Richardson v. State Tax Commission

• Decision Date: 14 December 1979
• Docket Number: No. 12736,12736
• Citation: 100 Idaho 705,604 P.2d 719
• Parties: Joe E. RICHARDSON, Individually and as a partner, and Dale J. Richardson, Individually and as a partner in the partnership of the Riverside Lumber Company, Plaintiffs-Respondents and Cross-Appellants, v. STATE TAX COMMISSION, State of Idaho, Defendant-Appellant and Cross-Respondent.
• Court: Idaho Supreme Court

Page 719

604 P.2d 719

100 Idaho 705

Joe E. RICHARDSON, Individually and as a partner, and Dale J. Richardson, Individually and as a partner in the partnership of the Riverside Lumber Company, Plaintiffs-Respondents and Cross-Appellants, v. STATE TAX COMMISSION, State of Idaho, Defendant-Appellant and Cross-Respondent.

No. 12736.

Supreme Court of Idaho.

Dec. 14, 1979.

David H. Leroy, Atty. Gen., David G. High, Deputy Atty. Gen., Boise, for defendant-appellant and cross-respondent.

S. David Swayne, Moscow, for plaintiffs-respondents and cross-appellants.

William J. Brauner, Caldwell, amicus curiae.

BAKES, Justice.

We are called upon to determine in this appeal whether certain equipment used in a lumber mill operation owned by plaintiff respondents Richardsons is exempt from the state sales tax under the sales tax manufacturing and processing exemption contained in I.C. § 63-3622(d). ¹ Both the defendant appellant State Tax Commission and plaintiff respondents and cross appellants Richardsons appeal from the district court's application of the sales tax exemption to the equipment in question.

Joe and Dale Richardson, dba Riverside Lumber Co. (taxpayer), operate a lumber mill on leased Indian lands near Orofino, Idaho. To meet air quality emission standards imposed in the early 1970's, the taxpayer ceased burning waste wood generated in the milling process and installed equipment enabling the mill to sell its waste wood in chip form to Potlatch Forest Industries in Lewiston, Idaho, for use in papermaking. The equipment installed included the following:

(1) Debarker: used to strip bark from logs to be milled so that wood chips made from mill waste would be free from bark.

(2) Surge bin: installed between the equipment which chips the waste wood and a sizing screen which screens from the chips wood particles too fine to be used in papermaking. The surge bin maintains an even flow of chips to the screen.

(3) Rader pneumatic conveyor: a forced air conveyor system, functionally equivalent to a conventional belt conveyor, which moves screened chips from the sizing screen to the chip bin.

(4) Chip bin: stores the wood chips until enough are collected to be loaded into semi-trailers and hauled away.

(5) Sprinkler system: installed for fire protection in the mill.

In 1975 the sales tax section of the State Tax Commission audited the taxpayer and issued a deficiency notice proposing $1,971.26 plus a penalty and interest in additional sales taxes due. Upon the taxpayer's protest, the State Tax Commission conducted a hearing and found for the taxpayer in part and upheld the deficiency determination in part. The taxpayer then sought review of the State Tax Commission redetermination in district court. Following a court trial the district court held that materials used in constructing the base and roof of the debarker were improvements to real property and therefore not exempt from the sales tax; that materials used in the roof of the surge bin were improvements to realty and therefore not exempt; and that the pneumatic blower, the chip bin, and the sprinkler system were necessary and essential to the taxpayer's manufacturing process, were directly used in that process, and are within the sales tax exemption provided by I.C. § 63-3622(d).

The State Tax Commission appeals from the district court's determination that the pneumatic blower, the chip bin, and the sprinkler system are directly used or consumed in or during the taxpayer's processing or manufacturing operation and are, therefore, exempt from the state sales tax under the provisions of I.C. § 63-3622(d). The taxpayer brings a cross appeal from the trial court's rulings that I.C. § 63-1223 ² and I.C. § 63-105T ³ do not apply to a sales tax determination. The taxpayer contends that had the district court properly applied I.C. § 63-1223 and I.C. § 63-105T to this case, all of the equipment in question would have been found to be exempt from the state sales tax.

