Merch. Warehouse Co. v. Ind. Dep't of State Revenue

• Decision Date: 11 January 2017
• Docket Number: Cause No. 49T10-1302-TA-00009
• Citation: 67 N.E.3d 666
• Parties: MERCHANDISE WAREHOUSE CO., INC., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Indiana Tax Court

67 N.E.3d 666

MERCHANDISE WAREHOUSE CO., INC., Petitioner,

v.INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

Cause No. 49T10-1302-TA-00009

Tax Court of Indiana.

January 11, 2017

ATTORNEYS FOR PETITIONER : DONALD F. FOLEY, TONY H. ABBOTT, FOLEY & ABBOTT, Indianapolis, IN.

ATTORNEYS FOR RESPONDENT : CURTIS T. HILL, JR., ATTORNEY GENERAL OF INDIANA, EVAN W. BARTEL, DEPUTY ATTORNEY GENERAL, Indianapolis, IN.

ORDER ON RESPONDENT'S MOTION FOR SUMMARY JUDGMENT

WENTWORTH, J.

Between October 2009 and September 2012 (the period at issue), Merchandise Warehouse Co., Inc. purchased certain freezer equipment and electricity to power its freezer equipment. Upon review, the Court finds that those retail transactions were not exempt from Indiana sales tax under Indiana Code § 6–2.5–5–3 and Indiana Code § 6–2.5–5–5.1.

FACTS AND PROCEDURAL HISTORY

Merchandise Warehouse, an Indiana corporation, operates a food storage warehouse in Indianapolis, Indiana. Merchandise Warehouse's customers are food manufacturers that deliver to, and store, their products in Merchandise Warehouse's facility. Their food products—meats, vegetables, and soups specifically prepared for businesses like Panera, Chili's, and Wendy's—arrive at Merchandise Warehouse's facility already packaged and on pallets. (First Jt. Stip. Facts, Ex. 5 at 14-15, 17, 19-20, 22-23; Second Jt. Stip. Facts ¶¶ 17, 19, Ex. 23 at 8.) Upon arrival, the food products are either at room temperature, chilled, or even frozen. (See Second Jt. Stip. Facts ¶¶ 11, 20.)

Because some of Merchandise Warehouse's customers want their room-temperature or chilled food products stored in a frozen state, Merchandise Warehouse provides them with either "slow" or "blast" freezing services. (See, e.g., First Jt. Stip. Facts, Ex. 5 at 7; Second Jt. Stip. Facts ¶ 21.) With slow freezing, Merchandise Warehouse simply places its customers' pallets of food products in a freezer to freeze at their own pace, typically five to twelve days. (First Jt. Stip. Facts, Ex. 5 at 7; Second Jt. Stip. Facts ¶ 11.) With blast freezing, however, Merchandise Warehouse uses specialized equipment to freeze the pallets of food products within two days.¹ (Second Jt. Stip. Facts ¶¶ 12, 14, 25.) Either way, the food products are frozen to prolong their shelf-life. (See First Jt. Stip. Facts, Ex. 5 at 7 (indicating that Merchandise Warehouse's customers have a longer amount of time to store and then ship the food products when frozen); Second Jt. Stip. Facts ¶¶ 15-16.)

Merchandise Warehouse stores the frozen food products until its customers release them to their own customers or their designated common-carriers. (See Second Jt. Stip. Facts ¶¶ 23, 26-27, 29-30.) The frozen products leave Merchandise Warehouse's facility on the same pallets upon which they arrived. (Second Jt. Stip. Facts ¶ 27.) Merchandise Warehouse never takes title to its customers' food products. (Second Jt. Stip. Facts ¶ 18.) Merchandise Warehouse bills its customers for the storage space and any freezing incident to that storage. (See, e.g., First Jt. Stip. Facts, Exs. 5 at 9-10, 6 at 6.)

In 2011 and 2012, Merchandise Warehouse filed two Forms ST-200 ("Utility Sales Tax Exemption Applications") and three Forms GA-110L ("Claims for Refund") with the Department covering the period at issue. (See First Jt. Stip. Facts ¶¶ 3, 8, 19, Exs. 1, 5, 12.) In those Forms, Merchandise Warehouse asserted that the electricity it purchased to operate its freezer equipment, as well as certain purchases of freezer equipment, should have been exempt from sales tax because "[t]he freezing of the food constitutes the last stage in the [food's] manufacturing process." (First Jt. Stip. Facts, Exs. 1, 5 at 4, 12 at 1.)

The Department initially denied all three of Merchandise Warehouse's Claims for Refund. (See, e.g., First Jt. Stip. Facts ¶¶ 3-13, 19-21.) After two subsequent administrative hearings, the submission of evidence, and a supplemental audit, however, the Department determined that Merchandise Warehouse was entitled to a 15% refund with respect to its electricity purchases. (See First Jt. Stip. Facts ¶¶ 11, 14-17, 21-23, Exs. 7, 9 at 3-5, 10.) The Department reaffirmed its denial of Merchandise Warehouse's claim for refund on the purchases of the freezer equipment. (See First Jt. Stip. Facts ¶ 24.)

