The Sherwin-williams Co. v. Iowa Dep't Of Revenue

• Citation: 789 N.W.2d 417
• Decision Date: 08 October 2010
• Docket Number: No. 07-1534.,07-1534.
• Parties: THE SHERWIN-WILLIAMS COMPANY, Appellee, v. IOWA DEPARTMENT OF REVENUE, Appellant.
• Court: United States State Supreme Court of Iowa

789 N.W.2d 417

THE SHERWIN-WILLIAMS COMPANY, Appellee,

v.IOWA DEPARTMENT OF REVENUE, Appellant.

No. 07-1534.

Supreme Court of Iowa.

Oct. 8, 2010.

Thomas J. Miller, Attorney General, and Marcia E. Mason, Assistant Attorney General, for appellant.

Bruce W. Baker of Nyemaster, Goode, West, Hansell & O'Brien, P.C., Des Moines, and John A. Panno, Joseph F. Timmons, and Laura T. Gorjanc of The Sherwin-Williams Company, Cleveland, Ohio, for appellee.

TERNUS, Chief Justice.

The appellee, The Sherwin-Williams Company, paid Iowa use tax on certain machines used in its Iowa retail outlets to mix base paint with colorant. The appellant, Iowa Department of Revenue, denied Sherwin-Williams' refund claim for these taxes, refusing to apply the so-called manufacturing exemption set forth in Iowa Code section 422.45(27)( a )(1) (1999). ¹ On judicial review, the district court reversed the department's ruling, and the Iowa Court of Appeals affirmed the district court. We granted the department's application for further review. Concluding the exemption applies, we affirm the decision of the court of appeals and the judgment of the district court.

I. Background Facts and Proceedings.

Sherwin-Williams is an Ohio-based company that manufactures, distributes, and sells paint and paint-related products. It owns and operates thirty-eight retail outlets in Iowa and, in addition, sells its products to independent retail stores such as Menards, Home Depot, and Lowes. Since the 1960s, Sherwin-Williams has used a decentralized manufacturing process that requires retailers to mix colorants with a base liquid according to precise formulas to create usable paint. ²

To implement this process, each Sherwin-Williams retail location must have a spectrographic color-matching machine that determines the mixing formula to achieve the precise color desired; a dispensing/tinting machine, known as a mini accutinter, to insert the colorant into the base; and a mixer/shaker to combine the colorant and base. The base is a thick liquid composed of binders and resins. The colorant, which contains additives such as glycol and water, gives the base paint flow and leveling abilities. Neither the colorant nor the base is salable at retail or usable by itself.

This legal proceeding began when Sherwin-Williams filed a refund claim for use taxes it paid from July 1, 1992, through December 31, 2000, on the machinery used to produce paint in its Iowa stores. It contended it had no liability for use tax, relying on a manufacturing exemption contained in Iowa Code section 422.45(27)( a ). The department denied a refund for taxes paid prior to July 1, 1997, the effective date of an amendment to the manufacturing exemption that expanded its scope, and issued a refund check for taxes paid after the amendment went into effect. Sherwin-Williams requested a review of the department's denial of a refund of pre-July 1, 1997 taxes. This review request prompted the department to ask the company for additional information. Upon reviewing the additional information submitted by Sherwin-Williams, the department not only refused to change its denial of a refund for pre-July 1, 1997 taxes, but also revoked its earlier decision granting a refund for the post-July 1, 1997 taxes. Thereafter, Sherwin-Williams formally withdrew its request for a refund of taxes paid prior to the 1997 expansion of the manufacturing exemption.

The department then issued a notice of tax due in the amount of the original refund plus interest, which was followed by a notice of assessment. Sherwin-Williams filed a protest, prompting an evidentiary hearing before an administrative law judge (ALJ). The ALJ issued a proposed decision that Sherwin-Williams was a “manufacturer” as that term is defined by statute, exempted from payment of use taxes by section 422.45(27)( a ). The department appealed, and the department director issued a final decision that Sherwin-Williams was not a “manufacturer” and did not qualify for the exemption. The agency decision was reversed by the district court on judicial review. As noted above, the court of appeals affirmed the district court. This court granted the department's application for further review.

II. Applicable Statutes and Administrative Rules.

It is helpful to provide a context for our discussion of this case by first reviewing the applicable statutes and agency rules. At the time relevant to this lawsuit, Iowa Code section 423.2 imposed a five percent tax “on the use in this state of tangible personal property purchased for use in this state,” calculated on the purchase price of the property. Iowa Code section 423.4(4) exempted from use tax tangible personal property exempt from sales tax under section 422.45. At issue in this case is the manufacturing exemption set forth in section 422.45(27)( a )(1).

