[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Veolia Water N. Am. Operating Servs., Inc. v. Testa, Slip Opinion No. 2016-Ohio-756.]




                                        NOTICE
     This slip opinion is subject to formal revision before it is published in
     an advance sheet of the Ohio Official Reports. Readers are requested
     to promptly notify the Reporter of Decisions, Supreme Court of Ohio,
     65 South Front Street, Columbus, Ohio 43215, of any typographical or
     other formal errors in the opinion, in order that corrections may be
     made before the opinion is published.



                         SLIP OPINION NO. 2016-OHIO-756
VEOLIA WATER NORTH AMERICAN OPERATING SERVICES, INC., APPELLANT, v.
                          TESTA, TAX COMMR., APPELLEE.
  [Until this opinion appears in the Ohio Official Reports advance sheets, it
      may be cited as Veolia Water N. Am. Operating Servs., Inc. v. Testa,
                         Slip Opinion No. 2016-Ohio-756.]
Taxation—R.C. 5709.20 and 5709.21—Exemptions—Water-pollution-control
        facilities.
   (No. 2014-0170—Submitted November 17, 2015—Decided March 2, 2016.)
               APPEAL from the Board of Tax Appeals, No. 2008-987.
                               ____________________
        Per Curiam.
        {¶ 1} This is an appeal from a decision of the Board of Tax Appeals
(“BTA”), which affirmed the tax commissioner’s disposition of an application for
an exempt-facility certificate filed by appellant, Veolia Water North American
Operating Services, Inc. Veolia is the private owner and operator of a waste-
water-treatment plant located in Franklin, Ohio, that serves the communities of
                            SUPREME COURT OF OHIO




Franklin, Germantown, and Carlile.           The facility also treats waste water
emanating from paper- and cardboard-making operations of the Franklin
Boxboard, Cheney Pulp and Paper, and Atlas businesses.
       {¶ 2} Formerly known as the Franklin Regional Wastewater Treatment
Facility and owned by the Water Conservation Subdistrict of the Miami
Conservancy District, the plant was sold to Wheelabrator EOS of Ohio, Inc.
During the period of its public ownership, the plant enjoyed complete exemption.
That status came into question with private ownership and operation.
       {¶ 3} The basis for Veolia’s exemption claim is the treatment of the
industrial waste water generated by its manufacturing customers. Veolia sought
exemption of the real-estate improvements and all the personal property at the
plant. The tax commissioner granted the exempt-facility certificate for only a
percentage of the personal property the commissioner deemed to be exempt. The
percentage reflected the amount of inflow that is industrial waste water but did
not include the amount of residential waste water generated by the communities.
The BTA affirmed the tax commissioner’s disposition.
       {¶ 4} Veolia has appealed. Veolia contended below that it was entitled to
exemption of all the personal property or, at a minimum, that the percentage
exempted should correspond not to the percentage of inflow from industrial
operations but rather to the percentage of pollutants in the industrial waste water.
On appeal, Veolia argues only that the entire facility is exempt; it does not
address a partial tax reduction. The appeal also claims that the tax commissioner
violated its duty to give some of Veolia’s supplemental documentation to the
Ohio Environmental Protection Agency (“EPA”).
       {¶ 5} Because we hold that the BTA’s decision is both reasonable and
lawful, we affirm.




                                         2
                                January Term, 2016




                     THE “EXEMPT FACILITIES” PROVISIONS
       {¶ 6} In 1965, the General Assembly passed legislation “to encourage the
installation of industrial water pollution control facilities * * * by providing tax
exemption for such facilities.” Title, Am.H.B. No. 1, 131 Ohio Laws, Part II,
1635. The law provided for the issuance of certificates by the newly created
water-pollution-control board in the state health department.          Former R.C.
6111.02, id. at Part I, 1418-1419. Later, the administrative duties were transferred
to the Ohio EPA after the creation of that agency.          Former R.C. 6111.31,
Am.Sub.S.B. No. 397, 134 Ohio Laws, Part I, 695, 772-773.              In 2003, the
provisions    governing      industrial-water-pollution-control    facilities   were
consolidated with other exempt-facility provisions and placed under the
administrative aegis of the tax department. R.C. 5709.20 and 5709.21.
       {¶ 7} The current list of exempt facilities includes air-pollution-control
facilities, energy-conversion facilities, noise-pollution-control facilities, solid-
waste-energy-conversion facilities, thermal-efficiency-improvement facilities, and
industrial-water-pollution-control facilities.   R.C. 5709.20.    Application for a
certificate is made to the tax commissioner. R.C. 5709.21(B). Upon obtaining a
certificate from the tax commissioner, the holder enjoys exemption of the
property described in the certificate from real and personal-property taxation.
R.C. 5709.25(B). Additionally, the transfer of tangible personal property when
the personal property is incorporated into property certified as an exempt facility
is not a sale, and the transaction is exempt from sales and use taxation. R.C.
5709.25(A).
                             FACTUAL BACKGROUND
                               The property at issue
       {¶ 8} On March 16, 2005, Veolia filed an “Application for Air, Noise or
Water Exempt Facility,” with “water” marked as the focus of the application.
Exemption was sought for the real-property improvements as well as personal




