Ash Grove Cement Co. v. Neb. Dep't of Revenue

Decision Date28 August 2020
Docket NumberS-19-675.,S-19-674,Nos. S-19-669,s. S-19-669
Citation947 N.W.2d 731,306 Neb. 947
Parties ASH GROVE CEMENT COMPANY, appellee, v. NEBRASKA DEPARTMENT OF REVENUE et al., appellants. Lyman-Richey Corporation, appellant, v. Nebraska Department of Revenue et al., appellees.
CourtNebraska Supreme Court

Douglas J. Peterson, Attorney General, and L. Jay Bartel, Lincoln, for Nebraska Department of Revenue et al.

Nicholas K. Niemann, Kristopher Covi, and Matthew R. Ottemann, of McGrath, North, Mullin & Kratz, P.C., L.L.O., Omaha, for Ash Grove Cement Company and Lyman-Richey Corporation.

Heavican, C.J., Miller-Lerman, Cassel, Stacy, Funke, Papik, and Freudenberg, JJ.

Funke, J.

The Nebraska Department of Revenue; Tony Fulton, in his capacity as Tax Commissioner; and the State of Nebraska (collectively the Department) appeal the order of the district court for Lancaster County finding that the production of aggregate by Ash Grove Cement Company (Ash Grove) qualifies as "processing" under the Nebraska Advantage Act (NAA), Neb. Rev. Stat. §§ 77-5701 to 77-5735 (Reissue 2009 & Cum. Supp. 2016).

Lyman-Richey Corporation (Lyman-Richey), a wholly owned subsidiary of Ash Grove, separately appeals, challenging the court's finding that its aggregate production does not qualify as "manufacturing" under the NAA and denying its claims for overpayment of sales and use tax.

The appeals are without merit. We affirm.

BACKGROUND

In June 2012, Ash Grove and its subsidiaries applied to the Department for an agreement with the commissioner for a tier 2 project as defined under § 77-5725(1)(b). In December 2016, the commissioner and Ash Grove executed an agreement for the project, which included NAA tax incentives.

Ash Grove's project encompassed multiple locations, including administrative locations, cement manufacturing locations, maintenance locations, and concrete production locations. It is undisputed that one or more of the activities at these locations constitute qualified business under the NAA, making Ash Grove eligible for tax incentives. Under § 77-5715(1)(c), for a tier 2 project, "qualified business" means any business engaged in the "assembly, fabrication, manufacture, or processing of tangible personal property."

Because Lyman-Richey is wholly owned by Ash Grove, Ash Grove is eligible to include Lyman-Richey in its application for NAA tax incentives. The project included nine locations at which Lyman-Richey produces aggregate. Generally, aggregate consists of sand and gravel. Lyman-Richey sells aggregate products used for things like manufacturing concrete, manufacturing asphalt, masonry and mortar, road gravel, and golf course top dressing

. A significant portion of Lyman-Richey's aggregate products are used by Lyman-Richey or a related entity at its concrete production locations.

To produce aggregate, Lyman-Richey uses excavation equipment at a designated site to expose the water table, forming a lake, and then extracts raw slurry from the lake. Raw slurry is a naturally occurring mixture consisting of sand and gravel particulates, mud, waste products, and debris. Lyman-Richey uses dredging equipment to initially break down, clean, and segregate sand and gravel. The dredging equipment includes a ladder with a "cutter head," which spins and loosens the raw slurry. Pumps transport the materials through inbound pipelines to a Lyman-Richey plant for further operations.

The particulates reach classifier tanks that sort the materials into different mixtures, producing various aggregate products according to the precise "recipe" or specification of customers. The plant equipment has rotary screens, which filter the particulates by size. The raw slurry hits the screens that catch gravel with dirt and clay in it and discharge mud, rocks, or waste. Larger materials are sent through a "log washer" to turn, scrub, and break up clay and dirt particles. The sand and gravel particulates pass through a dewatering operation, which mixes the sand and gravel back together and removes mud and clay particles. Pumps return waste products through outbound pipes to the lake. Conveyors stockpile the finished sand and gravel aggregate products, which are loaded into trucks and weighed on a scale. Customers are billed according to weight.

At times, Lyman-Richey uses crushing equipment on the sand and gravel. Lyman-Richey has three crushers, which are often transported and used to crush aggregate at customer locations.

