Dept. of Revenue v. Interstate Warehousing

• Citation: 783 N.E.2d 248
• Decision Date: 14 February 2003
• Docket Number: No. 49S10-0205-TA-00266.,49S10-0205-TA-00266.
• Parties: INDIANA DEPARTMENT OF REVENUE, Appellant (Defendant below), v. INTERSTATE WAREHOUSING, INC., Appellee (Plaintiff below).
• Court: Supreme Court of Indiana

783 N.E.2d 248

INDIANA DEPARTMENT OF REVENUE, Appellant (Defendant below), v. INTERSTATE WAREHOUSING, INC., Appellee (Plaintiff below).

No. 49S10-0205-TA-00266.

Supreme Court of Indiana.

February 14, 2003.

Steve Carter, Attorney General, Nandita G. Shepherd, Deputy Attorney General, Indianapolis, IN, Attorney for Appellant.

Craig R. Finlayson, Swift & Finlayson, Fort Wayne, IN, Attorneys for Appellee.

ON PETITION FOR REVIEW

SULLIVAN, Justice.

Interstate Warehousing, Inc., uses electricity to liquify ammonia that is then used to chill warehouse space that Interstate rents to customers to store perishables. Interstate seeks to avoid the taxes due on its electricity purchases. We find that Interstate does not qualify for the statutory tax exemption it seeks because Interstate's use of the ammonia does not constitute the "production of other tangible personal property" and because Interstate is not in the "business of ... processing."

Background

Interstate Warehousing, Inc. ("Interstate"), is an Indiana corporation that operates two refrigerated warehouse facilities, located in Indianapolis and Lafayette. Interstate Warehousing, Inc. v. Indiana Dep't of State Revenue, 764 N.E.2d 313, 314 (Ind. Tax Ct.2002), review granted, 2002 Ind. LEXIS 351 (Ind. May 3, 2002). Food manufacturers and retailers of frozen agricultural goods deliver to and store frozen and agricultural goods in Interstate's warehouses. Id.

Interstate cools the air in its storage facilities by chilling ammonia to negative 20 degrees Fahrenheit using processes involving electrical energy. Id. This converts the ammonia from gas form to a liquid. Id. The liquid ammonia is then circulated through a closed loop distribution system to lower the temperature of the air in the storage rooms. Id. When the temperature of the chilled refrigerant ammonia rises to zero degrees, it is returned through the same closed loop distribution system to the compressors and condensers of the central refrigeration system. Id. Upon receiving the warmed ammonia, Interstate again cools it and recirculates it through the closed loop system. Id.

Interstate charges its customers based on the temperature that is required to be maintained in the refrigerated storage area and the quantity of perishables that the customer delivers. Id.

From 1993 to 1996, Interstate paid sales and use taxes totaling $91,566.85 for electricity purchased for its Indianapolis and Lafayette facilities. Claiming that these electricity purchases were exempt from sales and use tax, Interstate sought a refund. The Department of State Revenue ("Department") denied Interstate's refund claim. Interstate appealed and the Indiana Tax Court held that Interstate was entitled to the refund of sales and use tax it sought. Interstate Warehousing, Inc., 764 N.E.2d at 317.

Discussion

The Indiana General Assembly has imposed excise taxes, known as the "state gross retail tax" and the "use tax," on retail transactions. Ind.Code §§ 6-2.5-2-1 and 6-2.5-3-2 (1993).¹ However, the Legislature has provided an exemption from these taxes for purchases that meet the following requirements:

Transactions involving tangible personal property are exempt from the state gross retail tax if the person acquiring the property acquires it for direct consumption as a material to be consumed in the direct production of other tangible personal property in the person's business of manufacturing, processing, refining, repairing, mining, agriculture, horticulture, floriculture, or arboriculture. This exemption includes transactions involving acquisitions of tangible personal property used in commercial printing as described in IC 6-2.1-2-4.

Ind.Code § 6-2.5-5-5.1(b). "Tangible personal property" is defined to include "electrical energy." Id. at § 5.1(a). Interstate claims that the electricity it purchases is required for purposes that qualify it for this exemption and, as such, is entitled to a refund of sales and use taxes paid. It is well established that exemption statutes are strictly construed against a taxpayer so long as the intent and purpose of the Legislature is not thwarted. Indiana Dep't of State Revenue v. Fort Wayne Nat'l Corp., 649 N.E.2d 109, 113 (Ind.1995); Monarch Steel Co. v. State Bd. of Tax Comm'rs, 699 N.E.2d 809, 810 (Ind. Tax Ct.1998). As such, Interstate had the burden of establishing its entitlement to the exemption. Indiana Dep't of State Revenue v. Hardware Wholesalers, Inc., 622 N.E.2d 930, 933-34 (Ind.1993); Sony Music Entertainment, Inc. v. Indiana State Bd. of Tax Comm'rs, 681 N.E.2d 800, 801 (Ind. Tax Ct.1997),review denied, 690 N.E.2d 1182.

