Ohio Supreme Court Rules for Taxpayer as to Start of Slag Manufacturing Process, Reversing BTA
In Lafarge North America, Inc. v. Testa, Slip Op. No. 2018-Ohio-2047 (May 31, 2018), the Ohio Supreme Court held that the slag manufacturing process of Lafarge North America, Inc. (“Lafarge”) began at slag mountain where its bulldozer first cut, broke, and crushed raw slag which was transported to the screening plant for further processing and not at the screening plant as the Ohio Department of Taxation (“Department”) had argued and the Ohio Board of Tax Appeals (“BTA”) had found. Accordingly, Lafarge’s purchases of fuel and repair parts associated with heavy machinery were exempt from Ohio use tax because the heavy machinery was used in Lafarge’s slag manufacturing process.
In Lordstown, Ohio, Lafarge manufactures slag, a byproduct of steel manufacturing, into pelletized slag, which is used for various construction purposes, including paving roads. The screening plant is located adjacent to a “slag mountain,” a large slag mass that numerous steel mills created over several decades. A bulldozer breaks chunks of slag off the slag mountain and cuts and crushes the slag into smaller pieces. Other heavy equipment transports the broken-up slag to the screening plant, where the slag is fed into a grizzly feeder, oversized pieces are broken down further, impurities are screened and filtered out, and the slag is sorted by size.
Ohio’s use tax does not apply to the purchase of an item intended for use “primarily in a manufacturing operation to produce tangible personal property for sale.” R.C. 5739.02(B)(42)(g); see also R.C. 5741.02(C)(2). After an audit, the Department assessed use tax against Lafarge for purchases of fuel and repair parts used by the bulldozer and other heavy equipment used in the slag mountain processes. Lafarge challenged the assessment, and the Department determined that the breaking up and transport of slag from the slag mountain precedes Lafarge’s manufacturing operation, concluding that Lafarge’s manufacturing operation does not begin until the slag reaches equipment that screens and sorts it by size. The BTA affirmed the commissioner’s final determination, finding that on slag mountain Lafarge was simply moving raw material from a pre-production point of storage.
On appeal, the Court held that “to determine whether Lafarge’s Lordstown slag-manufacturing operation begins at the slag mountain, we must answer two questions: When is the slag ‘changed, converted, or transformed into a different state or form from which [it] previously existed’? And when is the slag ‘committed to the manufacturing process’?… To answer these questions, it is important to understand that the object of Lafarge’s manufacturing operation is to reduce the slag mountain to smaller, marketable pieces of slag.” The Court went on to hold that the bulldozer and the other heavy equipment were used in Lafarge’s slag-manufacturing operation.
Manufacturing sales tax exemptions are notoriously complex. Every state has a slightly different approach for determining the taxability of items associated with manufacturing processes, and as was the case here, it is crucial for taxpayers to advocate for the proper beginning and ending of their manufacturing processes and to contest a department of taxation’s attempt to artificially narrow the scope of that process and thus the exemption. A taxpayer engaged in manufacturing should understand and document the scope of the processes taking place at the facility; an experienced tax professional can assist.