In August 2016, the Department issued Ash Grove a notice of deficiency determination, stating that the aggregate production locations are not engaged in qualified business under the NAA. Ash Grove timely protested. While the dispute between Ash Grove and the Department over the scope of the NAA project was pending, Lyman-Richey filed claims for overpayment of sales and use tax for 2011 based on Nebraska's manufacturing machinery and equipment exemption under Neb. Rev. Stat. §§ 77-2701.47(1)(a) and (b) and 77-2704.22 (Reissue 2018). The commissioner consolidated the matters and conducted an administrative hearing lasting 3 days.

COMMISSIONER'S DECISION

The commissioner first considered whether the activities at the aggregate production locations constitute "manufacturing" under the NAA. Neb. Rev. Stat. § 77-2701.46 (Reissue 2018) defines "[m]anufacturing," in part, as "an action or series of actions performed upon tangible personal property ... which results in that tangible personal property being reduced or transformed into a different state, quality, form, property, or thing. " (Emphasis supplied.) Ash Grove and Lyman-Richey argued that because they take raw slurry from the ground, clean and sort the material, and extract desirable sizes of sand and gravel, they transform and reduce the raw slurry into a different state, quality, form, property, or thing. The commissioner disagreed and concluded that the aggregate production activities cannot be considered "manufacturing." The commissioner concluded that the aggregate products are not "reduced" or "transformed," but, rather, that they remain sand and gravel before and after extraction. The commissioner found that the aggregate production activities described mining, not manufacturing. Under 316 Neb. Admin. Code, ch. 1, § 107.03C (2017), manufacturing does not include "[m]ining, quarrying, and any other activity performed in severing raw materials or other property from the ground."

The commissioner conceded that Lyman-Richey's crushing activities do constitute "manufacturing." The commissioner also found that some, but not all, of the aggregate production locations qualified for NAA tax incentives on separate grounds, under § 77-5715(1)(e) and (4). Thus, the commissioner granted in part and denied in part Ash Grove's protest.

The commissioner denied Lyman-Richey's claims for overpayment, finding that because the aggregate production locations are not engaged in "manufacturing," Lyman-Richey failed to prove entitlement to the manufacturing machinery or equipment exemption. The court found that the claims for overpayment were for 2011 and that Lyman-Richey failed to adduce evidence that crushing occurred in 2011.

DISTRICT COURT ORDER

Ash Grove and Lyman-Richey separately sought judicial review of the commissioner's final decision pursuant to the Administrative Procedure Act, Neb. Rev. Stat. §§ 84-901 to 84-920 (Reissue 2014 & Cum. Supp. 2016). Upon consolidation of the matters, the issue before the court was whether the aggregate production locations were engaged in qualified business under the NAA even if they do not crush gravel. Following a hearing, the court issued an order reversing the commissioner's determination partially excluding the aggregate production locations from the NAA project on the basis that they are not engaged in qualified business and affirming the commissioner's denial of Lyman-Richey's claims for overpayment of sales and use tax.

The court agreed with the commissioner that the aggregate is the relevant property for consideration and that the cleaning, sorting, and blending of aggregate does not qualify as "manufacturing" under the NAA. The court noted that no Nebraska appellate court has decided whether the production of aggregate products is considered "manufacturing" and that the decisions of courts in other jurisdictions are mixed, but concluded the majority of courts have found that aggregate production does not constitute "manufacturing."1 The court agreed with the commissioner that removing mud and water from the aggregate and blending particles together did not "reduce" or "transform" the aggregate, and it stated that "[t]he aggregate remained what it was before Lyman-Richey extracted it from the earth, albeit cleaner and grouped with different particles."

However, the court found that the aggregate production locations are engaged in the qualified business of "processing" under § 77-5715(1)(c) of the NAA. In doing so, the court rejected the Department's argument that the terms "manufacturing" and "processing" have the same meaning according to an energy source exemption regulation, 316 Neb. Admin. Code, ch. 1, § 089.02A (2017). The court found that the regulation was not at issue. In interpreting the plain and ordinary meaning of the word "processing" as used in § 77-5715(1)(c), the court relied upon cases from other jurisdictions to conclude that "processing" does not require the reduction or transformation of tangible personal property.2 The court defined " [p]rocess’ " as " ‘to subject to a particular method, system, or technique of preparation, handling, or other treatment designed to effect a particular result ...,’ "3 and it found that the activity at the aggregate production locations met that definition of "processing." As a result, the court found that the commissioner erred by partially excluding the nine aggregate production locations from Ash Grove's NAA project. Because the court found that the aggregate production locations were engaged in the qualified business...

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