Arizona Dept. of Revenue v. Sonee Heat Treating Corp., TX

Citation872 P.2d 682,178 Ariz. 278
Decision Date04 April 1994
Docket NumberNo. TX,TX
PartiesARIZONA DEPARTMENT OF REVENUE v. SONEE HEAT TREATING CORPORATION. 93-00010.
CourtTax Court of Arizona
OPINION

SCHAFER, Judge.

The issue in this case is whether certain testing equipment is "machinery or equipment used directly in manufacturing" and therefore, exempt from use tax under A.R.S. § 42-1409(B)(1).

Sonee Heat Treating Corporation is a specialty metal heat treating processor. Approximately two-thirds of Sonee's heat treating business is for the aerospace or other high-end commercial industries such as Karsten Manufacturing Corporation, a golf club manufacturer. Sonee's treatments and processing results in specific metallurgical changes to the metal being treated. A majority of Sonee's customers, including all of those in the aerospace industry, require Sonee to provide certification that its treatments and processing imparted the expected properties, in accordance with customer or industry specifications, to the metal being treated. In some instances, the customer specifications require Sonee to test 100% of the treated metals; sometimes sample testing is mandated. Additionally, some of the tests require that specimens be mounted for microscopic examination. The testing is performed at various stages and intervals throughout the heat treating process. In order to test the metals to ensure the required metallurgical changes have taken place, Sonee has purchased special equipment.

The Arizona Department of Revenue audited Sonee for the period March 1, 1987, through December 31, 1991, and assessed use tax and interest on eleven pieces of Sonee's testing equipment. 1 Sonee contends that the equipment is exempt from taxation under A.R.S. § 42-1409(B)(1) because it is machinery or equipment "used directly in manufacturing." The Department maintains the equipment is not "used directly in manufacturing" and therefore, is not exempt from the use tax. This Court agrees with Sonee.

ANALYSIS

There is no dispute that the eleven pieces of equipment at issue are tangible personal property, purchased at retail, and subject to the use tax unless an exemption applies. Sonee claims an exemption under A.R.S. § 42-1409(B)(1). That section exempts from use tax:

Machinery or equipment used directly in manufacturing, processing, fabricating, job printing, mining or metallurgical operations. The terms "manufacturing", [and] "processing" ... as used in this paragraph refer to and include those operations commonly understood within their ordinary meaning.

A.R.S. § 42-1409(B)(1) (emphasis added).

There is no dispute that the items involved are "machinery or equipment." The dispute is whether the items are "used directly in manufacturing." "Used directly" is not defined by the Tax Code; but the Court of Appeals focused upon its meaning in Duval Sierrita Corp. v. Arizona Dept. of Rev., 116 Ariz. 200, 568 P.2d 1098 (App.1977).

The Duval court determined the legislative intent behind the exemption created by section 42-1409:

The primary purpose of the statute here under consideration [exempting equipment used directly in mining] is to encourage the production of more valuable tangible personal property for sale, itself subject to the sales tax, by exempting from the operation of such tax the purchase of property used and consumed by the purchaser in the production of such ultimate tangible personal property, and at the same time to avoid a species of double taxation.

Duval, 116 Ariz. at 204, 568 P.2d at 1102 (quoting Bailey v. Evatt, 142 Ohio St. 616, 53 N.E.2d 812, 814 (1944)) (brackets in original). The Duval court then adopted the test to be used in Arizona for determining whether a piece of equipment is "used directly in" one of the activities listed in the statute:

In our opinion, the boundaries of the exempt operation must be drawn taking into consideration the entire operation as it is "commonly understood" which operation must, of necessity, include those items which are essential to its operation and which make it an integrated system.

Id. 116 Ariz. at 206, 568 P.2d at 1104. This test is in keeping with the statutory...

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4 cases
  • ADOR v. BLUE LINE DISTRIBUTING, INC., 1 CA-TX 01-0011.
    • United States
    • Court of Appeals of Arizona
    • April 4, 2002
    ...that define "manufacturing" and "processing" as the transformation of raw material into products. See ADOR v. Sonee Heat Treating Corp., 178 Ariz. 278, 279, 872 P.2d 682, 683 (Tax Ct.1994) (manufacturing is making raw materials by hand or machine into a product suitable for use); G.B. Inv. ......
  • RenalWest L.C. v. Arizona Dept. of Revenue, 1
    • United States
    • Court of Appeals of Arizona
    • January 21, 1997
    ...kidneys. Thus, Items 1 thorough 103 in their entirety constitute a prosthetic appliance. See also Department of Revenue v. Sonee Heat Treating, 178 Ariz. 278, 279, 872 P.2d 682, 683 (1994); Duval Sierrita Corp. v. Department of Revenue, 116 Ariz. 200, 205, 568 P.2d 1098, 1103 (App.1977) (br......
  • Associated Testing Laboratories, Inc. v. Commissioner of Revenue
    • United States
    • United States State Supreme Judicial Court of Massachusetts
    • June 10, 1999
    ...be performed by the same entity as the rest of the manufacturing process. The board's citation to Arizona Dep't of Revenue v. Sonee Heat Treating Corp., 178 Ariz. 278, 872 P.2d 682 (1994) (construing Ariz.Rev.Stat. § 42-1409[B], renumbered as § 42-5159[B] ), and Pledger v. Baldor Int'l, Inc......
  • State ex rel. Arizona Dept. of Revenue v. Phoenix Lodge No. 708, Loyal Order of Moose, Inc., TX
    • United States
    • Tax Court of Arizona
    • April 4, 1994

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