H. Samuels Co., Inc. v. Wisconsin Dept. of Revenue

• Decision Date: 19 December 1975
• Docket Number: No. 138,138
• Citation: 70 Wis.2d 1076,236 N.W.2d 250
• Parties: H. SAMUELS COMPANY, INC., Respondent, v. WISCONSIN DEPARTMENT OF REVENUE, Appellant. (1974).
• Court: Wisconsin Supreme Court

Page 250

236 N.W.2d 250

70 Wis.2d 1076

H. SAMUELS COMPANY, INC., Respondent, v. WISCONSIN DEPARTMENT OF REVENUE, Appellant.

No. 138 (1974).

Supreme Court of Wisconsin.

Dec. 19, 1975.

Bronson C. La Follette, Atty. Gen., E. Weston Wood, Asst. Atty. Gen., Madison, for appellant.

LaFollette, Sinykin, Anderson & Abrahamson, Madison by Shirley S. Abrahamson, Madison, of counsel, Gould, Reichert & Strauss, Cincinnati, Ohio by Howard Gould and David Reichert, Cincinnati, Ohio, of counsel, for respondent.

CONNOR T. HANSEN, Justice.

The facts are not in dispute. The general sales and use tax became effective on September 1, 1969, replacing the selective sales tax. Under the new procedure, everything is taxable unless specifically exempted. Section 77.54, Stats., contains the following exemption:

'77.54 General exemptions. There are exempted from the taxes imposed by this subchapter:

'. . .

'(6) The gross receipts from the sale of and the storage, use or other consumption of:

'(a) Machines and specific processing equipment and repair parts or replacements thereof, exclusively and directly used by a manufacturer in manufacturing tangible personal property.'

The definition of the term 'manufacturing' is contained in sec. 77.51, Stats.:

'(27) For purposes of s. 77.54(6)(a) 'manufacturing' is the production by machinery of a new article with a different form, use and name from existing materials by a process popularly regarded as manufacturing.'

The department determined that the taxpayer was not entitled to the exemption provided by sec. 77.54(6)(a), Stats., because the business in which it is engaged is not within the statutory definition of 'manufacturing.' As a result of this determination, additional taxes in the amount of $8,655.52, were assessed against the taxpayer.

The taxpayer petitioned the Wisconsin Tax Appeals Commission for reversal of the determination. Hearing was held before the commission which produced the following evidence.

The taxpayer is engaged in the business of processing scrap metal. He has two sites of operation, one located in Portage, the other in Madison. The raw material used in his operations consist of waste metals such as old appliances, farm and factory machinery, demolished bridges, reinforcing bars, pipes, plumbing fixtures, old railroad freight cars, factory scrap and rejected parts, auto hulks, and ship hulls. His process consists of transforming these waste metals into prepared grades of iron and steel suitable for use in the foundries, mills and smelters of his customers. The process involves elimination of all non-ferrous material, increasing density, elimination of impurities, composition of the finished material into the appropriate metallurgical and chemical tolerances, and conformation of the material to the size and form required by the customers. Following the completion of the process, the consuming steel mills, foundries or smelters charge the purchased product directly into steel-making furnaces.

The taxpayer produces more than 30 grades of ferrous metals, designated by such terminology as 'No. 1 heavy melting steel,' 'No. 2 heavy melting steel,' 'No. 2 bundles,' and different grades of specialty items. At no point in the process are new elements 'added' to the raw material. Prepared grades of iron and steel scrap, such as those produced by the taxpayer, are sold on a per-ton basis, and the prevailing geographical area prices for each grade are quoted daily in national trade publications including the Wall Street Journal and the American Metal Market, and weekly in Iron Age, and the Waste Trade Journal. Specifications for each grade are apparently very rigid, since a variation can result in large monetary losses for customers and such specifications have been approved and published by federal government agencies including the Bureau of Mines, the U.S. Department of Commerce and the Offices of Price Administration and Price Stabilization. The industry itself furnishes statistical information on consumption by grades, prices and specifications, which are utilized by customers of scrap iron and steel processors.

