Sony Music Entertainment, Inc. v. Indiana State Bd. of Tax Com'rs

• Decision Date: 22 May 1997
• Docket Number: No. 49T10-9411-TA-00250,49T10-9411-TA-00250
• Citation: 681 N.E.2d 800
• Parties: SONY MUSIC ENTERTAINMENT, INC., Petitioner, v. INDIANA STATE BOARD OF TAX COMMISSIONERS, Respondent.
• Court: Indiana Tax Court

Page 800

681 N.E.2d 800

SONY MUSIC ENTERTAINMENT, INC., Petitioner, v. INDIANA STATE BOARD OF TAX COMMISSIONERS, Respondent.

No. 49T10-9411-TA-00250.

Tax Court of Indiana.

May 22, 1997.

Barton T. Sprunger, Mark J. Richards, Ice Miller Donadio & Ryan, Indianapolis, for petitioner.

Jeffrey A. Modisett, Attorney General, Ted J. Holaday, Deputy Attorney General, Indianapolis, for respondent.

FISHER, Judge.

Petitioner, Sony Music Entertainment, Inc. ("Sony Music") appeals from a final determination by the State Board of Tax Commissioners in which the State Board denied Sony Music an interstate commerce exemption from the property tax for certain of its personal property held in Indiana. Sony Music admits that the goods in question are commonly removed from their original packages but claims that they are removed only for repackaging for transshipment out of state. The State Board disagreed and held that the goods are not merely being repackaged for shipping purposes but are being processed into final saleable products. The Court affirms the State Board's assessment.

FACTS AND PROCEDURAL HISTORY

The parties stipulated to the relevant facts. Sony Music is a Delaware corporation with its principal place of business in New York. Sony Music manufacturers audio compact discs and sells them at wholesale across the nation. Because Sony Music's manufacturing facilities do not have sufficient capacity to meet the demand for its products, it entered into an agreement with Digital Audio Disc Corporation ("DADC") to produce additional discs. DADC has its principal facilities in Terre Haute, Indiana. Both Sony Music and DADC are subsidiaries of Sony Corporation of America.

The evidence shows that the compact discs at issue are designed to be sold in plastic jewel cases with front and back liners. The liners are analogous to album covers, featuring various designs, graphics, and pictures. The discs also often come with short booklets containing promotional information, lyrics, or other information. Once a disc has been placed in its tray in a jewel case with the appropriate liner and booklet, either the case is shrink wrapped alone, or it is placed in a longbox, and the case and longbox are shrink wrapped together. Longboxes are printed cardboard sleeves that are folded and glued around the jewel cases in order to make them compatible with the old record album displays in retail shops.

Under the agreement between DADC and Sony Music, DADC produced the actual discs as well as most of the plastic trays and jewel cases. Sony Music supplied the booklets, liners, and longboxes (collectively, the "artwork"). Sony Music purchased the artwork from out-of-state suppliers, and all of the design and production work on the pieces was completed outside Indiana. DADC was responsible for preparing the discs for sale by placing the artwork in the jewel cases with the discs and putting many of the cases in longboxes. DADC would then pack twenty-five to thirty fully assembled compact discs into cardboard boxes for shipment to locations throughout the United States.

On March 1, 1993, Sony Music had close to $4 million in artwork stored in DADC's warehouse in Terre Haute. More than 52% of the pieces were booklets and liners; over 47% were longboxes; and the remainder were miscellaneous items. When Sony Music filed its 1993 business personal property tax return for this property, it claimed an exemption for 98.6% of these items under Ind.Code Ann. § 6-1.1-10-29.3 (West Supp.1996) on the grounds that they were ready for transshipment out of state, except for repackaging. The parties stipulated that during the twelve months preceding March 1, 1993, Sony Music shipped slightly more than $45 million in merchandise from DADC, 98.12% of which was shipped out of state.

After performing an audit, a hearing officer for the State Board found that the artwork was not merely being stored for transshipment, but rather the booklets, liners, and longboxes constituted "raw materials" that had to be assembled with the compact discs to form a saleable good. Therefore, the officer concluded that the inventory of artwork was not exempt under Ind.Code Ann. § 6-1.1-10-29.3. He initially recommended an assessment of $804,530 but later increased that figure to $844,760. After a hearing, the State Board affirmed this assessment on September 30, 1994. Sony Music timely filed its notice of intent to appeal on October 31, 1994.

STANDARD OF REVIEW

The determinations of the State Board are accorded great deference when the Board is operating within the scope of its authority. Dav-Con, Inc. v. State Bd. of Tax Comm'rs, 644 N.E.2d 192, 194 (Ind. Tax Ct.1994); Mid-America Mailers, Inc. v. State Bd. of Tax Comm'rs, 639 N.E.2d 380, 382 (Ind. Tax Ct.1994). This Court will reverse such a determination only if the Board's conclusion is unsupported by substantial evidence, constitutes an abuse of discretion, exceeds statutory authority, or is arbitrary and capricious. Dav-Con, 644 N.E.2d at 194; Mid-America Mailers, 639 N.E.2d at 382.

