Mechanics Laundry & Supply, Inc. v. Indiana Dept. of State Revenue

• Decision Date: 11 May 1995
• Docket Number: No. 49T10-9212-TA-00109,49T10-9212-TA-00109
• Citation: 650 N.E.2d 1223
• Court: Indiana Tax Court
• Parties: MECHANICS LAUNDRY & SUPPLY, INC., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

Page 1223

650 N.E.2d 1223

MECHANICS LAUNDRY & SUPPLY, INC., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

No. 49T10-9212-TA-00109.

Tax Court of Indiana.

May 11, 1995.

Lawrence A. Jegen, III, Indianapolis, Jay D. McShurly, Somerset, KY, for petitioner.

Pamela Carter, Atty. Gen., David A. Arthur, Deputy Atty. Gen., Indianapolis, for respondent.

FISHER, Judge.

Mechanics Laundry and Supply, Inc. (Mechanics Laundry) appeals the Indiana Department of State Revenue's (the Department) denial of its claim for refund of Indiana State Gross Retail and Use Taxes (sales taxes) for 1989.

ISSUES

At issue is whether Mechanics Laundry's purchases of: 1) cleaning supplies and products, ¹ 2) machinery and equipment, ² 3) utilities, ³ 4) repair parts, ⁴ and 5) EPA compliance items ⁵ are exempt from the sales tax under:

I. IND.CODE 6-2.5-5-3, the equipment exemption;

II. IND.CODE 6-2.5-5-5.1, the consumption exemption;

III. IND.CODE 6-2.5-5-6, the incorporation exemption;

IV. IND.CODE 6-2.5-5-30, the environmental quality exemption. ⁶

Also at issue is:

V. Whether the Department failed to rely on previously stated, ascertainable standards when it denied Mechanics Laundry's claim for refund and thereby violated Mechanics Laundry's constitutional right to due process under the Fifth and Fourteenth Amendments of the United States Constitution.

MECHANICS LAUNDRY'S BUSINESS OPERATIONS

Mechanics Laundry is in the business of renting clean textiles including uniform apparel, walk-off mats, shop rags, table linens, bed sheets, and roll towels. Its customers include businesses such as garages, restaurants, and hotels, whose activities typically cause textiles to become heavily soiled. Mechanics Laundry operates ten plants in Indiana at which it performs three main activities: 1) the preparation of uniform apparel for rental, 2) the laundering of soiled textiles for re-rental, and 3) the decontamination of waste water resulting from the laundering of soiled textiles in order to make that water acceptable for release into municipal sewer systems.

The preparation of uniform apparel for rental is a multi-staged activity. First, Mechanics Laundry selects from its inventory the uniform apparel that each customer requires. Then, it tailors each garment to fit the person who will wear it. Next, it designs, sews, and affixes to the uniform apparel various logos and name tags. Finally, Mechanics Laundry places the uniform apparel in plastic garment bags and loads the uniform apparel onto trucks for delivery to customers.

The laundering of soiled textiles is also a multi-staged activity. To insure that its customers have a continuous supply of clean textiles, Mechanics Laundry periodically delivers clean textiles to, and picks up soiled The decontamination of waste water is a multi-staged activity, as well. First, Mechanics Laundry routes waste water from its industrial washing machines into waste water treatment equipment. Then, Mechanics Laundry injects various chemicals and acids into the waste water treatment equipment. The chemicals and acids cause contaminants in the water to sink and form a sludge at the bottom of the waste water treatment equipment. Finally, the cleaned water is separated from the sludge and released into municipal sewer systems.

textiles from, its customers. When soiled textiles are returned to Mechanics Laundry, they are washed, dried, and pressed. Any damaged textiles are mended and repaired. Then, cleaned and repaired textiles are placed in plastic bags and loaded onto trucks for re-delivery to customers.

PROCEDURAL HISTORY

On September 1, 1992, Mechanics Laundry filed a claim for refund of sales taxes paid in 1989 in the amount of $131,900.43. In its claim for refund, Mechanics Laundry asserted that the preparation of uniform apparel and the laundering of soiled textiles constituted "processing" tangible personal property within the meaning of I.C. 6-2.5-5-3, 6-2.5-5-5.1, and 6-2.5-5-6. ⁷ Therefore, Mechanics Laundry claimed, many of its purchases were exempt from the sales tax. On September 21, 1992, the Department denied Mechanics Laundry's claim for refund on the ground that Mechanics Laundry was not engaged in "production." On December 17, 1992, Mechanics Laundry filed this appeal.

