Taxpayers may use Industry Changes to Justify a Reduction in the True Value of Tangible Personal Property for Purposes of Ohio Personal Property tax

The Ohio Board of Tax Appeals recently held that industry changes may support a finding that the use of the 302 computation to value tangible personal property produces an unjust and unreasonable result. However, the taxpayer still has the burden to introduce probative evidence of the true value in money of the tangible personal property. Alcoa Inc. v. Zaino, B.T.A. No. 1999-G-1401 (Oct. 22, 2004), appeal pending Ohio Supreme Court Case No. 04-1953, referred to mediation, briefing schedule stayed.

Alcoa Inc. ("Alcoa") operates a forged product manufacturing facility in Cleveland, Ohio ("Cleveland Works"). Two plants are located within the Cleveland Works, the A-Plant and the H-Plant. Both plants were originally constructed during World War II to produce military aircraft parts. Following the war, the plants continued to produce military aircraft parts.

However, changes in the aerospace industry, including the end of the cold war and a large reduction in the amount of defense spending by the United States government resulted in a decline for the demand of the military aircraft parts produced at the Cleveland Works. Due to this, the taxpayer claimed that the 302 computation used by the Tax Commissioner to value its tangible personal property did not reflect the true value of such property and sought a reduction.

Every taxpayer engaged in business in Ohio must file a personal property tax return annually. R.C. 5711.02. On this return, the taxpayer must list "all his taxable property . . . as to value, ownership and taxing district as of the tax lien date . . . ." R.C. 5711.03. All tangible personal property used in business is valued on the return at book value less book depreciation. R.C. 5711.18. The Tax Commissioner values all tangible personal property in Ohio using a formula known as the composite annual allowance or 302 computation ("302 Computation"). The Ohio Supreme Court has repeatedly recognized the 302 Computation as an appropriate method to value tangible personal property. See e.g., PPG Industries v. Kosydar, 65 Ohio St.2d 80 (1981). The valuation determined by the 302 Computation is prima facie evidence of the true value in money of the taxable tangible personal property. Ohio Adm. Code 5703-3-11(B).

A taxpayer can support a deviation from the 302 Computation three ways:

1. by proving that special or unusual circumstances exist; or
2. by proving that the use of the 302 Computation produces an unjust or unreasonable result; or
3. offering direct evidence of the tangible personal property’s true value.

Alcoa asserted that due to a decline in demand and increased competition in forgings for military and commercial aircraft, combined with changes in technology, the usage of the aerospace machinery equipment in the A and H plants had decreased dramatically. In earlier decisions, the Board determined that special or unusual circumstances exist when business equipment is subjected to conditions that are abnormal for the industry and that cause the equipment to age more rapidly than like equipment.

Here, the Board found that Alcoa did not establish that the equipment was subjected to special or unusual circumstances when compared to the rest of the aerospace industry. In fact, the Board noted that Alcoa acknowledged that other large forgers had experienced the same decline in business and had left the industry.

Not to be deterred, Alcoa forged on! In support of its claim that the application of the 302 Computation created unjust or unreasonable results, Alcoa presented the testimony and appraisal reports of three appraisers employed by Evaluation Research Corporation. The Board found this testimony combined with the appraisal report was reliable, and provided competent, probative evidence of the true value of Alcoa’s machinery and equipment. Thus, the Board valued Alcoa’s tangible personal property per the appraisal.

Alcoa also contended that certain portions of its machinery were jigs exempt from taxation under R.C. 5701.03. This provision exempts from the definition of personal property "patterns, jigs, dies, or drawings that are held for use and not for sale in the ordinary course of business." The Ohio Supreme Court has defined a jig as:

General Motors Corp. v. Kosydar, 37 Ohio St.2d. 138, 139 (1974). Further, the Court approved the Board’s definition of a jig as "devices which perform a holding and positioning function during machining or processing operations." Timken Company v. Lindley, 17 Ohio St. 3d. 85 (1985).

To support its claim that portions of the hydraulic and mechanical presses, steam hammers and vertical turning machines or lathes were jigs, Alcoa presented the testimony of two engineering employees who testified regarding the function of the equipment.

In determining which components were jigs, the Board stressed function over form, and allowed the jig exemption only for equipment whose primary function was to hold or position the product during machining or processing. Although the Board found that certain pieces of equipment were jigs, the Board determined that Alcoa had failed to establish the cost of each jig because the cost information presented by Alcoa was based on quotes for the similar equipment, rather than the actual machinery used at Cleveland Works.

Lastly, Alcoa claimed that a portion of the original cost of rebuilt machinery should be removed when the additional rebuild costs were capitalized. In support of its contention, Alcoa presented testimony regarding the original cost and the cost of the rebuild or replacement. Alcoa’s witness used the Marshall Valuation Service to calculate the portion of the original cost replaced by rebuilds and removed that amount from the original cost of the asset.

Although the Tax Commissioner objected to Alcoa’s methodology for determining rebuild costs, the Board approved it based on testimony of the Department’s Assistant Administrator of Personal Property Tax who stated that the Department uses essentially the same method.

It is important for any taxpayer objecting to the Tax Commissioner’s 302 Computation to remember that the taxpayer has two burdens:

1) to establish that a deviation from the 302 Computation is warranted, and

2) to establish with competent, probative evidence the true value of the tangible personal property.

Meeting these burdens requires careful planning by the taxpayer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.