Indianapolis Fruit Co. v. Department of State Revenue

• Decision Date: 25 February 1998
• Docket Number: No. 49T10-9702-SC-00129,49T10-9702-SC-00129
• Citation: 691 N.E.2d 1379
• Parties: INDIANAPOLIS FRUIT CO., Petitioner, v. DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Indiana Tax Court

Page 1379

691 N.E.2d 1379

INDIANAPOLIS FRUIT CO., Petitioner, v. DEPARTMENT OF STATE REVENUE, Respondent.

No. 49T10-9702-SC-00129.

Tax Court of Indiana.

Feb. 25, 1998.

Rosemary G. Spalding, Spalding & Watson, Indianapolis, for petitioner.

Jeffrey A. Modisett, Attorney General of Indiana, Angela L. Mansfield, Deputy Attorney General, Indianapolis, for respondent.

FISHER, Judge.

Indianapolis Fruit Co. (Indianapolis Fruit) appeals a final determination of the Department of State Revenue (Department) denying it an exemption from certain sales and use taxes for the 1992 through 1995 tax years. Indianapolis Fruit claims that the Department improperly denied it a sales and use tax exemption for certain property purchased or leased during the tax years at issue.

FACTS

Indianapolis Fruit is a wholesale supplier of fruits and vegetables. Indianapolis Fruit also operates a "Garden Cut" facility. The Garden Cut facility produces freshly cut fruits and vegetables for resale by restaurants and grocery stores. In the course of its wholesale business, Indianapolis Fruit receives fruits and vegetables and distributes them to its customers. Most of these fruits and vegetables require little in the way of processing before resale because they are in a marketable condition when Indianapolis Fruit receives them. This is not the case with bananas and tomatoes; when Indianapolis Fruit receives them, they are not marketable, and they require additional processing to put them into that condition.

Banana Ripening

Indianapolis Fruit buys bananas in large quantities from various locations in Central and South America. When the bananas arrive, they are green, hard, and inedible, and are not marketable. Soon after Indianapolis Fruit receives the bananas, they are taken directly to the banana ripening area, where they are inspected for pulp temperature, firmness, temperature damage, and overall quality. Once they have been inspected, the bananas are placed in banana ripening booths, which are controlled for temperature, humidity, air circulation, and ethylene gas concentration. Indianapolis Fruit varies these environmental controls depending on the condition of the bananas and the specifications of the customer order to be filled.

Ethylene gas exposure is an important part of the ripening process. If Indianapolis Fruit did not introduce the gas into the banana ripening booths, the bananas would not satisfactorily ripen on their own. Rather, the bananas would turn from green to black, instead of green to yellow. Additionally, the necessary conversion from starch to sugar would not occur, and as a result, the pulp would never have satisfactory taste or texture.

In nature, the bananas themselves produce the ethylene gas that triggers ripening. However, in order to prevent or delay ripening during banana shipments from remote locations, many banana suppliers grow hybridized While the bananas are ripening in the ripening booths, they are inspected several times each day. Depending on their condition, the bananas may be moved to different ripening booths. The ripening process lasts from four to eight days. Once the bananas are ripened to the customer's specifications, the bananas are shipped.

bananas that do not produce enough ethylene to trigger ripening. Other suppliers chemically induce a state of dormancy in the bananas to prevent premature ripening. In either situation, ripening can only be triggered by introducing ethylene gas into the booths.

Tomato Ripening and Repackaging

The tomato ripening process is in many respects identical to the banana ripening process. However, Indianapolis Fruit does not ordinarily expose the tomatoes to ethylene gas. Instead, Indianapolis Fruit's suppliers usually expose the tomatoes to ethylene gas before shipment. This is done because tomatoes take longer to ripen than bananas and because the tomatoes that Indianapolis Fruit receives are usually grown and shipped from within the United States.

Like the bananas, once the tomatoes arrive, they are inspected for color, firmness, temperature damage, and overall quality. They are then placed in tomato processing units, which are controlled for temperature, humidity, and air circulation. When the tomatoes are adequately ripened, they are either shipped in bulk or further processed by Indianapolis Fruit.

The further processing of some tomatoes is required because some of Indianapolis Fruit's customers order tomatoes packaged by size and ripeness. Indianapolis Fruit washes and dries these tomatoes. They are then sorted by size and ripeness, packaged in styrofoam trays and wrapped in plastic.

The Garden Cut Facility

Indianapolis Fruit operates a Garden Cut facility where employees clean, cut, and package fruits and vegetables for resale by restaurants and grocery stores. Indianapolis Fruit requires its Garden Cut employees to wear protective clothing to ensure that its facility meets or exceeds applicable state and federal standards concerning contamination of food for human consumption. In addition, several of Indianapolis Fruit's customers regularly inspect the Garden Cut facility to ensure that adequate food sanitation procedures are carried out.

