory property tax levied on pe-

titioner’s inventory of imported tires was not inter-

dicted by the Import-Export clause of the Constitu-

tion.”

The appellant claims that the bearings were still in

transit, since the bearings were earmarked for a specific

customer located outside Ohio. Thus, it is contended that

this merchandise was not being held in storage for cus-

tomers located within as well as outside Ohio. This Board

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disagrees. The bearings were no longer in transit. The

bearings were purchased from Koyo Seiko and then sold

to customers in the United States. The appellant did not

ship an entire order as received from the factory, even

though the appellant claims that it only sold bearings in

pallet size quantities.* The bearings remained in the ap-

pellant’s warehouse until needed to meet the customers

varying delivery schedules. This storage was a2 necessary

part of the appellant’s business [11] activity. Thus, the

bearings were subject to Ohio’s nondiscriminatory personal

property tax. It should also be noted that the palletized

bearings cannot be considered as instrumentalities of

foreign or interstate commerce. See Japan Line, Ltd., v.

County of Los Angeles, 441 U.S. 434 (1979).

The appellant also claims that the bearings were not

“used in business” as that term is defined in R. C. 5701.08.

The Ohio Supreme Court has interpreted R. C. 5701.08 in

Joslyn Mfg. & Supply Co. v. Bowers 170 Ohio 575 (1960).

The syllabus reads:

“Personal property held in Ohio pending shipment

directly to customers is not held ‘for storage only’

within the meaning of Section 5701.08, Revised Code,

and is subject to taxation as property used in busi-

ness in Ohio regardless of whether such shipment upon

order by customers is to points inside or outside Ohio.”

In Torrington Co., Inc. v. Bowers 173 Ohio St. 86 (1962),

the Supreme Court held that merchandise stored at a

distribution point for sale and shipment to customers was

personal property used in business. The appellant at-

tempts to factually distinguish these cases by saying that

the bearings were not held in inventory [12] pending cus-

*It seems inconceivable that the quantity required by the

customer would always equal the quantity palletized by the

factory in Japan.

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tomer orders. This Board is not satisfied that the appel-

lant’s operation is substantially different. The Westlake

warehouse is a distribution point. The storage of the

bearings until needed by the customer is a vital part of

the appellant’s operation. The Board finds that the bear-

ings were returnable as personal property used in business.

Giving effect to the findings of the Board of Tax Ap-

peals, the statutes, and the applicable case law, it is the

order of the Board of Tax Appeals that the final assessment

certificate of valuation should be and hereby is affirmed.

It is further ordered that a certified copy of this decision

and order be certified to the Auditor of Cuyahoga County.

I hereby certify the foregoing to be a true and correct

copy of the action of the Board of Tax Appeals of

the State of Ohio, this day taken, with respect to the

above matter.

/s/ Robert E. Boyd, Jr.

Chairman

ASJ/prm

OHIO REVISED CODE 5701.08

5701.08 Used in business and business defined [Ef-

fective 12-2-67]

As used in Title LVII of the Revised Code:

(A) Personal property is “used” within the meaning

of “used in business” when employed or “utilized in con-

nection with ordinary or special operations, when acquired

or held as means or instruments for carrying on the busi-

ness, when kept and maintained as a part of a plant

capable of operation, whether actually in operation or not,

or when stored or kept on hand as material, parts, products,

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or merchandise. Machinery and equipment classifiable

upon completion as personal property while under con-

struction or installation to become part of a new or existing

plant or other facility is not considered to be “used” by the

owner of such plant or other facility within the meaning

of “used in business” until such machinery and equipment

is installed and in operation or capable of operation in the

business for which acquired. Agricultural products in

storage in a grain elevator, a warehouse, or a place of

storage which products are subject to control of the United

States government and are to be shipped on order of the

United States government, and merchandise or agricultural

products shipped from outside of this state and held in

this state in a warehouse or a place of storage for storage

only and for shipment outside of this state are not used in

business in this state. Moneys, deposits, investments, ac-

counts receivable, and prepaid items, and other taxable in-

tangibles are “used” when they or the avails thereof are

being applied, or are intended to be applied, in the con-

duct of the business, whether in this state or elsewhere.

(B) “Business” includes all enterprises, except agri-

culture, conducted for gain, profit, or income and extends

io personal service occupations.

HISTORY: 132 v H 480, eff. 12-2-67

126 v 78; 1953 H 1; GC 5325-1

5701.08 Used in business and business defined [Ef-

fective 7-1-83]

As used in Title LVII of the Revised Code:

(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, when

A20

kept and maintained as a part of a plant capable of opera-

tion, whether actually in operation or not, or when stored or

kept on hand as material, parts, products, or merchandise.

