[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as E.
Mfg. Corp. v. Testa, Slip Opinion No. 2018-Ohio-2923.]




                                         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. 2018-OHIO-2923
EAST MANUFACTURING CORPORATION, APPELLANT AND CROSS-APPELLEE, v.
            TESTA, TAX COMMR., APPELLEE AND CROSS-APPELLANT.
  [Until this opinion appears in the Ohio Official Reports advance sheets, it
  may be cited as E. Mfg. Corp. v. Testa, Slip Opinion No. 2018-Ohio-2923.]
Use tax—Board of Tax Appeals correctly determined that manufacturer does not
        qualify for exemption from use tax under R.C. 5739.011(C)(5)’s exception
        for total environmental regulation of a “special and limited area” of the
        facility or for either R.C. 5739.011(B)(4)’s general exemption for items
        used in a manufacturing operation or R.C. 5739.011(B)(8)’s specific
        exemption for gas used in a manufacturing operation—Board of Tax
        Appeals’ decision affirmed.
      (No. 2017-0666—Submitted April 24, 2018—Decided July 26, 2018.)
   APPEAL and CROSS-APPEAL from the Board of Tax Appeals, No. 2015-2111.
                                ____________________
                            SUPREME COURT OF OHIO




       DEGENARO, J.
       {¶ 1} In this direct appeal, we consider whether the Board of Tax Appeals
(“BTA”) correctly upheld a use-tax assessment on the natural-gas purchases of
appellant and cross-appellee, East Manufacturing Corporation (“East”).        East
contends that the ambient heat provided by the natural gas was necessary for its
manufacturing process and that the BTA erred by not granting an exemption under
R.C. 5739.011(B)(4), (B)(8), or (C)(5). We disagree and affirm the decision of the
BTA.
                    Relevant Facts and Procedural History
       {¶ 2} East manufactures custom aluminum truck trailers. The trailers are
fabricated in six buildings, some of which are devoted to specialized steps in the
manufacturing process. Only Building A has interior walls; administrative offices
are separated by a wall from manufacturing areas. The other five buildings have
open internal spaces to better accommodate the large truck attachments being
fabricated and facilitate movement from station to station during the manufacturing
process.
       {¶ 3} Appellee and cross-appellant, tax commissioner, audited East’s
purchases for the period January 1, 2003, through December 31, 2006. Neither of
East’s two natural-gas suppliers collected use tax during this period. On February
27, 2009, the commissioner issued a use-tax assessment for East’s natural-gas
purchases during the audit period, exempting only the portion of natural gas used
in painting operations, which took place in Building D, and welding systems. The
remaining natural gas was deemed to have been used to heat the plant’s six
buildings, which together total roughly 382,240 square feet. This portion of East’s
natural gas, the commissioner determined, was taxable. East appealed to the BTA.
       {¶ 4} At the hearing before the BTA, East conceded that the natural gas
used to heat the administrative areas in Building A, which comprised 8.11 percent
of the assessed natural gas, was nonexempt, but it contended that the remaining




                                        2
                                     January Term, 2018




91.89 percent of the assessed natural gas was exempt because maintaining the
temperature at 50 degrees Fahrenheit or higher in the plant’s buildings was essential
to its manufacturing process. Emphasizing the extensive use of welding in its
manufacturing process, East’s manager for research and development testified
about the high specifications the plant adhered to and their importance to the
solidity of the welds, and he noted that welding at temperatures of 50 degrees or
higher prevents condensation from accumulating on the aluminum and infecting
the welds, steadies the hands of the welders, and is important in bending
aluminum.1
         {¶ 5} Citing the manual that East uses as a guide for aluminum welding, the
tax commissioner countered in the BTA that condensation arises as a result of three
interacting factors: ambient air temperature, relative humidity, and temperature of
the metal to be processed. According to the manual (which was admitted into
evidence at the BTA hearing), depending on the relative humidity, a difference of
a certain number of degrees between the ambient air temperature and the
temperature of the aluminum may result in condensation. But, so long as the
aluminum temperature matches the ambient air temperature, condensation will not
occur at any humidity level. The commissioner contends that this evidence negated
East’s argument and showed that no particular ambient temperature—such as 50
degrees—is required by industrial needs.
         {¶ 6} The BTA affirmed the tax commissioner’s assessment on the portion
of the natural gas that East used to heat the plant. The BTA held that “East has
failed to establish how the affected manufacturing area, which consists of all or
portions of all of the buildings within the facility, could qualify as a ‘special and



1
  East also contends that maintaining a temperature of at least 50 degrees is necessary for painting
steel, which it performs in Building D. The tax commissioner argues that because East mentioned
only welding in its petition for reassessment and notice of appeal to the BTA, East has waived the
argument. Because of our disposition of the appeal, we will not address this issue.