Garden Cut employees who are involved directly with handling food must wear hair restraints, lab coats, vinyl gloves, and neoprene aprons and sleeves. Employees who do not handle the food directly are required to wear hair restraints only. Indianapolis Fruit regularly trains its employees in the prevention of food contamination. It provides training films in both English and Spanish to ensure that all its employees understand food safety. Indianapolis Fruit also has specific disciplinary procedures in place for violations of its food safety policies. Additional facts will be added as necessary.

PROCEDURAL HISTORY

On December 31, 1995, Indianapolis Fruit filed a claim for refund with the Department alleging that it had paid sales and use tax on certain exempt items for the tax years at issue. The Department conducted a hearing and denied a large part of Indianapolis Fruit's claim in a letter of findings dated November 20, 1996. On February 14, 1997, Indianapolis Fruit filed this original tax appeal as a small tax case, and on June 27, 1997, the parties tried this cause before this Court. At issue in this case is Indianapolis Fruit's contention that it is entitled to a refund of sales and use tax paid on equipment used in the banana and tomato ripening process and the protective clothing worn by Indianapolis Fruit's employees in the Garden Cut facility.

ANALYSIS AND OPINION

Standard of Review

This Court reviews the Department's final determinations de novo and is bound by neither the evidence nor the issues raised at the administrative level. See IND.CODE ANN. § 6-8.1-9-1(d) (West Supp.1997); Horrall v. Department of State Revenue, 687 N.E.2d 1219, 1220 (Ind.Tax Ct.1997).

Discussion and Analysis

Indiana imposes an excise tax (gross retail or sales tax) on retail transactions in Indiana. See IND.CODE ANN. § 6-2.5-2-1 (West 1989). Indiana also has a complementary excise tax (use tax) on tangible personal property stored, used, or consumed in this state. See IND.CODE ANN. § 6-2.5-3-2 (West Supp.1997); Mid-America Energy Resources, Inc. v. Department of State Revenue, 681 N.E.2d 259, 261 (Ind.Tax Ct.1997), review denied; see also USAir, Inc. v. Department of State Revenue, 623 N.E.2d 466, 468-69 (Ind.Tax Ct.1993) (discussing complementary sales and use taxes). A variety of exemptions from these complementary taxes are available. ¹ See IND.CODE ANN. §§ 6-2.5-5-1 to -38.2 (West 1989 & Supp.1997). Like any other exemptions, these exemptions are strictly construed against the taxpayer, see Sony Music Entertainment, Inc. v. State Bd. of Tax Comm'rs, 681 N.E.2d 800, 801 (Ind.Tax Ct.1997), review denied, and the taxpayer bears the burden of demonstrating entitlement to the exemption. See id. However, this Court must avoid reading an exemption provision so grudgingly that the legislative intent and purpose are thwarted. See Mid-America Energy Resources, 681 N.E.2d at 261; Harlan Sprague Dawley v. Department of State Revenue, 605 N.E.2d 1222, 1225 (Ind.Tax Ct.1992).

Indianapolis Fruit contends that it is entitled to the exemptions contained in sections 6-2.5-5-1 to -3 for its banana and tomato ripening equipment and the protective clothing worn by its employees at the Garden Cut facility. Sections 6-2.5-5-1 and -2 exempt tangible personal property used in agricultural production. Section 6-2.5-5-3 is a more general provision, and is often referred to as the equipment exemption. It exempts manufacturing machinery, tools, and equipment used to produce "other tangible personal property." IND.CODE ANN. § 6-2.5-5-3(b) (West Supp.1997).

All three exemption provisions require that the taxpayer engage in production before qualifying for the exemption. See Mechanics Laundry & Supply, Inc. v. Department of State Revenue, 650 N.E.2d 1223, 1228-29 (Ind.Tax Ct.1995) (construing section 6-2.5-5-3 as requiring production); Department of State Revenue v. American Dairy, Inc., 167 Ind.App. 367, 338 N.E.2d 698, 700 (1975) (construing predecessor statute to sections 6-2.5-5-1 and -2 as requiring production). Production does not have different meanings under different exemption provisions. See Citizens Action Coalition, Inc. v. Northern Ind. Pub. Serv. Co., 485 N.E.2d 610, 617 (Ind.1985); Mechanics Laundry, 650 N.E.2d at 1232 (construing environmental quality exemption, IND.CODE ANN. § 6-2.5-5-30 (West 1989) (amended 1997), in harmony with the industrial exemptions); Harlan Sprague Dawley, 605 N.E.2d at 1230 (construing utility exemption, IND.CODE ANN. § 6-2.5-4-5(c) (West 1989) (amended 1993), in harmony with the industrial exemptions). Consequently, as a practical matter, there is little difference between analyzing Indianapolis Fruit's operation under the agricultural exemptions and section 6-2.5-5-3. ²

Indianapolis Fruit's...