Tuesday, April 24, 2018
State of Ohio v. James L. Dunson, Case no. 2017-0186
Second District Court of Appeals (Montgomery County)
Wells Fargo Bank, N.A. v. A. Christopher M. Burd, Case no. 2017-0279
Tenth District Court of Appeals (Franklin County)
City of Toledo v. State of Ohio et al., Case no. 2017-0327
Sixth District Court of Appeals (Lucas County)
East Manufacturing Corp. v. Joseph W. Testa, Ohio Tax Commissioner, Case no. 2017-0666
Ohio Board of Tax Appeals
Must Trial Courts Evaluate Inmate’s Ability to Pay Court Costs?
State of Ohio v. James L. Dunson, Case no. 2017-0186
Second District Court of Appeals (Montgomery County)
ISSUE: When ruling on a post-conviction motion to vacate, stay, or remit court costs, must a trial court consider an inmate’s present or future ability to pay court costs, or determine whether any exemption statutes prohibit collection from an inmate’s account?
BACKGROUND:
James Dunson was convicted in March 2013 of murder and aggravated robbery along with firearm specifications. The trial court in Montgomery County sentenced Dunson to 18 years in prison and ordered him to pay courts costs and restitution. Court costs were assessed at $6,199.10.
From prison, Dunson filed a motion pro se with the trial court on Dec. 28, 2015, to vacate or delay his court costs, fines, and/or restitution. He included an affidavit stating that he is indigent. The court rejected his request, stating:
“Upon review, the Court notes that Defendant made the choices which led to the accrual of the fees at issue, and he must take responsibility for his conduct, as well as the resulting consequences. Moreover, there is no evidence that Defendant is unable to make payment toward the costs at this time, or that he will not be able to make payments toward the fees once his term of incarceration ends.”
Dunson appealed the trial court’s denial of his motion. The Second District Court of Appeals concluded that the trial court had to determine Dunson’s present and future ability to pay the court costs and ascertain whether any statutes exempted him from having his inmate earnings used to pay his costs.
The Montgomery County Prosecutor’s Office appealed the decision to the Ohio Supreme Court, which agreed to review the issue.
State Law Doesn’t Mandate Assessment of Ability to Pay, Prosecutor Argues
R.C. 2947.23 states that trial courts must determine the costs of prosecution in criminal cases and impose those costs on the convicted defendant. According to R.C. 2947.23(C), “[t]he court retains jurisdiction to waive, suspend, or modify the payment of the costs of prosecution, including any costs under section 2947.231 of the Revised Code, at the time of sentencing or at any time thereafter.”
Contrary to the Second District’s decision, the prosecutor maintains that R.C. 2947.23 doesn’t give any factors to consider when deciding whether to waive, suspend, or modify the payment of court costs and includes no requirement to consider the defendant’s ability to pay court costs. To support this view, the prosecutor quotes the Ohio Supreme Court’s 2004 decision in State v. White: “[W]aiver of costs is permitted – but not required – if the defendant is indigent.”
The Second District also ruled that, before deciding whether to waive or stay court costs, a trial court must consider R.C. 2329.66, which lists items that are exempt from garnishment to satisfy a court judgment or order. The prosecutor contends, though, that Dunson must claim he is exempt within the prison system, through the Ohio Department of Corrections (DRC). The Ohio Administrative Code includes rules that govern how prisons are to consider whether any earnings or funds belonging to an inmate are exempt from garnishment, the prosecutor explains. The prosecutor suggests that the Second District overlooked this DRC process.
Also Dunson was convicted in Montgomery County, but is imprisoned in a different county, the prosecutor notes, arguing that Dunson had to file his claim against the DRC in the county where the prison is located.
The prosecutor concludes that requiring a trial court to consider whether an inmate has the ability to pay court costs after the trial court has imposed the costs doesn’t make sense procedurally.
Courts Need to Consider Indigent Defendants’ Ability to Pay Costs, Inmate Asserts
Dunson notes that he makes $17 each month in prison and can receive an additional $21 monthly in incentive pay. If he paid the full $38/month toward his court costs, it would take him 13 years, 7 months to cover the $6,199.10 in court costs if no interest were added to the amount.