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limited area’ ” as required for exemption under R.C. 5739.011(C)(5). BTA No.
2015-2111, 2017 WL 1443845, *3 (Apr. 17, 2017).
        {¶ 7} With respect to East’s claim that the gas was generally “used during
the manufacturing operation” under R.C. 5739.011(B)(4) and also qualified under
the more specific exemption for gas “used in the manufacturing operation” under
R.C. 5739.011(B)(8), the BTA concluded that the heating constituted a type of
“quality control function” rather than a necessity for the manufacturing operation.
2017 WL 1443845 at *4. The BTA elaborated by stating that instead of being
“necessary for the * * * continuation of the manufacturing process” under R.C.
5739.011(B)(4), “some of the issues raised by failure to regulate temperature in the
manufacturing areas were cosmetic in nature, e.g., trailers were not as ‘shiny’ and
therefore not as ‘attractive,’ ” a consideration that brought East’s products “ ‘within
[a] margin of acceptable quality.’ ” 2017 WL 1443845 at *4, quoting the hearing
transcript.
        {¶ 8} The BTA denied East’s claim for exemption in its entirety. East has
appealed, and the tax commissioner has cross-appealed.
                         “Thing Transferred” Exemption
        {¶ 9} We review BTA decisions to determine whether they are reasonable
and lawful. R.C. 5717.04. Factual findings will be affirmed if supported by reliable
and probative evidence, while legal issues will be reviewed de novo. Accel, Inc. v.
Testa, 152 Ohio St.3d 262, 2017-Ohio-8798, 95 N.E.3d 345, ¶ 11, 16. Although
the BTA recited East’s contentions that temperature maintenance was essential to
its ability to perform welding and painting operations, the BTA made no finding
that those assertions were correct. See id. at ¶ 35-37 (BTA’s recitation of taxpayer’s
argument did not constitute a finding by the BTA that that argument was correct).
Instead, the BTA focused on how the relevant statutes and administrative rules
should be construed and applied assuming that East’s factual contentions were true.
Thus, this case primarily presents a question of law.




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                                 January Term, 2018




        {¶ 10} Under the sales- and use-tax statutes, every sale or use of tangible
personal property is presumed to be taxable. R.C. 5739.02(C) (“[A]ll sales made
in this state are subject to the [sales] tax until the contrary is established”); R.C.
5741.02(G) (“[I]t shall be presumed that any use * * * of tangible personal property
in this state is subject to the [use] tax until the contrary is established”). Thus, East
bears the burden of proving that it is entitled to an exemption under R.C. 5739.011.
        {¶ 11} R.C. 5739.02(B)(42)(g) states that the use tax does not apply “where
the purpose of the purchaser is * * * [t]o 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.”
        {¶ 12} Throughout the proceedings before the tax commissioner, the BTA,
and this court, East has claimed that it is entitled to the R.C. 5739.011 “thing
transferred” exemption under three theories. First, it claims that the natural gas is
“tangible personal property used during the manufacturing operation that
control[s], physically support[s], produce[s] power for, lubricate[s], or [is]
otherwise necessary for the functioning of production machinery and equipment
and the continuation of the manufacturing operation,” R.C. 5739.011(B)(4); Ohio
Adm.Code 5703-9-21(C)(4); second, that it is “gas * * * used in the manufacturing
operation,” R.C. 5739.011(B)(8); Ohio Adm.Code 5703-9-21(C)(8); and third, that
it is “tangible personal property that totally regulates the environment in a special
and limited area of the manufacturing facility where the regulation is essential for
production to occur,” R.C. 5739.011(C)(5), an exception that applies to a “clean
room or paint booth,” Ohio Adm.Code 5703-9-21(D)(6).
        {¶ 13} East’s first two propositions of law assert that it is entitled to an
exemption because the gas is used for regulating the environment in a special and
limited area under R.C. 5739.011(C)(5). The statute provides that for purposes of
R.C. 5739.02(B)(42)(g), the “thing transferred” does not include




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                              SUPREME COURT OF OHIO




       [m]achinery, equipment and other tangible personal property used
       for ventilation, dust or gas collection, humidity or temperature
       regulation, or similar environmental control, except machinery,
       equipment, and other tangible personal property that totally
       regulates the environment in a special and limited area of the
       manufacturing facility where the regulation is essential for
       production to occur.


