Texas Citrus Exchange v. Sharp

• Decision Date: 23 October 1997
• Docket Number: No. 03-97-00010-CV,03-97-00010-CV
• Citation: 955 S.W.2d 164
• Parties: TEXAS CITRUS EXCHANGE, a Texas Cooperative Association, Appellant, v. John SHARP, Comptroller of Public Accounts of the State of Texas; and Dan Morales, Attorney General of the State of Texas, Appellees.
• Court: Texas Court of Appeals

Page 164

955 S.W.2d 164

TEXAS CITRUS EXCHANGE, a Texas Cooperative Association, Appellant, v. John SHARP, Comptroller of Public Accounts of the State of Texas; and Dan Morales, Attorney General of the State of Texas, Appellees.

No. 03-97-00010-CV.

Court of Appeals of Texas Austin.

Oct. 23, 1997.

Scott A. Walsh, Jarvis & Kittleman, P.C., McAllen, for Appellant.

Dan Morales, Atty. Gen., Nancy L. Prosser, Asst. Gen., Taxation Division, Austin, for Appellee.

Before CARROLL, C.J., and ABOUSSIE and B.A. SMITH, JJ.

ON MOTION FOR REHEARING

BEA ANN SMITH, Justice.

To address certain issues raised in the motion for rehearing we withdraw our earlier opinion and judgment issued August 14, 1997, and substitute this one in its place.

Texas Citrus Exchange sued the Comptroller for a refund of $49,593.26 in taxes paid on electricity used in juice production. The Comptroller determined that electricity Texas Citrus used in maintaining frozen ingredients as part of juice production was "warehousing," a commercial use subject to taxation under Texas Tax Code section 151.317 and Comptroller's rule 3.295. Texas Citrus claims that maintaining frozen concentrate is part of its manufacturing process and thus the electricity is used for a "noncommercial" purpose, exempt from taxation under the code and rule. The district court rendered judgment for the Comptroller. In four points of error, Texas Citrus challenges the imposition of the tax under the Tax Code and the Comptroller's rule. We will reverse the trial court's judgment and render judgment that Texas Citrus receive the refund.

THE CONTROVERSY

Texas Citrus is a cooperative marketing association of over 200 citrus farmers. In addition to marketing the farmers' fresh fruit, the cooperative produces fruit juice at its factory in Mission, Texas. This all-natural juice does not contain preservatives and must adhere to strict quality standards regarding acidity, sugar content, and other factors. Because fruit harvested in different seasons varies in acidity and sugar content, the juices collected at different times of the year must be held for several months and then blended to produce a uniform juice product. Texas Citrus extracts juice from the fruit and removes the water to obtain a thick syrupy substance known as industrial concentrate. ¹ Texas Citrus tests the industrial concentrate for sugar-acid ratios and sends it to a tank farm or freezer rooms to be frozen. It takes approximately seven days to freeze the concentrate. The tank farm maintains the concentrate at a temperature of ten degrees Fahrenheit; the freezer rooms keep the concentrate at eight degrees below zero. ² The Comptroller agrees the electricity used to freeze the concentrate is exempt from taxation. The parties disagree as to whether the electricity used to keep the industrial concentrate frozen until it is used to make juice or sold as concentrate is taxable.

Texas Citrus sells a small portion of the frozen industrial concentrate to other producers, but most is used in the production of its own juice. In order to make the final product uniform, Texas Citrus must blend industrial concentrate from several batches of fruit harvested at different times during the season. ³ Once the blended concentrate matches the required characteristics, water is added and the mixture is heated to produce the final juice product. The juice is then canned, labeled, and boxed for shipment.

Subchapter H of Chapter 151 sets out taxable items that are exempted from the sales, excise, and use taxes imposed by the code. Tex. Tax Code Ann. § 151.301 (West 1992). Electricity is exempt from these taxes except when it is employed for commercial use, which means "use by a person engaged in selling, warehousing, or distributing a commodity or a professional or personal service...." Id. § 151.317(a), (c)(2) (West 1992). Commercial use does not include "processing tangible personal property for sale as tangible personal property...." Id. 151.317(c)(2)(A)(i). According to the Comptroller, Texas Citrus warehouses frozen concentrate for up to six months and the electricity required to maintain the frozen concentrate is taxable. Texas Citrus insists that maintaining several batches of frozen concentrate for blending into a uniform final product is part of its nontaxable manufacturing process.