While he understands that the trial judge should impose a punishment for the choices and conduct that led to his conviction, he contends that the choice that led to the generation of court costs was his decision “to exercise fundamental constitutional rights to a full criminal process – including a jury trial.” When a defendant demonstrates that he or she is indigent, Dunson argues, trial courts must examine the defendant’s current and future ability to pay when ruling on a motion to waive or modify court costs to ensure that the defendant isn’t punished for exercising constitutional rights.
Dunson points to the U.S. Supreme Court’s ruling in Fuller v. Oregon (2004), which found constitutional an Oregon law mandating that certain indigent defendants had to pay attorney fees. The Supreme Court concluded the law was constitutional in part, however, because the “legislation [was] tailored to impose an obligation only upon those with a foreseeable ability to meet it, and to enforce that obligation only against those who actually become able to meet it without hardship.” The Ohio Supreme Court in White drew a distinction between the Ohio decision, which involved R.C. 2947.23 and the right to a jury trial, and Fuller, which considered the right to counsel. Dunson reasons, however, that the prosecutor’s position in this case creates a constitutional problem under Fuller “because [the prosecutor] offers no guarantee that an indigent defendant who lacks the future ability to pay court costs can petition for relief from costs on the grounds of extreme financial hardship.”
Noting that the R.C. 2947.23 states that trial courts can waive, suspend, or modify court costs “at the time of sentencing or at any time thereafter,” Dunson argues that the General Assembly has given trial courts continuing jurisdiction over the issue of court costs. The statute is an explicit exception to the general rule that courts lack jurisdiction to modify their sentences, Dunson maintains.
Dunson mentions an Ohio Supreme Court bench card that lists factors such as a person’s income, basic living expenses, and current place of residence that courts may consider when deciding whether a person has the ability to pay court costs or fines. Dunson asks the Supreme Court to rule that trial courts reviewing a motion to vacate, stay, or remit court costs must consider in a reasoned way the convicted defendant’s present and future ability to pay.
Groups File Amicus Brief Backing Defendants
In support of Dunson, an amicus curiae brief has been submitted collectively by the American Civil Liberties Union of Ohio Foundation, the American Civil Liberties Union Foundation, the Southern Poverty Law Center, and the Lawyers’ Committee for Civil Rights Under Law.
– Kathleen Maloney
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing the State of Ohio from the Montgomery County Prosecutor’s Office: Meagan Woodall, 937.225.4117
Representing James L. Dunson from the Ohio Public Defender’s Office: Patrick Clark, 614.466.5394
Can Bank Foreclose After Failing to Follow Federally-Insured Lenders Rule?
Wells Fargo Bank, N.A. v. A. Christopher M. Burd, Case no. 2017-0279
Tenth District Court of Appeals (Franklin County)
ISSUES:
- May a lender foreclose on a Federal Housing Administration-backed loan if a required face-to-face meeting with the borrower doesn’t takes place within a federal law’s required three-month time period?
- If a lender conducts the face-to-face meeting with a borrower after the required three-month period, may a lender foreclose on the property and be subject to civil penalties issued by the U.S. Department for Housing and Urban Development?
BACKGROUND:
Wells Fargo Bank is appealing a trial court’s rejection of its third attempt to foreclose on the residential home of its borrower A. Christopher M. Burd. Burd purchased a Blacklick home in 2006 by securing a mortgage insured by the Federal Housing Administration (FHA). Burd borrowed about $231,000, and in 2009 Wells Fargo sought to foreclose after Burd failed to make his home loan payments. The bank dropped its lawsuit against Burd, and the parties entered a loan modification agreement in 2010.
In 2012, Wells Fargo sought again to foreclose on Burd after he missed payments. Wells Fargo and Burd participated in court-ordered mediation about 10 months after Burd stopped paying. The sides couldn’t come to an agreement. Burd asked the trial court to dismiss the second foreclosure attempt, arguing that Wells Fargo failed to follow the rules in 24 C.F.R. 203.604, which require the lender to attempt to have a face-to-face meeting with the borrower before three full monthly installment payments on the mortgage are unpaid. The trial court agreed and found Wells Fargo never attempted to conduct the meeting and was barred from foreclosing.
In 2014, Wells Fargo made its third attempt to foreclose on Burd, maintaining that the attempted 2012 mediation constituted the “face-to-face meeting,” and since it occurred before the bank foreclosed, it met the regulatory requirement. The trial court sided with Burd again, and the bank appealed to the Tenth District Court of Appeals.