                                          3
                              SUPREME COURT OF OHIO




property; a list was attached to the application. The list is also set forth in the tax
commissioner’s final determination, where the property is divided into that which
is found to be partially exempt and that which is fully taxable.
                             The treatment of waste water
       {¶ 9} At the BTA hearing, Veolia’s witness, Joe Hart, the former plant
manager, distinguished the two sources of waste water treated by the plant. First,
there was residential waste water, which is essentially sewage from households in
the three cities using the plant. He indicated that treating this waste water was
relatively easy: “[Y]ou come in, put some air to it, get the bacteria going and send
it on its merry way.” Second, there was industrial waste water, referred to as
“Captain Nasty” because it carried a heavy stench and looked “like real thick
gritty chocolate pudding.”
       {¶ 10} Veolia contends that the pollutants in the industrial waste water
constituted 94 percent of the pollutants treated at the facility. On that basis,
Veolia argues that the primary purpose of the plant is to treat the industrial waste
water; according to Veolia, that reasoning justifies a 100 percent exemption for all
the property at issue.
                         Application and the EPA’s opinion
       {¶ 11} After Veolia filed its application for exemption, the tax
commissioner referred it to the Ohio EPA for an opinion, as required by R.C.
5709.211. The EPA’s opinion divided the property listed in the application into
“recommended property” and “non-recommended property.” The EPA stated that
the non-recommended property was not primarily used as an exempt facility. The
EPA proposed approval of 17 percent of the recommended property, based on
“factoring out residential and commercial waste”; the EPA based the percentage
on information supplied by Veolia.




                                          4
                                January Term, 2016




                     Proceedings before the tax commissioner
       {¶ 12} The tax commissioner issued a proposed finding based upon the
EPA recommendation on August 17, 2006, and Veolia sought reconsideration and
a hearing. Veolia did not request that the EPA attend the hearing.
       {¶ 13} A hearing was held at the tax department on August 7, 2007.
Veolia submitted documentation before and after the hearing.
       {¶ 14} On April 29, 2008, the tax commissioner issued his final
determination. Relying on the EPA’s recommendation and Veolia’s admission
that “only 17 percent of the waste coming into its facility is industrial waste,” the
commissioner granted a 17 percent exemption. The determination notes that
during and after the hearing, Veolia “insisted that the percentage of industrial
pollutants accounted for more than 94 percent of the pollutants it treats at its
facility,” but before the hearing it had presented evidence that 57 percent of the
pollutants it treated were industrial pollutants. The tax commissioner viewed that
as a “sharp increase” that indicated that “the applicant’s facts and figures may be
unreliable.” The tax commissioner included as exempt several items of personal
property that were previously excluded, subject to the 17 percent exemption, but
continued to refuse exemption for other items of personal property.
                           Proceedings before the BTA
       {¶ 15} Veolia appealed to the BTA on July 7, 2008. The BTA held a
hearing on November 2, 2010, at which Veolia presented the testimony of Hart,
the former plant manager, and the tax commissioner presented the testimony of
Dan Kopec, an EPA engineer. The testimony clarified that the 17 percent figure
relied on by the EPA and the tax commissioner corresponded to the percentage of
the total flow of waste water that was “industrial flow.” In contravention, Veolia
contended that the percentage of the exemption should correspond to the
percentage of contaminants in the industrial inflow, which was higher.




