Schulte Oil Co., Inc. v. Oklahoma Tax Com'n

• Decision Date: 20 September 1994
• Docket Number: No. 80215,80215
• Citation: 882 P.2d 65,1994 OK 103
• Parties: SCHULTE OIL CO., INC. and RDL Service, Inc., Appellants, v. OKLAHOMA TAX COMMISSION, Appellee.
• Court: Oklahoma Supreme Court

Page 65

882 P.2d 65

1994 OK 103

SCHULTE OIL CO., INC. and RDL Service, Inc., Appellants, v. OKLAHOMA TAX COMMISSION, Appellee.

No. 80215.

Supreme Court of Oklahoma.

Sept. 20, 1994.

On Certiorari to the Court of Appeals, Div. 4.

Taxpayer, who asserted manufacturer status, sought refund of sales tax paid on purchases of diesel fuel claimed to have been used in the manufacturing process. The Business Tax Division of the Oklahoma Tax Commission denied taxpayer's request for refund. Upon protest, the Tax Commission (a) denied the refund and (b) cancelled taxpayer-held manufacturer's limited tax exemption

certificate. The Court of Appeals affirmed. On certiorari previously granted

THE COURT OF APPEALS' OPINION IS VACATED; THE TAX COMMISSION'S ORDER IS REVERSED; AND THE CAUSE REMANDED FOR FURTHER PROCEEDINGS NOT INCONSISTENT WITH TODAY'S PRONOUNCEMENT.

Randy Mecklenburg, Harrison & Mecklenburg, Kingfisher, for appellants.

David Hudson, Gen. Counsel, Marjorie L. Welch, Deputy Gen. Counsel, Oklahoma Tax Com'n, Oklahoma City, for appellee.

OPALA, Justice.

Two issues are pressed: Does remanufacture of unusable oilfield pipe constitute "manufacturing" within the meaning of 68 O.S.Supp.1990 § 1352(H) and 68 O.S.Supp.1988 § 1359(A) and (C)? ¹ and if so, Is the diesel fuel used for protestant's forklifts consumed in the "manufacturing process" and hence exempt from sales tax? ² We answer both questions in the affirmative.

I THE ANATOMY OF LITIGATION

RDL Services, Inc. [RDL or taxpayer], appellant, is engaged in the business of (a) converting raw pipe (tubing and casing) into finished oilfield pipe, and (b) refurbishing used and damaged pipe into a marketable product. Its operation primarily consists of processing new (20%) and used (70%) pipe for resale. A small portion of the business is committed to repairing used pipe belonging to others (10%). RDL began business in January 1990 by purchasing the assets of an existing establishment which manufactured oilfield pipe. During the years it produced pipe, RDL's predecessor held a manufacturer's limited (tax) exemption [MLE] certificate, which entitled it to certain exemptions from the sales and use tax. An Oklahoma Tax Commission [Commission] auditor determined that RDL, like its predecessor, qualified for the exemption; and a MLE certificate was issued in its name on January 4, 1990. RDL's manufacturing process is identical to that of the predecessor business.

The controversy before us draws in question RDL's purchases of diesel fuel from Schulte Oil Co. [Schulte] to run forklifts at its plant during the period between January 31, 1990 and October 31, 1990. Unaware that RDL had a MLE certificate, Schulte inadvertently collected sales tax on these purchases and remitted the tax to the Commission. Schulte later sought a refund of $473.76. A field auditor from the Commission's Business Tax Division [Division] went to RDL's business premises to review its operations. Stating that the diesel fuel in question was a taxable purchase, the Division denied Schulte's refund claim by its letter of July 19, 1991. Six days later, the Division (a) notified RDL that, because its operations did not qualify for a manufacturer's exemption, the MLE certificate "had been issued in error" and (b) directed RDL to return the license for cancellation. RDL filed two protests to the Division's actions--one for itself and the other on Schulte's behalf. Because the majority of RDL's business (70%) consisted of producing pipe from used and damaged materials, an administrative law judge found that it was not engaged in manufacturing. She recommended that the sales tax refund claim be denied. The Commission also (a) denied the claim and (b) cancelled RDL's MLE certificate. The Court of Appeals affirmed the Commission's order.