Merchandise Warehouse timely filed an original tax appeal. The Department subsequently moved for summary judgment, claiming that Merchandise Warehouse's purchases of electricity and freezer equipment were not exempt under either Indiana Code § 6–2.5–5–5.1 or Indiana Code § 6–2.5–5–3. (See, e.g., Resp't Br. Supp. Mot. Summ. J. ("Resp't Br.") at 4; Hr'g Tr. at 6 -7, 78 -82.) The Court conducted a hearing on the Department's motion on October 23, 2015. Additional facts will be provided when necessary.

STANDARD OF REVIEW

The Court reviews refund claim denials by the Department de novo. IND. CODE § 6–8.1–9–1(c) (2017). Accordingly, the Court is not bound by the evidence or the issues presented at the administrative level. Horseshoe Hammond, LLC v. Indiana Dep't of State Revenue, 865 N.E.2d 725, 727 (Ind. Tax Ct. 2007), review denied.

Summary judgment is appropriate only when the designated evidence demonstrates that no genuine issues of material fact exist and that the moving party is entitled to judgment as a matter of law. See Ind. Trial Rule 56(C). "When any party has moved for summary judgment, the court may grant summary judgment for any other party upon the issues raised by the motion although no motion for summary judgment is filed by such party." T.R. 56(B).

LAW

Indiana imposes an excise tax, known as the state sales tax, on retail transactions made within the state. IND. CODE § 6–2.5–2–1(a) (2009). "The person who acquires property in a retail transaction is liable for the tax on the transaction[.]" I.C. § 6–2.5–2–1(b).

In an effort to encourage industrial growth and to limit the effect of tax pyramiding, the Indiana legislature has enacted several statutes that exempt from sales tax certain purchases of tangible personal property that are used or consumed in the production of other tangible personal property. See, e.g., Harlan Sprague Dawley, Inc. v. Indiana Dep't of State Revenue, 605 N.E.2d 1222, 1228 (Ind. Tax Ct. 1992). Two of those statutes are directly at play in this case.

The first statute is Indiana Code § 6–2.5–5–5.1. It provides that

[t]ransactions involving [the purchase of electrical energy] are exempt from the [sales] tax if the person acquiring the [electrical energy] acquires it for direct consumption as a material to be consumed in the direct production of other tangible personal property in the person's business of manufacturing, processing, refining, repairing, mining, agriculture, horticulture, floriculture, or aboriculture.

IND. CODE § 6–2.5–5–5.1(a) -(b) (2009). This exemption is known as the Consumption Exemption.² See Brandenburg Indus. Serv. Co. v. Indiana Dep't of State Revenue, 60 N.E.3d 300, 303 (Ind. Tax Ct. 2016).

The second statute, Indiana Code § 6–2.5–5–3, is known as the Equipment Exemption. See id. It provides, in relevant part, that "transactions involving manufacturing machinery, tools, and equipment are exempt from the [sales] 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." IND. CODE § 6–2.5–5–3(b) (2009) (amended 2015).

ANALYSIS

The question before the Court is whether the electricity and freezer equipment Merchandise Warehouse uses to freeze its customers' food products qualifies for the Consumption and Equipment Exemptions. In order to qualify for these exemptions, Merchandise Warehouse must: 1) be engaged in the production of other tangible personal property, and 2) use its electricity and freezer equipment as an essential and integral part of its integrated production process. See Aztec, LLC v. Indiana Dep't of State Revenue, 35 N.E.3d 320, 324 (Ind. Tax Ct. 2015) ; Indiana Waste Sys. of Indiana, Inc. v. Indiana Dep't of State Revenue, 633 N.E.2d 359, 362 (Ind. Tax Ct. 1994). Merchandise Warehouse meets neither of these requirements.

1.

When determining the applicability of the Consumption and Equipment Exemptions, "there is one iron-clad rule: without production there can be no exemption." See Indianapolis Fruit Co. v. Dep't of State Revenue, 691 N.E.2d 1379, 1384 (Ind. Tax Ct. 1998) (citations omitted). Production is broadly defined to encompass a host of different activities and situations; thus, "whether production is occurring depends on the factual circumstances of the [particular] case." Id. at 1383–84. Nonetheless, the Indiana Supreme Court has explained that "production" focuses on the transformation of materials into a new, distinct marketable good.³ See Indiana Dep't of Revenue v. Interstate Warehousing, Inc., 783 N.E.2d 248, 250–51 (Ind. 2003) ; Harlan Sprague Dawley, 605 N.E.2d at 1228 (explaining that the creation of a new, distinct marketable good means that the number of "scarce economic goods" has been increased). See also Rotation Prods. Corp. v. Dep't of State Revenue, 690 N.E.2d 795, 801 (Ind. Tax Ct. 1998) (explaining that while an activity may have an impact on the number of scarce economic goods by increasing their longevity, that activity might not actually produce scarce economic goods).

The Department claims it is entitled to judgment as a matter of law because Merchandise Warehouse is not engaged in production of other tangible personal property when it freezes its customers' food products. More specifically, it explains that the distinct marketable goods in this case—the food products—have already been created by Merchandise Warehouse's customers. (See Resp't Br. at 4, 6-7.) The Department maintains that Merchandise Warehouse merely performs a service upon those already-created, distinct marketable goods (i.e., by freezing them) in order to...