The Tenth District affirmed the lower court’s ruling, finding that while the mediation was a face-to-face meeting, it did not occur within the time limits and couldn’t be used for the third foreclosure attempt. Wells Fargo appealed to the Ohio Supreme Court, which agreed to hear the case.
Bank Suggests Ruling Prevents Foreclosure
Wells Fargo argues that the Tenth District’s interpretation of 24 C.F.R. 203.604 is inconsistent with other appellate courts and prevents a lender from ever foreclosing on a defaulting borrower if it fails to conduct a face-to-face meeting during the three-month time period. The bank argues this reading of the law means that even if the bank is one day late, it can’t ever foreclose on a borrower and that the borrower could get a free house.
Wells Fargo suggests the U.S. Department of Housing and Urban Development (HUD) regulations should be enforced based on the law’s “overall regulatory scheme.” It notes that the 90-day meeting rule doesn’t specify the penalty for failing to conduct the meeting within the time period, and argues that the Tenth District wrote that it stops the bank from foreclosing. Instead, Wells Fargo asserts the overall HUD regulation for FHA loans imposes civil penalties on lenders that don’t follow the rules. The bank suggests that the law allows it to foreclose any time after it conducts, or follows the rules for attempting to conduct, the meeting with the defaulting borrower. If a lender fails to follow the rules as written, it can still foreclose, but is subject to fines by HUD, the bank maintains. It notes the rules allow for fines of up to $9,623 per violation with an annual cap of more than $1.9 million for lenders that violate HUD rules.
While barring foreclosing on Burd based on the 2011 default date, the Tenth District ruled that this didn’t stop Wells Fargo from ever foreclosing on Burd. The court stated the bank could come into compliance with the HUD rules, attempt to meet with Burd again, and foreclose if necessary. Wells Fargo counters that the Tenth District’s “cure” isn’t part of the federal law and the result would mean that it would have to refrain from attempting to collect years of unpaid interest on the loan in order to move forward.
Wells Fargo explains that for FHA loans, when a borrower defaults, the lender forecloses on the property and recoups as much of the loan amount as possible from the property’s sale. At that point the bank turns over ownership of the property to HUD. The bank then submits an insurance claim to HUD to receive payment for the gap between what was collected from the sale and the amount of the loan.
The bank asserts that by not allowing the foreclosure, not only can it not recoup payment from the sale of the house, it also can’t apply for HUD insurance benefits to cover its losses.
“Barring a lender from foreclosing in these circumstances deprives the lender both of its collateral and its ability to apply for FHA insurance benefits, the opposite of what HUD regulatory scheme provides,” Wells Fargo’s brief states.
Bank Must Conduct ‘Loss Mitigation’ to Proceed, Borrower Asserts
Burd maintains the FHA-insured loan program requires lenders to follow certain “loss mitigation” steps to ensure the government maintains a healthy insurance fund. That’s why the law requires the bank to meet with the defaulting borrower early in the process before it becomes increasingly more difficult for the homeowner to catch up with the missed payments, he explains. Burd agrees with the Tenth District that the bank must satisfy the requirements of the law and maintains that no Ohio appellate court has allowed a foreclosure without the lender satisfying the requirements of 24 C.F.R. 203.604.
Burd asserts that Wells Fargo never attempted to comply with the rule, relying only on a court-ordered mediation as its face-to-face meeting requirement. Challenging Wells Fargo’s contention that the Tenth District added the penalty of preventing foreclosure for not following the rule, he argues the trial and appellate courts simply applied the law as written, which requires the bank to be in compliance with the rule when it attempts to foreclose.
Burd also argues that Wells Fargo is overstating the consequences of the Tenth District’s ruling and noted the court never wrote that the bank would face the “harsh penalty of forfeiture” for not following the rule. Instead, Burd notes a number of ways Wells Fargo could adjust in order to pursue foreclosure, acknowledging that the bank could reduce the amount it expected to recoup in interest and attorney fees.
“The timing requirement in 24 C.F.R. 203.604 is mandatory. Wells Fargo must comply with it, and it failed to do so. Wells Fargo cannot then use its failure to come to this Court and have it rewrite a federal regulation to its benefit. It is a multi-billion-dollar national bank that should have complied with its duty, as required by the regulations incorporated into Mr. Burd’s note and mortgage,” Burd’s brief states.
