General Motors Corp. v. Indiana Dept. of State Revenue
| Decision Date | 11 September 1991 |
| Docket Number | No. 49T05-8912-TA-00064,49T05-8912-TA-00064 |
| Citation | 578 N.E.2d 399 |
| Parties | GENERAL MOTORS CORPORATION, Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent. |
| Court | Indiana Tax Court |
Larry J. Stroble, Michael Rosiello, and Ronald d'Avis, Barnes & Thornburg, Indianapolis, for petitioner.
Linley E. Pearson, Indiana Atty. Gen. and Marilyn S. Meighen, Deputy Atty. Gen., Indianapolis, for respondent.
General Motors Corporation (GM) seeks a refund of Indiana Gross Retail Sales and Use taxes (sales/use tax) assessed and collected by the Indiana Department of State Revenue (Department) on expendable packing materials GM purchased and used in transporting certain automobile parts from one GM facility to another during the calendar years 1978, 1979, 1980, and 1981.
GM manufactures motor vehicles (automobiles). GM is a Delaware corporation with its principal places of business in Detroit, Michigan, and New York, New York. GM is organized as a vertically integrated production process, manufacturing automobile parts at component plants and then transporting these parts to other GM plants for final assembly. Throughout the calendar years of 1978 through 1981, GM owned and operated several component plants in Indiana. GM purchased expendable packing materials, such as corrugated cardboard cartons, separators, liners, pads, wrapping paper, plastic plugs, pallets, and other items (packing materials), to protect the parts during shipment to assembly plants outside of Indiana. The packing materials were used to package and protect products, such as lamps, transmissions, and other automobile parts, when shipped from one GM facility to another (component plant to assembly plant).
In audits prior to 1978, the Department allowed an exemption from sales/use tax for GM's packing materials. After a succeeding audit, however, the Department assessed sales/use tax on identical packing materials purchased in the tax years 1978 through 1981, which GM paid with interest in 1984, 1985, and 1986.
On December 23, 1986, GM timely filed claims for refund of the sales/use tax and interest paid on both its purchase of the packing materials and other items on behalf of some of its divisions in the aggregate amount of $2,082,009.47. GM filed its original tax petition for refund of sales/use tax on December 12, 1989, although the Department has not issued a final determination concerning GM's claims for refund. 1 Prior to the trial in this case, the parties settled all the issues involved in GM's claims for refund except the issue involving the tax treatment of GM's packing materials. Concerning this remaining claim, GM seeks a refund of sales/use tax and interest in the amount of $453,266.25 paid on its purchase of packing materials for the years at issue.
Additional facts will be included as necessary.
I. Whether GM's purchases of packing materials are exempt from sales/use tax because they are used within an integrated production process entitling GM to a refund?
II. Whether GM is entitled to receive interest from the Department on the interest portion of its overpayment that the Department held? If so, what is the applicable interest rate and period of accrual?
GM claims its packing materials are exempt from sales/use tax under IND.CODE 6-2-1-39(b)(6) and its successor IND.CODE 6-2.5-5-3 (1980) (). 2 The sales/use tax statutes provide an exemption for manufacturing equipment directly used in the direct production of other tangible personal property:
Sales of manufacturing machinery, tools and equipment to be directly used in the direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining or finishing of tangible personal property; sales of agricultural machinery, tools and equipment to be directly used by the purchaser in the direct production, extraction, harvesting or processing of agricultural commodities; and sales of tangible personal property to be directly used by the purchaser in the direct production or manufacture of any such manufacturing or agricultural machinery, tools and equipment.
IC 6-2-1-39(b)(6) (emphasis added).
In 1980, the equipment exemption was recodified, providing:
Transactions involving manufacturing machinery, tools, and equipment are exempt from the state gross retail tax if the person acquiring that property acquires it for his direct use in the direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining, or finishing of other tangible personal property.
