Sharp v. Tyler Pipe Industries, Inc.
| Decision Date | 13 March 1996 |
| Docket Number | No. 03-95-00212-CV,03-95-00212-CV |
| Parties | John SHARP, Comptroller of Public Accounts, and Dan Morales, Attorney General of Texas, Appellants, v. TYLER PIPE INDUSTRIES, INC., Successor-in-Interest to Tyler Pipe Industries of Texas, Inc., Appellee. |
| Court | Texas Court of Appeals |
Dan Morales, Attorney General, Thomas J. Meaney, Assistant Attorney General, Taxation Division, Austin, for appellants.
David H. Gilliland, Clark, Thomas & Winters, Austin, for appellee.
Before CARROLL, C.J., and JONES and B.A. SMITH, JJ.
Tyler Pipe Industries, Inc., successor-in-interest to Tyler Pipe Industries of Texas, Inc. ("Tyler Pipe"), sued State Comptroller John Sharp and State Attorney General Dan Morales (collectively the "Comptroller") seeking a refund of sales taxes paid in the purchase of certain equipment. See Tex.Tax Code Ann. § 112.151 (West 1992). The trial court granted summary judgment for Tyler Pipe, ordering the Comptroller to refund approximately $35,000. On appeal, the Comptroller asserts that the trial court misconstrued a statutory exemption for the purchase of property used in manufacturing. See Tax Code § 151.318(g). We will affirm.
There are no disputed facts in this case. Tyler Pipe manufactures and sells cast-iron pipe and pipe fittings, using molds made of specially treated sand to produce the desired size and shape of both the interior and exterior surfaces of its products. There are five basic stages, followed by all manufacturers, in manufacturing cast-iron pipe and fittings: (1) melting scrap iron and steel; (2) forming a mold to the exact size and shape of the product being manufactured; (3) pouring the molten iron into the mold; (4) letting the molten iron cool and harden; and (5) removing Metal molds are used by some manufacturers in lieu of sand molds. Metal molds, which are permanent and can be used repeatedly, are used to make thin-walled, low-pressure pipe and fittings. Sand molds, on the other hand, are needed to make thick-walled, high-pressure pipe. Unlike metal molds, sand molds can be used only once, after which they are destroyed. It is through the use of one of these two types of molds that manufacturers of cast-iron pipe and fittings control the size and shape of the products they produce.
the pipe casting from the mold and knocking off any rough edges.
In 1990, Tyler Pipe bought certain equipment used for making sand molds to be employed in its manufacture of cast-iron pipe and fittings, paying sales taxes on the purchase. Tyler Pipe subsequently filed an administrative claim for a refund of $35,478.46, twenty-five percent of the total amount of tax paid, in accordance with the phase-in schedule for the "manufacturers' exemption." See Tax Code § 151.318(h). The tax division of the Comptroller's office denied the refund. The Comptroller subsequently affirmed the denial, concluding that although the molds themselves were used in the "actual manufacturing" of pipe and fittings, the mold-making equipment was not. Tyler Pipe appealed to the district court. After cross-motions for summary judgment were filed, the trial court granted summary judgment in favor of Tyler Pipe. It is from this judgment that the Comptroller appeals to this Court.
In a single point of error, the Comptroller contends that Tyler Pipe's purchase of equipment for use in making sand molds does not qualify for the manufacturers' exemption from sales taxes found in section 151.318(g) of the Tax Code:
Each person engaged in manufacturing, processing, fabricating, or repairing tangible personal property for ultimate sale is entitled to a refund or a reduction in the amount of tax imposed by this chapter as provided by Subsection (h) for the purchase of machinery, equipment, and replacement parts or accessories with a useful life in excess of six months if the equipment is used or consumed in or during the actual manufacturing, processing, fabrication, or repair of tangible personal property for ultimate sale, and the use or consumption of the property is necessary or essential to the manufacturing, processing, fabrication, or repair operation, or to a pollution control process.
Tax Code § 151.318(g) (emphasis added).