                                         5
                                 SUPREME COURT OF OHIO




       {¶ 16} The BTA issued its decision on December 31, 2013. BTA No.
2008-987, 2013 Ohio Tax LEXIS 7596 (Dec. 31, 2013). The BTA found “no
error in the commissioner’s use of the amount of waste, rather than the amount of
contaminants therein, in determining whether the facility’s ‘primary purpose’ is to
treat industrial waste.”    Id., 8.   The BTA found that the “use of flow as a
measurement, rather than the concentration of pollutants, [was] a more practical
measure in light of the evidence presented.” Id., 9-10. In support of its decision,
the BTA emphasized Joe Hart’s acknowledgment that the concentration of
pollutants “varies day by day and at different points in a single day,” as well as
Kopec’s testimony that the concentration of pollutants could not be determined
without additional information that Veolia had not provided. Id.
       {¶ 17} The BTA also affirmed the determination that certain property was
not entitled to the partial exemption. Id., 11. With respect to the contention that
the tax commissioner had failed to submit certain evidence to the EPA, the BTA
noted that the tax commissioner had abided by the statutory requirements, that the
information in question was not submitted in the original application, and that
Veolia had not requested that the EPA participate in the hearing before the tax
department.
       {¶ 18} The BTA affirmed the tax commissioner’s determination, and
Veolia has appealed.
                           VEOLIA’S PROPOSITIONS OF LAW


               1. The statutory requirement of “primary purpose” is
       determined by the property’s function, rather than other arbitrary
       and easily-identifiable traits.
               2. The      Tax    Commissioner   must    consult   with   the
       Environmental Protection Agency to consider data presented by
       the taxpayer which describes the pollution control activities.




                                           6
                               January Term, 2016




  STATUTORY BASIS FOR THE VEOLIA PLANT TO QUALIFY AS AN INDUSTRIAL-
                    WATER-POLLUTION-CONTROL FACILITY
     The test for exempt-facility status for industrial-water-pollution control
       {¶ 19} The exempt-facility provisions at R.C. 5709.20 et seq. constitute
tax-reduction provisions that call for the applicant to meet a stringent burden of
proof: Veolia must show that the statutes “ ‘clearly express[ ] the exemption’ in
relation to the facts of the claim.” Anderson/Maltbie Partnership v. Levin, 127
Ohio St.3d 178, 2010-Ohio-4904, 937 N.E.2d 547, ¶ 16, quoting Ares, Inc. v.
Limbach, 51 Ohio St.3d 102, 104, 554 N.E.2d 1310 (1990); accord Timken Co. v.
Lindley, 64 Ohio St.2d 224, 227, 416 N.E.2d 592 (1980) (in evaluating a claim for
an analogous air-pollution-control certificate, “laws relating to exemption from
taxation” must be “construed most strongly against the exemption”); Newman v.
Levin, 120 Ohio St.3d 127, 2008-Ohio-5202, 896 N.E.2d 995, ¶ 30 (applying
strict-construction principle to an electric-generating station’s application to
exempt a thermal-efficiency-improvement facility).
       {¶ 20} Thus, Veolia had the burden to show that its property qualifies as
an industrial-water-pollution-control facility.   There are several elements to
making such a showing:
          The effluent treated must satisfy the definition of “industrial waste,”
           which is “any liquid, gaseous, or solid waste substance resulting from
           any process of industry, manufacture, trade, or business, or from the
           development, processing, or recovery of any natural resource, together
           with such sewage as is present.” R.C. 6111.01(C).
          The property must be “designed, constructed, or installed for the
           primary purpose of collecting or conducting industrial waste to a point
           of disposal or treatment” or “reducing, controlling, or eliminating
           water pollution caused by industrial waste; or reducing, controlling, or




