Kerr-McGee Chemical Corp. v. Buelow, KERR-M

• Decision Date: 21 December 1995
• Docket Number: KERR-M,No. 94-CA-00881-SCT,94-CA-00881-SCT
• Citation: 670 So.2d 12
• Parties: cGEE CHEMICAL CORPORATION v. Ed BUELOW, Jr., Chairman and Commissioner of Revenue, and the Mississippi State Tax Commission.
• Court: Mississippi Supreme Court

Page 12

670 So.2d 12

KERR-McGEE CHEMICAL CORPORATION v. Ed BUELOW, Jr., Chairman and Commissioner of Revenue, and the Mississippi State Tax Commission.

No. 94-CA-00881-SCT.

Supreme Court of Mississippi, In Banc.

Dec. 21, 1995.

Rehearing Denied March 14, 1996.

Jamie G. Houston, III, Robert A. Miller, Frank A. Wood, Jr., Watkins & Eager, Jackson, for appellant.

Brenda G. Cameron, Bobby R. Long, Jackson, for appellee.

SMITH, Justice, for the Court:

This case of first impression comes to this Court from the Chancery Court of Hinds County on appeal of Kerr-McGee Chemical Corporation (KMCC) who claims that it is entitled to a tax refund based on the premise that certain electricity purchased from the Tennessee Valley Authority (TVA) from November 1, 1986, through July 31, 1990, was used as a raw material in its electrolytic processes, thereby exempting KMCC from Mississippi sales and use taxes. KMCC claims that the electricity was combined with certain chemical solutions in the electrolytic cells to create the products of sodium chlorate and manganese metal. Thus, this Court must determine whether the electricity was a raw material or a catalyst and not subject to taxation under the spirit of Miss.Code Ann. § 27-65-101 and § 27-67-7 (1972), as argued by KMCC.

The Mississippi State Tax Commission contends that all of the electricity used by KMCC is energy and meant to bring about end products in the electrolytic process; since by definition electricity is energy and has no mass or space, it cannot be a raw material.

The chancellor agreed with the Tax Commission and found that because she could not find a legislative intent to include electricity in the exemption provided for raw materials, electricity used in the electrolytic cell processes should be revisited by the legislature to clarify its intent under Miss.Code Ann. § 27-65-101(1)(b) (1972). The chancellor also held the statute of limitations issue as moot as to what period of time KMCC could claim a refund in the event it was awarded the refund sought. KMCC appeals to this Court citing two issues:

I. WHETHER ELECTRICITY IS A RAW MATERIAL SUBJECT TO SALES AND USE TAX EXEMPTION UNDER MISS.CODE ANN. § 27-65-101(1)(B) (1972).

II. IN THE EVENT THE REFUND SOUGHT IS GRANTED, WHAT IS THE APPLICABLE STATUTE OF LIMITATIONS ON SUCH REFUND UNDER MISS.CODE ANN. § 27-65-42 (1972).

FACTS

Kerr-McGee Chemical Corporation owns and operates a chemical manufacturing facility On September 24, 1990, KMCC made a timely application for a hearing before the Board of Review for correction of the amount of tax assessed. In conjunction with said application, KMCC also submitted to the Board of Review a claim for refund of certain use taxes erroneously paid by KMCC on certain electricity used in the plant's electrolytic process. The claim for refund was for the amount of $605,590.04, and it covered the period November 1, 1986, to July 31, 1990. This amount was based upon a representative percentage figure for usage of electricity attributable to the two electrolytic manufacturing processes within the Hamilton plant. This claim was later revised to a figure totaling $618,387.58.

located in Hamilton, Mississippi. There, KMCC produces several chemicals which are sold to other manufacturers for further processing. By a letter dated December 14, 1989, the Tax Commissioner notified KMCC that an examination had been initiated of certain sales and use tax returns filed on and after December 14, 1986, since the statute of limitations applied to any returns filed after that date. On August 13, 1990, the Commissioner made an assessment of an additional use tax in the amount of $96,510.72 plus interest and damages in the amount of $18,444.35, for a total of $114,955.07. This assessment covered the period of November 1, 1986, to May 31, 1990.

A hearing was held before the Board of Review on December 3, 1990, at which the Board heard both KMCC's and the Commissioner's arguments. Subsequently, the Board issued an order dated January 15, 1991, in which it reduced the initial use taxes assessment to $108,020.28, from the earlier $114,955.07, and denied KMCC's unrelated refund claim in the amount of $605,590.04 for the period of November 1, 1986, to July 31, 1990.

