United States: Engineering Drawings Exclusion Claim From Ohio Property Tax Fails

For decades, Ohio’s personal property tax code has excluded the cost of engineering drawings from the tax base of machinery and equipment. The exclusion works because the definition of taxable "personal property" eliminates ". . . drawings that are held for use and not for sale in the ordinary course of business." R.C. 5701.03(A). For the same number of decades, the Ohio Department of Taxation has disliked the drawings exclusion and has demanded that the taxpayer-manufacturer prove its drawings costs by producing detailed invoices from outside engineering firms, if the taxpayer has used outside engineers to design, draw, and install the new project or renovate an existing site.

The problem is that your Editor has never seen an outside engineering firm render detailed invoices with drawings costs broken down by type and class of drawing and the hourly rates of drafters, designers and engineers who drew the drawings. Thus, the Ohio Department of Taxation routinely denies the taxpayers’ claims for reduction in the base of their Schedule 2 machinery and equipment. Many taxpayers have appealed to the Board of Tax Appeals and have largely prevailed. Unfortunately, this was not the result in Anheuser-Busch Companies, Inc. v. Zaino, Case No. 2003-K-699, Ohio Board of Tax Appeals LEXIS 1483 (Sept. 24, 2004) .

During tax years 1995 and 1996, Anheuser- Busch undertook four separate construction projects at its Columbus, Ohio, brewery and used two outside engineering firms. New or modified engineering drawings were created by these firms. However, neither firm’s invoices separately stated ". . . the specific costs attributable to the creation of engineering drawings."

After the Tax Commissioner denied Anheuser- Busch’s claims for reduction in the taxable value of newly installed machinery and equipment as a result of the four projects, Anheuser-Busch appealed to the Board of Tax Appeals. The taxpayer’s main proof was introduced through an internal analysis performed by a senior manager of engineering services who had worked for Anheuser-Busch for thirty years. This witness managed internal engineers who created drawings and also oversaw projects assigned to outside engineering firms.

In general, the witness "costed" the drawings by this process:

• organizing the drawings into a particular engineering discipline (such as mechanical vs. electrical);

• attributing an average number of hours for the creation of new or revised drawings;

• estimating the cost of each drawing by using reasonable prudent hourly rates times the estimated hours for creation of each drawing.

This methodology had been used by the taxpayer in Duquesne Light Co. v. Tracy, 88 Ohio St.3d 1459; Duquesne Light Co. v. Tracy, BTA Case No. 1995-K-40, et. seq. (June 2, 2000), which decision had been vacated after settlement of the case.

In its analysis which ultimately rejected Anheuser-Busch’s proof of its drawings costs, the Board of Tax Appeals found compelling the Ohio Supreme Court’s minority opinion in United Tel. Co. of Ohio v. Tracy, 84 Ohio St.3d 506 (1999). There, the taxpayer used a statistical analysis to "cost" certain telephone line and cable property that was not used or usable in business and, thus, was not subject to taxation. The minority opinion insisted that the telephone company produce all the detailed records that existed to prove its tax claims, rather than relying on a statistical analysis.

Your Editor was counsel to the taxpayers in both Duquesne and United Tel. Co. In her humble opinion, the BTA clearly erred in using a "burden of proof" standard from a completely different kind of case. In United Tel. Co., records existed but were too voluminous and changed to often to review in less than thousands and thousands of people hours. In the engineering drawings cases, there are no records to review because outside engineering firms do not, on a national industry basis, render "hourly" invoices as do law firms, accounting firms, and other consulting firms. Moreover, the statute, R.C. 5701.03(A), does not mandate any particular way of "costing" engineering drawings.

The case was not appealed. However, the Ohio Department of Taxation should see the difference between this case and United Tel. Co. and, hopefully, correct its wrong-headed minority view of the burden Ohio property taxpayers must bear to gain the exclusion that the law allows.

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