Southwire Co. v. Chilivis

• Decision Date: 30 June 1976
• Docket Number: No. 2,No. 52313,52313,2
• Citation: 228 S.E.2d 295,139 Ga.App. 329
• Parties: SOUTHWIRE COMPANY v. N. P. CHILIVIS, Commissioner of Revenue
• Court: Georgia Court of Appeals

Page 295

228 S.E.2d 295

139 Ga.App. 329

SOUTHWIRE COMPANY v. N. P. CHILIVIS, Commissioner of Revenue.

No. 52313.

Court of Appeals of Georgia, Division No. 2.

June 30, 1976.

Rehearing Denied July 16, 1976.

Christopher N. Zodrow, Carrollton, for appellant.

Arthur K. Bolton, Atty. Gen., David A. Runnion, Asst. Atty. Gen., Atlanta, for appellee.

PANNELL, Presiding Judge.

The State Revenue Commissioner assessed sales and use taxes against the Southwire Company for the period from January 1, 1970 to April 30, 1973. Southwire appealed the assessment to the Superior Court of Carroll County. Both Southwire and the Revenue Commissioner filed motions for summary judgment. The trial judge granted summary judgment in favor of the Revenue Commissioner. Southwire appeals the denial of its motion for summary judgment and the granting of summary judgment in favor of the Revenue Commissioner.

This appeal presents two distinct issues of law. The first issue is whether certain equipment and machinery purchased by Southwire qualify for exemption under the Sales and Use Tax Act. The second issue is whether a tolling arrangement employed by Southwire results in the sale of conversion services only or in the sale of a new copper product to Southwire's customers.

EXEMPTION FROM THE SALES AND USE TAX

The Sales and Use Tax Act imposes a tax upon the 'sale at retail' and use of tangible personal property. Ga.L.1951, pp. 360, 362 as amended. (Ga. Code Ann. § 92-3402a(a) and (b)). Appellant Southwire contends that certain of its purchases of equipment are exempt from sales and use taxes because they are 'machinery which is used directly in the manufacture of tangible personal property.' Ga.L.1963, p. 13 (Code Ann. § 92-3403a C(2)(n).) The machinery involved is electrical equipment used in the process of refining scrap copper. The equipment includes rectifiers, busbars, a monitoring system (infrared scanner), electrical switches, and electrical metering and monitoring equipment. A simplified description of the various items of equipment and their functions follows.

The rectifiers transform outside electrical current from alternating current into direct current. This direct current is then transmitted to electrolytic cells through busbars (electrical conducting blocks). Located within the electrolytic cells are an impure copper anode and a pure copper cathode. The rectifiers send out electricity through the busbars to the pure copper cathode and draw in electrons through other busbars from the impure copper anode. This function creates a deficiency of electrons in the copper atom (thereby creating a copper ion) and an abundance of electrons at the cathode. The copper ions are thus attracted to the copper cathode where they plate out into the form of pure copper.

The electrical switches direct the electrical current to the electrolytic cells and control the amperage in the rectifiers. The electrical monitoring devices, infrared line scanner and other monitoring equipment, are used to monitor the functioning of the electrical current, to detect electrical short circuits in the refining system, and to monitor the environment of the copper.

Appellant Southwire claims exemption of all of the above equipment under the provisions of Ga.Code Ann. § 92-3403a C(2)(n)1 (Ga.L.1963, p. 13). The statute provides an exclusion from the sales and use tax for '(t)he sale of machinery which is used directly in the manufacture of tangible personal property when such machinery is incorporated for the first time into a new manufacturing plant located in this State.' (Emphasis supplied.) The Revenue Commissioner asserts that the equipment does not satisfy the 'used directly' aspect of the exemption as interpreted by the decisions of this court. Three cases have interpreted the phrase 'used directly.' See Blackmon v. Screven County Industrial Development Authority, 131 Ga.App. 265, 205 S.E.2d 497; Hawes v. Custom Canners, Inc., 121 Ga.App. 203, 173 S.E.2d 400; State of Ga. v. Cherokee Brick & Tile Co., 89 Ga.App. 235, 79 S.E.2d 322. All three cases have narrowly restricted the application of the exemption in accordance with the general proposition that in interpreting tax exemptions all doubts must be resolved in favor of the taxing authority. Cherokee Brick, etc., Co. v. Redwine, 209 Ga. 691, 75 S.E.2d 550; Oxford v. J. D. Jewell, Inc., 215 Ga. 616, 619, 112 S.E.2d 601.

In State of Georgia v. Cherokee Brick, etc., Co., supra, the court dealt with a similar provision exempting industrial materials 'used directly in the fabricating, converting or processing of articles of tangible personal property or parts thereof for resale.' Ga.L.1951, pp. 360, 365. The court held that '(f)laming natural or artificial gas used to produce heat, which produces physical and chemical changes in the raw materials used to produce brick and clay products, is not Directly used in the fabricating, converting, or processing of those products within the meaning of section 3(c)2 of the Act of 1951 . . . so as to exempt from taxation the sale, use, or consumption of such gas or gases.' The court reasoned that the gas itself did not perform a function in the process of manufacturing brick; rather, it was the heat generated by the flaming gas which converted the clay into the brick. Thus, the court held that the gas was indirectly, rather than directly, used in the manufacturing process.

We find the above facts to be analogous to the factual situation in the present case. The rectifiers and busbars do not themselves perform a function on the scrap copper; rather, it is the electricity transformed and transferred by these devices which produces chemical and physical changes in the raw materials used to produce pure copper plates.

Appellant Southwire contends that the equipment for which it claims exemption is similar to the air compressors which were held exempt in Hawes v. Custom Canners, Inc., 121 Ga.App. 203, 173 S.E.2d 400. The air compressor created a counter-pressure in the fillerhead of cans and bottles. This allowed the introduction of the liquid into the cans and bottles. Thus, the air compressor directly affected the production of the finished product. There was no intervening agency. However, in our case, the rectifier and busbars do not directly effect the chemical change in the raw material; rather, the electrical current creates an electron imbalance within the electrolytic cell, which causes a chemical and physical change in the raw material. The rectifier and busbar simply modify and transmit this electrical current. This process is more closely analogous to the function of the steam generator and boiler in the Custom Canners case. These items were used to heat water which was sprayed on cans to bring them to a determined temperature. This court held that the steam generator and boiler were not used directly in the manufacturing process.

In Blackmon v. Screven County Industrial Development Authority, 131 Ga.App. 265, 205 S.E.2d 497, supra, this court held that climate control equipment, used in the manufacture of synthetic yarn, was not 'used directly' in manufacture within the meaning of the statute. The court concluded that the equipment, though essential to the manufacturing operation, was designed to control the environment of the goods. The court held that 'devices used to affect the environment of goods in manufacture are not 'used directly' in manufacturing. As this court stated in Custom Canners, "the test is not whether the property is essential to the operation of the plant, but whether it is an actual part of the process of manufacture." 121 Ga.App. 203, 205, 173 S.E.2d (400) at 402.' Supra at 267, 205 S.E.2d at 499. The court further stated that one test for 'direct use' in manufacture is the absence of an intervening agency. The climate control equipment failed this test because it operated solely on the air which then, as an intervening agency, circulated around the yarn. Similarly, in the present situation, the busbars and rectifiers operate solely on the electrical...