The taxpayer uses heavy machinery in processing the scrap metal into prepared grades. This equipment includes hydraulic shears, hydraulic presses, hammermills, fragmentizers, shredders, ball drops, acetylene torches, briquetters, metal separators, cast washers, balers, and sweat furnaces. As an individual piece of metal may weigh several tons, assembly line movement through various stages of the process is facilitated by the use of overhead cranes, crawler cranes, conveyor belts, and magnets.

At the hearing before the commission, the taxpayer presented several witnesses who testified with respect to the process described above. The chief metallurgist for a large Wisconsin foundry testified that the foundry did not purchase 'scrap' metal but only graded metal, prepared to specification, from which undesirable alloys have been eliminated. He further stated that the material which arrived in the scrap iron yards was different from the processed product purchased by the foundry; otherwise it would be foolhardy for the foundry to purchase it, because the foundry would end up with an unsaleable product.

The taxpayer's next witness, an assistant professor at the University of Wisconsin Graduate School of Business, was called for the purpose of analyzing the various examples of manufacturers and non-manufacturers, as classified by the department in its Technical Information Memorandum (TIM) S--31, according to any common characteristics these specified examples might possess.

TIM S--31 gives departmental guidelines for classification of businesses as manufacturing or non-manufacturing. It opens with a general definition:

'Manufacturing consists of an operation at a fixed location complete in itself, or one of a series of operations each at a fixed location, whereby, through the application of machines to tangible personal property a new article of tangible personal property with a different form, use and name is produced.'

By way of illustration, the following businesses, among others, are listed as ordinarily engaging in 'manufacturing': Bakeries, chemical processing plants, creameries, dairies, flour and feed mills, food processing plants--canning and freezing; foundries, meat packing and processing plants, and sawmills.

By way of illustration, the following businesses, among others, are listed as nonmanufacturers: Farming, trucking, hotels, logging, mining, real property construction activities, repair services, sand and gravel pit operators, and tire retreading.

The witness reduced the list to four types of manufacturing: aggregative (many inputs, few or single output; example--television set); disaggregative (few inputs, many outputs; example--refining, dairy operations); fabrication (taking an item and making it into an item with a different purpose and form; example--punching out of parts from sheet metal; processing (example--canning and freezing of food). The nonmanufacturing businesses were reduced to the categories of agriculture, extractive operations, transport, service, repair, entertainment and harvesting. In his opinion, the various activities of the taxpayer's operation corresponded more closely with those of businesses listed as illustrative of manufacturers.

A third witness, a consultant metallurgist, testified that taxpayer's operation is the first step in the production of steel, that the term 'scrap' was outdated, loose nomenclature and that the product purchased by the taxpayer's customers should be referred to as secondary metal recovered from scrap.

The tax commission affirmed the determination of the department. The commission found as facts that:

'19. The petitioner did not produce a new article with a different form, use and name from existing materials.

'20. The petitioner's process is not popularly regarded as manufacturing.'

The commission determined, as conclusions of law, that '1. During the period involved herein the petitioner was not engaged in manufacturing as that term is defined in Section 77.51(27), Wisconsin Statutes.

'2. The petitioner is not entitled to the manufacturing exemption provided for in Section 77.54(6)(a), Wisconsin Statutes.'

The trial court reversed the determination of the commission, finding that the issue involved a question of law, and that the taxpayer's operations were within the statutory definition of 'manufacturing.' We agree.

In our opinion this case resolves itself to two issues:

1. What is the appropriate scope of review?

2. Whether the taxpayer is engaged in 'manufacturing' as defined by sec. 77.51(27), Stats., and thus entitled to the sales and use tax exemption provided in sec. 77.54(6)(a)?

SCOPE OF REVIEW.

Section 227.20, Stats., provides, in pertinent part, as follows:

'(1) . . . The court may affirm the decision of the agency, or may reverse or modify it if the substantial rights of the appellant have been prejudiced as a result of...