Friend-of-the-Court Brief
An amicus curiae brief supporting the Burd’s position has been submitted jointly by the Legal Aid Society of Southwest Ohio, the Legal Aid Society of Cleveland, Advocates for Basic Legal Equality, Community Legal Aid Services, and Pro Seniors.
- Dan Trevas
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing Harris Design Services: Grant Wolfe, 614.221.2330
Representing the Public Utilities Commission of Ohio from the Ohio Attorney General’s Office: Robert Eubanks, 614.466.8703
Representing Columbia Gas of Ohio Inc.: Brooke Wancheck, 614.460.5558
Could Trial Court Block State Law That Reduced Funding to Cities Using Traffic Cameras?
City of Toledo v. State of Ohio et al., Case no. 2017-0327
Sixth District Court of Appeals (Lucas County)
ISSUES:
- Did a trial court have jurisdiction to enforce an earlier injunction against automated traffic camera laws in response to state laws, enacted later, that require full compliance with the traffic camera laws and cut off funding to municipalities not in compliance with the laws?
- Did trial court’s order enforcing its earlier injunction against automated traffic camera laws limit the General Assembly’s discretionary spending power and violate separation-of-powers principles?
BACKGROUND:
The city of Toledo and other municipalities, including Akron, Dayton, and Springfield, have passed local laws to use traffic cameras to automatically catch drivers who run red lights and exceed speed limits. Violations caught on camera are treated as civil, rather than criminal, offenses. Those who receive tickets may appeal through an administrative hearing.
In late 2014, the Ohio General Assembly passed Senate Bill 342, which enacted statewide laws about the use of automated cameras to capture red-light and speeding violations. S.B. 342’s effective date was March 23, 2015, and most of the traffic camera law’s provisions are found in R.C. 4511.092 to R.C. 4511.0914.
City Sues State Over First Traffic Camera Law
Toledo filed a complaint on March 13, 2015, against the state of Ohio and the Ohio attorney general contesting the constitutionality of S.B. 342 and asking the Lucas County Common Pleas Court to prevent the legislation from going into effect. At that time, Toledo had 44 cameras in place.
Finding that some of the traffic camera laws violated the city’s right to home rule, as guaranteed in the Ohio Constitution, the court in April 2015 imposed an injunction prohibiting the state from enforcing the following provisions:
- R.C. 4511.093(B)(1) and (3): requiring police officer presence during the operation of photo-monitoring devices
- R.C. 4511.095: mandating the completion of a safety study prior to implementation of photo-monitoring system
- R.C. 4511.096: setting forth various law enforcement officer duties
- R.C. 4511.097: specifying the requirements for tickets issued under an automated traffic control program
- R.C. 4511.098: indicating the procedure that should be followed by a person who receives a ticket alleging a violation of the traffic law under the automated traffic control program
- R.C. 4511.099: providing an administrative hearing for those wishing to appeal a citation
- R.C. 4511.0911(A) and (B): requiring manufacturers to provide maintenance records for photo-monitoring devices, along with a certificate of proper operation that attests to their accuracy
- R.C. 4511.0912: specifying that speed limit violations are only punishable if the speed exceeds the posted limit by at least 6 mph in a school zone and 10 mph elsewhere.
The Sixth District Court of Appeals upheld the trial court’s decision. Other challenges to the statewide traffic camera laws were brought across the state, leading to mixed rulings in the state’s appeals courts.
Supreme Court Rules in Dayton Traffic Camera Appeal
The Ohio Supreme Court reviewed one of the cases, from Dayton. In July 2017, the Supreme Court determined in Dayton v. State that three of S.B. 342’s provisions were unconstitutional – requiring the presence of a police officer at traffic cameras, mandating a safety study and public notice before using traffic cameras, and the speed limit specifications. The Court barred those provisions from enforcement.
Legislature Passes Additional Traffic Camera Laws in 2015
On June 30, 2015, as various traffic camera litigation was moving through the courts, Ohio lawmakers passed House Bill 64, the 2015-2017 budget bill. The General Assembly included provisions in the bill requiring municipalities to fully comply with the state’s traffic camera laws, R.C. 4511.092 to R.C. 4511.0914. Municipalities operating traffic cameras are mandated to file reports of compliance or noncompliance with the state’s traffic camera laws to the state auditor and, if not compliant, to include the gross amount of fines billed for traffic camera violations. For localities running traffic camera programs that don’t comply with the state’s laws, the state reduces the funding for that local entity by the amount of billed traffic camera fines. If a municipality doesn’t file a report, the tax commissioner and county treasurers halt payments from the state’s local government fund to the municipality.
