Tri-States Double Cola Bottling Co. v. Department of State Revenue, TRI-STATES

• Decision Date: 23 February 1999
• Docket Number: TRI-STATES,No. 49T10-9406-TA-00172,49T10-9406-TA-00172
• Citation: 706 N.E.2d 282
• Parties: DOUBLE COLA BOTTLING CO., Petitioner, v. DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Indiana Tax Court

Page 282

706 N.E.2d 282

TRI-STATES DOUBLE COLA BOTTLING CO., Petitioner, v. DEPARTMENT OF STATE REVENUE, Respondent.

No. 49T10-9406-TA-00172

Tax Court of Indiana.

Feb. 23, 1999.

Stephan L. Hodge, Thomas F. Schnellenberger, Mchale Cook & Welch, Indianapolis, Indiana, Attorneys for Petitioner.

Jeffrey A. Modisett, Attorney General of Indiana, Ted J. Holaday, Deputy Attorney General, Indianapolis, Indiana, Attorneys for Respondent.

FISHER, J.

Tri-States Double Cola Bottling Co. (Tri-States) appeals a final determination of the Department of State Revenue (Department) assessing use tax on certain items that Tri-States purchased during 1988 through 1990. The parties have narrowed the issues to be decided to three:

1) Whether employee uniforms purchased by Tri-States during the years at issue are exempt from use tax.

2) Whether glass-front coolers purchased by Tri-States during the years at issue are exempt from use tax.

3) Whether computer equipment purchased by Tri-States during the years at issue is exempt from use tax.

BACKGROUND AND PROCEDURAL HISTORY

Located in Evansville, Tri-States is engaged in the business of selling bottled beverages. Tri-States produces its own beverages and distributes them to retail merchants who in turn sell the beverages to the general public. In 1991, the Department audited Tri-States and concluded that Tri-States had numerous tax deficiencies. Consequently, the Department issued notices of proposed assessments to Tri-States for those alleged tax deficiencies. See IND.CODE ANN. § 6-8.1-5-1(a) (West Supp.1998). Tri-States filed a timely written protest of these proposed assessments. Id. § 6-8.1-5-1(c) (West Supp.1998). The Department held a number of hearings on Tri-States' protest and issued its final determination on April 26, 1994. Tri-States commenced this original tax appeal on June 30, 1994, and on May 20, 1996, the parties tried this cause before the Court.

ANALYSIS AND OPINION

Standard of Review

The Court reviews final determinations of the Department de novo and is bound by neither the evidence presented nor the issues raised at the administrative level. See IND.CODE ANN. § 6-8.1-5-1(h) (West Supp.1998); Rotation Prods. Corp. v. Department of State Revenue, 690 N.E.2d 795, 797 (Ind. Tax Ct.1998).

Discussion

Indiana imposes an excise tax (gross retail or sales tax) on retail transactions in Indiana. See IND.CODE ANN. § 6-2.5-2-1 (West 1989). Indiana also imposes a complementary excise tax (use tax) on the use, storage or consumption of tangible personal property in Indiana. See id. § 6-2.5-3-2 (West 1989) (amended 1989); see also USAir v. Department of State Revenue, 623 N.E.2d 466, 468-69 (Ind. Tax Ct.1993) (discussing complementary nature of Indiana's sales and use taxes). The legislature has provided a variety of exemptions from these complementary taxes. ¹ See IND.CODE ANN. §§ 6-2.5-5-1 to -38.2 (West 1989 & Supp.1998). Pursuant to its statutory authority, ² the Department has issued regulations interpreting some of these exemption provisions.

In Indiana, it is well-settled that tax exemptions are to be strictly construed against the taxpayer, see White River Envtl. Partnership v. Department of State Revenue, 694 N.E.2d 1248, 1250 (Ind. Tax Ct.1998), and the taxpayer bears the burden of proving entitlement to the exemption. See Indianapolis Fruit Co. v. Department of State Revenue, 691 N.E.2d 1379, 1383 (Ind. Tax Ct.1998); see also IND.CODE ANN. § 6-8.1-5-1(b) (West Supp.1998) ("The burden of proving

that the proposed assessment is wrong rests with the person against whom the assessment is made."). However, the Court must avoid reading an exemption provision so narrowly so as to exclude cases rightly falling within the ambit of that exemption provision. See Rotation Prods. Corp., 690 N.E.2d at 798 (citing Harlan Sprague Dawley, Inc. v. Department of State Revenue, 605 N.E.2d 1222, 1225 (Ind. Tax Ct.1992)).

I. The Uniforms

During the years at issue, Tri-States purchased uniforms for its employees. Tri-States contends that some of these uniforms are exempt from use tax under IND. ADMIN. CODE tit. 45, r. 2.2-5-8(c)(2)(F) (1996), which exempts "[s]afety clothing ... [that] is required to ... prevent contamination of the product during production" from sales and use tax. ³ Tri-States maintains that uniforms worn by its production employees (i.e., employees engaged in the manufacture of the beverages) are required to prevent contamination of the beverages.

