Indiana Dept. of State Revenue, Gross Income Tax Div. v. Indiana Harbor Belt R. Co.

Decision Date27 February 1984
Docket NumberNo. 3-283A43,3-283A43
PartiesINDIANA DEPARTMENT OF STATE REVENUE, GROSS INCOME TAX DIVISION, Defendant- Appellant, v. INDIANA HARBOR BELT RAILROAD COMPANY, Plaintiff-Appellee.
CourtIndiana Appellate Court

Linley E. Pearson, Atty. Gen. of Ind., Dan S. LaRue, Deputy Atty. Gen., Indianapolis, for defendant-appellant.

Harold Abrahamson, Kenneth D. Reed, Abrahamson, Reed & Tanasijevich, Hammond, for plaintiff-appellee.

GARRARD, Judge.

Defendant-Appellant Indiana Department of State Revenue, Gross Income Tax Division (the Department) appeals from the trial court's grant of summary judgment in favor of the plaintiff-appellee Indiana Harbor Belt Railroad Company (the Railroad). The judgment provided for a refund of certain sales and use taxes assessed by the Department and paid under protest by the Railroad for the tax years 1973, 1974 and 1975.

The Railroad is a public carrier engaged in interstate commerce between the States of Indiana and Illinois with its principal offices, operations and properties located in Hammond, Indiana.

The Department conducted an audit of items of personal property purchased by the Railroad in the tax years 1973, 1974 and 1975 and demanded payment of tax on certain purchases which the Railroad had claimed to be exempt from taxation. The Railroad paid, under protest, the amount of $101,388.68 claimed due, and filed a claim for refund with the Department. The Railroad did not accept the Department's proposed refund and then filed this suit for refund in the Lake County Superior Court. The suit subsequently was transferred to the Newton Circuit Court.

The parties stipulated to the accuracy of a list describing over 500 items of personal property purchased and its usage by the Railroad. On the Railroad's motion for summary judgment, the list was submitted to the trial court for determination of the applicability of the exemption statute, IC 6-2-1-39(b)(4), to the listed items and the amount of refund, if any, to which the Railroad was entitled.

The trial court concluded, inter alia, that the vast majority of the items

"... are exempt from sales/use tax by reason of being tangible personal property stored, used or otherwise consumed by plaintiff in the State of Indiana in the rendering of public transportation of property and goods."

Transcript, pp. 203-11, Court's Findings. The trial court concluded that the balance of the items

"... are non-exempt from sales/use tax by reason of being intangible personal property stored, used or consumed by plaintiff in the State of Indiana in the Transcript, pp. 203-11, Court's Findings.

rendering of public transportation of property and goods."

On the basis of these conclusions, a refund was ordered in the principal sum of $62,585.27.

ISSUES

1. Whether the trial court erred in concluding that certain purchases of tangible personal property stored, used or consumed by the Railroad in rendering public transportation were exempt from sales or use tax without a specific conclusion that the items were directly used or consumed in the rendering of public transportation.

2. Whether the trial court erred by failing to apply guidelines found in the Department of Revenue Regulations when making the exemption determination.

3. Whether the trial court's conclusion that the items of tangible personal property purchased by the Railroad were exempt from sales or use tax because used or consumed in the rendering of public transportation was contrary to the law.

IC 6-2-1-39 1 provides, in pertinent part, that the gross retail tax generally imposed by IC 6-2-1-37 2 shall not apply to:

"(b)(4) The sale, storage, use or other consumption in this state of tangible personal property or service which is directly used or consumed in the rendering of public transportation of persons or property."

IC 6-2-1-43 3 provides a similar exemption for the use tax imposed by IC 6-2-1-41 4 by reference to subsection (b) of IC 6-2-1-39 cited in part above.

As noted in appellee's brief, the legislature used the phrase "directly used by the purchaser in the direct production of...." (emphasis added), or a phrase substantially similar, when describing the conditions for exemption from taxation for purchases by: Farmers and food producers--IC 6-2-1-39(b)(1); tool and equipment manufacturers--(b)(6); producers of tangible personal property--(b)(10), and utilities--(b)(16)-(18). Appellee's brief, p. 15. This phrase represents the "double-directness" test which has been interpreted and applied in several cases since the amendment of the exemption statute. Indiana Department of State Revenue v. Cave Stone, Inc.; Indiana Department of State Revenue v. Meshberger Stone, Inc. (1983), Ind., 457 N.E.2d 520; Indiana Department of Revenue v. U.S. Steel Corp. (1981), Ind.App., 425 N.E.2d 659; State v. Calcar Quarries, Inc. (1979), Ind.App., 394 N.E.2d 939; Indiana Department of Revenue v. American Dairy of Evansville, Inc. (1975), 167 Ind.App. 367, 338 N.E.2d 698; Indiana Department of Revenue v. RCA Corporation (1974), 160 Ind.App. 55, 310 N.E.2d 96.