These requirements are described in R.C. 4511.0915, 5747.50(C)(5), and 5747.502. The Ohio Attorney General’s Office refers to these statutes enacted in H.B. 64 as the “set-off law,” while the city of Toledo calls them the “penalty provisions.”
Toledo Asks Court to Block Enforcement of New Laws
Toledo filed a motion on July 8, 2015, asking the Lucas County trial court to enforce its April judgment and injunction by prohibiting the enforcement of the H.B. 64 provisions. In granting the request, the court concluded that if the state withheld funds from the city, the state would be in contempt of the court’s earlier injunction by forcing the city to comply with the S.B. 342 provisions that the court had found unconstitutional.
On appeal, the Sixth District affirmed, concluding that the H.B. 64 provisions “compel a municipality to comply with the very statutes that were struck down” earlier by the trial court. The state appealed to the Ohio Supreme Court, which accepted the case.
State Contests Validity of Lower Court’s Order
The attorney general notes that the April 2015 injunction didn’t encompass the H.B. 64 set-off provisions, which were enacted two months later. The trial court’s order stated that the later actions taken by the state to enforce the S.B. 342 laws that were declared unconstitutional by the trial court were a violation of the order. However, the attorney general maintains that the H.B. 64 set-off provisions don’t enforce or mandate compliance with the traffic camera laws. Instead, the new provisions establish “a reporting system and a formula for distributing discretionary funds,” according to the attorney general’s brief. The office argues that municipalities may operate their traffic cameras following the General Assembly’s criteria to receive funding or operate the cameras as they want and forego funding from the state.
“Toledo has no ‘home rule’ right to receive money from the General Assembly,” the brief states. “It is not ‘losing’ money that it has, but rather choosing to give up money in order to run its traffic-camera program as it sees fit.”
In addition, Toledo should have filed a new complaint in court to make claims against the H.B. 64 provisions, instead of challenging the new laws by asking the trial court to enforce an injunction related to a different law, the attorney general argues. Akron took this proper approach, the office notes. The attorney general contends that the trial court didn’t have ongoing, or continuing, jurisdiction over statutes enacted by the legislature at a later time.
While the trial court prohibited enforcement of the H.B. 64 set-off provisions, the attorney general asserts that the step was improper because neither the trial court nor the Sixth District found the provisions unconstitutional. The office maintains that the injunction must be set aside because Toledo has suffered no injury, but the people of Ohio have been injured because their elected representatives enacted H.B. 64 and the trial court has tried to block the traffic camera parts of that legislation.
“The Sixth District’s holding invades the legislative power and exceeds the judicial power because courts do not have roving license to enjoin legislation,” the attorney general writes. “Courts must instead draw the power to block legislation from specific constitutional prohibitions.”
City Argues Lawmakers Want to Coerce Compliance with Unconstitutional Laws
The city of Toledo responds that the H.B. 64 penalty provisions require municipalities to report whether they have “fully complied” with R.C. 4511.092 to 4511.0914, which were enacted by S.B. 342. Toledo maintains that because the H.B. 64 provisions specifically cite R.C. 4511.092 to 4511.0914, those statutes are incorporated into the new provisions. However, the Ohio Supreme Court found three of the S.B. 342 statutes unconstitutional and the Lucas County trial court determined that several other parts of the traffic camera laws were unconstitutional because they infringed on the city’s home rule rights. The state is using economic sanctions in H.B. 64 to “legislatively coerce compliance with statutes that have been stricken as unconstitutional,” the city contends.
The city disputes the state’s position that the H.B. 64 traffic camera provisions are “incentives.” They can’t be incentives because municipalities start with full funding from the state and, if non-compliant with H.B. 64’s traffic camera statutes, then a municipality loses state funding equivalent to the amount of traffic ticket fines billed, the city argues. And, Toledo stresses, the funding is reduced by the amount of fines billed, not the amount collected by a local entity. Because municipalities rarely have a 100 percent collection rate, they can lose state funding greater than the amount they actually collect from tickets generated by automated traffic cameras, the city points out.