DISCUSSION AND ANALYSIS

Standard of Review

"The court reviews appeals from the Department de novo." Kenny Kent Chevrolet Co. v. Indiana Dep't of State Revenue (1994), Ind.Tax, 627 N.E.2d 890, 891. It is bound by neither the issues nor the evidence presented at the administrative level. Id. When a taxpayer claims entitlement to a tax exemption, the taxpayer bears the burden of showing that the terms of the exemption are met. Indiana Bell Telephone Co. v. Indiana Dep't of State Revenue (1994), Ind.Tax, 627 N.E.2d 1386, 1387. The burden is a difficult one, for ambiguities in exemption statutes are strictly construed against the taxpayer. See General Motors Corp. v. Indiana Dep't of Revenue (1991), Ind.Tax, 578 N.E.2d 399, 404, aff'd (1992), Ind., 599 N.E.2d 588. Nevertheless, exemption statutes are not to be construed so narrowly as to defeat the legislature's purpose in enacting them. Id.

I. The Equipment Exemption

Mechanics Laundry contends that when it prepares uniform apparel and launders soiled textiles it is engaged in "processing ... other tangible personal property" within the meaning of I.C. 6-2.5-5-3, the equipment exemption. The equipment exemption provides:

Transactions involving manufacturing machinery, tools, and equipment are exempt from the state gross retail tax if the person acquiring that property acquires it for direct use in the direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining, or finishing of other tangible personal property.

I.C. 6-2.5-5-3 (emphases added). Because "processing" is not defined in I.C. 6-2.5-5-3, Mechanics Laundry urges this court to construe the word "processing" in accord with its common dictionary definition. Mechanics Laundry offers several definitions of the word "processing" as found in various dictionaries. Petitioner's Exhibit 1 at 18-27. The Department, however, contends that in the context of the equipment exemption, the When the meaning of a statute's language is reasonably susceptible to more than one interpretation, the court turns to the rules of statutory construction for guidance in construing the statute. Johnson County Farm Bureau Coop. v. Indiana Dep't of State Revenue (1991), Ind.Tax, 568 N.E.2d 578, 580, aff'd (1992), Ind., 585 N.E.2d 1336. One rule of statutory construction is that words and phrases are to be given their plain, ordinary, and usual meaning. IND.CODE 1-1-4-1(1); Johnson County Farm Bureau, 568 N.E.2d at 581. The plain, ordinary, and usual meaning of a word is usually found in a dictionary. See id. The question whether Mechanics Laundry is engaged in "processing" within the meaning of the equipment exemption, however, cannot be answered merely by looking to the dictionary, for the goal of statutory interpretation is to ascertain and give effect to the legislature's intent. Id. at 580. When the legislature's intent reveals that a word is used in a manner different from its common dictionary definition, the common dictionary definition must be disregarded. Id. at 581.

word "processing" has meaning only to the extent that "production" occurs. ⁸

Mechanics Laundry advances four arguments to support its claim that it is entitled to the equipment exemption. First, Mechanics Laundry argues that one can be engaged in "processing" within the meaning of the equipment exemption without being engaged in "production." Specifically, Mechanics Laundry asserts that because the terms "production," "manufacture," "fabrication," "assembly," "extraction," "mining," "processing," "refining," and "finishing" are separated by commas, the correct "grammatical interpretation" requires that they be viewed as separate and distinct--not linked to production.

When the meaning of a statute is in doubt, a court may apply the rules of grammar to interpret the statute. Leehaug v. State Bd. of Tax Comm'rs (1991), Ind.Tax, 583 N.E.2d 211, 212. Nevertheless, considerations of grammatical and rhetorical usage are not controlling when the legislative purpose reveals a contrary intent. Hill v. State (1986), Ind., 488 N.E.2d 709, 710. Likewise, considerations of grammatical and rhetorical usage are not controlling when our supreme court has already provided guidance on the interpretation of a statute.

In the case of the equipment exemption, our supreme court has held that the terms used are not separate and distinct. Indiana Department of State Revenue v. Cave Stone, Inc. (1983), Ind., 457 N.E.2d 520. Indeed, the supreme court stated that the terms used "are not mutually exclusive; ... [rather, they] overlap and at times encompass each other." Id. at 524. The supreme court even employed the terms "interchangeably without using any separate definitions." Harlan Sprague Dawley Inc. v. Indiana Dep't of State Revenue (1992), Ind.Tax, 605 N.E.2d 1222, 1226.

Most significant, however, is the fact that our supreme court held that the terms used in the equipment exemption statute provide a "comprehensive description of the various means of production" and "circumscribe[ ] all of the operations or processes by which [a] finished product is derived." Cave Stone, 457 N.E.2d at 524 (emphasis added). Accordingly, there can be production by the means of manufacture, production by the means of fabrication, production by the means of processing, and so forth. The terms used, therefore, have meaning only to the extent that there is production. Indeed, in enacting the equipment exemption, it was the legislature's intent to "encourage industrial growth by allowing an exemption for items closely connected with the production of goods." General Motors, 578 N.E.2d at 404 (emphasis in original) (quoting Indiana Dep't of State Revenue...