Machinery and equipment classifiable upon completion as

personal property while under construction or installation to

become part of a new or existing plant or other facility is

not considered to be “used” by the owner of such plant or

other facility within the meaning of “used in business” until

such machinery and equipment is installed and in operation

or capable of operation in the business for which acquired.

Agricultural products in storage in a grain elevator, a

warehouse, or a place of storage which products are subject

to control of the United States government and are to be

shipped on order of the United States government, and

merchandise or agricultural products shipped from outside

of this state and held in this state in a warehouse or a place

of storage for storage only and for shipment outside of this

state are not used in business in this state. 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.” Moneys, deposits, invest-

ments, accounts receivable, and prepaid items, and other

taxable intangibles are “used” when they or the avails

thereof are being applied, or are intended to be applied, in

the conduct of the business, whether in this state or else-

where.

(B) “Business” includes all enterprises, except agricul-

ture, conducted for gain, profit, or income and extends to

personal service occupations.

HISTORY: 1983 H 291, eff. 7-1-83

132 v H 480; 126 v 78; 1953 H 1; GC 5325-1

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OHIO REVISED CODE 5709.01

TAXABLE PROPERTY

5709.01 Taxable property entered on general tax

list and duplicate [Effective 12-2-67]

All real property in this state is subject to taxation,

except only such as is expressly exempted therefrom. All

personal property located and used in business in this state,

and all domestic animals kept in this state and not used

in agriculture, except unmanufactured tobacco which shall

be exempt from taxation for state purposes to the extent of

the value, or amounts, of any unpaid nonrecourse loan or

loans thereon granted by the United States government or

any agency thereof, are subject to taxation, regardless of

the residence of the owners thereof. All ships, vessels, and

boats, and all shares and interests therein, defined in sec-

tion 5701.03 of the Revised Code as personal property and

belonging to persons residing in this state, and aircraft be-

longing te persons residing in this state and not used in

business wholly in another state, other than aircraft li-

censed ‘a accordance with sections 4561.17 to 4561.21, in-

clusive, of the Revised Code, are subject to taxation. All

property mentioned as taxable in this section shall be

entered on the general tax list and duplicate of taxable

property.

HISTORY: 132 v H 480, eff. 12-2-67

126 v 166; 1953 H 1; GC 5328

A22

TAXABLE PROPERTY

5709.01 Taxable property entered on general tax

list and duplicate; exemptions [Effective 7-1-83]

(A) All real property in this state is subject to taxa-

tion, except only such as is expressly exempted therefrom.

(B) Except as provided by division (C) of this section

or otherwise expressly exempted from taxation:

(1) All personal property located and used in business

in this state, and all domestic animals kept in this state

and not used in agriculture are subject to taxation, regard-

less of the residence of the owners thereof.

(2) All ships, vessels, and boats, and all shares and

interests therein, defined in section 5701.03 of the Revised

Code as personal property and belonging to persons resid-

ing in this state, and aircraft belonging to persons residing

in this state and not used in business wholly in another

state, other than aircraft licensed in accordance with sec-

tions 4561.17 to 4561.21 of the Revised Code, are subject

to taxation.

(C) The following property of the kinds mentioned in

division (B) of this section shall be exempt from taxation;

(1) Unmanufactured tobacco to the extent of the value,

or amounts, of any unpaid nonrecourse loans thereon

granted by the United States government or any agency

thereof.

(2) All other such property in the aggregate taxable

value thereof required to be listed by the taxpayer under

Chapter 5711. of the Revised Code does not exceed tn

thousand dollars. If the taxable value of such property

exceeds ten thousand dollars:

A23

(a) Only such property having an aggregate taxable

value of ten thousand dollars shall be exempt.

(b) If such property is located in more than one taxing

district as defined in section 5711.01 of the Revised Code,

the exemption of ten thousand dollars shall be applied as

follows:

(i) The taxable value of such property in the district

having the greatest amount of such value shall be reduced

until the exemption has been fully utilized or the value has

been reduced to zero, whichever occurs first;

(ii) If the exemption has not been fully utilized under

division (C) (2) (b) (i) of this section, the value in the dis-

trict having the second greatest value shall be reduced

until the exemption has been f ‘ly utilized or the value

has been reduced to zero, whichever occurs first;

(iii) If the exemption has not been fully utilized under

division (C) (2) (b) (ii) of this section, further reductions

shall be made, in repeated steps which include property in

districts having declining values, until the exemption has

been fully utilized.

(D) All property mentioned as taxable in this section

shall be entered on the general tax list and duplicate of

taxable property.

HISTORY: 1983 H 291, eff. 7-1-83

132 v H 480; 126 v 166; 1953 H 1; GC 5328