Ladish Malting Co. v. Wisconsin Dept. of Revenue

Decision Date21 August 1980
Docket NumberNos. 79-495,s. 79-495
Citation98 Wis.2d 496,297 N.W.2d 56
PartiesLADISH MALTING CO., a Wisconsin corporation, Plaintiff-Respondent, v. WISCONSIN DEPARTMENT OF REVENUE, Defendant-Appellant, Town of Aztalan, Defendant. * to 79-498.
CourtWisconsin Court of Appeals

Review Denied.

John C. Murphy, Asst. Atty. Gen., for defendant-appellant; Bronson C. La Follette, Atty. Gen., and E. Weston Wood, Asst. Atty. Gen., on brief.

John A. Hazelwood (argued) and Elwin J. Zarwell, Quarles & Brady, Milwaukee, on brief, for plaintiff-respondent.



This is an appeal by the Wisconsin Department of Revenue (department) from a judgment determining that certain property used by the Ladish Malting Company (taxpayer) in the manufacture of malt was exempt from property taxes under sec. 70.11(27), Stats. The taxpayer brought four separate actions seeking declaratory judgment and a refund of taxes paid to the defendant Town of Aztalan from 1974 through 1977 based on the department's assessments. The town is not a party to this appeal. The actions were heard together on the basis of a detailed stipulation of facts, disposed of by a single judgment ordering a total refund of $375,125, and consolidated on appeal. We affirm.

Section 70.11(27), Stats., was created by ch. 90, Laws of 1973, as a part of the budget bill. The subsection embodies the so-called "M & E" exemption from property taxation of "(m)anufacturing machinery and specific processing equipment, exclusively and directly used by a manufacturer in manufacturing tangible personal property." The exempted property is defined by the statute as:

any combination of electrical, mechanical or chemical means, including special foundations therefor, designed to work together in the transformation of materials or substances into new articles or components, including parts therefor, regardless of ownership and regardless of attachment to real property. This shall not be construed to include materials, supplies, buildings or building components ; nor shall it include equipment, tools or implements used to service or maintain manufacturing machinery or equipment. (Emphasis supplied.)

The disputed items of property are attemporators, kilns, and malt elevators. It is undisputed that each of these items is used exclusively and directly by the taxpayer in the transformation of barley into malt. The parties stipulate that "but for the building-building component exception" to the M & E exemption, the property would not be taxable.

The department's main contention is that none of the properties is a machine because each of them is a "building" within the meaning of the italicized exclusion from the definition of machinery and equipment set forth above. In its reply brief on appeal, however, it also contends that the exemption "applies only to machinery which is not a building or building component."

The department thereby proffers, though it does not press, two inconsistent views of the statute. Under its first contention machinery and equipment on the one hand, and buildings or building components on the other, are mutually exclusive categories of property. Under its second contention they are not. Because we agree with the trial court's determination that the structures in question are machinery or equipment and are not buildings within the contemplation of the statute, we need not address the question whether it is possible for one structure to fit both categories simultaneously nor whether any such structure would be entitled to the statutory exemption.

The structures involved in this case share certain characteristics. All have walls, floors, and ceilings or roofs. At least the kiln and the attemporator have foundations. All are very large structures comporting, as the trial court noted, with the magnitude of the taxpayer's operations. All have a "building-like" appearance from the outside. Each performs an independent, essential function in the manufacturing process by which malt meeting the various specifications of the taxpayer's customers is made.

The parties agree that an attemporator is similar to a "giant air conditioner-humidifier." Its function is to maintain the exact temperature and humidity conditions required to induce the germination of barley kernels- the first step of the malt-making procedure-within "growing compartments" inside the taxpayer's malt house. 1 Each attemporator consists of a fan and three compartments attached to a growing compartment. The fan forces air to circulate past water sprays in the compartments of the attemporator, where it is saturated to 100 percent humidity. The air is then forced into the growing compartments. The parties agree that no part of the attemporator's walls, ceiling, or floor has any value solely on its own, and that the same are designed to channel the moisturized air through the attemporator and into the growing compartments. The outer shells of the taxpayer's attemporators, which are custom made, are composed of one-half inch of transite (a corrugated asbestos and concrete material), the same as the outer shell of the malt houses to which they are attached. Commercially produced attemporators made of stainless steel are available on the market. They perform exactly the same function as the taxpayer's attemporators and do not look like buildings.