(Emphasis added.) R.C. 5739.011(C)(5). Thus, under R.C. 5739.011(C)(5), gas
used for temperature regulation generally is not exempt from taxation unless the
gas qualifies under the “special and limited area” exception.
       {¶ 14} Ohio Adm.Code 5703-9-21(D)(6) elaborates as follows:


               All equipment and supplies that monitor, regulate, or
       improve the environmental conditions in the manufacturing facility
       are taxable. This includes all lighting, heaters, air conditioning
       equipment, fans, heat exhaust equipment, air make up equipment,
       dust control or collection equipment, and gas detection, collection,
       and exhaust equipment. This should not be read to change the
       traditional classification of real and personal property.
               The only exception to the taxing of these items is equipment
       which totally regulates the environment in a special and limited area
       of the facility, such as a clean room or paint booth, where such total
       regulation is essential for production to occur. Even in such a
       special area, things that do not provide essential environmental
       regulation, such as safety or communication equipment, are taxable.
               See examples 7, 47, 48, and 49.




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                                January Term, 2018




(Emphasis added.)
       {¶ 15} To qualify for an exemption under this exception, East must satisfy
a three-prong test: “(1) the * * * tangible personal property must be used to totally
regulate the environment, (2) the regulation must be in a special and limited area of
the manufacturing facility, and (3) the regulation must be essential for production
to occur.” Ellwood Engineered Castings Co. v. Zaino, 98 Ohio St.3d 424, 2003-
Ohio-1812, 786 N.E.2d 458, ¶ 36. The failure to satisfy any prong of the test defeats
the exemption claim.
       {¶ 16} The meaning of a “clean room or paint booth” is explained by
Example 7, which discusses the process of applying coating on specialized paper
for full-color photocopying. The process must be done in a dust- and pollution-free
environment separated from the rest of the plant. The example further explains:


       Three of the walls and the ceiling are free standing and not part of
       the walls and ceiling of the building itself; the fourth wall, however,
       is a section of a wall of the larger structure. Employees can only
       enter the clean room through two airlocks, which prevent dirty air
       from entering. All air is filtered and regulated as to temperature and
       humidity by heat pumps, electric heaters, dehumidifiers, and
       exhaust fans that serve only the clean room and maintain a positive
       air pressure in the room. This equipment is automatically controlled
       by a small computer using data from air monitoring sensors in the
       room. Employees must wear disposable paper coveralls, overshoes,
       and caps. The room has an intercom to minimize personnel traffic
       in and out of the room.       Lighting in the room is by normal
       fluorescent fixtures attached to the ceiling.


Ohio Adm.Code 5703-9-21, Example 7.




                                          7
                             SUPREME COURT OF OHIO




       {¶ 17} Under this scenario, “[s]ince the clean room provides environmental
regulation in a special and limited area, and such regulation is essential for the
manufacturing to occur, it is not taxable.” Id. Conversely, Example 48 posits a
candy-cane maker that needs to regulate temperature and humidity to fabricate the
product, but no exemption is available because the regulation occurs throughout the
factory. Id., Example 48.
       {¶ 18} The BTA concluded that because East’s entire plant is heated, the
temperature control is not focused on a “special and limited area.” 2017 WL
1443845 at *3. The BTA then deemed it unnecessary to consider the other prongs
of the test for applying the “special and limited area” exception because East’s
failure to satisfy the second prong defeated its exemption claim.
       {¶ 19} East advances two contentions in challenging the BTA’s conclusion.
First, it argues that its natural gas heats a “special and limited area” inasmuch as
only its buildings—not all the contiguous property under East’s ownership that is
part of the facility—are heated. But equating “special and limited area” with
“indoors” would result in the exception swallowing the general rule that the “thing
transferred” for temperature regulation is taxable and would defeat the restrictive
effect of the statutory language. Second, East equates “subareas” in the buildings
where the manufacturing occurs with “special and limited area.” This argument
fails because the heating permeates the entirety of the buildings, even if it is most
important at particular places within the plant.       Ohio Adm.Code 5703-9-21
describes a clean room as an area that is physically separated from the rest of the
facility and where the environmental conditions are more fully regulated than in
other areas.
       {¶ 20} The stated purpose of R.C. 5739.011(C)(5) is to establish that the
concept of “use[] in the manufacturing operation” under R.C. 5739.011(B) does not
extend generally to the function of regulating the environment within which
manufacturing occurs. See Ellwood Engineered Castings, 98 Ohio St.3d 424,




