Dolese Bros. v. STATE EX REL. COM'N, 96,267.

Decision Date21 January 2003
Docket NumberNo. 96,267.,96,267.
Citation64 P.3d 1093,2003 OK 4
PartiesDOLESE BROS. Co. and Roger M. Dolese and Bryan Arnn, as Officers of Dolese Bros. Co. and as Individuals, Protestants/Appellants, v. STATE OF OKLAHOMA ex rel. OKLAHOMA TAX COMMISSION, Respondent/Appellee.
CourtOklahoma Supreme Court

Robert D. Tomlinson and H. Craig Pitts, McKinney & Stringer, P.C., Oklahoma City, OK, and Robert O. O'Bannon, Phillips McFall McCaffrey McVay & Murrah, P.C., Oklahoma City, OK, for Appellants.

Douglas B. Allen and Marjorie L. Welch, Oklahoma Tax Commission, Oklahoma City, OK, for Appellee.

OPALA, V.C.J.

¶ 1 Three issues are pressed on appeal: (1) Does the manufacturer's exemption from sales and use tax apply to purchases of equipment and property used to remove the overburden and to place and detonate explosives at appellants' stone manufacturing plants? (2) Does the corporate appellant's method of producing sand constitute manufacturing and if so, does the process of manufacturing sand begin with the removal of the overburden? and (3) Is there record proof that appellants stand relieved of liability for sales tax on transactions that appellants characterize as exempt agricultural sales? We answer the first and second questions in the affirmative and the third in the negative.

I ANATOMY OF LITIGATION

¶ 2 The audit division of the Oklahoma Tax Commission (the Commission) conducted an audit of the books and records of Dolese Bros. Co. (Dolese or the company), an Oklahoma corporation, for the period beginning 1 January 1993 and ending 31 December 1995 (the audit period). Based on the audit, a proposed assessment was issued against Dolese and two of its officers, Roger M. Dolese and Bryan Arnn, individually and in their corporate capacity (collectively taxpayers), for additional sales tax, interest, and penalty in the amount of $271,912.98. A portion of this assessment was attributable to purchases of equipment and property by Dolese on which it paid no sales tax. The remainder was attributable to sales tax that Dolese neither collected nor remitted on certain of its sales. The Commission also proposed to assess taxpayers the sum of $148,424.73 in additional use tax, interest, and penalty on equipment and property purchased outside the state and brought into the state for Dolese's use or consumption.

¶ 3 Taxpayers timely protested the proposed assessments, contending that (a) the purchases made by Dolese on which the Commission based its assessments are exempt from sales tax under the provisions of the manufacturer's exemption, 68 O.S. Supp. 1993, § 13591, and from use tax by the provisions of 68 O.S.1991 § 1404(d)2, and (b) the sales made by Dolese on which the Commission based its assessment are exempt from sales tax by the provisions of the agricultural exemption, 68 O.S. Supp.1993, § 1358.3

¶ 4 Several months later, Dolese initiated a proceeding in the Commission to recover the sum of $1,237,368.00 in sales tax paid between 1 January 1993 and 31 December 1996 (the refund-claim period). Dolese claims the tax it seeks to recover was mistakenly paid on purchases that were exempt from taxation under the terms of the manufacturer's exemption. Dolese later reduced the refund claim to the sum of $818,489.00.

¶ 5 The protest and claim for refund were consolidated for adjudication by the Commission and heard by an administrative law judge on 30-31 October 1997. At the conclusion of the hearing, the judge agreed to keep the record open for the parties' post-hearing submission of findings, conclusions, and recommendations and for the receipt of revised exhibits delineating the amounts remaining at issue. Those exhibits show that there remains in controversy (a) the sum of $35,052 with respect to the proposed assessments of sales and use tax4 and (b) the sum of $274,683.00 with respect to Dolese's refund claim.5

¶ 6 On 29 January 2001 an administrative law judge submitted to the Commission findings of fact, conclusions of law, and a recommendation for the disposition of the proceeding.6 The judge concluded that (a) the manufacturer's exemption does not extend to equipment or property used in the removal of the overburden or in the placement and detonation of explosives at a stone manufacturing plant; (2) the production of sand does not constitute "manufacturing;" hence equipment and property used in sand production does not qualify for the manufacturer's exemption; and (3) taxpayers failed to prove that they were entitled to the agricultural exemption for the sales challenged in the audit. The administrative law judge recommended that the protest and claim for refund both be denied. These findings, conclusions, and recommendation were adopted by the Commission. Taxpayers' appeal stands retained for this court's disposition.

