26th Annual Tuesday & Wednesday, January 24‐25, 2017 Hya� Regency Columbus, Columbus, Ohio Workshop A Ohio Tax Ohio Manufacturing Rule … Has It Really Been 26 Years? And, Is It Still Relevant? Tuesday, January 24, 2017 1:45 p.m. to 2:45 p.m.
Biographical Information Tony Long, Senior Counsel, Honda North America, Inc. 24000 Honda Parkway, Marysville, OH 43040 tony_long@hna.honda.com 937.644.6645 Practice Areas: Energy, Tax, Transactional, Credits & Incentives, Legislation, Land Use and Real Property Tony has worked at Honda since 2001. Before that Tony worked in the Ohio Department of Taxation for 13 years in the Department’s Legal Counsel Office. Currently, Tony assists business teams with projects, matters and issues in the above areas of law. Tony represents Honda before various regulatory agencies such as the PUCO, FERC, IRS and state tax agencies. Tony also attends various committee meetings at trade organizations – Ohio Chamber (Tax), OMA (Tax and Energy) and COST (Property and Policy). Tony has presented many times at this conference and has presented at other seminars and before other groups in both the areas of taxation and energy. Tony has also taught classes at Honda on various topics. Tony received his law degree from Toledo in 1986 and has a Bachelor of Arts degree from Mount Union College. Jeff Stonerock, Tax Director, Clarus Partners 1233 Dublin Rd., Columbus, OH 43215 jstonerock@claruspartners.com 614-832-0754 As a Director in the State and Local tax group, Jeff brings over 24 years of tax planning, incentives, audit defense, refund claims and tax compliance experience. Jeff’s primary responsibilities include: tax planning, refund claims and audit defense in State and local tax. Jeff previously worked at Honda for 17 years providing tax planning, incentives and audit defense in the Federal income, State income, sales tax, property tax and various miscellaneous taxes in both the US and Canada. Prior to this experience, Jeff has worked in the tax groups of various companies. Jeff received his bachelor degree from the Ohio State University in 1993 and is a licensed CPA from the State of Ohio. Gabriel Tomlin, Assistant Administrator – Audit Division, Ohio Department of Taxation 4485 Northland Ridge Blvd. Columbus, OH 43229 Gabriel.Tomlin@tax.state.oh.us 614.387.2044 Gabriel (Gabe) Tomlin is a graduate of The Ohio State University with a degree in Business Administration. In 2014, he received an MBA from Capital University. In 2010, he began his career with the Ohio Department of Taxation where he specialized as a sales and use tax auditor. He has extensive tax auditing experience in the manufacturing, construction, oil and gas, and retail industries. Gabe is currently an Assistant Administrator of the Audit Division. His responsibilities include managing a team of audit personnel assigned to do audits in several different tax types as well as leading the division on several process improvement plans. This will be Gabe’s third year speaking at the tax conference.