                                         7
                             SUPREME COURT OF OHIO




           eliminating the discharge into a disposal system of industrial waste or
           what would be industrial waste if discharged into the waters of this
           state.” R.C. 5709.20(L).
          The law distinguishes between “exclusive property” and “auxiliary
           property.” R.C. 5709.21. The latter category is property “installed,
           used, and necessary for the operation of an exempt facility that is also
           used in other operations of the business other than an exempt facility
           purpose,” while the former is property installed to operate an exempt
           facility “that is not auxiliary property.” Auxiliary property will enjoy
           a partial certification and exemption, while exclusive property will be
           fully certified and exempted. See R.C. 5709.21(C)(2). When property
           is used exempt “for discrete periods of time,” exemption is determined
           based on the percentage of time that it is used for the exempt purpose.
           R.C. 5709.21(A)(3)(a). If the property is used concurrently for an
           exempt and a nonexempt purpose, R.C. 5709.21(A)(3)(b) applies, and
           the burden of proving the exempt share is on the applicant.
          The property must also have been both “placed into operation or
           initially capable of operation after December 31, 1965, and installed
           pursuant to the approval of the environmental protection agency or any
           other governmental agency having authority to approve the installation
           of industrial water pollution control facilities.” Id.
       {¶ 21} As for the fourth point, there is no dispute on either prong. The
facility dates back to the early 1970s, and the record contains its 2003 approval by
the EPA.
       {¶ 22} The dispute in this appeal concerns the first three points: only some
of the effluent treated is “industrial waste,” the remainder being residential waste
water, and the treatment of industrial and residential waste water means that the
property is not used only for the treatment of industrial waste water. As to the




                                          8
                                January Term, 2016




distinction between “exclusive property” and “auxiliary property,” Veolia argues
that the tax commissioner’s reliance on flow measurements as the basis for a
percentage exemption is “without legal justification.” But the distinction between
exclusive and auxiliary property furnishes precisely the justification for a
percentage approach, and it is telling that Veolia fails to address the auxiliary-
property concept.
 THE TAX COMMISSIONER AND THE BTA PROPERLY APPLIED THE PRIMARY-
           PURPOSE TEST AND THE AUXILIARY-PROPERTY CONCEPT
    Veolia’s claim for 100 percent exemption cannot be reconciled with R.C.
                           5709.21(B) and the case law
       {¶ 23} Although it argued for a higher percentage of exemption below, on
appeal Veolia stands by its “entire facility” claim: “Because the Treatment
Facility’s primary purpose is to treat industrial waste—and the industrial
pollutants contained therein—the entire Treatment Facility is exempt from tax.”
This assertion is contradicted by both the statute and the case law. Indeed,
Veolia’s insistence that the BTA and the tax commissioner never defined
“primary purpose,” or that they defined it incorrectly, is beside the point; the
central point is whether the primary-purpose test should be applied to the entire
plant or to each article of property individually. Veolia argues for the global
application of the test, which is mistaken for two reasons.
       {¶ 24} First, Veolia’s argument ignores the distinction in R.C. 5709.21
between “exclusive property” and “auxiliary property.” The distinction requires
the tax commissioner to look at the functionality of each article of property in
relation to the control of pollution and break out the percentage of use that permits
the exemption. Thus, the global approach advocated by Veolia is precluded.
       {¶ 25} Additionally, R.C. 5709.20(M) states that property that serves the
business’s own benefit, rather than the control of pollution, is not an exempt
facility, thereby underscoring the need to look at property piece by piece.




                                         9
                             SUPREME COURT OF OHIO




       {¶ 26} Second, Veolia’s argument runs afoul of the case law, which
reinforces that the functionality criterion must be applied to each article of
property individually. In Transue & Williams, Div. of Std. Alliance Industries,
Inc. v. Lindley, 54 Ohio St.2d 351, 376 N.E.2d 1341 (1978), the taxpayer’s
forging plant, which had been cited for violating Ohio air-pollution-control
regulations, implemented a pollution-control strategy. The tax commissioner, the
BTA, and ultimately this court rejected the taxpayer’s contention that “but for the
necessity that it bring itself into compliance with EPA standards, it would have
made none of the expenditures for capital improvements being taxed and,
therefore, all such new facilities were ‘designed primarily for the control of air
pollution.’ ” Id. at 352-353. The certification was limited to the portions of the
articles of property that were “used exclusively for air * * * pollution control,”
pursuant to former R.C. 5709.21, Am.H.B. No. 1, 135 Ohio Laws, 1067, 1107.
Id. at 353. Accord Timken, 64 Ohio St.2d 224, 416 N.E.2d 592; Sun Oil Co. v.
Lindley, 56 Ohio St.2d 313, 383 N.E.2d 908 (1978).
       {¶ 27} Although the present case differs from most others because it
involves a privately owned plant that was previously publicly owned, that fact
does not establish entitlement to a full exemption of the plant. More familiar in
the case law are those cases in which an industrial facility seeks to exempt some
portion that is devoted to pollution control. Here, the entire plant’s purpose is
indeed pollution control. And Veolia relies on this unusual circumstance—that
the entire plant is pollution control—to seek exemption of all the property
associated with the operation of the plant, to the extent that the “primary purpose”
of the plant is industrial-waste-water treatment.
       {¶ 28} But Veolia’s argument is mistaken under the case law; even if the
plant treated only industrial waste water, trucks and general buildings would not
be exempted under the primary-purpose test. Certain trucks, for example, would
not have been acquired and used by the taxpayer but for the fact that industrial