We hold that Interstate has failed to demonstrate that it qualifies for the exemption here in two respects: (1) we do not find that Interstate is engaged in the "production of other tangible personal property"; and (2) we do not find that Interstate is in the business of "manufacturing, processing, refining, repairing, mining, agriculture, horticulture, floriculture, or arboriculture." As the language of the statute makes clear, it must satisfy both these requirements to qualify for the exemption.

I

Beginning with the first of these two requirements—the production of other tangible personal property—we reiterate that Interstate uses electricity to cool gaseous ammonia to liquid form and then circulates the liquid through its warehouse facilities to cool the air. When the temperature of the ammonia begins to rise, it is again chilled. The ammonia stays in the refrigeration system in what the parties refer to as a "closed loop." While it is certainly true that there is some transformation of the ammonia from gas to liquid form as a consequence of the consumption of electricity, such transformation alone is not sufficient to constitute "production of other tangible personal property" under the statute. By "production of other tangible personal property," the Legislature meant that the taxpayer must use the electricity to transform the ammonia into a distinct marketable good. That does not occur here; the liquid ammonia is never marketed.

The Tax Court itself has identified the elements of "production of other tangible personal property" in a number of cases in recent years. The "distinct marketable good" requirement is illustrated by White River Envtl. P'ship v. Department of State Revenue, 694 N.E.2d 1248, 1252 (Ind. Tax Ct.1998). In that case, the taxpayer, an operator of a wastewater treatment facility, claimed the exemption at issue here for the sales and use taxes it paid on chemicals and materials consumed during its treatment process. The Tax Court correctly concluded that byproducts generated by the treatment process—clean water, ash and sludge—were not part of a production process "because the `products' of [the taxpayer's] treatment process do not satisfy any market...." Id.

The element of "transformation" is illustrated by Mechanics Laundry & Supply, Inc. v. Indiana Dep't of State Revenue, 650 N.E.2d 1223, 1231 (Ind. Tax Ct.1995), and by Faris Mailing, Inc. v. Indiana Dep't of State Revenue, 512 N.E.2d 480, 483 (Ind. Tax Ct.1987). In Mechanics Laundry, the taxpayer, an operator of a commercial laundry, claimed the exemption at issue here for the sales and use taxes it paid on cleaning supplies, water, gas, electricity, and other products consumed during the laundering of soiled textiles. The Tax Court correctly concluded that the laundering of soiled textiles did not constitute "production." Id. at 1229. The taxpayer was not engaged "in an overall process directed to the production of textiles;" instead, it was "perpetuat[ing] textiles that were produced by others." Id. at 1229-30.

In Faris Mailing, the taxpayer, a business that processed and prepared mailing items for customers, claimed the exemption at issue here for sales and use taxes it paid on labels, directories and other similar items. The Tax Court correctly concluded that the taxpayer was not engaged in the "production of other tangible personal property." According to the Tax Court, "[t]he items used in [the taxpayer's direct mail assembly] process cannot reasonably be assumed to transform the customer's package into a new product." Id.

One final example is particularly helpful. In Indianapolis Fruit Co. v. Department of State Revenue, 691 N.E.2d 1379, 1383 (Ind. Tax Ct.1998), the taxpayer, a wholesaler of fruits and vegetables, claimed that it was engaged in "production" (under different exemptions than the one at issue here) for sales and use taxes it paid on its banana and tomato ripening equipment. The Tax Court noted that the taxpayer actively ripened the bananas by introducing ethylene gas into the banana ripening booth but allowed the tomatoes to ripen by merely placing them in a tomato processing unit. Id. at 1382, 1385-86. The court held that the taxpayer was engaged in production with respect to the bananas because the taxpayer had physically and chemically transformed the bananas from unmarketable bananas to marketable ones. Id. at 1381, 1385. The Court, however, found that the taxpayer's tomato ripening process did not constitute production because the taxpayer did not trigger the ripening process but merely passively allowed it to occur. Id. at 1381, 1385-86.

The common thread in all of these cases is that where the taxpayer did not transform property into a distinct marketable product for customer consumption, the Tax Court held that the taxpayer was not engaged in the "production of other tangible personal property." We agree with the Tax Court's analysis in those cases. Applying the same analysis to the facts here, we find that Interstate's liquification of ammonia within the "closed loop" of its warehouses' refrigeration systems may meet the transformation requirement but, because the liquefied ammonia is not purchased by Interstate's Warehouse customers, the "distinct marketable good" requirement is not met. Interstate is not engaged in the "production of other...