To aid in enforcing section 151.317, the Comptroller promulgated tax rule 3.295. See 34 Tex. Admin. Code § 3.295 (West 1988). ⁴ Under rule 3.295, the taxation of electricity is based on its predominant use: If over fifty percent of the electricity measured on a single meter is used for taxable purposes, all electricity is taxed; if over fifty percent is used for exempt purposes, all electricity is exempt. Id. § 3.295(d). During an audit of Texas Citrus for the period of April 1, 1987 to March 31, 1991, the Comptroller determined that Texas Citrus's predominant use of electricity for the first two years of the period was taxable. The Comptroller measured the electricity used to lower the temperature of the concentrate to the desired temperature and considered that electricity to be exempt. Since the electricity used in freezing made up less than fifty percent of Texas Citrus's total use of electricity, the Comptroller concluded Texas Citrus's predominant use of electricity was taxable. Unhappy with these findings, Texas Citrus initiated a second study for the same period. The supplemental study measured only the electricity used to maintain the concentrate at the necessary temperature levels. Texas Citrus argued that this maintenance electricity was also exempt, and if combined with the freezing electricity measured in the original study, the predominant use of electricity for all four years would be exempt. The Comptroller adhered to its position that the maintenance electricity was taxable and imposed a tax of $49,593.26 for the predominantly commercial use of electricity in Texas Citrus's plant for the first two years. See Tex. Tax Code Ann. §§ 151.101, 151.317 (West 1992). Texas Citrus paid the tax under protest and requested a refund. See id. § 111.104. After the Comptroller denied its request, Texas Citrus brought suit in district court. See id. § 112.151.

The trial court held a bench trial to determine whether Texas Citrus was entitled to a refund. See id. § 112.054 (suit for tax refund is by trial de novo). For purposes of the suit, the Comptroller and Texas Citrus stipulated that if the maintenance electricity is exempt the predominant use of electricity for all four years is exempt from taxation. After hearing evidence detailing Texas Citrus's production process and hearing argument regarding the parties' interpretations of the statute, the trial court concluded that Texas Citrus was not entitled to the exemption. ⁵ In support of this conclusion, the trial court made Findings of Fact 5 and 6:

5. Texas Citrus is engaged in selling, warehousing, or distributing a commodity.

6. Maintaining industrial juice concentrate in a frozen state at a constant temperature is not processing the concentrate.

The district court rendered judgment for the Comptroller, and this appeal ensued.

DISCUSSION

In points of error one and two, Texas Citrus challenges the legal and factual sufficiency of the evidence to support Findings of Fact 5 and 6. In points of error three and four, it contends the trial court erred in concluding that the disputed electricity is not exempt and in rendering judgment for the Comptroller. Because the parties stipulated that the character of the disputed electricity will determine whether Texas Citrus is entitled to a refund, this appeal turns on the legal question whether Texas Citrus's maintenance of industrial concentrate at a constant frozen temperature is warehousing or is part of the manufacturing process.

In addressing this issue, we may consider the purpose and intent of the law, giving due deference to the interpretation placed upon the provision by the agency. See ADP Credit Corp. v. Sharp, 921 S.W.2d 490, 493 (Tex.App.--Austin 1996, writ denied); Borden, Inc. v. Sharp, 888 S.W.2d 614, 620 (Tex.App.--Austin 1994, writ denied); Direlco, Inc. v. Bullock, 711 S.W.2d 360, 363 (Tex.App.--Austin 1986, writ ref'd n.r.e.). We give serious consideration to an agency's construction of a statute that it is charged with enforcing, so long as the interpretation is reasonable and does not contradict the plain language of the statute. Stanford v. Butler, 142 Tex. 692, 181 S.W.2d 269, 273 (1944); Borden, Inc., 888 S.W.2d at 620; TEXALTEL v. Public Util. Comm'n, 798 S.W.2d 875, 884 (Tex.App.--Austin 1990, writ denied).

Ordinarily, it is the taxpayer's burden to show it is entitled to an exemption. North Alamo Water Supply Corp. v. Willacy County Appraisal Dist., 804 S.W.2d 894, 899 (Tex.1991); Sharp v. Chevron Chem. Co., 924 S.W.2d 429, 432 (Tex.App.--Austin 1996, writ denied). However, when the Comptroller relies on an exclusion from an exemption, this Court has held the burden shifts back to the Comptroller to prove the use fits within the exclusion. Chevron Chem. Co., 924 S.W.2d at 432. In this case, the Tax Code exempts the purchase of electricity except when sold for commercial Use. Tex. Tax Code Ann. § 151.317. Under the Chevron Chem. Co. rationale, the Comptroller would have the burden to show the disputed electricity was used for commercial purposes.

The Comptroller argues that such a ruling would contradict our holding in Direlco, Inc., 711 S.W.2d 360. We disagree. In Direlco this Court held that the term "commercial use" contained in a prior version of § 151.317 was ambiguous and we looked to legislative intent to determine the extent of the exemption for electricity. Again in Sharp v. Tyler Pipe Industries, Inc., 919 S.W.2d 157 (Tex.App.--Austin 1996, writ denied), we emphasized the importance of determining the intent of the legislature in creating the manufacturing exemption to be construed. We recognized the...