DISCUSSION

An interstate commerce exemption, like any other tax exemption, is strictly construed against the taxpayer and in favor of taxation, Monarch Steel Co. v. State Bd. of Tax Comm'rs, 611 N.E.2d 708, 713 (Ind. Tax Ct.1993), and the taxpayer bears the burden of proving that it is entitled to the exemption, see Dav-Con, 644 N.E.2d at 194; Mid-America Mailers, 639 N.E.2d at 383. This is so " '[b]ecause an exemption releases property from the obligation of bearing its share of the cost of government and serves to disturb the equality and distribution of the common burden of government upon all property.' " National Assoc. of Miniature Enthusiasts v. State Bd. of Tax Comm'rs, 671 N.E.2d 218, 220 (Ind. Tax Ct.1996) (quoting St. Mary's Med. Ctr., Inc. v. State Bd. of Tax Comm'rs, 534 N.E.2d 277, 280 (Ind. Tax Ct.1989), aff'd, 571 N.E.2d 1247 (Ind.1991)). Of course, the Court's objective remains to ascertain and effect the intent of the legislature, so the Court will not read an exemption " 'so narrowly its application is defeated in cases rightly falling within its ambit.' " Monarch Steel, 611 N.E.2d at 713 (quoting Harlan Sprague Dawley, Inc. v. Department of State Revenue, 605 N.E.2d 1222, 1225 (Ind. Tax Ct.1992)).

In this case, Sony Music claims the exemption from Indiana's personal property tax provided in Ind.Code Ann. § 6-1.1-10-29.3 (West Supp.1996). The statute provides Personal property shipped into Indiana is exempt from property taxation if the owner or possessor is able to show by adequate records that the property:

(1) is stored in an in-state warehouse for the purpose of transshipment to an out-of-state destination; and

(2) is ready for transshipment without additional manufacturing or processing, except repackaging.

Ind.Code Ann. § 6-1.1-10-29.3. The State Board does not dispute that Sony Music has shown by adequate records that the artwork is stored in an in-state warehouse for the purpose of transshipment to an out-of-state destination. The issue is whether DADC's assembling of the discs, jewel cases, artwork, and longboxes constitutes more than "repackaging." The Court holds that it does and that, therefore, Sony Music is not entitled to the claimed exemption.

Sony Music argues that the artwork is exempt by the plain meaning of the statute. Sony Music points out that Webster's defines "repackage" in part as "to package again or anew." Webster's Third New International Dictionary 1923 (1981) (hereinafter Webster's Dictionary). The verb "package" is defined in part in terms of its noun form. It means "to make into or as if into a package." Id. at 1618. Sony quotes the following passage for the definition of the noun "package":

1 ...: the act or process of packing ... 4: ... b: a combination of related elements to be accepted or rejected as a whole ... c: a combination of benefits ... d: a combination of necessaries (as food or tickets) and services usu. offered at a special rate < the sportsincludes accommodations in heated cabins, with or without bath and meals; two sessions at the ski school and unlimited use of the ski lifts ... > ....

Id. at 1617-18. According to Sony Music, these denotations of "repackaging" clearly and unambiguously encompass "all acts of DADC in bundling the Artwork, compact disc, jewel case and related items into a 'package' for shipment." Br. at 6. The Court cannot agree.

Whatever allure Sony Music's argument might have when section 6-1.1-10-29.3 is considered in isolation quickly fades when the section is read in the context of the other interstate commerce exemptions. Section 29.3 stands as an alternative exemption for taxpayers unable to qualify for the "original package" exemptions provided in sections 6-1.1-10-29(b) ¹ and 6-1.1-10-30(a), (b), and (c). ² Although there are important differences among sections 29(b), 30(a), 30(b), and 30(c), they share the common requirement that the goods in question be stored in their original packages for the purpose of shipment or transshipment out of state. "Original package" refers to the container in which the goods are shipped to or placed in the storage facility. The regulations define "original package" as "the box, case, bale, skid, bundle, parcel, or aggregation thereof bound together and used by the seller, manufacturer, or packer for shipment." Ind.Admin.Code tit. 50, § 4.2-12-5(d) (1992). The emphasis in these provisions is on the fact that the taxpayer has maintained the integrity of the original shipping boxes or cartons.

Section 29.3 stands for the proposition, however, that all is not necessarily lost if the taxpayer opens the "original packages" and transfers the goods to other containers. Where the goods are shipped into Indiana, the taxpayer may still enjoy an exemption for its property if it does no more than "repackage" the goods for transshipment out of state. ³ Against the background of the "original package" exemptions, the...