Ohio’s manufacturing exemption is defined broadly to exempt from sales / use tax items purchased to be used in manufacturing, assembling, processing, or refining a product. Assembly is defined as “attaching or fitting together parts to form a product, but [does] not include packaging a product.” R.C. 5739.01(R). In Accel Inc. v. Testa, the Ohio Supreme Court addressed the treatment of an activity that involves both assembly and packaging, the latter of which is specifically excluded from the exemption. The Court found that Accel’s activities of compiling its customers’ toiletry products into gift sets reasonably fit into the manufacturing exemption even though they involved both “assembly” and “packaging.”
Accel did more than just package products, as the gift set creation involved three stages—a design phase, a planning phase, and an assembly phase. Accel highlighted the significance of, and value created by, the design and planning phases, which typically took two to six months before the gift sets were ready to be assembled. Although Accel’s operations included packaging – the activity clearly involved boxing, wrapping and bounding, which are packaging activities – that did not disqualify its activities from constituting “assembling” under the manufacturing exemption. The packaging was merely incidental to assembly of the gift set components which, when placed together, created a “new and differently marketable product.”
Therefore, when packaging is an incidental part of the overall purpose to create a new and more valuable product, the activity constitutes product assembly for Ohio sales and use tax purposes and, accordingly, is entitled to the manufacturing exemption. The Accel decision is consistent with the Ohio Board of Tax Appeals’ decision Express Packaging, Inc. v. Limbach, Ohio BTA Case No. 89-K-22 (September 18, 1992), where we represented the taxpayer.
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