Tri-States is required to maintain a sanitary environment in its production facility because Tri-States produces items for human consumption. To ensure compliance with this requirement, Tri-States' production facility is regularly inspected by various federal and state regulatory authorities. Although the regulatory authorities do not specifically require that the production employees wear uniforms, Tri-States requires its production employees to do so. Tri-States provides the production employees with six sets of uniforms. The production employees are required to change their uniforms daily. However, they are allowed to wear the uniforms to and from work as well as during breaks.

The Department, citing General Motors Corp. v. Department of State Revenue, 578 N.E.2d 399, 401 (Ind. Tax Ct.1991), aff'd, 599 N.E.2d 588 (Ind.1992), argues that the Court must make a finding that the uniforms are essential and integral to the production process in order for Tri-States to gain the exemption. This is contrary to the regulation. Although it is well-settled that items must be essential and integral to a production process in order to be exempt from sales and use taxes, see Department of State Revenue v. Cave Stone, Inc., 457 N.E.2d 520, 524 (Ind.1983), the Department has adopted regulations that deem certain items to meet that essential and integral standard. One such item is clothing that is required to prevent contamination of a product. See IND. ADMIN. CODE tit. 45, r. 2.2-5-8(c)(2)(F); Indianapolis Fruit Co., 691 N.E.2d at 1386. This means that the Court need only examine whether the uniforms in this case are required to prevent contamination of Tri-States' product.

It is undisputed that Tri-States is required to maintain a sanitary environment in its production facility in order to prevent contamination of its products. One possible source of contamination is through the production employees, who, despite the fact that Tri-States' bottling process is largely automated, have some physical contact with the beverages as they are being produced. (Trial Tr. at 27). Tri-States has chosen to guard against this possible source of contamination by requiring its production employees to wear clean uniforms and change them every day. This, however, does not meet the requirements of the regulation.

Undoubtedly, Tri-States' policy of requiring its production employees to wear clean uniforms contributes to the overall cleanliness of its production facility. However, the fact that the uniforms reduce the possibility of contamination to some unspecified degree does not prove that they are required to prevent contamination. In addition, if the wearing of the uniforms were truly required to prevent contamination, it is highly unlikely that Tri-States would permit those uniforms to be worn outside its production facility where they can be exposed any number of contaminants. See IND. ADMIN. CODE tit. 45, r. 2.2-5-8(c)(4)(B). Therefore, the Court finds that Tri-States has not met its burden of establishing entitlement to the exemption.

II. The Glass-Front Coolers

During the years at issue, Tri-States purchased glass-front coolers that it provides free of charge to retailers who sell Tri-States' products. Tri-States enters into written agreements with the retailers concerning the coolers. Tri-States maintains that these coolers are leased to the retailers, thereby making them exempt from the use tax under IND.CODE ANN. § 6-2.5-5-8 (West 1989) (amended 1990) ⁴, which exempts goods acquired for resale, rental, or leasing, from sales and use tax. ⁵ The Department contends that the agreements between Tri-States and the retailers do not constitute leases and that therefore section 6-2.5-5-8 does not apply.

With respect to leases of tangible personal property, section 6-2.5-5-8 and subsection 6-2.5-4-10(a) work together. Subsection 6-2.5-4-10(a) imposes a tax on the leasing of tangible personal property. Section 6-2.5-5-8 exempts, inter alia, tangible personal property acquired for the purpose of leasing that property to others. This means that either Tri-States' purchase of coolers ⁶ is taxable or each transaction between Tri-States and the retailers is taxable. They cannot both be subject to taxation nor can they both escape taxation because taxation of one depends on the lack of taxation of the other.

Therefore, in resolving this dispute, the Court must look to the meaning of lease as it is used in section 6-2.5-5-8 and as it is used in subsection 6-2.5-4-10(a). Neither section 6-2.2-5-8, subsection 6-2.5-4-10(a), nor Department regulations provide a definition of lease. ⁷ It is therefore proper for the Court to refer to other areas of the law to determine the meaning of lease. See Monarch Beverage Co. v. Department of State Revenue, 589 N.E.2d 1209, 1212 (Ind. Tax Ct.1992) (court may look to the "law of sales for assistance in interpreting tax laws that relate to the sale of goods"). IND.CODE ANN. § 26-1-2.1-103(1)(j) ⁸ (West 1995) defines a lease as "a transfer of the right to possession and use of goods for a term in return for consideration...." ⁹

The transactions between Tri-States and the retailers do arguably fall within the outer limits of subsection 26-1-2.1-103(1)(j).

                The transactions involve a transfer of a right to possession of goods for consideration. 10  The only question is whether the fact that there are no time periods specified in the agreements means that the agreements do not satisfy the "for a term"

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