Indiana Dept. of State Revenue, Gross Income Tax Division v. American Dairy of Evansville, Inc.

• Decision Date: 29 December 1975
• Docket Number: No. 1--1274A190,1--1274A190
• Citation: 167 Ind.App. 367,338 N.E.2d 698
• Parties: INDIANA DEPARTMENT OF STATE REVENUE, GROSS INCOME TAX DIVISION, Appellant (Defendant below), v. AMERICAN DAIRY OF EVANSVILLE, INC., Appellee (Plaintiff below).
• Court: Indiana Appellate Court

Page 698

338 N.E.2d 698

167 Ind.App. 367

INDIANA DEPARTMENT OF STATE REVENUE, GROSS INCOME TAX DIVISION, Appellant (Defendant below), v. AMERICAN DAIRY OF EVANSVILLE, INC., Appellee (Plaintiff below).

No. 1--1274A190.

Court of Appeals of Indiana, First District.

Dec. 29, 1975.

Rehearing Denied Feb. 6, 1976.

Theodore L. Sendak, Atty. Gen., Robert S. Spear, Deputy Atty. Gen., Indianapolis, for appellant.

Daniel F. Hewins, Inglehart, Hewins & Songer, Evansville, for appellee.

LYBROOK, Judge.

Defendant-appellant Indiana Department of State Revenue (State) appeals from a judgment granting plaintiff-appellee American Dairy of Evansville, Inc. (Dairy) a refund of certain sales and use taxes assessed and paid for the years 1968 through 1970. The issue presented is whether the trial court erred in determining that purchases of various items and substances used by Dairy in the production and processing of milk and milk products are exempt from the Indiana State Gross Retail Tax. IC 1971, 6--2--1--37 et seq. (Burns Code Ed.).

The exemptions challenged by the State are those granted for purchases of (1) insecticides, insect spray and bird repellent, (2) cleaning compounds and cleaning equipment, (3) refrigeration equipment, ice and dry ice, (4) plastic and wire milk cases and milk cans, (5) electrical energy for cold storage purposes. The State concedes that all of these items and substances are necessary for the proper production and distribution by Dairy of its milk and milk products. Each will be hereinafter considered in conjunction with the pertinent statutory exemptions as found by the trial court.

Initially, it should be noted that in construing the relevant statutory language granting the claimed exemptions, we are bound by the established rule of construction that in the presence of ambiguity the language of the statute must be strictly construed against the party claiming the exemption. Indiana Department of State Revenue v. RCA Corporation (1974), Ind.App., 310 N.E.2d 96; Indiana Department of State Revenue v. Boswell Oil Co. (1971), 148 Ind.App. 569, 268 N.E.2d 303.

I.

The trial court found that the items or substances which we have previously designated into categories (1), (2) and (3) are exempt under one or more of the following subsections of IC 1971, 6--2--1--39 (Burns Code Ed.):

(b)(1): 'Sales to farmers and other persons occupationally engaged in the business of producing food and commodities for human, animal or poultry consumption either for sale or for further use in producing such food and commodities for sale, of animal and poultry life to be directly used by the purchaser in the direct production of food and commodities, feed for such animals and poultry, and seeds, plants, fertilizers, fungicides, insecticides and other tangible personal property to be directly used in the direct production of food and commodities.'

(b)(6): 'Sales of manufacturing machinery, tools and equipment to be directly used by the purchaser 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.'

(b)(10): 'Sales of any tangible personal property as a material which is to be directly consumed in direct production by the purchaser in the business of producing tangible personal property by manufacturing, processing, refining, repairing, mining, agriculture, horticulture, floriculture, or arboriculture.' (Our emphasis.)

Each of these subsections share in common the requirements that the items or substances be directly used or consumed in direct production. In Indiana Department of State Revenue v. RCA Corporation, supra, this court addressed the question of whether air conditioning equipment installed to maintain environmental conditions conducive to the manufacture of color television picture tubes and component parts was 'directly used' in 'direct production' within the meaning of IC 1971, 6--2--1--39(b)(6), supra. In determining that the air conditioning equipment did not fall within the exemption, it was written:

'. . . In that attempt we also have the duty of adopting a definition which strictly construes the exemption against the taxpayer.

