The Ohio Board of Tax Appeals (BTA) recently issued two decisions. In the first (Marion Ethanol, LLC v. McClain, BTA Case Nos. 2017-337, 2017-338 (May 16, 2019) (Marion Ethanol)), the BTA rejected a narrow interpretation of the manufacturing exemption by the Ohio Department of Taxation (Department) under the sales and use tax law as to when manufacturing begins. In the second (Time Warner Cable, Inc. v. City of Cincinnati, BTA Case No. 2017–1448 (May 31, 2019) (Time Warner Cable)), the BTA clarified the membership of a city consolidated group for elections made under the city income tax laws in effect prior to 2016. Each of these rulings is discussed below.

Marion Ethanol

The taxpayer in Marion Ethanol operates a biorefinery that manufactures ethanol and other corn-based products. The Department assessed the taxpayer additional use tax on certain items it used to process raw materials to remove contaminants. Under the taxpayer's manufacturing process, corn is delivered by truck to the taxpayer's facilities, where it is immediately tested for quality, moisture and temperature. Accepted corn is emptied into hoppers that feed it to a conveyor that runs through the taxpayer's manufacturing facility. After falling onto the conveyor, the corn moves past a magnet that removes metal contaminants from the corn.

For sales and use tax purposes, the taxpayer claimed that its manufacturing process begins at the magnet and thus, any purchase of machinery and equipment from that point on was eligible for the manufacturing exemption. On audit, the Department disagreed and assessed based on its conclusion that the taxpayer's manufacturing process begins at a later point. The BTA, relying on the Ohio Supreme Court's decision in LaFarge N. Am., Inc. v. Testa, 153 Ohio St.3d 245, 2018-Ohio-2047 (LaFarge)(see Tax Alert 2018-1245), agreed with the taxpayer and concluded that the manufacturing process begins at the magnet, as its purpose was to refine the corn. Thus, the BTA concluded that any equipment installed from that point forward was eligible for the manufacturing exemption. The BTA also distinguished prior Ohio court decisions involving magnets, noting that the magnets in those cases did not prepare raw materials for manufacturing as in LaFarge and this case.

Time Warner Cable

Before 2016, Ohio Revised Code Section 718.06 required a city that imposes an income tax on a corporation to " … accept for filing a consolidated income tax return from any affiliated group of corporations … if that affiliated group filed for the same tax reporting period a consolidated return … pursuant to … " IRC Section 1501. Ohio cities interpreted this provision in two different ways. Many cities allowed taxpayers to file a city consolidated return with membership that mirrored and was identical to that of the federal consolidated group. Other cities, including Cincinnati, however, had enacted ordinances that only allowed those members of the federal consolidated group that actually had nexus with the city to join in a city consolidated return.

In Time Warner Cable, the taxpayer claimed that the Cincinnati ordinance was inconsistent with, and pre-empted by, the provisions of Ohio Revised Code Section 718.06. The Cincinnati Board of Review (Board of Review), however, disagreed and ruled in favor of the city, finding that the Ohio statute did not expressly pre-empt the local ordinance in this area. On appeal, the BTA reversed the Board of Review's findings and concluded that the state statute required the city filing group to be the same as the federal filing group. To support its ruling, the BTA focused on the Legislature's use of the words "if that affiliated group."

Implications

It is not known whether the affected tax authorities will appeal these respective BTA decisions.

If the Marion Ethanol case stands, it may present a sales and use tax refund opportunity for businesses, particularly those that manufacture food products. Auditors of the Department often issue additional sales and use tax assessments for equipment that removes impurities from raw materials because, in their view, the manufacturing process has not yet begun. The statute of limitations for claiming refunds for Ohio sales/use tax is four years from the date of payment.

If the Time Warner Cable decision stands, it may have a more limited application because beginning in 2016, the Legislature amended Ohio Revised Code Section 718.06 to further emphasize and clarify that the membership of a city consolidated return must mirror that of the federal consolidated group. Thus, the last tax year for which cities could have asserted that only a nexus-consolidated filing was allowed would have been 2015. Moreover, the relevant three year statute of limitations under Ohio Revised Code Section 718.12(A)(1) and related city ordinances may be quickly running out. Accordingly, unless a waiver of the applicable statute of limitations is pending, the only year open for refund would most likely be limited to 2015. Nevertheless, affected taxpayers should consider their facts and circumstances to determine if a refund claim is warranted. EY will continue to monitor developments in this area.

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