Idaho State Tax Com'n v. Haener Bros., Inc.

• Decision Date: 17 March 1992
• Docket Number: No. 17729,17729
• Citation: Idaho State Tax Com'n v. Haener Bros., Inc., 828 P.2d 304, 121 Idaho 741 (Idaho 1992)
• Parties: IDAHO STATE TAX COMMISSION, Appellant/Cross-Respondent, Respondent on Appeal, v. HAENER BROS., INC. and Albert J. Haener Equipment Rentals, Respondents/Cross-Appellants, Appellants on Appeal. Boise, December 1991 Term
• Court: Idaho Supreme Court

Page 304

828 P.2d 304

121 Idaho 741

IDAHO STATE TAX COMMISSION, Appellant/Cross-Respondent, Respondenton Appeal, v.HAENER BROS., INC. and Albert J. Haener Equipment Rentals, Respondents/Cross-Appellants, Appellantson Appeal.

No. 17729.

Supreme Court of Idaho,

Boise, December 1991 Term.

March 17, 1992.

[121 Idaho 742] Green Law Office, Boise, for respondents/cross-appellants. Cumer L. Green argued.

Larry J. EchoHawk, Idaho Atty. Gen., Theodore V. Spangler, Jr., Deputy Atty. Gen., Boise, for appellant/cross-respondent. Theodore V. Spangler, Jr. argued.

ON REHEARING

BOYLE, Justice.

In this casewe are called upon to apply the production exemption provision of the Idaho Sales Tax Act, Chapter 36,Title 63 Idaho Code.The appellants, Haener Bros, Inc., and Albert J. Haener Equipment Rentals (hereafter jointly referred to as "Haener"), are in the business of renting heavy equipment to contractors and other companies.The State Tax Commission assessed sales tax on the amounts Haener charged for the rental of its equipment to Potlatch Corporation and five independent contractors who were under contract to Potlatch.Haener contends that these rental fees are exempt from tax under I.C. §§ 63-3615(b)and63-3622(d).

I.

Between August of 1978 and June of 1980, Haener Brothers leased heavy equipment to Potlatch and to the five independent contractors that were engaged in construction or renovation projects for Potlatch.Between March of 1974 and June of 1980, Albert J. Haener Equipment Rentals, Inc., also leased heavy equipment to the same lessees.The rental equipment leased to Potlatch and the contractors by Haener was used to construct, install and repair production equipment and to move materials from one production unit to another.

The State Tax Commission had issued to Potlatch a "resale certificate" and number.This exempted Potlatch from sales tax for the purchase of goods within the resale exemption.The State Tax commission does not issue a "production exemption certificate" or number, but does supply forms to be used when claiming the exemption.In this case Potlatch submitted purchase orders to Haener with its resale tax exemption number.Since the State Tax Commission's forms do not really fit a rental transaction, the five contractors submitted a "resale" exemption form with Potlatch's resale number in the appropriate place.All parties recognized that the rented equipment was not for resale, but would be returned at the end of the rental period.The district court found that the use of the resale exemption form was not to mislead or conceal the nature of the transaction but an effort on the part of the contractors to claim a production exemption on behalf of Potlatch and with its knowledge and permission.The record indicates that Haener relied upon Potlatch's determination as to whether a given lease or rental transaction was taxable.

In 1981, the Tax Commission performed a sales tax audit and issued a Notice of Deficiency Determination to Haener.Haener appealed these decisions to the Idaho Board of Tax Appeals(BTA) which held a hearing on August 11, 1982, and concluded that most of the leased equipment was exempt from tax.The Tax Commission appealed the decision of the BTA to the district court.The district court reversed the BTA and upheld the Tax Commission's assessment of sales tax on the equipment rentals, but concluded that the penalties assessed by the Tax Commission were not warranted.On appeal, Haener contends that the "production exemption" provisions of I.C. § 63-3622(d) apply to the equipment rentals made by Haener to Potlatch and its independent contractors.

II.

Statutes are to be construed to give effect to the intent of the legislature.Keenan v. Price, 68 Idaho 423, 195 P.2d 662(1948).The literal wording of the statute is important, however, other sources should also be considered in determining legislative intent.

[A]ccount must be taken of other matters, such as the context, the object in view, the evils to be remedied, the history of the times and the legislation upon the same subject, public policy, contemporaneous construction and the like.(citation omitted).This court takes judicial notice of public and private acts of the legislature and the journals of the legislative bodies for the purpose of ascertaining what was done by the legislature.

Knight v. Employment Sec. Agency, 88 Idaho 262, 266, 398 P.2d 643, 645(1965).

