Indiana Dept. of State Revenue v. Cave Stone, Inc.

• Citation: 457 N.E.2d 520
• Decision Date: 14 December 1983
• Docket Number: Nos. 1283S444,2-1278A433,s. 1283S444
• Parties: INDIANA DEPARTMENT OF STATE REVENUE, Appellant (Defendant Below), v. CAVE STONE, INC., Appellee (Plaintiff Below). INDIANA DEPARTMENT OF STATE REVENUE, Appellant (Defendant Below), v. MESHBERGER STONE, INC., Appellee (Plaintiff Below).
• Court: Supreme Court of Indiana

Page 520

457 N.E.2d 520

INDIANA DEPARTMENT OF STATE REVENUE, Appellant (Defendant Below), v. CAVE STONE, INC., Appellee (Plaintiff Below).

INDIANA DEPARTMENT OF STATE REVENUE, Appellant (Defendant Below), v. MESHBERGER STONE, INC., Appellee (Plaintiff Below).

Nos. 1283S444, 2-1278A433.

Supreme Court of Indiana.

Dec. 14, 1983.

Theodore L. Sendak, Atty. Gen., Wallace T. Gray, Deputy Atty. Gen., Indianapolis, for appellant.

Michael R. Fruehwald, Larry J. Stroble, Indianapolis, for appellees; Barnes, Hickam PRENTICE, Justice.

Pantzer & Boyd, Indianapolis, of counsel.

This cause is before us on the petition of Cave Stone, Inc. and Meshberger Stone, Inc. (Appellees) to transfer the cause from the Court of Appeals, Second District, following its reversal in part (Judge Buchanan, dissenting) of the judgment of the trial court that certain machinery, parts, and related items purchased by the Appellees (Cave and Meshberger) were exempt from the imposition of the Indiana Gross Retail Tax and that the taxpayers were not liable for a penalty.

The decision of the Court of Appeals, reported at 409 N.E.2d 690, was filed on August 28, 1980. Its opinion on petition for rehearing was filed on November 10, 1981 and is reported at 427 N.E.2d 922.

Because we find that the decision of the Court of Appeals conflicts with other decisions of that court, as hereinafter set forth, the petition to transfer is now granted, and the decision and opinion of the Court of Appeals is vacated.

Actions were commenced in the trial court by separate complaints filed by Appellees. The cases were consolidated for trial. Separate judgments were entered and separate motions to correct errors were filed, both of which were overruled. The issues in both cases are identical and have been treated in one appeal which presents the following issues:

1. Whether the trial court erred in finding that machinery, parts and related items used by the Appellees in their hauling crude stone and stock out steps were directly used by the purchaser in the direct production, manufacture, mining, processing or finishing of tangible personal property within the terms of Ind.Code Sec. 6-2-1-39(b)(6) (Burns 1976) and applicable regulations of the Indiana Department of State Revenue, and were, therefore, exempt from the imposition of Indiana Gross Retail tax and the Appellees entitled to a refund of the tax, interest, and penalties paid;

2. Whether the trial court erred in finding that the Appellees' delayed payments of tax were not due to negligence or intentional disregard of the law, and that, therefore, no penalties should have been assessed against them.

The facts giving rise to this cause and the trial court's findings of fact and law were presented by the Court of Appeals as follows:

"Appellees Cave Stone Incorporated (Cave) and Meshberger Stone, Incorporated (Meshberger) are engaged in the business of selling sized aggregate stone removed from their respective quarries. The procedure involves stripping, drilling, blasting, and loading the crude stone into a truck. The crude stone is then hauled from the blasting area to the primary crusher (hauling crude stone). Thereafter the crude stone is crushed, separated, washed, and screened into various grades of aggregate. The graded stone is next taken by conveyor to a front-end loader which loads it onto a truck which carries it to separated stockpiles (stock out) from which it is eventually sold. Stockpiling serves a dual purpose. It (1) preserves the grading of stone and prevents commingling, and (2) allows moisture to drain and evaporate from the washed stone, thereby reducing moisture levels to a standard generally acceptable to stone purchasers.

"This controversy involves two of the procedures: hauling crude stone and stock out.