                                         8
                                January Term, 2018




2003-Ohio-1812, 786 N.E.2d 458, at ¶ 35 (the “first part” of R.C. 5739.011(C)(5)
“specifically exclude[s] as a ‘thing transferred’ * * * tangible personal property
used for * * * environmental control”). And the “special and limited area”
exception of R.C. 5739.011(C)(5) evinces the legislative decision to allow
exemption in a very limited circumstance. Ellwood Engineered Castings at ¶ 35
(the “second part” of R.C. 5739.011(C)(5) “provide[s] a limited exception from the
general exclusion”); see Ohio Adm.Code 5703-9-21(D)(6).             The legislative
creation of a narrow scope of exemption for particular items or transactions should
not be circumvented by an expansive interpretation of other, more general tax
exemptions. See Columbus City School Dist. Bd. of Edn. v. Testa, 130 Ohio St.3d
344, 2011-Ohio-5534, 958 N.E.2d 557, ¶ 28; Innkeeper Ministries, Inc. v. Testa,
148 Ohio St.3d 43, 2016-Ohio-5104, 68 N.E.3d 765, ¶ 19.
       {¶ 21} Here, the only way the disputed 91.89 percent of the assessed natural
gas could arguably contribute to the manufacturing process is by regulating the
environment of East’s entire plant. Thus, while East in essence likens its facility’s
configuration and use of the natural gas to the color-paper manufacturer described
in Ohio Adm.Code 5703-9-21, Example 7, the record demonstrates that it is the
equivalent of the candy-cane manufacturer described in Example 48 of that
provision.
       {¶ 22} East’s argument in support of a more expansive interpretation of the
“special and limited area” exception is contrary to the strict construction we must
apply when considering exemption statutes and regulations generally. Personal
property used to regulate temperature is specifically excluded from exemption by
R.C. 5739.011(C)(5), and because of that exclusion, it cannot be deemed to be
“used in the manufacturing operation” for purposes of applying R.C. 5739.011(B).
That is the very function of R.C. 5739.011(C)(5) in the legislative scheme. The
statute in clear terms requires the distinction between East’s use of natural gas
directly to operate welding and painting equipment, which was exempted, and its




                                         9
                             SUPREME COURT OF OHIO




use of gas to control the environment within which the manufacturing operation
occurs, which R.C. 5739.011(C)(5) excludes from exemption. Thus, the BTA’s
rejection of East’s “clean room” arguments under R.C. 5739.011(C)(5) was
reasonable and lawful.
        {¶ 23} We turn next to East’s third proposition of law, which asserts that its
purchase of natural gas is exempt because it qualifies as a “thing transferred” under
R.C. 5739.011(B)(4), which generally exempts items used in a manufacturing
operation, and under R.C. 5739.011(B)(8), which specifically exempts gas that is
used in a manufacturing operation.
        {¶ 24} As noted, because heating East’s buildings constitutes “temperature
regulation,” it falls within the items excluded from the definition of “thing
transferred” for use in manufacturing under R.C. 5739.011(C)(5). As a result, gas
used for heating cannot also qualify as being “used in the manufacturing operation”
for purposes of R.C. 5739.011(B)(4) and (B)(8). R.C. 5739.011(C)(5) is a more
specific provision that excludes from exempt status those items that are used for
temperature control, even if those items would otherwise fall under the more
general exempting language of R.C. 5739.011(B).
        {¶ 25} This reading relies on the “familiar rule of statutory construction that
when there is a conflict between a general provision and a more specific provision
in a statute, the specific provision controls.” MacDonald v. Cleveland Income Tax
Bd. of Rev., 151 Ohio St.3d 114, 2017-Ohio-7798, 86 N.E.3d 314, ¶ 27, citing
Scalia & Garner, Reading Law: The Interpretation of Legal Texts 183 (2012) and
R.C. 1.51. Just as the more specific exclusion of pension income controlled over a
more general definition of taxable income in MacDonald, the more specific
exclusion of temperature regulation from the manufacturing exemption controls
here.
        {¶ 26} East directs our attention to Q3 Stamped Metal, Inc. v. Zaino, 92
Ohio St.3d 493, 751 N.E.2d 1001 (2001), but that case is inapposite. In Q3, we