II

THE DOCTRINE OF ORAL ROBERTS UNIVERSITY v. OKLAHOMA TAX COMMISSION

³ IS SANS RECORD SUPPORT FOR

APPLICATION EITHER TO THE TAXPAYER'S OR

TO THE COMMISSION'S POSITION

Oral Roberts teaches ⁴ that an agency's longstanding construction of an ambiguous or uncertain statute will not be disturbed without cogent reason. Courts tend to accord great weight to an agency's construction of a statute when (1) the administrative interpretation was made contemporaneously with the enactment of the statute, ⁵ (2) a longstanding construction has been placed on the statute by an agency charged with its execution ⁶ or (3) a word-for-word reenactment of statutory text previously burdened with time-honored agency gloss may be regarded as the Legislature's act of acquiescence in the pre-reenactment administrative construction. ⁷ The Oral Roberts shield for preservation of long-continued agency construction was invoked below only by the taxpayer. Because there is no support in this record for any prior, firmly established Commission policy that would favor either party's contention, our decision must be rested on other grounds. See Part III of this opinion.

A.

RDL argues that the Oral Roberts doctrine supports its position because for the 11 years before the cancellation in contest here the business held a valid MLE certificate. The taxpayer urges that the Commission may not modify its longstanding interpretation of the sales tax exemption statute. The Commission counters that it was the character of RDL's business at the point of its license cancellation, not the agency policy, that had undergone a change and thus occasioned the MLE revocation.

If by the Commission's longstanding policy remanufacturing had indeed been included within the orbit of manufacturer's exemption and there was record proof of agency conduct consistent with this interpretation, the taxpayer could rely on tacit legislative approbation of the agency's construction (either by long-continued silence or by post-interpretive reenactment of the exemption statute). To benefit from the Oral Roberts doctrine, RDL would have had to show (at the hearing below) that its past holding of the MLE license (and that of the predecessor entity) for 11 years constitutes clear proof of the agency's long-time commitment to the view that the tax exemption in suit applies to re-manufacturing process. The record fails to show this critical nexus.

B.

Neither does Oral Roberts give comfort to the Commission's quest for placing RDL dehors the law's exemption. This is a question of tax liability. It presents a public-law controversy. In public-law litigation the reviewing court is generally free to grant corrective relief upon any applicable legal theory that finds support in the record, ⁸ but appellate freedom to raise and settle public-law issues sua sponte is circumscribed by the record brought before us for review. Issues clearly outside the record may not be addressed.

The restrictive meaning the Commission would have us today ascribe to the § 1359 exemption is sans any anchor in prior history or in the materials before us. The record (a) neither reveals a long course of agency's interpretive conduct that should be left judicially undisturbed (b) nor provides us with any proof of some longstanding administrative interpretation that would support the contended-for exclusion of remanufacturing process from the exemption in contention. The Division's ⁹ brief to the Commission argues simply that "the processes of repairing used oilfield pipe do not come within the criteria generally recognized as manufacturing under our statutes and rules". ¹⁰ In support of its position that RDL's business is not "generally recognized as a manufacturer," the Division pointed out that RDL repairs pipe belonging to other companies. A true manufacturer, the Division added, "does not process materials that belong to someone else." ¹¹ This observation seems of no consequence in considering the question before us since RDL's repair service, as noted in Part III infra, constitutes only 10% of its total operations. Moreover, the record reveals that the field auditor was himself at a loss to know from existing rules and regulations what tax treatment should be accorded RDL's re manufacturing process. His July 3, 1991 report (a) states that in his "opinion, the process in question does not fall under the definition of manufacturing" because the "casing and tubing does not have new forms, qualities, properties or combinations whenever the process is completed"; (b) observes that "[t]he only way, in my opinion, that the process could be considered manufacturing is that they are converting unusable casing and tubing to usable casing and tubing," ¹² and (c) lists various equipment and materials that would be exempt "[i]f the process is deemed to be manufacturing." The field auditor testified that by the quoted expressions he meant that "if someone could make a decision that simply converting ... nonusable [pipe] to usable [pipe] was manufacturing, ... [he] could see where they would have a point. " (Emphasis added.) The Division's July 25, 1991 letter to RDL, by which refund was denied and the MLE certificate revoked, does not rest on longstanding policy. It explains merely that "[r]ethreading and testing used oilfield pipe does not qualify for the manufacturer exemption addressed in ... [s] 1359". ¹³

In short, on this record we must hold that, because in this cause there is no support for any longstanding agency policy vis-a-vis the claimed tax exemption in suit, neither party can rely on Oral Roberts to advance for our approval some firmly-established agency position, developed over time, which clearly defined the contested exemption's outer perimeter.

III

REMANUFACTURING OF USED OILFIELD PIPE CONSTITUTES

MANUFACTURING WITHIN THE MEANING OF A

MANUFACTURER'S EXEMPTION

The Commission asserts that, when engaged in restoring used oilfield pipe to its original condition, RDL is not a manufacturer but at most a repairer. Manufacturing occurs, the Commission argues, when raw or new material is processed for conversion into a new form or into one possessing new...