Bunker Hill Co. v. State ex rel. State Tax Com'n
| Decision Date | 28 August 1986 |
| Docket Number | No. 15789,15789 |
| Citation | 111 Idaho 457,725 P.2d 162 |
| Parties | The BUNKER HILL COMPANY, a Delaware corporation; and Bunker Limited Partnership, an Idaho limited partnership, Plaintiffs-Respondents, v. STATE of Idaho, ex rel. STATE TAX COMMISSION, Defendant-Appellant. |
| Court | Idaho Supreme Court |
Jim Jones, Atty. Gen. and Theodore V. Spangler, Jr., Deputy Atty. Gen., Boise, for defendant-appellant.
William F. Boyd, Kellogg, James P. Keane, Coeur d'Alene, and Charles L.A. Cox, Kellogg, for plaintiffs-respondents.
1986 opinion no. 11, issued January 24, 1986, is hereby withdrawn and this opinion is substituted therefor.
ON DENIAL OF PETITION FOR REHEARING
This appeal raises the issue as to whether certain purchases of tangible personal property by Bunker Hill are subject to the payment of a 3% tax under the Idaho Sales Tax Act, Title 63, Chapter 36 of the Idaho Code. Specifically at issue are four categories of purchases: (1) materials utilized in the construction of two steel-reinforced concrete smoke stacks, 610 and 715 feet in height; (2) ties, spikes, plates and rails used to construct an intraplant railway (surface rail); (3) oxygen and acetylene welding gases consumed in the repair of production equipment; and (4) safety clothing and equipment issued to employees.
An audit of the Bunker Hill Company conducted by the State Tax Commission audit staff resulted in the issuance of a notice of deficiency determination for the period of January 1, 1975 through December 31, 1977. At the conclusion of the administrative proceedings, the Tax Commission ruled that there was due $149,936 in unpaid taxes, interest of $70,844, and penalty of $7,497, for a total of $228,277. Bunker Hill filed a timely complaint in district court which resulted in a decision that none of the taxes were due, the court holding that the purchases were exempt under I.C. § 63-3622(d). This appeal followed. We discuss the appropriate treatment of each of the four categories of purchases in turn.
During the audit period, Bunker Hill constructed two tall stacks, one for its zinc plant and the other for its lead smelter, which were affixed to the real estate on large foundations. The stacks were over 610 feet and 715 feet tall, respectively. Construction was done with a continuous pour of concrete in a "slip form" that rose vertically as the concrete in the form set sufficiently to sustain weight, the materials utilized being primarily reinforcing steel bars and the ingredients of the concrete. Bunker Hill provided its suppliers with exemption certificates and, thus, the sales tax was not collected by the vendors of the tangible personal property.
I.C. § 63-3619 (1975-77) provides in pertinent part:
An excise tax is hereby imposed upon each sale at retail at the rate of three per centum (3%) of the sales price of all property subject to taxation under this act....
The terms "retail sale" and "sale at retail" are defined in I.C. § 63-3609 (1975-77) which reads in pertinent part:
63-3609. Retail sale--Sale at retail.--The terms "retail sale" or "sale at retail" means a sale of tangible personal property for any purpose other than resale of that property in the regular course of business or lease or rental of that property in the regular course of business where such rental or lease is taxable under section 63-3612(h) of this act.
(a) All persons engaged in constructing, altering, repairing or improving real estate, which includes construction of prefabricated buildings as defined in section 63-3606A, are consumers of the material used by them; all sales to or use by such persons of tangible personal property are taxable whether or not such persons intend resale of the improved property.
Bunker Hill's purchases of the materials for the tall stacks clearly come within the provisions of I.C. § 63-3609(a), since the stacks were real estate and that Bunker Bunker Hill urged before the trial court, and urges before this Court, that this transaction is subject to the so-called "production exemption" contained in I.C. § 63-3622(d) (1975-77) 1, arguing that the stacks have become production equipment which is used to produce the products at the mine and smelter. Such is a novel, and rather tortured, interpretation of the act. The Sales Tax Act imposes a tax only on tangible personal property, and the exemptions are exemptions of tangible personal property which would otherwise be subject to the tax. The stacks as such are real property and therefore are not in the class of "tangible personal property" exempted in I.C. § 63-3622(d). In other words, the literal language of the production exemption is that it applies to tangible personal property used or consumed in the production process. Thus, we reject the novel argument that the "use" of the stacks is the taxable event, rather than the purchase of the materials which went into the construction of the stacks, since the purchases clearly are the taxable event involved under the plain wording of I.C. § 63-3609.