                                          10
                                January Term, 2018




affirmed a finding by the BTA that goggles worn by welders while they worked
were exempt from the use tax because the goggles were “used in the manufacturing
operation” pursuant to R.C. 5739.011(B)(4), despite the fact that the goggles also
functioned as safety equipment, which is explicitly excluded from exemption by
R.C. 5739.011(C)(6).
       {¶ 27} Here, there is only one function that the assessed natural gas
performs: controlling the manufacturing environment by heating it, a function that
is fully removed from the division (B) exemptions pursuant to R.C.
5739.011(C)(5). By contrast, the goggles in Q3 performed two distinct functions:
protecting the welder’s eyes—a safety, nonexempt function—and allowing the
welder to see and perform welding tasks, thus being used in the manufacturing
operation, an exempt function. Id. at 496. Here, East argues only that the heating
function itself, which is nonexempt, is important to manufacturing. Q3 is therefore
inapposite.
       {¶ 28} Although the BTA rejected East’s claims under R.C. 5739.011(B)
on different grounds than we apply here, the tax commissioner’s cross-appeal
explicitly places the statutory-construction point—namely, that the more specific
statutory provision in R.C. 5739.011(C)(5) controls over the more general statutory
provisions described in R.C. 5739.011(B)(4) and (B)(8)—at issue. See Internatl.
Paper Co. v. Testa, 150 Ohio St.3d 348, 2016-Ohio-7454, 81 N.E.3d 1225, ¶ 30-
34 (discussing circumstances under which a protective cross-appeal must be filed
in order to preserve an issue). We are free to consider that point first, and because
it is dispositive, we need not consider the validity of the other grounds relied on by
the BTA when it rejected East’s claims under R.C. 5739.011(B), especially because
the failure to satisfy any of the three prongs of the Ellwood test defeats the
exemption claim. See Ellwood Engineered Castings, 98 Ohio St.3d 424, 2003-
Ohio-1812, 786 N.E.2d 458, at ¶ 36.




                                         11
                              SUPREME COURT OF OHIO




          {¶ 29} Thus, the BTA’s rejection of East’s arguments under R.C.
5739.011(B)(4) and (B)(8) was reasonable and lawful for the reasons we articulate
here rather than the finding relied upon by the BTA.
          {¶ 30} In light of our disposition of East’s propositions of law, the
arguments raised in the tax commissioner’s six propositions of law to defend the
decision of the BTA are rendered moot.
                                     Conclusion
          {¶ 31} The BTA’s decision is reasonable and lawful. The BTA correctly
determined that East does not qualify for an exemption from the use tax under R.C.
5739.011(C)(5)’s exception for total environmental regulation of a “special and
limited area” of the facility. The BTA also correctly determined that East does not
qualify for R.C. 5739.011(B)(4)’s general exemption for items used in a
manufacturing operation or for R.C. 5739.011(B)(8)’s specific exemption for gas
used in a manufacturing operation, although for the reasons stated herein rather than
the BTA’s rationale. For the foregoing reasons, we affirm the decision of the BTA.
                                                                 Decision affirmed.
          O’CONNOR, C.J., and O’DONNELL, KENNEDY, FRENCH, and DEWINE, JJ.,
concur.
          FISCHER, J., concurs in judgment only.
                                _________________
          Buckingham, Doolittle & Burroughs, L.L.C., Steven A. Dimengo, Matthew
R. Duncan, and Richard B. Fry III, for appellant and cross-appellee.
          Michael DeWine, Attorney General, and Sophia Hussain, Assistant
Attorney General, for appellee and cross-appellant.
                                _________________




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