Prior to 1997, certain sales of machinery and equipment were exempted from use tax, including

[t]he gross receipts from the sale ... of industrial machinery, equipment and computers ... if the following conditions are met:

a. The industrial machinery, equipment and computers shall be directly and primarily used in the manner described in section 428.20 in processing tangible personal property or in research and development of new products or processes of manufacturing, refining, purifying, combining of different materials or packing of meats to be used for the purpose of adding value to products....

....

b. The industrial machinery, equipment and computers must be real property within the scope of section 427A.1, subsection 1, paragraph “ e ” or “ j ”.

Iowa Code § 422.45(27) (1997) (emphasis added). Iowa Code section 428.20, to which reference is made in paragraph ( a ), states:

A person who purchases, receives, or holds personal property of any description for the purpose of adding to its value by a process of manufacturing, refining, purifying, combining of different materials, or by the packing of meats, with a view to selling the property for gain or profit, is a “ manufacturer ” for the purpose of this title.

Iowa Code § 428.20. Section 427A.1(1)( e ), to which reference is made in paragraph ( b ), provides that “[m]achinery used in manufacturing establishments” is assessed and taxed “as real property.” The term “manufacturing establishments” was not defined in the tax statutes. An agency rule, however, provided the following definition:

A manufacturing establishment is a business entity in which the primary activity consists of adding to the value of personal property by any process of manufacturing, refining, purifying, the packing of meats, or the combination of different materials with the intent of selling the product for gain or profit.

Iowa Admin. Code r. 701-71.1(6)( a ) (emphasis added).

During the 1997 legislative session, section 422.45(27) was amended. 1997 Iowa Acts ch. 87, § 1. According to the explanation contained in the house bill that was adopted by the legislature, the bill rewrote the statute “by defining those manufacturing activities which give rise to the [sales and use tax] exemption.” H.F. 126, 77th G.A., Reg. Sess., explanation (Iowa 1997). As of July 1, 1997, the effective date of this amendment, section 422.45(27)( a ) exempts the following receipts from use tax:

The gross receipts from the sale or rental of computers, machinery and equipment ... if such items are any of the following:

(1) Directly and primarily used in processing by a manufacturer.

Iowa Code § 422.45(27)( a )(1) (1999) (emphasis added). Iowa Code section 422.45(27)( d )(4) provides that “ ‘ [m]anufacturer ’ means as defined in section 428.20.”

A comparison of the pre and postamendment versions of this statute reveals two notable changes effected by the amendment. First, the requirement that the items sold “be real property,” i.e., “used in manufacturing establishments,” was eliminated. Second, the amendment changed the interplay between the manufacturing exemption and section 428.20. Under the amended statute, the equipment must be used “by a manufacturer” as defined in section 428.20. Prior to the 1997 amendment, the statute only required that the equipment be used “in the manner described in section 428.20.” The fiscal note that accompanied the bill predicted a decrease in revenue to the general fund of approximately $4 million in fiscal year 1998 and thereafter. H.F. 126, 77th G.A., Reg. Sess., fiscal note (Iowa 1997). We conclude from this information that the general assembly understood the amendment would have the effect of broadening the applicability of the manufacturing exemption, thereby resulting in less sales and use tax collections.

The department's primary argument in support of its position that the amended exemption does not apply under the facts of this case is that Sherwin-Williams is not a “manufacturer” for purposes of machinery used in its retail operation. ³ The department relies in part on its administrative rule defining the term “manufacturer”:

“ Manufacturer ” means any ... corporation that purchases, receives, or holds personal property for the purpose of adding to its value by any process of manufacturing, refining, purifying, combining of different materials, or by packing of meats with an intent to sell at a gain or profit.

Iowa Admin. Code r. 701-18.58(1). This definition essentially mirrors the statutory definition of “manufacturer.” Compare id., with Iowa Code § 428.20. The departmental rule goes on, however, to provide examples of businesses that do and do not fall within this definition:

Those who are in the business of printing, newspaper publication, bookbinding, lumber milling, and production of drugs and agricultural supplies are illustrative, nonexclusive examples of manufacturers. Construction contracting; remanufacture or rebuilding of tangible personal property (such as automobile engines); provision of health care; farming; transportation for hire; and the activities of restaurateurs, hospitals,...