[111 Idaho 459] Hill was, by definition, the consumer of the material used to construct the stacks. Bunker Hill was, then, required to pay the sales tax at the time it purchased the materials.
On petition for rehearing, Bunker Hill asserts that we have misconstrued the statute by " ... choos[ing] a different date to determine the exemption than the date of the taxable event." That is, that the date of the purchase of the materials (cement, rebar, etc.) from which the stacks were built, is the taxable event and that this court used the time of status as completed stacks to determine the applicability of the exemption. Such a characterization of the analysis is incorrect. We apply the date of purchase of the materials for both analyses. On the date of purchase, the materials were not being used to produce anything under the exemption statute--they were purchased for incorporation into real estate.
The rationale for imposing the sales tax on tangible personal property used to construct or improve real estate is well stated in the report of the House Revenue and Taxation Committee on House Bill 222, which implemented the tax. In referring to I.C. § 63-3609, the report stated:
Section 9(a) is intended to ensure that there will be a tax imposed on the sale of building materials and other items that will be used to erect buildings or otherwise improve real property. The process of construction is regarded as a service, and sale of materials to the contractor is taxed without regard to resale intentions. This insures that a tax will be collected. Since the sale of the building or other real property will not be taxed, sale of Accordingly, we must reverse that portion of the ruling of the trial court which exempts from taxation the purchase of the materials and supplies later incorporated into the tall stacks.
[111 Idaho 460] the materials which are used to erect or improve it must be taxed if a tax is to be imposed on consumption of this property.
Bunker Hill, in its petition for rehearing, correctly notes that our remand should permit the trial court to rule on the applicability of the pollution control exemption of I.C. § 63-3622(e) 2 to a portion of the materials incorporated into the tall stacks. The trial court memorandum opinion noted:
The parties agreed that the cost of materials incorporated into the stacks is the sum of $4,390,392. A portion of these materials were [sic] purchased after July 1, 1977, the effective date of a statutory exemption commonly called the "pollution exemption." The cost of the materials after July 1, 1977, was $1,231,352.
Bunker Hill's request is well taken. Accordingly, on remand, the trial court will determine what portion of the $1,231,352 expenditure, if any, qualifies for such exemption.
Bunker Hill owns and operates a surface railroad system at its facility consisting of 8.4 miles of track. One mile of that track is used for shipping the finished product which is ready for marketing either directly to market or to storage areas awaiting marketing. It is the tax on the materials utilized to construct the remaining 7.4 miles that is in dispute, those materials having a value of $2,095. Since Bunker Hill purchased the track, spikes, and ties for "constructing, altering, repairing, or improving real estate," the purchase of those materials was subject to tax under I.C. § 63-3609, keeping with the analysis utilized with respect to the tall stacks.
The oxygen and acetylene purchases at issue involve purchases totaling $38,059, the gases having been utilized in the welding and repair of production process equipment. Again, Bunker Hill seeks to exempt these purchases under the production exemption of I.C. § 63-3622(d).
The Tax Commission asserted a tax on the oxygen and acetylene used to perform repair work on production equipment since the welding work does not directly contribute to the producing of tangible personal property for resale. The production exemption statute specifically excludes from the production exemption equipment which is merely used to "maintain" production equipment. It reads:
... This exemption does not include ... materials and supplies used in a manner that is incidental to the manufacturing ... operations such as maintenance and janitorial equipment and supplies....
The district court believed that the legislature intended to make a distinction between "maintenance" and "repair," concluding in its memorandum opinion:
It does appear that the legislature intended to draw a line of distinction between maintenance and repair. In any given case or process this is going to be a very difficult line of demarcation. Some examples would seem to be easily distinguished such as oil or grease regularly put upon machinery bearings to prevent their deterioration which would clearly be maintenance. On the other...
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