Presenters: Gabe Tomlin – Ohio Department of Taxation Ohio Mfg. Rule Tax Program Assistant Has it Really Administrator been 27 Years! Tony Long – Honda North America Is It still Senior Counsel Relevant? Jeff Stonerock – Clarus Partners Tax Director Email – jstonerock@claruspartners.com P – 614-832-0754
Legal Disclaimer • The information in this presentation is for general guidance only and is not a substitute for professional or legal advice. The presenter accepts no responsibility for any actions taken or not taken on the basis of the information contained in this presentation. • To ensure compliance with Treasury Department regulations, I wish to inform you that any tax information contained in this presentation is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
History I ssues: Integrated Plant Theory (see OAMCO v. Lindley) General Statue Numerous Cases to Define Exempt Items PPG Industries, Inc. v. Tracy, Ohio BTA Nos. 93-M-411 and 93-M-413 (Oct. 21, 1994) A manufacturer of polymer resins (organic compounds formed by chemical reactions) was entitled to a manufacturing exemption for a vacuum system that carried samples from the mixing tanks, reactors, thin tanks, and work-in-process tanks to a quality control laboratory located within the same building but off the production line was qualified for exemption as equipment used during the manufacturing period to test or check the quality of the thing being manufactured (Sec. 5739.02(R)(2)). Solution: Ohio Mfg. Law 5739.011 and Mfg. Rule 5703-9-21 3
Current Audit Program Updates regarding the Audit Division: • Update on Direct Payment Permit (DPP) – Reviews are continuing • ODT contacting all DPP holders (Began May 2015) • Audit Stats: 166 Complete, 113 Active, 169 to be audited • 52 Cancelled DPP • Audit Selection Project – objective, efficient, fair and equitable way to review taxpayers for compliance • Process of using data analytics and tax returns to effectively score and select audit leads • Predictive Analytical Models & Trending Models • Cross tax comparisons • Peer group comparisons • Tax filing trends • Leads involve various tax types, industry sectors and geographic locations. 4
Manufacturing Exemption & Definitions Exem ption: To use the thing transferred, as described in section 5739.011 of the Revised Code, primarily in a manufacturing operation to produce tangible personal property for sale Definitions: “Thing Transferred” – Production machinery, consumables, testing machinery, material handling equipment, repair service, installation service and other tangible personal property used during and necessary for the manufacturing process Not “Thing Transferred” – Items used to clean or repair Mfg. Equipment, Safety equipment, items to handle or store raw material or the completed product, items used in administrative, security, record-keeping or general functions 5
Manufacturing Exemption & Definitions Definitions: “Manufacturer” – a person who is engaged in manufacturing, processing, assembling, or refining a product for sale. “Manufacturing Operation” – a process in which materials are changed, converted or transformed into a different state or form from which they previously existed and includes refining materials, assembling parts and preparing raw materials and parts by mixing, measuring, blending or otherwise committing such materials or parts to the manufacturing process. “Continuous Manufacturing Operation” – the process in which materials or components are moved through the steps whereby manufacturing occurs 6
Manufacturing Exemption & Definitions Definitions: “Material Handling” – the movement of the product being or to be manufactured, during which movement the product is not undergoing any substantial change or alteration in it state or form. “Testing” – a process or procedure to identify the properties or assure the quality of a material or product. “Completed Product” – a manufactured item that is in the form or condition as it will be sold by the manufacturer. “Refining” – removing or separating a desirable product from raw or contaminated materials by distillation or physical, mechanical or chemical processes. “Assembly” – attaching or fitting together parts to form a product, but do not include packaging a product. 7
Manufacturing Exemption & Definitions 8
Examples Manufacturing Begins: Example: An oil refinery obtains supplies of raw crude from numerous sources. It stores this crude in various storage tanks. When the raw crude is needed for the manufacturing process, it is removed from the storage tanks by piping and taken to metering equipment where it is metered. The crude is committed (and manufacturing begins) when it is metered at the metering equipment Example 2: A manufacturer of springs uses a fork-lift to unload reels of wire (raw material) from a delivery truck and transport the reels of wire to a warehouse for storage. When a job is set up, the same fork-lift moves the reel of wire from the warehouse to the spring making machine. An overhead crane helps load the reel of wire onto a dereeler which slowly feeds the wire into the spring making machine. The dereeler is feeding the wire into the spring making machine. This represents the point of commitment for the manufacturing process to begin. 9
Examples Manufacturing: Mfg. Rule: Exempt Examples Manufacutring • Robots • Weld & Assembly Equipment • Jigs, Dies and Molds • PLC (Programmable Logic Controller) 10
Examples I n Process Moving: After commitment of raw material to manufacturing process and before manufacturing ends. Example 10 and Example 11 are simple examples of this concept. In Example 10, forklifts are used to transport clay pipe from the machine that forms the pipe to the kiln where the pipe is cured. (Exempt from tax) In Example 11, an intermediate feed at a petroleum plant is temporarily stored to be used later to produce a completed product to be sold. The piping used to transport the feed to the storage bin and from the storage bin are in- process items and not subject to tax. 11
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