II STATUTORY PROVISIONS IN EFFECT AT THE TIME OF THE TRANSACTIONS IN QUESTION, AND NOT SUBSEQUENT AMENDMENTS, APPLY TO TAXPAYERS' PROTEST AND DOLESE'S REFUND CLAIM

¶ 7 The decisions to be made in this case require the application of several provisions of the Oklahoma Sales Tax Code (Sales Tax Code),7 among which are the statutory definition of manufacturing and the statute creating the manufacturer's exemption. It also rests on the application of a Commission rule outlining the documentation a seller must furnish the Commission in order to obtain relief from liability for uncollected sales tax based upon an exemption. In its order denying taxpayers' protest and Dolese's refund claim, the Commission applied amendments to the relevant statutes that did not take effect until 1 November 1998 and an amendment to the Commission rule that did not take effect until 26 June 1997.8 Both effective dates occur after the audit and refund-claim periods end. Taxpayers argue that the Commission's retroactive application of the amended statutes and rule was error. Although the Commission now appears to agree,9 we nevertheless address the issue to prevent the Commission's order that retroactively applies the amended statutes and rule from becoming the settled law of the case.10

¶ 8 As a general rule, statutes and statutory amendments will be construed as operating prospectively unless by express declaration or necessary implication from the language used the Legislature clearly demonstrates a contrary intent.11 If there is any doubt, it must be resolved against retroactivity.12 Nothing in the amendatory enactments here at issue expressly declares or necessarily implies a legislative intent that their provisions should be applied to transactions that took place prior to their effective date. The Commission erred in applying the amended statutory provisions. ¶ 9 The same rules of construction apply to administrative rules and regulations as to statutes.13 Generally, substantive administrative rules and regulations apply only to conduct that occurs after their effective date.14 The Commission has presented the court with no argument that an exception should be made for this case. Hence, the Commission rule on exemption documentation in effect at the time of the sales in question, and not the subsequently-enacted amendment, applies to taxpayers' protest.

III CRUSHED STONE IS PRODUCED IN AN INTEGRATED MANUFACTURING PROCESS THAT INCLUDES THE REMOVAL OF THE OVERBURDEN AND THE PLACEMENT AND DETONATION OF EXPLOSIVES

¶ 10 The Sales Tax Code imposes a tax on non-exempt sales of tangible and intangible personal property and on specified services.15 The Use Tax Code imposes a tax on tangible personal property purchased outside of Oklahoma if the property is used or consumed here and would have been subject to sales tax had it been purchased in this state.16 Both codes exempt certain purchases from the tax. The provisions of 68 O.S. Supp. 1993, § 1359, the manufacturer's exemption, exempt from sales tax (a) property purchased for use or consumption in the manufacturing process or that which becomes an integral part of the manufactured article [§ 1359(A)]17 and (b) machinery and equipment that is purchased by a manufacturer for use in the operation of a manufacturing plant, provided the equipment or machinery is incorporated into, and directly used in, the manufacturing process [§ 1359(C)].18 A manufacturing plant is defined as an establishment "primarily engaged in manufacturing or processing operations, and generally recognized as such."19 The terms of 68 O.S.1991, § 1404(d) provide a similar exemption from use tax.20

¶ 11 Dolese operates eight rock quarries in Oklahoma that manufacture crushed stone for use in the construction industry. In Tulsa Machinery Company v. Oklahoma Tax Commission,21 we held that the transformation of rock into crushed stone through the action of various crushers, which pulverize and process the rocks for commercial use, constitutes manufacturing.22 In that case, we fixed the point at which the process of manufacturing crushed stone commences as the action of the primary crusher.23 The question presented here is whether the removal of the overburden from, and the placement and detonation of explosives in, a rock formation — processes that take place before the action of the primary crusher — are part of the process of manufacturing crushed stone. If they are, the equipment and property used or consumed in those activities are exempt from sales and use tax.

¶ 12 Overburden removal is the first procedure performed on a rock formation from which crushed stone will be produced. The overburden is the layer of earth above the formation consisting of dirt, clay, vegetation, and other extraneous materials. The overburden must be removed in the manufacture of crushed stone in order to prevent contamination of the finished product and interference with the operation of the stone crushing machinery. Removal is accomplished by using bulldozers, front-end loaders, trucks, and chain saws.

¶ 13 After the overburden is removed, holes are drilled in the exposed rock formation and explosives are inserted. The...

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