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

• Decision Date: 28 August 1980
• Docket Number: No. 2-1278A433,2-1278A433
• Citation: 409 N.E.2d 690
• 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: Indiana Appellate Court

Page 690

409 N.E.2d 690

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).

No. 2-1278A433.

Court of Appeals of Indiana, Second District.

Aug. 28, 1980.

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

Michael R. Fruewald, Indianapolis, for appellee.

SHIELDS, Judge.

The Indiana Department of State Revenue (Department) appeals the decision of the trial court ordering a refund of state gross retail tax and use tax (sales and use tax) paid on the purchase of transportation equipment and supplies, repairs, and fuel used in connection with the equipment.

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

"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."

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 § 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.

"6. Cave is entitled to a refund of gross retail tax, interest, and penalties paid with respect to its hauling crude and stock out steps, as set forth above, plus interest at 6% from the date of payment to the date of judgment."

Judgment was entered for Cave in the amount of $10,230.71 plus prejudgment interest of $1,636.91. Meshberger received $4,321.27 plus prejudgment interest of $691.40.

We affirm in part and reverse in part.

Department asserts the trial court erred:

(1) in finding the machinery, parts and related items used by Cave and Meshberger in the hauling crude stone and stock out procedures were exempt from sales and use tax by IC 6-2-1-39(b)(6) (Burns Code Ed., Supp.1979) and applicable Department regulations; ²

(2) in declaring applicable Department regulations invalid insofar as they require a finding that the contested items were not exempt from the sales and use tax;

(3) in finding the delayed payments were not due to negligence or intentional disregard of the law; and

(4) in finding Cave and Meshberger were entitled to a refund. ³

I

IC 6-2-1-39(b)(6) reads as follows:

"(b) Nor shall the state gross retail tax apply to any of the following transactions. . . .

(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; . . . ."

The Department takes the position IC 6-2-1-39(b)(6) requires the purchased machinery, tools, and equipment must directly effect a change in the basic material substance in production to qualify for exemption.

Cave and Meshberger argue the equipment is exempt because it directly contacts and moves the stone during its processing. They contend the decision of the trial court is supported by the plain meaning of the statute, by recent Indiana decisions exempting such transportation equipment, by the Department's own regulations, and by well-reasoned authorities...