Pan Am. Sulphur Co. v. State Dept. of Assessments and Taxation

• Decision Date: 06 December 1968
• Docket Number: No. 393,393
• Citation: 248 A.2d 354,251 Md. 620
• Parties: PAN AMERICAN SULPHUR COMPANY et al. v. STATE DEPARTMENT OF ASSESSMENTS AND TAXATION.
• Court: Maryland Court of Appeals

Page 620

251 Md. 620

248 A.2d 354

PAN AMERICAN SULPHUR COMPANY et al. v. STATE DEPARTMENT OF ASSESSMENTS AND TAXATION.

No. 393.

Court of Appeals of Maryland.

Dec. 6, 1968.

Russell R. Reno, Jr., Baltimore (J. Crossan Cooper, Jr., and Stuart H. Rome, Baltimore, on the brief), for appellants.

Jon F. Oster, Asst. Atty. Gen. (Francis B. Burch, Atty. Gen., Baltimore, on the brief), for appellee.

Before HAMMOND, C. J., and MARBURY, BARNES, FINAN, SINGLEY and SMITH, JJ.

FINAN, Judge.

This case involves three appeals, one by Pan American Sulphur Company and two by Pan American Sales Company (collectively referred to as Pan Am), from an order of Judge Joseph L. Carter of the Baltimore City Court affirming a decision of the Maryland Tax Court. The effect of the order was to deny to the appellants the benefit of the Maryland and Baltimore City manufacturer's exemptions from personal property taxation for a liquid sulphur storage facility located in Baltimore City. The tax years and assessments involved are 1963 in the amount of $432,410.00, 1964 in the amount of $384,360.00 and 1965 in the amount of $363,320.00.

The parties submitted an agreed statement of facts of which the following is a summary.

Pan Am, a Delaware Corporation, having its principal office in Houston, Texas, has for many years engaged in the business of sulphur exploration, sulphur mining and the sale of sulphur. The main source of supply is located in Mexico. This sulphur which is located in underground 'sulphur domes' is pumped to the surface in a heated liquid state. Until recently it would be allowed to cool and harden and then be shipped to various customers. These customers or purchasers would then usually reheat the sulphur and convert it into a liquid state to be useable in their business.

Because of technological advances, it become feasible to maintain the sulphur in its heated, liquid state and to ship it and store it in this same heated, liquid state. After transportation in ships containing heated cargo tanks, the sulphur is stored in heated tanks at or near its ultimate destination. Such a heated storage facility was built in Baltimore by the appellant on land leased to that company by the Baugh Chemical Company (which is now known as Kerr-McGee Chemical Corporation), Kerr-McGee Chemical Corporation is a large user of liquid sulphur and purchases a great quantity of it from the appellant. The liquid sulphur is converted into sulphuric acid which is then used by Kerr-McGee in the manufacture of fertilizer. The American Agricultural Chemical Company (AACC) located on land adjacent to the land leased from Kerr-McGee by the appellant, is also a user of liquid sulphur and draws from the supply stored in the tanks on the property of Kerr-McGee and also has certain of the components of the distribution system located on its own property. It is this heated storage facility which is the subject of the three tax assessments currently under protest.

The facility consists of two large heated tanks, which are specially constructed so that the contents can be maintained at the requisite temperature of 270 degrees fahrenheit. The liquid sulphur is pumped from the heated vessel by the vessel's pumping apparatus to these two large storage tanks. There is a pipe running from the Clinton Street dock of Kerr-McGee to the liquid sulphur storage tanks approximately 500 feet away, located on land leased from Kerr-McGee. There are then two blister pipes running from the storage tanks to the fertilizer manufacturing plant of Kerr-McGee and the AACC which carry the sulphur at the required temperature of 270 degrees fahrenheit.

The two large storage tanks, the pipe line from the dock to the tanks, and the feeder lines from the tanks to each plant are owned by Pan Am. The steam boiler furnace, and oil storage tanks, which are part of the steam producing system necessary to maintain temperature, are likewise owned by Pan Am. There are also two reservoir tanks on the property which are owned by Pan American.

Although the furnace, steam boiler, and oil tanks, as stated above, are the property of Pan Am, they are within the Kerr-McGee plant and are operated and maintained by Kerr-McGee.

Approximately 38,000 tons of liquid sulphur are imported and stored in the large liquid sulphur storage tanks each year. In the neighborhood of 7,500 tons of liquid sulphur are drawn from these and utilized each year by AACC. The balance of approximately 30,500 tons is consumed each year by Kerr-McGee.

