Morton Bldgs., Inc. v. Dept. of State Revenue

• Citation: 819 N.E.2d 913
• Decision Date: 13 December 2004
• Docket Number: No. 49T10-9812-TA-187.,49T10-9812-TA-187.
• Parties: MORTON BUILDINGS, INC., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Indiana Tax Court

819 N.E.2d 913

MORTON BUILDINGS, INC., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

No. 49T10-9812-TA-187.

Tax Court of Indiana.

December 13, 2004.

Larry J. Stroble, Barnes & Thornburg, Indianapolis, IN, Abraham M. Stanger, Sarah E. Williams, Attorneys at Law, New York, NY, Attorneys for Petitioner.

Steve Carter, Attorney General of Indiana, David A. Arthur, Deputy Attorney General, Indianapolis, IN, Attorneys for Respondent.

FISHER, J.

Morton Buildings, Inc. (Morton) appeals the final determination¹ of the Indiana Department of State Revenue (Department) denying its claim for refund of use taxes it paid from January 1, 1993 through September 30, 1998 (the period at issue). The issue for this Court to decide is whether the raw materials Morton purchased and used out of state to make building components, that were eventually assembled into prefabricated buildings in Indiana, are subject to Indiana use tax.

FACTS

Morton, an Illinois corporation licensed to do business in Indiana, is engaged in the production, sale, and on-site erection of prefabricated timber-frame, metal-sheathed warehouses and other buildings for agricultural and industrial use. Morton maintains no factories in Indiana, only sales offices. At the time this appeal was filed, Morton actively conducted business in approximately 40 states.

Morton purchases the raw materials used in its business in bulk from vendors outside Indiana and stores them in its warehouses which are also located outside Indiana. The principal materials include, among other things, steel and lumber. These materials are not purchased by Morton for application to any particular customer order, but rather are purchased on the basis of factory-by-factory projections. The materials are kept in inventory until they are needed for a particular order.

When Morton receives an order from a customer, the necessary materials are withdrawn from storage and are fabricated into finished building components and hardware in accordance with the customer's specifications.² These building components include trusses, lower columns, upper columns, purlins, metal panels, and overhang rafters. Production of these components takes place entirely outside of Indiana. After production is complete, the building components are transported by Morton to the building site in Indiana. All of the loading, unloading, transportation, and erection of the building is performed by Morton's employees or, in certain circumstances, by subcontractors hired by Morton. Generally, it takes Morton's crew less than one week to complete the erection of a building.

Morton's customers own the real estate on which the buildings are erected. The erection of a building by Morton constitutes an improvement to real property for purposes of Indiana sales and use tax. The contract between Morton and its customers provides for Morton to deliver, erect and affix a completed building in finished condition to the customer's building site at a lump sum price specified in the contract. Title does not pass until the building is completed by Morton and turned over to the customer.

PROCEDURAL HISTORY

During the period at issue, Morton filed monthly Indiana Sales and Use Tax Returns with the Department and paid all use taxes to the Department in conjunction with each return. On December 13, 1995, Morton filed a claim for refund with the Department (the First Claim) requesting a refund of a portion of the use taxes paid on raw materials from January 1, 1993 through October 31, 1995 (the First Tax Period). On October 29, 1998, Morton filed another claim for refund with the Department (the Second Claim) requesting a refund of a portion of the use taxes paid on raw materials from November 1, 1995 through September 30, 1998 (the Second Tax Period). Morton received no response to either of these claims.

On December 10, 1998, Morton initiated an original tax appeal contesting the Department's failure to refund the First Claim.³ On May 18, 2001, the parties filed a Stipulation of Facts with the Court and requested that in lieu of a trial, the case be decided on the record. The Court heard the parties' oral arguments on October 24, 2001. Additional facts will be provided as necessary.

STANDARD OF REVIEW

This Court reviews final determinations of the Department de novo. Ind.Code Ann. § 6-8.1-5-1(h) (West 2004). Accordingly, it is bound by neither the evidence nor the issues presented at the administrative level. Snyder v. Indiana Dep't of State Revenue, 723 N.E.2d 487, 488 (Ind. Tax Ct.2000), review denied.

