The Ohio Court of Appeals, 7th District (court), issued its decision in R.L. Best Co.,¹ upholding an assessment of sales and use tax on certain motor vehicles and trailers for which an exemption was claimed.

The taxpayer was a manufacturer of custom extrusion presses and handling systems and also rebuilt and provided repair services to that equipment. The taxpayer used its trucks and trailers for three purposes: (1) to deliver equipment that it sold to customers, (2) to retrieve equipment from its customer's location for rebuilding or repair at its location, and (3) to transport its own tools to be used for equipment removal or installation at a customer location. The taxpayer was only authorized to haul the type of equipment it sold or repaired, so there were no opportunities to back-haul, resulting in deadhead miles. In most cases, the taxpayer did not charge a transportation fee on customer invoices; when it did charge a fee, it was usually far less than the taxpayer's actual cost. Finally, the taxpayer did not employ dedicated drivers, but its service people would drive the vehicles.

The taxpayer claimed exemption for the vehicles and trailers under Ohio Rev. Code Section5739.02(B)(32), which exempts vehicles, including trailers, used primarily to transport tangible personal property belonging to others by a person engaged in providing highway transportation for hire. Ohio Rev. Code Section5739.01(Z)(1) defines "highway transportation for hire" as "the transportation of tangible personal property belonging to others for consideration … ." The Ohio Department of Taxation (Department) assessed tax against the vehicles and trailers asserting they did not meet the requirements for exemption. The taxpayer appealed the decision to the Ohio Board of Tax Appeals which affirmed the assessment. The taxpayer then appealed to the Court of Appeals.

In affirming the Department's assessment, the court held that the taxpayer was not transporting tangible personal property belonging to others for consideration. In so doing, the court concluded that the absence of a separately stated transportation charge in most cases, or providing a dramatically reduced charge in others, did not evidence the requisite consideration. Additionally, the court rejected testimony from the taxpayer that the taxpayer knew that the transportation charges were built into the overall cost and that it did not separately state the charge to avoid any effort by the customer to negotiate a lower price. Accordingly, the court concluded that the customers were not able to make a conscious choice² to receive the transportation services and, as such, there was no consideration.

Having concluded that there was no consideration, the court did not delve into other errors raised by the taxpayer, such as the auditor reducing its usage computation by deadhead trips or whether it primarily transported tangible personal property belonging to others. The court also denied the taxpayer's request for penalty abatement. Although the taxpayer fully cooperated in the audit, the court concluded that it had reason to know³ that it needed to separately state its transportation charges to be entitled to exemption.

Implications

The court's discussion of consideration and its distinguishing of the recent Cincinnati Reds case is helpful in understanding where consideration may be found in transactions for which exemption depends upon a transfer for consideration.

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ENDNOTES

¹ R.L. Best Co. v. Testa, No. 18 MA 0001 (Ohio Ct. App. Dec. 28, 2018).

² The taxpayer argued that the Ohio Supreme Court's recent decision in Cincinnati Reds, LLC v. Testa, Slip Opinion No. 2018-Ohio-4469, did not require the transportation services to be separately stated. In the Cincinnati Reds case, the Ohio Supreme Court held that the transfer, without separate charge, of bobblehead dolls to ticketholders was for consideration. The court distinguished the Cincinnati Reds' case on the ground that the bobblehead dolls were distributed for less desirable games. Accordingly, a ticker buyer made a conscious decision to attend the less desirable game to receive the bobblehead doll.

³ In making this conclusion, the court cited Ohio Board of Tax Appeals decisions in which the exemption was denied because the transportation charges were not separately stated. See e.g., Kurz Bros., Inc. v. Tracy (December 15, 1995), BTA No. 1994-P-614, Pallet World, Inc. v. Levin (June 22, 2010), BTA No. 2007-M-116.