After germination has occurred to the desired degree, the resultant "green malt" is transferred to kilns, which are self-supported brick wall enclosures, for heating and drying. Huge fans at the top of the structure draw heated air up through three tiers of trays with perforated bottoms upon which the grain is spread. The trays have louvers which are opened manually from time to time to allow the grain at the higher levels to fall to the tray beneath at the appropriate stage in the drying process. The temperature inside the kiln may reach as high as 220 degrees Fahrenheit, depending on the type of malt being produced.

After drying is completed to the required specifications, the grain is placed in malt elevators for aging and blending according to the individual customer's order. Aging is an organic process during which the moisture content in the kernels of green malt stabilize at a uniform level from the center of each kernel to its outer shell. The taxpayer has more than 50 brewery customers, each of which specifies the length of time the ordered malt is to be aged and the particular mix of different malts desired. Externally the malt elevators look like barley elevators in which the barley is stored prior to the malt-making process. The taxable status of the storage elevators is not challenged by the taxpayer. The malt elevators contain rows of bins in which different types of malts are kept. The particular mix ordered by the customers is blended by regulating the flow of various malts onto conveyor belts beneath the bins. The final mix is transported to shipping bins, which are not involved in this appeal.

The three structures may be entered by employees for maintenance or cleaning but are not generally occupied by employees during the course of the manufacturing process. The attemporators, kilns and malt elevators are monitored on an almost totally automated basis from a central control room in a different location.

Employees are not inside the attemporators during any time they are operating. When employees enter the kilns each day to manually rotate the louvers and dump the tray floors, they must pass through an air lock adjoining the kiln because of the enormous difference in external and internal air pressure. The temperature within the kiln is reduced to 100 degrees during such times. Access to the top of the malt elevators for servicing the conveyor equipment is provided by a concrete stair tower or a man lift. It is very unusual for an employee to be inside a malt bin, and this never occurs when there is an appreciable amount of malt within the bin.

There are no plumbing, heating or cooling facilities within the three structures except as they specifically relate to the manufacturing processes which occur within them. There is electric wiring for lighting and manufacturing purposes, but no toilets, rest areas or other "creature comforts" inside any of them.

We cannot improve on the trial court's designation of the central issue. It asked:

What is the meaning of "buildings or building components"? The noun "building", considered outside of any factual context is an inert concept noting in its broadest possible sense the enclosure of space. . . . Was it the intent of the legislature to exclude from exemption any creation which encloses space, even though it also may functionally contribute to the "transformation of substance"?

The answers to these questions are not clear from the face of the statute, even applying the appropriate rules of construction. Pursuant to those rules, a tax exemption statute is to be strictly construed against granting the exemption since "tax exemptions, deductions and privileges are matters of legislative grace." Ramrod, Inc. v. Department of Revenue, 64 Wis.2d 499, 504, 219 N.W.2d 604, 607 (1974). Moreover, the burden of bringing the property in question within the terms of the exemption is on the taxpayer, and any doubts that he has done so are to be resolved in favor of taxation. Ramrod, 64 Wis.2d at 504, 219 N.W.2d at 607; First Nat. Leasing Corp. v. Madison, 81 Wis.2d 205, 208, 260 N.W.2d 251 (1977). On the other hand, the supreme court has stated:

"(A) strict construction is nonetheless a construction, and an exemption statute need not be given an unreasonable construction or the narrowest possible construction. A 'strict but reasonable' construction seems to be the pithy and popular statement of the rule." Columbia Hospital Assn. v. Milwaukee, 35 Wis.2d 660, 668, 151 N.W.2d 750, 754 (1967),...

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