Foster v. State Tax Assessor

• Decision Date: 07 August 1998
• Citation: 716 A.2d 1012
• Parties: Robert H. FOSTER et al. v. STATE TAX ASSESSOR.
• Court: Maine Supreme Court

Page 1012

716 A.2d 1012

1998 ME 205

Robert H. FOSTER et al. v. STATE TAX ASSESSOR.

Supreme Judicial Court of Maine.

Argued Sept. 3, 1997.

Decided Aug. 7, 1998.

Brent A. Singer (orally), Rudman & Winchell, L.L.C., Bangor, for plaintiffs.

Andrew Ketterer, Attorney General, Thomas A. Knowlton (orally), Clifford B. Olson, Asst. Attys. Gen., Augusta, for defendant.

James G. Good, Jonathan A. Block, Pierce Atwood, Portland, for amicus curiae Maine Chamber & Business Alliance.

Before WATHEN, C.J., and ROBERTS, CLIFFORD, DANA, and LIPEZ ^*, JJ.

CLIFFORD, Justice.

¶1 Robert H. and Caroline M. Foster and Amr and Mary Ismail appeal from the judgment entered in the Superior Court (Kennebec County, Alexander, J.) affirming the State Tax Assessor's denial of certain income tax credits pursuant to the investment tax credit statute, 36 M.R.S.A. § 5219-E (Supp.1996). ¹ They contend that the court erred by concluding that a wastewater pre-treatment facility did not constitute machinery or equipment eligible for the investment tax credit and by concluding that the facility was not used directly in the production of tangible personal property. Because the facility was not used in the production of tangible personal property within the meaning of section 5219-E(1)(C)(2), we affirm the judgment.

¶2 The following facts are undisputed. Robert Foster and Amr Ismail are shareholders of Maine Wild Blueberry Company (Company). The Company owns and operates a plant in Machias where fresh fruit is processed into individually quick frozen fruit, which is further processed into various products, including laser-scanned berries, frozen fruit puree, canned fruit, and infused, air-dried fruit. The Company uses water to wash, convey, separate, rinse and freeze the berries; to process the frozen fruit; to remove frost from the freezing tunnels daily; and to maintain compliance with sanitation standards set by FDA regulations.

¶3 One of the methods by which the Company disposes of wastewater is through discharge into the Town of Machias sewer system. By late 1990, the Company's operations had tripled and the amount of wastewater generated had grown proportionately. As a result, the Town became concerned that its sewer system could not handle the volume of wastewater discharged by the Company. In 1991, the Town and the Company entered into an agreement imposing restrictions on, inter alia, the daily gallonage and the amount of solids that the Company could discharge into the Town's sewer system. The Company was required to pay surcharges if it violated the agreement.

¶4 To comply with the restrictions in the agreement, the Company hired engineers and contractors to design and construct a wastewater pre-treatment facility on real estate owned by the Company. The purpose of the facility was to "reduce the amount of sugars and other organic material in the wastewater by screening, filtering, and chemically and organically treating the water before it entered [the Town's] sewer system." By the end of 1991, the facility was substantially completed. It consists of two partially underground concrete basins that collect wastewater, six aerators on floating beds in the basins, and an adjacent concrete block and brick building containing the control components, various piping, electrical wiring and fixtures. The aerators are held in place by guide cables affixed to the sides of the basins. Wastewater is constantly conveyed, via floor drains and pipes, to the facility to allow the continual functioning of the production processes described above. A roto-screening device removes solids such as whole berries from the water before it enters clarification tanks, which are located in the concrete block and brick building adjacent to the bins. While the water is in the clarification tanks, additional pollutants settle to the bottom. The overflow is then discharged into two 250,000 gallon aeration basins where microorganisms digest the remaining biodegradable solids. The sludge settles to the bottom and the clarified supernate rises to the top, is siphoned off, and sent to the Town's wastewater treatment facility.

¶5 On several occasions, the Company exceeded the daily limits in the discharge agreement and incurred surcharges totalling more than $100,000. In 1992, the Company paid contractors to make enhancements to the facility. The parties stipulated that these enhancements were necessitated by design deficiencies in the facility which resulted in the surcharges.

