Rotation Products Corp. v. Department of State Revenue

• Decision Date: 30 January 1998
• Docket Number: No. 49T10-9508-TA-00081,49T10-9508-TA-00081
• Citation: 690 N.E.2d 795
• Parties: ROTATION PRODUCTS CORP., Petitioner, v. DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Indiana Tax Court

Page 795

690 N.E.2d 795

ROTATION PRODUCTS CORP., Petitioner, v. DEPARTMENT OF STATE REVENUE, Respondent.

No. 49T10-9508-TA-00081.

Tax Court of Indiana.

Jan. 30, 1998.

Thomas F. Schnellenberger, Stephan L. Hodge, McHale, Cook & Welch, Indianapolis, for Petitioner.

Jeffrey A. Modisett, Attorney General, Marilyn S. Meighen, Deputy Attorney General, Indianapolis, for Respondent.

FISHER, Judge.

Rotation Products Corporation (RPC) appeals a final determination of the Department of Revenue (Department) denying it an exemption from sales and use tax for equipment it used and materials it consumed in the remanufacturing of roller bearings during the tax years 1990 through 1992. The issue to be decided is whether this activity constitutes production of other tangible personal property, thereby entitling RPC to an exemption for the equipment used and materials consumed in this activity.

PROCEDURAL HISTORY

On December 3, 1993, the Department completed its audit of RPC's sales and use tax returns. The auditor concluded that RPC owed sales and use taxes for the tax years 1988 through 1992. On January 26, 1994, the Department issued RPC notices of proposed assessment for those years. ¹ RPC filed a timely written protest. The Department held a hearing February 25, 1995 and issued a letter of findings on June 1, 1995. In its letter of findings, the Department upheld RPC's protest for the 1988 and 1989 tax years because the notice was mailed after the three-year limitations period. See IND.CODE ANN. § 6-8.1-5-2(a) (West Supp. 1997). However, the Department denied RPC's protest with respect to the taxes and penalties assessed for the 1990 through 1992 tax years. ² On August 10, 1995, RPC filed this original tax appeal, and on March 29, 1996, the parties tried this cause before this Court.

FACTS

RPC is engaged in the repair and remanufacture of roller bearings. Roller bearings are used in industrial machinery. They mechanically couple a stationary machine element with a turning machine element. This mechanical coupling reduces the friction between the elements, thereby increasing their useful life.

Roller bearings have a number of components and vary in size. Roller bearings consist of an outer ring, an inner ring, rolling elements, and a roller cage. The rolling elements and the roller cage fit snugly between the inner and outer rings. The space between the inner and outer rings is called the raceway.

When a roller bearing is working, the turning elements and the working surfaces undergo friction. The friction causes pitting and/or a gradual wearing down (fatiguing) of the turning elements and the working surfaces. As a result, at some point, the bearing ceases to be operational. When this happens, RPC's customers bring the non-operational bearing to RPC.

RPC's work on non-operational roller bearings depends on the condition of the roller bearings. ³ Often, the bearing is so worn out that RPC cannot remanufacture it. The bearing is discarded for scrap. In those cases, RPC manufactures an entirely new bearing. The parties have stipulated that the equipment used in this process is exempt from Indiana sales and use tax. In other cases, the bearing does not need remanufacturing; rather, it merely needs to be cleaned and polished. The parties have stipulated that the equipment and materials used in this process are subject to Indiana sales and use tax.

Some bearings have suffered more wear and require more than a mere cleaning and polishing, but they need not be discarded as scrap because they are salvageable. RPC remanufactures these bearings. The parties dispute the taxability of equipment used and materials consumed in this process. The remanufacturing process is quite involved. The bearing is first taken apart, cleaned, and inspected. Then the inner and outer rings, which are made of hardened steel, are ground down to make them smooth. This grinding makes the rings a different thickness, thereby changing the distance between the inner and outer rings. Consequently, RPC must measure the distance between the inner ring and the outer ring, and fabricate a new rolling cage and rollers so that they fit snugly between the two rings. (Tr. at 13). The parties dispute whether equipment used and materials consumed in grinding and polishing the old rings and calculating the distance between the rings are exempt from sales and use tax. Additional facts will be provided as necessary.

STANDARD OF REVIEW

This Court reviews the Department's final determinations de novo and is bound by neither the evidence nor the issues raised at the administrative level. See IND.CODE ANN. § 6-8.1-5-1(h) (West Supp.1997); ANR Pipeline Co. v. Department of State Revenue, 672 N.E.2d 91, 93 (Ind. Tax Ct.1996).