Reference to any dictionary will reveal that there are a variety of definitions to choose from. The State has called our attention to one in Ind. Dept. of State Revenue, Gross Income Tax Division v. Colpaert Realty Corp. (1952), 231 Ind. 463, 109 N.E.2d 415:

'As an adjective, the word 'direct' means, among other things, immediate; proximate; without circuity. Black's Law Dictionary, Third Edition. It has been distinguished from collateral; consequential; incidental; and remote.' 231 Ind. at 477--478, 109 N.E.2d at 422.

Black's Law Dictionary (4th Ed., 1951) also states:

'Directly. In a direct way without anything intervening; not by secondary, but by direct, means. Clark v. Warner, 85 Okl. 153, 204 P. 929, 934; Olsen v. Standard Oil Co., 188 Cal. 20, 204 P. 393, 396.'

The Supreme Court of Ohio adopted that definition in refusing to hold that purchased tools used to manufacture other tools used directly in the manufacture of a product were also used directly in that manufacture and thus exempt from use and sales taxes. General Motors Corporation v. Bowers (1959), 169 Ohio St. 361, 159 N.E.2d 739, 741, said:

'To so hold would constitute a disregard of the plain meaning of the word 'directly' which the dictionaries define as 'without the intervention of a medium or agent.' It would seem beyond cavil that the manufactured tools are an intervention between the purchased tools and the final (product)'.

Whatever effect (whether positive or negative) that RCA's air conditioning or environmental control equipment may have on the tubes RCA manufactures, or on the process of their manufacture, is exerted through the medium or agency of the environment (i.e., the air). The very name of the equipment, whether 'air conditioning' or 'environmental control', signifies that its immediate effect is on the surroundings in which the manufacturing process takes place and only remotely, through the intervening agency of those surroundings, on the tubes or on the process by which they are manufactured.'

The State relies heavily upon the rationale of this decision in arguing that none of the items or substances found by the trial court to fall within the exemptions provided by subsections (b)(1), (6) and (10) of IC 1971, 6--2--1--39, supra, meet the requirement of being directly used or consumed in direct production.

The first items which we shall consider are insecticides, insect spray, bird repellent, and cleaning compounds used by the Dairy in and around its main processing plant to maintain a production environment conforming to standards required by the Indiana State Board of Health. The position taken by the State is that application of the test, found in Indiana Department of State Revenue v. RCA Corporation, supra, compels the conclusion that these items do not qualify for exemption, for as with the air conditioning equipment in that case, their immediate effect is not upon Dairy's food products but upon the environment in which the processing and production takes place.

Subsection (b)(1) of IC 1971, 6--2--1--39, supra, appears the most relevant to our inquiry at this point, for we do not believe it can be seriously questioned that Dairy falls within the class of 'other persons occupationally engaged in the business of producing food and commodities for human . . . consumption.' The problem with the State's analysis is its failure to recognize that in this particular subsection the Legislature has set forth specific examples of items and substances contemplated as qualifying for exemption, among them being insecticides and fungicides. It is a matter of common knowledge that the direct impact of these substances is generally upon the environment or medium in or through which production occurs.

In this instance, application of the test of Indiana Department of Revenue v. RCA Corporation, supra, as interpreted by the State, must yield to the express language of the statute. Guided by that language, we conclude that Dairy's purchases of insecticides, insect spray, bird repellent and cleaning compounds qualify for the exemption provided by IC 1971, 6--2--1--39(b)(1), supra. While cleaning compounds are not specifically listed therein, their use by Dairy to retard growth of harmful bacteria is functionally similar to the use of fungicides and therefore falls within the class of exempted items.

A somewhat different question is presented with respect to Dairy's cleaning equipment, specifically identified by the trial court as including sponges, scouring pads, towels, mops and wipers. Though clearly essential to the cleaning process, their impact is arguably less direct than that of the cleaning compounds. The drawing of a distinction at this point may seem unduly technical. However, the emphatic and repetitious language employed by the Legislature in expressing the requirement of directness reflects an intent that such technical distinctions be drawn. This apparent intent, when coupled with the principle requiring strict construction of exemption statutes against the taxpayer where ambiguity exists, leads us to the conclusion that the trial court erred in its determination that Dairy's purchases of cleaning equipment are exempt from taxation under one or more of the previously cited subsections of IC 1971, 6--2--1--39, supra.

II.

Also found by the trial court to be exempt under one or more of subsections (b)(1), (6),...