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Legislative Notes


In May of 1978, the 112th General Assembly enacted House Bill 635, amending section 5739.02 of the Ohio Revised Code. The bill added subsection (B)(25), a "use on use" exemption from the sales tax.' The ultimate effect of this exemption is to relieve certain sales from the sales tax.

This exception is known as the "direct use" sales tax exception. Because the definition of retail sale excludes the direct use transaction, no sales tax is imposed. These two definitions appear in the definitional section of the sales tax chapter.

The general sales tax levying provision, section 5739.02, lists numerous exemptions from the sales tax. The newest exemption, added by House Bill 635, exempts from sales tax any sale to persons engaged in manufacturing … of tangible personal property for use or consumption directly in the production by manufacturing … of other tangible personal property for use or consumption directly in the production of tangible personal property for sale by manufacturing … and of material and parts for incorporation into any such tangible personal property for use or consumption in production.

This is known as the "use on use" exemption because the sales of material which will be directly used in the production of a product, which will later be used to produce a product for sale, are now exempt from any sales tax. Note the close similarity of language between the direct use exception and the use on use exemption. … There appears to be no sound justification for exempting the purchase of a machine used to produce a product for retail sale, but taxing the purchase of materials used to build a machine for the same purpose. The use on use exemption removes one artificial economic cost from the decision whether to purchase or build items used to produce products for retail sale.

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