The Board's decision was then timely appealed to the Mississippi Tax Commission, for a hearing on both the original assessment and the denial of refund. On May 1, 1991, the Commission heard arguments, and on May 6, 1991, the Commission affirmed the Board of Review on both issues. KMCC has paid in full the costs of the initial assessment. Having exhausted all administrative remedies, KMCC filed in Hinds County Chancery Court for a review of the Commissioner's denial of KMCC's claim for a refund of $618,387.58, plus interest thereon. The chancellor affirmed the Commission's denial of a refund, initiating this appeal.

At the Hamilton facility, KMCC utilizes two electrolytic manufacturing processes ¹ to manufacture the products of sodium chlorate, hydrogen, manganese metal, sulfuric acid, and oxygen.

An electrolytic process is a process that produces a chemical change by the passage of an electric current through a substance, i.e., a chemical solution. ² In the electrolytic In the operation of the electrolytic cells, KMCC uses electricity purchased from TVA. A significant portion of the electricity is "used in the electrolytic process" for the purpose of manufacturing certain chemicals, and a small remainder is "used to fuel the electrolytic process."

process, electricity is used as a raw material/reactant, which enters into and is altered in the course of the chemical reaction. Thus, electricity is used in the manufacturing process by directly causing the formation of the chemicals manufactured and in this process becoming converted into chemical energy within the chemicals or elements manufactured.

KMCC's basic contention is that the electricity used by it in the electrolytic process to produce sodium chlorate and manganese metal constitutes a raw material or a catalyst and is therefore exempt from Mississippi sales tax under Miss.Code Ann. § 27-65-101(1)(b) ³ and thereby exempt from Mississippi use tax under Miss.Code Ann. § 27-67-7. ⁴ KMCC did not ask for an exemption for the electricity used for its administrative offices, burning lights, running motors, energy to run the cells or machines, or for the electricity expended in running its third sub-plant at the Hamilton facility. Moreover, no exemption is being sought for the electricity used in the manganese or sodium chlorate plants to make lights burn, power motors, run fans or heating and cooling equipment. KMCC claims that approximately 88-89% of the electricity introduced into the electrolytic cell is actually used in the process and only 10% is used to power the cell machinery. KMCC asks for an exemption only for that portion of the electricity used as an element in its two electrolytic processes; otherwise it argues taxing such electricity is tantamount to a value added tax. KMCC relies on the fact that electricity is not an end product, and suggests that the spirit of the law is meant only to tax the end product and to exempt ingredients used directly in manufacturing the product. KMCC also explains its position by comparing such electricity to certain enumerated exempt items, and by using industry standards that define electricity as a raw material when used in the electrolytic process.

The Mississippi State Tax Commission contends that the electricity is not entitled to an exemption because Webster's and classical science do not define it as a "raw material." The Commission believes that the electrical power or energy purchased "drives the reaction" or "causes it to happen" by pushing the flow of electrons into the cell. It was argued in the lower court that it is the electrons that should be considered the raw material, and since KMCC does not purchase electrons The lower court held that KMCC failed to prove either by the preponderance of the evidence or by clear and convincing evidence that electricity is a raw material within the meaning of Miss.Code Ann. § 27-65-101(1)(b). The chancellor did not discuss the statute of limitations question and for its findings of fact and conclusions of law, the lower court adopted the Tax Commission's findings of fact and Conclusions of Law verbatim. KMCC appeals on both the exemption and the statute of limitations issue.

from TVA and no electrons from TVA end up in the final product, the electricity cannot be considered raw material. In essence, the Tax Commission's argument is that electricity is not the raw material, but it causes a reaction in the raw materials. However, in the same breath, the Tax Commission admits that "a portion of the energy purchased from TVA finds its way into the final product."

DISCUSSION OF LAW

Generally, both the chancery court and the supreme court are limited in appellate authority to review actions of the State Tax Commission under the arbitrary and capricious standard. Miss. State Tax. Com'n. v. Jenkins, 624 So.2d 91, 92 (Miss.1993). However, the Supreme Court will not defer to the Commission's interpretation of a taxation statute when the interpretation is repugnant to plain meaning thereof. Miss. State Tax Com'n. v. Dyer Inv. Co., Inc., 507 So.2d 1287 (Miss.1987).

This Court's review of a chancellor's findings of fact is the manifest error/substantial evidence rule. Miss. State Tax Com'n v. Medical Devices, 624 So.2d 987 (Miss.1993). This Court reviews law application de novo and our scope of review is plenary. Id. at 989. Moreover, findings of fact and Conclusions of Law prepared by counsel and entered verbatim by a court are viewed "with a more critical eye to insure that the trial court has adequately performed its function." Rice Researchers, Inc. v. Hiter, 512 So.2d 1259, 1265 (Miss.1987).

Involved here is the construction of an exemption statute, Miss.Code Ann.1972, §...