However, IC 6-2-1-39(b)(4), which is here in issue uses the phrase "which is directly used or consumed in the rendering of public transportation...." In Section 39(b)(4), unlike the other sections, the directness requirement appears only once thus, by contrast, giving rise to a "single-directness" standard. Indiana Department of Revenue v. Indianapolis Transit System, Inc. (1976), 171 Ind.App. 299, 356 N.E.2d 1204. See also RCA, supra.

A chronological summary of the cases which have applied these two standards will facilitate the review of the trial court's application of the statute in the case presently before us.

It is a well settled rule of law in Indiana that an exemption statute is to be strictly construed against the person seeking its benefit whenever there is an ambiguity in the statute. Gross Income Tax Division v. National Bank & Trust Co. (1948), 226 Ind. 293, 298, 79 N.E.2d 651, 655; State v. Farmers Tankage, Inc. (1969), 144 Ind.App. 392, 393, 246 N.E.2d 409, 410; Storen v. Jasper County Farm Bureau Cooperative Assoc., Inc. (1936), 103 Ind.App. 77, 79, 2 N.E.2d 432, 433.

Farmers Tankage involved an interpretation of a section of the exemption statute before that section contained any explicit "directness" requirement. The trial court allowed a claim of exemption on the purchase of a truck used to collect dead animals from which the taxpayer manufactured feed. The appellate court, in affirming the trial court, implied that had the word "directly" been used in the statute to modify the phrase "used in such production," an ambiguity then would have existed requiring strict construction against the taxpayer and, consequently, a possible denial of the exemption. See RCA, 310 N.E.2d at 99.

In RCA, the Second District interpreted the "double-directness" language that then appeared in Section 39(b)(6). At issue was whether air conditioning or environmental control equipment was exempt as being "directly used ... in the direct production" of television picture tubes. The court applied its reading of Farmers Tankage to conclude that Section 39(b)(6) was rendered ambiguous by the inclusion of the "directness" requirements. The court rejected RCA's argument that the statutory exemption encompassed all equipment that was "an integral part of the manufacturing process," 310 N.E.2d at 100. In concluding that the repetition of the directness requirement by the legislature was an effort to avoid the "overly broad judicial construction of the single directness requirement in other states," 310 N.E.2d at 100, the court strictly construed the exemption statute against RCA and reversed the judgment of the trial court which had found the equipment to be exempt.

The scope of the exemption permitted by "double-directness" language was again at issue in Indiana Department of Revenue v. American Dairy of Evansville, Inc. (1975), 167 Ind.App. 367, 338 N.E.2d 698, a case involving items purchased and used by a milk producer. The First District was guided by a standard of strict construction consistent with the holding in RCA. While the exemptions for purchases of insecticides and cleaning compounds were upheld due to specific legislative grant, 5 the exemption for cleaning equipment 6 was disallowed because of its lack of direct impact on the production of milk. The exemptions claimed for electricity used at a storage facility to preserve the end product and for the cases in which the milk was delivered were similarly disallowed. The court would not go so far as to require an item be "actually incorporated into the final product," 338 N.E.2d at 702, but was strict in its demand that an item be "directly used in direct production." 338 N.E.2d at 702. Exemptions were upheld for refrigeration equipment, ice, dry ice and milk cans used at the production plant.

The only Indiana case interpreting the single-directness requirement of Section 39(b)(4) here at issue is Indiana Department of Revenue v. Indianapolis Transit System, Inc. (1976), 171 Ind.App. 299, 356 N.E.2d 1204 involving a company which provided public bus transportation. The company did not pay tax on items which they claimed were "reasonable and necessary to the furnishing of public transportation." 356 N.E.2d at 1206. The company justified its claim for exemption on the basis that it was required to provide:

"... services to its passengers which involve much paper work such as publications concerning financial matters, insurance, schedules, routes and rates. It must provide passenger stations, handle baggage, sell tickets and buses must be clean and safe for the passengers."

356 N.E.2d at 1209. The court seized upon the language used by Judge White in RCA implying that a single-directness requirement might allow a broader judicial construction than double-directness. 356 N.E.2d at 1208. The court justified its affirmation of the trial...

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