The H.B. 64 provisions incorporate and mandate full compliance with unconstitutional laws, and a penalty imposed based on an unconstitutional law is void, Toledo asserts. The city maintains that the penalties in H.B. 64 violate the trial court’s injunction. It argues that the legislature can’t undo a court’s decision or force a court to treat an unconstitutional law as valid. The H.B. 64 provisions are intertwined with the traffic camera laws enacted by S.B. 342, and they all work together, Toledo states.
Toledo insists that the state, not the city, has violated the separation of powers between the branches of government.
“If the General Assembly could simply ignore the judicial branch any time legislation is struck by withholding funds to those entities that do not comply with the unconstitutional legislative acts, th[e]n there is no separation of powers because the legislature would reign supreme,” the city’s brief states. “This type of legislation is not a ‘new’ law that merits a separate lawsuit and separate constitutional analysis, but moreover an affront to the authority of the judiciary. The Penalty Provisions try to avoid judicial control by reenacting unconstitutional laws.”
The state legislature isn’t giving municipalities a true choice; it’s trying to force municipalities to stop operating the traffic cameras, the city concludes.
Spending Powers of State Legislature Debated
The attorney general notes that the General Assembly has constitutional spending power over state funds but no general duty to appropriate money to municipalities. While the state constitution requires that not less than 50 percent of certain state taxes be returned to the locality where the taxes originated, the constitution doesn’t bar the legislature from placing conditions on the discretionary funds that it provides to municipalities, the attorney general contends. The office maintains that the H.B. 64 set-off provisions set conditions for localities if they want to receive funding.
The attorney general compares these provisions to conditions the federal government places on funding to the states. For example, while Congress may not have the power to establish a national drinking age of 21, it is permitted to provide federal highway funds to only those states that set a 21-year-old drinking age.
“The federal government has long incentivized certain actions by attaching conditions to federal funding,” the attorney general explains, concluding that the state legislature’s incentives in H.B. 64 are similar and legal.
Toledo counters that the trial court’s injunction doesn’t order the spending of any state funds, but instead blocks the state from enforcing the H.B. 64 provisions. Referencing restrictions that have been placed on Congress to limit its spending power, the city reasons that the H.B. 64 penalties don’t promote the general welfare, are ambiguous, aren’t related to a state interest, conflict with the home-rule rights of municipalities in the state constitution, and are coercive. The trial court had inherent authority to enforce its injunction against the H.B. 64 provisions, the city reasons.
- Kathleen Maloney
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing the State of Ohio from the Attorney General’s Office: Eric Murphy, 614.466.8980
Representing the City of Toledo: Joseph McNamara, 419.245.1088
Are Natural Gas Heating Costs Tax Deductible for Trailer-Making Facility?
East Manufacturing Corp. v. Joseph W. Testa, Ohio Tax Commissioner, Case no. 2017-0666
Ohio Board of Tax Appeals
ISSUES:
- Can a manufacturing operation’s natural gas purchases qualify for a tax exemption for a plant’s “special and limited area,” as defined in R.C. 5739.011(C)(5), if the area isn’t enclosed by walls?
- Can the tax exemptions in R.C. 5739.011(B)(4) and R.C. 5739.011(B)(8) apply to the natural gas purchases of an aluminum trailer production operation if a certain level of temperature is necessary for manufacturing?
BACKGROUND:
East Manufacturing Corp. produces customized aluminum truck trailers, and 98 percent of the products are made from aluminum. The company has six large buildings at its Portage County facility. Because some of the trailers are up to 53 feet long, most of the buildings have no interior walls. The trailers move to “sub-areas” within the buildings for different aspects of the manufacturing process. East indicates that welding, rather than bolting, the aluminum components together is critical to make the trailers stronger, and that it employs 25 welders who produce an average of 3,300 welds per trailer.
If either the room temperature or the aluminum is cooler than 50 degrees, the welding process causes condensation, which can adversely affect the welding bond. So the company ensures in the winter months that the manufacturing areas of the six buildings, totaling approximately 321,000 square feet, are heated using natural gas to at least 50 degrees.
Ohio places a use tax on natural gas delivered to manufacturers unless the gas purchases meet an exception in Ohio tax law. East requested that its gas supplier not tax 91.8 percent of the gas it purchased because the amount reflected the heat used in the manufacturing areas and to operate machinery involved in welding the trailers. The remaining amount of gas is used to heat the administrative offices in one portion of one of the six buildings, and the company didn’t claim the gas purchase for that area was tax exempt.