Of the statutory prerequisites for the manufacturers' exemption, there is no dispute that the mold-making equipment in question has a useful life in excess of six months. Nor is there any dispute that the mold-making equipment is necessary and essential to the production of cast-iron pipe and fittings. The sole issue here is whether such mold-making equipment is "used ... in or during the actual manufacturing" of Tyler Pipe's products. Because the mold-making equipment in question is used to form sand molds, which are not themselves for sale, but rather are used in turn to produce the desired size pipe and fittings, the Comptroller contends that the mold-making equipment is not used in the "actual manufacturing ... of tangible personal property for ultimate sale." In other words, the Comptroller argues that even when equipment is part of the fabrication process, it is not tax exempt unless it is used directly on the raw materials to produce the finished product.
The Comptroller argues first that by adopting Tyler Pipe's construction of section 151.318(g), the trial court gave no effect to the term "actual," thereby rendering it mere surplusage. The term "manufacturing" is defined in the Tax Code as "includ[ing] each operation beginning with the first stage in the production of tangible personal property and ending with the completion of tangible personal property having the physical properties ... that it has when transferred by the manufacturer to another." Tax Code § 151.318(d). The Comptroller argues, however, that the language of subsection (g) mandates a direct contact with the finished product in order to qualify for the exemption.
"Actual manufacturing," he contends, differs from "manufacturing," and the process of making a sand mold is distinct from that of making pipe and fittings. We conclude, however, that even assuming the legislature intended the term "actual" to limit the scope of "manufacturing," Tyler Pipe's mold-making equipment falls within any reasonable construction of "actual manufacturing."
"Actual" is defined simply as Webster's Third New International Dictionary 22 (Philip B. Gove ed., 1986). The summary-judgment evidence shows that the formation of a sand mold for the making of a pipe or fitting is not part of the mere preparation for the casting process, as the Comptroller contends. Rather, it is an indispensable operation in the actual production of cast-iron pipe and fittings. The summary-judgment evidence reflects that in this industry, because each mold is specialized for each pipe, and because sand molds can only be used once, manufacturers find it more efficient to produce their own sand molds than to purchase them from outside suppliers. As a result, the mold-making equipment and each mold it produces effectively act as a unit. The mold-making equipment is needed every time a mold is made; thus, because the mold can only be used once, the mold-making equipment is needed every time a pipe or fitting is made. Because each mold can be used to make only one product, the mold-making equipment has a direct relationship to the production process.
The way Tyler Pipe uses its mold-making equipment is analogous to the way a camera produces a photograph and the way a printing press produces a written publication. In photography, a camera is needed to produce a negative image--the intermediate product--which is then used to produce the positive print for sale. Similarly, printers need equipment to make printing plates, which are then used to transfer images to paper, making the final printed product. Because Tyler Pipe's mold-making equipment creates a unique mold that transfers specific measurements to molten iron to produce a pipe or fitting, we see no practical distinction between such equipment and a camera or plate-making equipment.
The Comptroller has admittedly allowed the sales tax exemption for both cameras and plate-making equipment. Moreover, other jurisdictions have also held such equipment to be exempt under similar statutes. For example, in allowing the tax exemption for a printer's plate-making equipment, the Massachusetts Supreme Judicial Court rejected the idea that printing plates were produced for the manufacturer's own use. Courier Citizen Co. v. Commissioner of Corps. & Taxation, 358 Mass. 563, 266 N.E.2d 284, 286 (1971). The printing plates in Courier, like the sand molds in the present case, were not reusable because they were discarded after the pressrun; therefore, their purpose was connected to a particular printing job, just as molds here are used in the fabrication of a particular pipe or fitting. Id. The court found that the production of printing plates was the first stage in the process culminating in the final printed product for sale. Id. Likewise, the production of sand molds via the mold-making equipment is simply an early stage in the production--the "actual manufacturing"--of cast-iron pipe and fittings.
The Comptroller next argues that because the mold-making equipment was admittedly essential to Tyler Pipe's overall manufacturing operation (the third requirement of section 151.318(g)), the trial court erroneously presumed that the equipment must have been used in the "actual manufacturing" of products for ultimate sale (the second statutory requirement). We find no indication in the record, however, that the trial court employed any such presumption or...
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