¶6 The Fosters and the Ismails filed joint Maine income tax returns for 1992 and 1993 and claimed investment tax credits with respect to the facility and the 1992 enhancements. ² The Bureau of Taxation disallowed the credits. On the taxpayers' petitions for administrative reconsideration, see 36 M.R.S.A. § 151 (Supp.1997), the Assessor upheld the disallowances. Pursuant to 5 M.R.S.A. § 11002 (1989), 36 M.R.S.A. § 151 and M.R. Civ. P. 80C, the taxpayers filed a petition for review in the Superior Court. The case was submitted for trial on a stipulated record. The court concluded "that the term 'machinery and equipment' cannot include real estate and fixtures that are part of the real estate," and held that the facility and the 1992 enhancements were items of real estate ineligible for the investment tax credits. Alternatively, the court concluded that:

"directly and primarily" used in production of goods to be sold for final use means machinery and equipment actually used to make the product for sale. Excluded from this interpretation would be machinery, equipment or facilities used to receive, process, transport and store raw material--here blueberries--before they are turned into a product for sale.

Also excluded would be the pretreatment facility--to the extent it is not real estate--because it is only indirectly involved in production. It did not even exist for the first seven years of production. Further, the record indicates that much of the use of the pretreatment facility results from the cleaning, storage, and preparation of raw materials for storage or production before the direct production processing occurs.

From a judgment in favor of the Assessor, the taxpayers appealed.

¶7 Judicial review of decisions by the Assessor is governed by 36 M.R.S.A. § 151, which provides that the Superior Court "shall conduct a de novo hearing and make a de novo determination of the merits of the case." We therefore review the court's interpretation of the statute directly. See Apex Custom Lease Corp. v. State Tax Assessor, 677 A.2d 530, 532 (Me.1996). "The meaning and construction of statutory language presents a question of law." Community Telecomm. Corp. v. State Tax Assessor, 684 A.2d 424, 426 (Me.1996). In the interpretation of a statute, we seek to effectuate the intent of the Legislature, which is ordinarily gleaned from the plain language of the statute. Interstate Food Processing Corp. v. Town of Fort Fairfield, 1997 ME 193, p 4, 698 A.2d 1074, 1075.

¶8 We recently affirmed the "well settled principle that 'taxation is the rule and tax exemption is the exception[.]' " SST & S, Inc. v. State Tax Assessor, 675 A.2d 518, 521 (Me.1996) (quoting Connecticut Bank & Trust Co. v. City of Westbrook, 477 A.2d 269, 271 (Me.1984)). This rule requires a taxpayer seeking an exemption to establish that the claimed exemption is "unmistakably within the spirit and intent" of the statute. Episcopal Camp Found., Inc. v. Town of Hope, 666 A.2d 108, 110 (Me.1995). We see no reason why this rule of construction should not apply equally to a tax credit statute.

¶9 The investment tax credit statute allows a taxpayer a credit against the taxpayer's Maine income tax liability for each taxable year equal to 1.0% of the taxpayer's investment credit base. See 36 M.R.S.A. § 5219-E(2) (Supp.1997). The "investment credit base" is defined, in pertinent part, as "the total original basis, without adjustment, for federal income tax purposes, of the taxpayer of all machinery and equipment ...." Id. § 5219-E(1)(B). The tax credit statute defines "machinery and equipment" in part as:

machinery and equipment as defined in section 1752, subsection 7-B, with a situs in the State as of the last day of the immediately prior taxable year:

....

(2) That is used directly and primarily in the production of tangible personal property intended to be sold or leased ultimately for final use or consumption.

Id. § 5219-E(1)(C). The Assessor contends that the pre-treatment facility is not used in the "production" of tangible personal property, and therefore does not qualify for the credit.

¶10 For purposes of the tax credit statute, "production" is defined as:

an operation or integrated series of operations engaged in as a business or segment of a business which transforms or converts personal property by physical, chemical, or other means into a different form, composition or character from that in which it originally existed.

Production includes manufacturing, processing, assembling and fabricating operations which meet the definitional requisites.

36 M.R.S.A. § 1752(9-B) (1990). Pursuant to 36 M.R.S.A. § 112(1) (1990), the Assessor promulgated the following rule:

"Production" referred to in § 1752(9-B) commences with the movement of raw materials to the first production machine after their receipt and storage at production site (after receipt if the raw materials are not stored) and ends with the completion of the finished product, including any packaging operation. The acquisition of raw materials, the transportation of raw materials or goods in process between production sites, and administrative and distributive operations do not constitute production.

Me. Bur. of Tax. Rule 303.01(A) (effective June 1, 1951). In SST & S, Inc. v. State Tax Assessor, 675 A.2d 518 (Me.1996), we observed that this rule was an amplification of, and not inconsistent with, the definition of production contained in section 1752(2-A). See 675 A.2d...