State Audits Facility
The Ohio Department of Taxation audited East’s natural gas purchases from 2003 through 2006, concluding the gas was purchased for general heating only, and that East owes use tax for its gas purchases except for the gas used in welding. East appealed the assessment in 2013, and two years later, the Ohio tax commissioner confirmed its original finding, which East appealed to the Ohio Board of Tax Appeals (BTA). The BTA affirmed the tax commissioner’s decision in 2017, and the company appealed to the Ohio Supreme Court, which at the time, was required to accept the appeal.
Company Meets Requirements for Exemption, East Asserts
The company cites several tax code provisions that qualify it for the exemption of the majority of its gas purchases, including R.C. 5739.011(C)(5). The law exempts purchases for equipment and supplies that “totally regulates the environment in a special and limited area of the manufacturing facility where the regulation is essential for the production to occur.” East argues production occurs in all six buildings and the size of the trailers requires that the spaces be large and open. Because welds are made in sub-fabrication areas of each building and the temperature must be at least 50 degrees in all of them, the entire operation counts as a manufacturing facility, East concludes. The company considers the six buildings a “special and limited area” because they account for a small portion of the 350 acres of East Manufacturing’s grounds in Portage County. Since each building is a special and limited area within the manufacturing facility, the natural gas is used to totally regulate the environment of those areas, and qualifies it for the exemption, the company argues.
The BTA sided with the state’s argument that special and limited areas are places such as clean rooms and paint booths that are enclosed spaces within a facility that have special environmental controls. East noted the tax commissioner conceded at the BTA hearing that the exemption doesn’t require a space to be enclosed to qualify for the exemption, and it argues that the unique manufacturing setting of East requires the open areas. Although the space is more open than more-traditional special and limited areas, East argues it still meets the definition to receive the exemption.
East also claims the company meets the exemptions in R.C. 5739.011(B)(4) and R.C. 5739.011(B)(8). The (B)(4) exemption is for property used in a manufacturing process to make the equipment function, and (B)(8) exempts gas used in the manufacturing operation. The company explains the areas need to be heated by gas so that the welding, painting, bending, and shaping of aluminum can take place. East objects to the BTA’s characterization that heating the buildings is a function of quality control and not essential to the production of the trailers. The company maintains that the heat assures that the welding isn’t compromised and that condition is consequential to the function and stability of the trailers its sells.
Commissioner Cites Space Use, Science in Rejection of Exemption
The tax commissioner notes that the exemption for natural gas purchases are for areas where a company “totally regulates the environment” as a “special and limited area” and “where the regulation is essential for production to occur.” The commissioner explains the Ohio Department of Taxation provides examples and explanations of how the law is enforced, and those examples refer to areas such as a clean room, where a company must tightly control the environment to protect against dust and other contaminants. The commissioner argues that East has paint booths with ovens and heaters to ensure the trailers are maintained at an optimal temperature for paint drying, and that generally heating the buildings isn’t the “total regulation of the environment” as required by the law.
The commissioner also maintains that the basic science behinds East’s contention that the ambient air temperature of the room must be at least 50 degrees to prevent condensation is wrong. The commissioner points to a chart used by the East plant that comes from a guide to aluminum welding. The chart indicates that room temperature alone doesn’t impact condensation. Maintaining the temperature level fails to meet the law’s requirement that to exempt the gas costs, the temperature regulation must be “essential for production,” the commissioner concludes.
Not only is maintaining the air temperature not essential in the areas where East welds trailers, but it also isn’t essential in some of the East buildings where little to no welding takes place, such as the painting building, the commissioner argues. The commissioner concedes the law doesn’t state an area has to be closed to be considered special and limited, but notes that East doesn’t make any attempt to regulate the temperature of the sub-areas where welding takes place through the use of air ductwork, dividers, flaps, or the location of heaters. The commissioner supports the BTA finding that the gas is used to generally heat the facility and isn’t used in the manufacturing process. He is urging the Court to affirm the BTA’s decision.
- Dan Trevas
Docket entries, memoranda, briefs (including amicus briefs), and other information about this case may be accessed through the case docket.
Contacts
Representing East Manufacturing Corp.: Steven Dimengo, 330.376.5300
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