I.C. § 63-3622(d) ⁴ exempts from the state sales tax tangible personal property which is primarily and directly used or consumed in or during a manufacturing or processing operation. In order to qualify for this "production exemption" from the state sales tax, the property in question must be tangible personal property, primarily and directly used or consumed in a processing operation, necessary or essential to the process, used by a business in its manufacturing or processing operation, and not used in a manner merely incidental to the manufacturing or processing operation. The State Tax Commission contends that the sprinkler system, pneumatic conveyor system, and chip bin, which the trial court found to fall within the sales tax exemption, are not equipment directly used or consumed in or during the taxpayer's manufacturing or processing operation within the meaning of I.C. § 63-3622(d). The state argues that while these items may well be necessary to the taxpayer's sawmill operation, they are equipment which is merely auxiliary to the actual production or processing operation. It is the state's contention that because the pneumatic blower, the chip bin, and the sprinkler system in no way effect a physical change in the composition of the lumber or the wood chips, they are not directly used in the operation.

Statutory tax exemptions exist only by legislative grace and should be strictly construed against the taxpayer, Leonard Construction Co. v. State ex rel. State Tax Comm'n, 96 Idaho 893, 539 P.2d 246 (1975); Kwik Vend, Inc. v. Koontz, 94 Idaho 166, 483 P.2d 928 (1971). However, we cannot agree with the State Tax Commission's contention that the sales tax exemption contained in I.C. § 63-3622(d) must be strictly limited to equipment which effects a physical change in the form of the product being manufactured. Our statute exempts from the sales tax equipment which is "primarily and directly used or consumed in or during . . . manufacturing, processing, mining, farming, or fabricating operations by a business or segment of a business . . . ." It is our opinion that the sales tax exemption in I.C. § 63-3622(d) should receive a practical construction and not be construed to divide a manufacturing operation which in fact is a continuous and integrated production process into theoretically distinct segments. To limit this exemption to equipment which actually causes some physical change in the manufactured product is a restriction not warranted by the language of the statute. Cf. General Mills, Inc. v. Commissioner of Taxation, 294 Minn. 175, 199 N.W.2d 636 (Minn.1972) (the word "manufacture" in sales tax exemption statute is not restricted to the limited function of turning out the finished article but contemplates a whole process of a much broader scope, including development, quality control, and product testing).

A sales tax exemption similar to that in the Idaho statute was interpreted by the New York courts to exempt coal and ash handling equipment utilized in an electric power generating plant despite the taxing authority's contention that the equipment was merely auxiliary to the taxpayer's principal manufacturing operation, production of electricity. The court held that the degree of synchronization and integration of the coal and ash handling equipment with the actual power generating process compelled a finding that the equipment fell within the production exemption to the sales tax. Niagara Mohawk Power Corp. v. Wanamaker, 286 App.Div. 446, 144 N.Y.S.2d 458 (1955), Aff'd, 2 N.Y.2d 764, 157 N.Y.S.2d 972, 139 N.E.2d 150 (1956). See also Rowe Contracting Co. v. State Tax Commission, 361 Mass. 158, 279 N.E.2d 675 (1972); and Courier Citizen Co. v. Commissioner of Corporations & Taxation, 358 Mass. 563, 266 N.E.2d 284 (1971).

We conclude that the pneumatic blower and the chip bin are items of equipment which are necessary and essential to the taxpayer's manufacturing process and are directly used in that process. As a result, these items fall within the sales tax exemption provided by I.C. § 63-3622(d). These two pieces of equipment are used by the taxpayer in removing waste wood from the sawmill. The trial testimony indicates that approximately 300 cubic yards of waste wood are generated each day by the milling operation and that without proper equipment to remove this waste from the mill the taxpayer's operation would soon have to cease. The pneumatic blower and chip bin were part of equipment installed by the taxpayer to enable the mill to sell as wood chips the waste wood which, prior to enactment of state and federal air quality controls, was disposed of by burning. It is our opinion that the chip handling equipment is an integral part of the taxpayer's lumber manufacturing process and falls within the sales tax exemption contained in I.C. § 63-3622(d). Cf., e. g., Minnaert v. Michigan Dept. of Revenue, 366 Mich. 117, 113 N.W.2d 868 (1962) (earthmoving equipment used to build tailing ponds into which tailings from a copper smelting operation were released and a decantate extracted and reused in the manufacturing process was equipment acquired for use and consumption in industrial processing).

We are, however, unable to agree with the trial court's conclusion that the sprinkler system installed by the taxpayer in his lumber...