DISCUSSION AND ANALYSIS

The use tax is "[a]n excise tax ... imposed on the storage, use, or consumption of tangible personal property in Indiana if the property was acquired in a retail transaction, regardless of the location of that transaction or of the retail merchant making that transaction." Ind.Code Ann. § 6-2.5-3-2 (West 1993). Indiana's use tax is complementary to its sales tax. See Ind.Code Ann. § 6-2.5-3-4 (West 1993). This complementary formulation exists to ensure that the Indiana sales tax may not be avoided by purchasing products in states where there is no sales tax or where there is a lower sales tax. See USAir, Inc. v. Indiana Dep't of State Revenue, 623 N.E.2d 466, 469 (Ind. Tax Ct.1993)

; Walter Hellerstein and Jerome R. Hellerstein, State Taxation v. 2, 16.01[2] (2000). Accordingly, the use tax bites where the sales tax does not. Morton Bldgs., Inc. v. Comm'r of Revenue, 43 Mass.App.Ct. 441, 683 N.E.2d 720, 722 (1997).

Morton does not claim an exemption from the use tax; rather, it claims that the use tax imposition statute, by its own terms, does not apply to Morton's activity. Consequently, the issue before the Court is one of statutory interpretation. Because Indiana Code § 6-2.5-3-2 is a tax imposition statute, it is to be strictly construed against the taxing authority, with any ambiguity resolved against the state and in favor of the taxpayer. See State Bd. of Tax Comm'rs v. Jewell Grain Co., 556 N.E.2d 920, 921 (Ind.1990)

; Mynsberge v. Indiana Dep't of State Revenue, 716 N.E.2d 629, 633 (Ind. Tax Ct.1999).

Section 6-2.5-3-2 establishes two conditions for the imposition of use tax on tangible personal property:

1. The "tangible personal property" at issue must be "stor[ed], use[d], or consum[ed] in Indiana;" and

2. The "tangible personal property" at issue must have been "acquired in a retail transaction."

See A.I.C. § 6-2.5-3-2. Morton argues that neither of these conditions have been met with respect to the materials used to manufacture its buildings. More specifically, Morton contends that the raw materials it acquired in a retail transaction were used in Morton's factories entirely outside of Indiana to fabricate building components. Further, the materials Morton did use in Indiana — the building components — were not acquired in a retail transaction; rather, they were fabricated by Morton and have an identity separate and distinct from the raw materials used to make them. Therefore, Morton argues, the Department cannot tax the raw materials because they were not used in Indiana and it cannot tax the building components because they were not purchased in a retail transaction.

The Department counters, however, that Morton has made a false distinction between the raw materials and the building components. Under the Department's theory, the raw materials do not lose their identity when they are assembled into building components. Accordingly, the Department argues that when the building components are used in Indiana to erect a building, the raw materials are also being used in Indiana and are therefore subject to the use tax.

Although this is an issue of first impression in Indiana, a number of other jurisdictions have addressed this same question under use tax statutes analogous to Indiana Code § 6-2.5-3-2. A majority of those jurisdictions have found in Morton's favor, holding that the use tax does not apply to the raw materials because they are not used in the taxing state, nor does it apply to the building components, because they are not acquired in a retail transaction.⁴ Although these holdings are by no means binding on this Court, their logic is both instructive and persuasive. See USAir, Inc., 623 N.E.2d at 469 n. 4.

Manufacturing, by its very nature, results in raw materials losing their identity and becoming part of a new item of tangible personal property. Although this is not an exemption case, the following exemption regulation is instructive in showing what effect manufacturing (or fabrication, the term used in the Stipulation of Facts) has on tangible personal property:

`Direct production, manufacture, fabrication, assembly, or finishing of tangible personal property' is performance as a business of an integrated series of operations which places tangible personal property in a form, composition, or character different from that in which it was acquired. The change in form, composition, or character must be a substantial change, and it must result in a transformation of property into a different product having a distinctive name, character, and use. Operations such as compounding, fabricating, or assembling are illustrative of the types of operations which may qualify under this definition.

IND. ADMIN. CODE tit. 45, r. 2.2-5-8(k) (1992) (1996). See also Mid-America Energy Res., Inc. v. Indiana Dep't of State Revenue, 681 N.E.2d 259, 263 (Ind. Tax Ct.1997)

(finding that the taxpayer was engaged in the direct production of other tangible personal property for purposes of the equipment exemption where the taxpayer's production process "create[d] a significant change in the properties" of the raw materials and where the tangible personal property produced "ha[d] utility and properties that the [raw materials] previously lacked"), review denied.

The Stipulation of Facts reveals that the raw materials go through an extensive production process in Morton's...