In appropriate circumstances, courts may defer to the agency charged with the administration of a statutory provision for its interpretation.SeeJ.R. Simplot v. Idaho State Tax Comm'n, 120 Idaho 849, 820 P.2d 1206(1991).

The legislative committee which drafted the legislation that eventually became I.C. § 63-3622(d) submitted a report that "set forth the considerations which guided it in arriving at the conclusions which are expressed" in the Sales Tax Act.House Revenue and Taxation Committee Report in Support of House Bill 222(May 4, 1965), p. 1(hereinafter "Committee Report").The legislative committee indicated that the report should "function as a guide to the office of the Tax Collector in administration of this act."

The Committee Report states the following concerning the application of the production exemption:

The function of this section is to establish a conceptual exemption for materials, machinery and equipment used or consumed in the production process.The design of this section is to equate the purchase for manufacturing or production purposes with the resale exemption applied to the purchase of finished goods.If the goods which are produced by mining, farming or manufacturing are to be resold, then the material, machinery and equipment entering into their make-up should be exempt.

Committee Report, p. 32.

Tax exemptions are never presumed, nor will a statute granting the exemption be extended by judicial construction so as to create an exemption not specifically authorized.Canyon County v. Sunny Ridge Manor, Inc., 106 Idaho 98, 675 P.2d 813(1984);Sunset Memorial Gardens, Inc. v. State Tax Comm'n, 80 Idaho 206, 327 P.2d 766(1958).Statutes granting tax exemptions must be strictly construed against the taxpayer and in favor of the state.Hecla Mining Co. v. Idaho State Tax Comm'n, 108 Idaho 147, 697 P.2d 1161(1985);Canyon County v. Sunny Ridge Manor, Inc., 106 Idaho 98, 675 P.2d 813(1984);Leonard Constr. Co. v. State Tax Comm'n, 96 Idaho 893, 539 P.2d 246(1975).

However, the production exemption must be viewed in light of the legislative intent to tax the ultimate retail consumer, thus avoiding multiple taxation.The production exemption is designed to exempt those items and costs of producing the final product for resale to the consumer.Although construction of exemption statutes is generally to be construed against the taxpayer, the overall scheme and intent of the legislation must not be overlooked.Richardson v. State Tax Comm'n, 100 Idaho 705, 604 P.2d 719(1979);accordState v. Calumet & Hecla Consol. Copper, 259 Ala. 225, 66 So.2d 726(1953).See alsoDavis, The Purposive Approach to the Interpretation of Sales Tax Statutes, 27 Ohio 429(1966), wherein the author urges that state sales tax laws should be rationally interpreted in light of their legislative purpose.

The production exemption contained in I.C. § 63-3622(d)¹ provides three categories of tangible personal property that are exempt from sales tax.The first category exempts all ingredients or materials used to form the final product.The second category exempts tangible personal property which is primarily and directly used or consumed in manufacturing the final product, provided the use or consumption of the property is necessary or essential to the performance of the manufacturing process.This second category exempts production machinery, equipment and supplies which would be used in making or forming the final product for resale.Both of these categories limit the exemption to "a business or segment of a business" which is primarily devoted to production operations.K Mart Corp. v. Idaho State Tax Comm'n, 111 Idaho 719, 727 P.2d 1147(1986).The third category includes all chemicals, catalysts or other materials that effect a change in the final product, remove impurities or place the product in a more marketable condition.This third category also includes any other articles or materials used in actual production.

The production exemption specifically excludes from the exemption certain tangible personal property that is used or consumed in a manner that is incidental to the manufacturing process.The statute sets forth in a non-exhaustive list the types of items that are incidental to a manufacturing operation and includes maintenance equipment and supplies, janitorial supplies, hand tools costing less than $100.00, office equipment, and materials used in selling, distributing, transporting or researching.

The question presented to us is whether leased equipment used to construct, install and repair manufacturing equipment is exempt from state sales tax pursuant to the production exemption stated in I.C. § 63-3622(d).We will address equipment used for construction and installation separately from equipment used for repair or maintenance.

III.

The district court concluded that Potlatch was "primarily devoted" to the business of manufacturing and processing wood and wood products, and therefore held that the production exemption did not apply to equipment leased to construct and install production equipment.Furthermore, because the five independent contractors who also constructed and installed equipment for Potlatch were not in a business primarily devoted to the construction of manufacturing and processing equipment, the district court held that the equipment leased to construct and install the manufacturing equipment was not tax exempt.The district court noted that if Potlatch had purchased the production equipment...