"Cave and Meshberger on October 29, 1975, after protest and assessment, paid sales tax with interest and penalty on equipment and supplies purchased for the hauling of crude stone, as follows:

                            Cave     Meshberger
                "1971     $  541.21   $  447.48
                 1972        186.91      364.25
                 1973      6,062.05      706.26
                          ---------  ----------
                          $6,798.17    1,518.00
                Interest     688.95      212.16
                Penalty      679.82      151.80
                

"On October 29, 1975 they also paid, after protest and assessment, sales tax with interest and penalty on equipment and supplies purchased and used in the stock out phase, as follows:

                            Cave     Meshberger
                "1971     $  615.94   $  670.86
                 1972        616.56      540.17
                 1973        408.56      743.92
                          ---------  ----------
                          $1,641.06   $1,954.95
                Interest     258.60      288.86
                Penalty      164.11      195.50
                

"Cave and Meshberger filed a timely claim for refund which was denied by Department. A timely suit was then commenced in the trial court. The separate suits of Cave and Meshberger were consolidated for all purposes.

"As to Cave ¹, the trial court specially found:

" '8. The hauling crude stone activity in Cave's operation consisted of the hauling by truck of crude stone from a front-end loader in the blasting area to a funnel-type bin which feeds the crusher. The purchases upon which the Department assessed tax in the hauling crude stone activity were purchases of two trucks and fuel, tires, repairs, and replacement parts for three trucks used for hauling.

" '9. Up to 3 trucks were used for hauling crude. Each truck used for hauling had special tires of appropriate size and tread for its particular use at Cave's plant and was used almost exclusively for hauling crude stone although it could be used for hauling stock out and clean-up. The trucks were not and could not be licensed for use on public highways.

" '10. The distance travelled by trucks hauling crude stone varies depending on the location of work in the quarry, but was not more than 1/2 mile. Neither the trucks nor the crusher feeder bin were used for storage of crude stone. No crude stone was loaded into a truck unless it was to be transported to the crusher feeder bin and crushed immediately thereafter.

" '11. Cave never sold crude stone direct from the quarry to customers. There was no market or commercial use for such crude stone. The stone became a marketable product only after further steps of crushing, screening, washing and sizing had occurred.

" '12. The stock out activity in Cave's operations consisted of the movement of crushed and graded stone to separate stockpiles. Equipment used in this step included conveyors from the end of the grading step to the outside of the building, at least one front-end loader, and truck(s). The purchases upon which the Department assessed tax with respect to the stock out activity were fuel, tires, repairs, and replacement parts for that equipment.

" '13. The conveyors and trucks used in stock out were used for no other purposes.

" '14. Stockpiles of crushed, graded and washed stone were stored in cone shaped piles in the stock out activity. Storage of processed stone in the stockpiles is necessary to preserve the grading of the stone and to prevent comingling [sic] of the grades of aggregate in the separate stockpiles.

" '15. Stockpiling of stone allowed moisture to drain and evaporate from the washed stone so that moisture levels were reduced to levels generally accepted by stone purchasers as standard. Many purchasers, including the State of Indiana, specifically required stone which had been stockpiled for a specified period, and some customers sought adjustments in price if stone purchased had excess moisture due to insufficient time in stockpile.

" '16. The hauling crude stone step constituted transportation of unfinished work in process in a continuous " '17. The materials transported during the stock out step had not yet been altered to their final, most marketable form, which was accomplished through drainage in stockpiles. Therefore, the stock out step also constituted transportation of unfinished work in process in a continuous flow from one production step to another in Cave's operations.'

flow from one production step to another within Cave's integrated operations.

"Based on the findings the court entered, in part, the following conclusions of law:

" '3. Cave's delayed payment of the sales and use tax involved in this action was due to a bona fide interpretation of the tax statutes supported by prior administrative practice and was not due to negligence or intentional disregard of the law. Therefore, no penalties should have been assessed against Cave on account of deficiencies asserted by the Department, regardless of the validity of the deficiencies, and Cave is entitled to a refund of such penalties paid with interest.

" '4. The machinery, parts and related items used by Cave in its hauling crude stone and stock out steps were directly used by Cave in the direct production, manufacture, mining, processing or finishing of tangible personal property within the terms of Section 39(b)(6) of the Gross Income Tax Act of 1933, Ind.Code Sec. 6-2-1-39(b)(6) (1976). Cave's purchases of that machinery, parts and related items are therefore exempt from the imposition of the Indiana gross retail tax.

" '5. The Department's Regulations 39-600, 39-610, and 39-620, 1 Burns Ind.Adm.R. & Regs. (6-2-1-39) -15, -16, -17 (Code Ed.1976), are inapplicable to transactions occurring before their effective date of April 24, 1972. The Court concludes that the entire operations of Cave described above constitute "production" or "processing" of tangible personal property as defined in Regulations 39-600 and 39-620, and that the hauling crude stone and stock out steps constitute exempted transportation under those two regulations. However, to the extent that any of the regulations cited above, or portions of those regulations, would require a result contrary to that expressed in Conclusion No. 4 in the circumstances presented here, those regulations or portions are invalid as contrary to the enabling statute....