Sulphur in the tanks is the property of Pan Am which company has the right to sell the sulphur to any user. On at least one occasion, Pan Am sold to another company liquid sulphur which was delivered by Pan Am out of the tanks located on the Kerr-McGee property.

The arrangements in connection with the establishment and maintenance of these sulphur facilities are contained in a 'Lease and Operating Agreement' between Pan Am and Kerr-McGee (then known as the Baugh Chemical Company), and an 'Agreement for Molten Sulphur Facilities' between Pan Am and AACC.

Under the terms of the agreement with Kerr-McGee, Pan Am leases the tract of land of approximately 15,000 square feet used for the facility. Kerr-McGee superintends the operation of the storage facilities and is required to pay the costs incidental thereto. For this service, Kerr-McGee is compensated at the rate of $1.25 for every ton of sulphur which is delivered from the storage facility. It is also paid $4,000.00 per year as an annual rent for the land. As a result of this arrangement, Pan Am maintains no personnel in Baltimore to supervise the operation of the storage facility. After ten years, the lease will terminate and the entire storage facility located on Kerr-McGee property will become the property of Kerr-McGee.

A similar arrangement exists with AACC. Title to the two small reservoir tanks located on their land is in Pan Am, while responsibility for their maintenance, operation, repair, and replacement is with AACC. After the expiration of 20 years or upon the consumption of $1,000,000 tons of liquid sulphur, title to these reservoir tanks passes to AACC.

Pan Am bases its claim for exemption of the facility from taxation on the fact that it is used entirely or primarily in connection with manufacturing in Baltimore City and thus, is exempt under the provisions of Ordinance No. 1340 (Ordinances and Resolutions of the Mayor and City Council of Baltimore 1957-1958 approved April 7, 1958, effective December 31, 1958), and Section 9(23) of Article 81 of the Maryland Code, which exempt from city and state personal property taxation property 'used' in manufacturing.

The pertinent and essential portions of the ordinance are:

'In order to encourage the growth and development of manufacturing industries in Baltimore City and thereby promote the general welfare of the inhabitants of said City, all personal property of every description used entirely or chiefly in connection with manufacturing in Baltimore City, including * * * mechanical tools or implements, whether worked by hand or steam or other motive power, machinery, manufacturing apparatus or engines, raw material on hand, and manufactured products in the hands of the manufacturers, shall be exempt from taxation for all ordinary municipal purposes of the Mayor and City Council of Baltimore * * *.'

The exemption from State taxation provided by Code (1965 Repl.Vol.) Art. 81, § 9(23) reads in part as follows:

'* * * Tools (including mechanical tools), implements, whether worked by hand, steam, or other motive power, machinery, manufacturing apparatus, or engines, used in manufacturing * * *.'

The appellants contend that the issue in this case is the 'use' which is made of the property for which the exemption is sought. If the facility is used for manufacturing, then under the terms of the ordinance and statute it should be exempted from taxation; and ownership of the property, ownership of the land on which it may be installed, and the business or occupation of the taxpayer is immaterial, as long as the property is used in manufacturing. We would agree with this proposition save for one important exception, namely, that the taxpayer seeking the exemption must be the one using the property for manufacturing purposes, whether it be by virtue of ownership, by lease or by circumstances set forth in Regulation 8 of the Department of Assessments and Taxation. ¹

In the instant case the taxpayer Pan Am, who is seeking the exemption, is not a manufacturer but a supplier. Pan Am describes the facility in the lease as a 'sulphur terminal and warehousing facility.' The facility for which the exemption is sought does not in any way change the form, shape or character of the product which it receives, from the time it is introduced into the tanks, from the ships berthed at the dock, until it leaves the tanks in the course of its transmission to the plant of the manufacturer. In this respect the facts are distinguishable from City of Baltimore v. Tax Commission, 161 Md. 234, 155 A. 739 (1931), wherein the exempted facility considerably altered the shape of the material which it processed. However, we do not think that in order to sustain our theory of this case it is necessary to distinguish City of Baltimore, supra, in this respect, as there are other basic differences between it and the case at bar. In City of Baltimore, supra, the taxpayer was the one making the claim that it was using the facility for manufacturing purposes, whereas in the instant case Pan Am justifies the exemption on the alleged use of the facility in manufacturing conducted, not by itself, but by customers who purchase the sulphur from it. It should also be kept in mind that Pan Am retains title, not only to the facility but to the product stored in it until it is purchased by the manufacturer, and Pan Am is at complete liberty to sell sulphur to manufacturers other than Kerr-McGee and AACC.

It...