DISCUSSION AND ANALYSIS

Indiana imposes an excise tax (gross retail or sales tax) on retail transactions in Indiana. IND.CODE ANN. § 6-2.5-2-1 (West 1989). Indiana also has a complementary excise tax (use tax) on tangible personal property stored, used, or consumed in this state. See IND.CODE ANN. § 6-2.5-3-2 (West Supp.1997); Mid-America Energy Resources, Inc. v. Department of State Revenue, 681 N.E.2d 259, 261 (Ind. Tax Ct.1997), review denied. Several exemptions from these complementary taxes are available, see IND.CODE ANN §§ 6-2.5-5-1 to -38.2 (West 1989 & Supp.1997), some of which are collectively known as the industrial exemptions. ⁴ See Mid-America Energy Resources, 681 N.E.2d at 261; Harlan Sprague Dawley, Inc. v. Department of State Revenue, 605 N.E.2d 1222, 1224 (Ind. Tax Ct.1992). RPC claims that its purchases of certain items used in its remanufacturing of roller bearings are exempt from sales and use tax under section 6-2.5-5-3 (the equipment exemption) and section 6-2.5-5-5.1 (the consumption exemption).

The statutes provide in relevant part:

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.

IND.CODE ANN. § 6-2.5-5-3(b) (West Supp.1997).

Transactions involving tangible personal property are exempt from the state gross retail tax if the person acquiring the property 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 arboriculture....

Id. § 6-2.5-5-5.1(b). ⁵

In Indiana, it is well-settled that exemptions are strictly construed against the taxpayer, see Harlan Sprague Dawley, Inc. v. Department of State Revenue, 605 N.E.2d 1222, 1225 (Ind. Tax Ct.1992), and courts have no power to create an exemption in the absence of statutory authority. However, "[w]hen construing an exemption, ... the court must always bear in mind the legislature's intent to avoid reading the exemption so narrowly its application is defeated in cases rightly within its ambit." Id.

The exemption provisions at issue in this case cover a host of different activities and factual situations. There are innumerable ways to produce other tangible personal property, and the exemption provisions cannot be expected to give a precise answer to each factual situation that arises. This Court will therefore construe these exemptions in light of our legislature's broad purposes in enacting them. In construing these exemptions, this Court may not ascribe a penuriousness to the legislature that was not intended, nor may it too readily give its succor to a taxpayer. This approach imposes the burden on the taxpayer of demonstrating to this Court its eligibility for the exemption. See Monarch Steel Co. v. State Bd. of Tax Comm'rs, 669 N.E.2d 199, 201 (Ind. Tax Ct.1996). After all, it is the taxpayer who knows his business, and it is the taxpayer who seeks the exemption.

The legislature had two purposes in mind when it exempted the purchase of equipment used and materials consumed in the production of "other tangible personal property." The first was "to encourage industrial growth by allowing an exemption for items closely connected with the production of goods." Harlan Sprague Dawley, 605 N.E.2d at 1228 (internal quotation marks omitted). The second was to limit the effect of tax pyramiding, a situation where a tax is levied upon a tax. ⁶ See id.

The parties discuss Department of Revenue v. Cave Stone, Inc., 457 N.E.2d 520 (Ind.1983) and its applicability to the case at bar. In Cave Stone, the Indiana Supreme Court analyzed a predecessor statute (IND.CODE § 6-2-1-39(b)(6) (1976) (repealed 1981)) to the present equipment exemption statute. In determining that trucks used to haul crude stone to a crusher were exempt from tax, the court rejected a narrow construction of the statute and embraced a comprehensive definition of the exemption provisions, i.e., the activities--manufacturing, processing, finishing, etc.--listed in the statute. Id. at 524. "The exemption provisions ... provide a comprehensive description of the various means of production ... [and] circumscribe[ ] all of the operations or processes by which the finished product is derived." Id. (emphasis added). A taxpayer's qualification for an industrial exemption is not based on whether the activity could be called manufacturing, processing, or any other of the listed terms, but rather whether the activity was directly involved in the creation of a product. See Mid-America Energy Resources, 681 N.E.2d at 262 ("Entitlement to the exemption does not rest on whether the taxpayer's operation fits within a particular category, such as processing or manufacturing.") (citing Harlan Sprague Dawley, 605 N.E.2d at 1226). Because the trucks were an integral part of the production of the stone, they fell under the equipment exemption and hence...