                                         10
                                   January Term, 2016




waste water is treated at the site; on this basis, Veolia contends that, for that
reason, these trucks are entitled to exemption. As just discussed, however, the
case law rejects a “but-for” test in favor of construing the pollution-control
statutes to impose a direct functionality test.
       {¶ 29} Under the latter test, the trucks were not themselves designed,
constructed, or installed for the primary purpose of either “collecting or
conducting industrial waste to a point of disposal or treatment,” or of “reducing,
controlling, or eliminating water pollution caused by industrial waste.” As a
result, the tax commissioner was justified in “disregard[ing] the taxpayer’s
purpose” in acquiring and using the trucks.           Timken, paragraph two of the
syllabus.
  Veolia’s argument concerning the primacy of the treatment of industrial over
        residential waste water is historically and quantitatively untenable
       {¶ 30} In arguing that the treatment of industrial waste had absolute
primacy, Veolia points to Hart’s testimony that the facility was constructed and
designed to treat industrial waste water.         Although Hart’s statement that the
industrial customers are the major contributors was not contradicted by another
witness, that assertion does not establish that the principal purpose of building the
plant was to serve those customers. Indeed, that assertion cannot be seen as
credible in light of the development of the plant in the 1970s to serve the three
communities as well as to process industrial effluent. Moreover, the evidence that
industrial inflow was limited to about 17 percent refutes the assertion from a
quantitative standpoint as well.
     Veolia’s reliance on the diluting properties of residential waste water is
                                       misplaced
       {¶ 31} Veolia also invokes the phrase “Dilution is critical in the solution
to industrial pollution” in support of its position: according to Hart’s testimony,
the less polluted residential waste water actually helps clean the more heavily




                                           11
                             SUPREME COURT OF OHIO




polluted industrial waste water. As a result, Veolia argues that the residential
waste water treats the industrial pollution.
       {¶ 32} But the fact that the residential waste water helps dilute the
industrial waste water does not establish that dilution is the reason for the
presence of the former at the plant. To the contrary, the residential waste water is
also in need of treatment, and is treated, by the plant. The plant exists for the
purpose of treating both kinds of inflow, not just one or the other.
NO LEGAL ERROR HAS BEEN SHOWN WITH RESPECT TO THE CONSIDERATION
                          OF THE EVIDENCE BY THE EPA

       {¶ 33} Under its second proposition of law, Veolia contends that the tax
commissioner had a duty to transmit the documentation it submitted during the
hearing process before the tax department to the EPA for evaluation. But our
review of the record in light of the statutes leads us to reject this contention on
two grounds.      First, we do not see any provision that requires the tax
commissioner to submit supplemental evidence to the EPA, yet here the
documentation at issue was submitted after the initial application and the EPA’s
review of it. Second, Veolia failed to exercise its statutory right under R.C.
5709.22(B) to demand that the EPA participate at the hearing before the tax
department, a demand that would have inevitably exposed the EPA to the new
documentation.
       {¶ 34} It is also worth noting that the testimony of the EPA engineer at the
BTA hearing indicated that the EPA’s recommendation would not have changed
based on the newly submitted documentation, because using pollutant
concentration to determine the percentage of the exemption has not been deemed
an acceptable approach by the EPA.
                                    CONCLUSION
       {¶ 35} For the foregoing reasons, we affirm the decision of the BTA.
                                                                  Decision affirmed.




                                          12
                                  January Term, 2016




       O’CONNOR, C.J., and PFEIFER, O’DONNELL, LANZINGER, KENNEDY,
FRENCH, and O’NEILL, JJ., concur.
                              _________________
       Bailey Cavilieri, L.L.C., and Harlan S. Louis, for appellant.
       Michael DeWine, Attorney General, and Sophia Hussain, Assistant
Attorney General, for appellee.
                              _________________




                                          13