IC 6-2.5-5-3(b) (emphasis added).
The double direct standard, expressed in the statutory language emphasized above, is the touchstone of the equipment exemption from sales/use tax. In Indiana Department of State Revenue v. Cave Stone, Inc. (1983), Ind., 457 N.E.2d 520, the seminal case interpreting the double direct standard, the Indiana Supreme Court recognized the essential and integral test to determine whether the double direct standard is met. The court held the transportation equipment at issue was both essential to transforming crude stone into a marketable product and integral to "the ongoing process of transformation." Id. at 524.
The court's inquiry focused on the production process itself, defining it broadly to encompass all the production steps involved in transforming work in process into a finished marketable product:
The [equipment exemption] statute circumscribes all of the operations or processes by which the finished product is derived. Thus, we find that the production or processing of the stone begins at the time of the initial stripping, drilling, and blasting at the quarry and ends at the time the stone is stockpiled. The production process is continuous and indivisible.
The issue, then, is whether the transportation is an integral part of the production or processing of the stone.
Id. at 524. Consequently, the equipment exemption's double direct standard is met when the manufacturing equipment used is an essential and integral part of an integrated production process.
The Department does not dispute GM's assertion that its packing materials are both essential and integral to its production of finished automobiles. GM asserts its packing materials are essential to protect automobile parts during shipment to the final assembly plants and to aid convenience and safety in loading and unloading. The evidence reveals that without such protection, the parts could be scratched, broken, or otherwise damaged and consequently, unusable for installation as part of a finished automobile.
Packing materials are integral to GM's production process because they function within the integrated series of steps necessary to produce a finished automobile. Indeed, unless the parts are carefully transported from component plants to assembly plants, no marketable automobiles could result. See Id. at 524. The court therefore finds GM's packing materials are an essential and integral part of producing a finished automobile.
The parties agree GM's packing materials are exempt if they are used within an integrated production process and are taxable if they are used outside the scope of an integrated production process. The facts in the case 3 as well as previous judicial findings 4 indicate GM's production process is by nature highly integrated. The court's sole concern, however, is whether GM's manufacture of finished automobiles qualifies as one continuous integrated production process for the purpose of exemption from sales/use tax. Both parties agree an integrated production process ends when a finished marketable product is produced. Nevertheless, the parties opposing contentions issue from differing definitions of the scope of an integrated production process. GM asserts its packing materials are exempt because they were used within one continuous integrated production process that ended upon the completion of finished marketable automobiles. On the contrary, the Department contends GM's packing materials are taxable because they were used after the end of one integrated production process, i.e., the manufacture of marketable component parts, and before the beginning of another integrated production process, i.e., the assembly of finished automobiles. The court must determine whether an integrated production process ends when a potentially marketable product first emerges (first finished marketable product) or whether it ends when the product is finished for actual sale in the marketplace (most marketable product) for purposes of the equipment exemption.
GM's component plants produce automobile parts; some become replacement parts diverted to the secondary market, some are sold to other automobile manufacturers, but most are integrated into GM's finished automobiles. 5 The Department asserts GM's packing materials used to protect parts transported to GM's assembly plants are taxable, relying on this court's dicta in Energy Supply, Inc. v. Indiana Department of State Revenue (1990), Ind. Tax, 549 N.E.2d 1110:
Accordingly, the court should examine the manufacturing process used by Energy to transform the raw coal into the finished product, marketable coal. Evidence has been presented that hauling the coal to the processing plant is necessary in order to obtain a marketable product.... The court could find that the processing plant to which the trucks are driven is a part of Energy's integrated manufacturing process because ... the coal is not a finished product until it leaves the plant. Based upon this analysis, the court could reasonably find that Energy's trucks are a part of an integrated process that does not end until after the coal leaves the processing plant.
Id. at 1114 (emphasis added). In Energy Supply, the intermediate stages of processing raw coal into marketable coal do not produce a finished marketable product....
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