WISCONSIN DEP'T OF REVENUE v. A. GAGLIANO CO., INC.

• Decision Date: 02 June 2005
• Docket Number: No. 2003AP3538.,2003AP3538.
• Citation: 702 N.W.2d 834,2005 WI App 170,284 Wis.2d 741
• Parties: WISCONSIN DEPARTMENT OF REVENUE, Petitioner-Respondent, v. A. GAGLIANO CO., INC., Respondent-Appellant.
• Court: Wisconsin Court of Appeals

284 Wis.2d 741

2005 WI App 170

702 N.W.2d 834

WISCONSIN DEPARTMENT OF REVENUE, Petitioner-Respondent,¹ v. A. GAGLIANO CO., INC., Respondent-Appellant.

No. 2003AP3538.

Court of Appeals of Wisconsin.

Submitted on briefs September 7, 2004.

Decided June 2, 2005.

On behalf of the respondent-appellant, the cause was submitted on the briefs of Joseph A. Pickart of Michael Best & Friedrich LLP, Milwaukee.

On behalf of the petitioner-respondent, the cause was submitted on the brief of Mary E. Burke, assistant attorney general, and Peggy A. Lautenschlager, attorney general.

Before Deininger, P.J., Vergeront and Lundsten, JJ.

¶ 1. LUNDSTEN, J.

This is a tax case involving the application of the term "manufacturing property" found in WIS. STAT. § 70.995 (2003-04)² to a facility owned by the appellant, A. Gagliano Company, Inc. Gagliano's facility is used to ripen tomatoes and other produce, which Gagliano then sells to chain warehouses, food service suppliers, and produce wholesalers. The respondent, Department of Revenue, repeatedly denied Gagliano's requests that its ripening facility be treated as "manufacturing property." Gagliano sought review before the Tax Appeals Commission, and the commission ruled in favor of Gagliano. The commission concluded that Gagliano's ripening facility is entitled to tax treatment as "manufacturing property" within the meaning of the statute. The circuit court, however, set aside the commission's decision and ruled in favor of the department. Gagliano appeals the circuit court's order. We reverse the circuit court's order and reinstate the commission's decision.

Background

¶ 2. In February 1999, Gagliano asked the Department of Revenue to classify Gagliano's produce-ripening activities at a Milwaukee facility as "manufacturing" and, therefore, to classify the entire facility as "manufacturing property" under WIS. STAT. § 70.995.³ Gagliano argued that the activity conducted in its sophisticated ripening chambers is a manufacturing activity. The department denied Gagliano's request after concluding that Gagliano was primarily engaged in the wholesale distribution of fruits and vegetables. Gagliano filed an objection with the department's State Board of Assessors, and then sought review before the Tax Appeals Commission.

¶ 3. In each of the next two years, Gagliano filed similar requests with the department. The department denied the requests, and each time Gagliano sought agency review. The commission consolidated the three matters into one proceeding. After holding a two-day evidentiary hearing regarding all three years, the commission reversed the department, concluding that Gagliano's facility is "manufacturing property" within the meaning of WIS. STAT. § 70.995.

¶ 4. The department petitioned the circuit court for review of the commission's decision. The circuit court set aside the commission's decision, essentially adopting the department's view that Gagliano's ripening chambers are not "manufacturing property" and that Gagliano is primarily a wholesale distributor of fruits and vegetables. Under applicable standards, property used primarily for the wholesale distribution of fruits and vegetables is not "manufacturing property" within the meaning of WIS. STAT. § 70.995. Gagliano appeals.

Discussion

¶ 5. This case presents a close question: Did the commission reasonably determine that Gagliano's ripening chambers, and thus its facility, are "manufacturing property" as that term is used in WIS. STAT. § 70.995? We conclude that the commission's decision is entitled to great weight deference and, under this standard, we affirm the commission. Consequently, we reverse the circuit court's order.

¶ 6. Before proceeding, we clarify the parties' dispute. The question is not whether Gagliano, as a business, is or is not a wholesale distributor of fresh fruits and vegetables. It is. The question is whether Gagliano's facility is "manufacturing property" based on the nature of its ripening chambers. The answer to this question does not turn on whether Gagliano is a wholesaler of fresh fruits and vegetables. Indeed, the department does not argue that, even if Gagliano's ripening chambers are properly classified as "manufacturing" under WIS. STAT. § 70.995, those chambers are an insufficient part of Gagliano's activity to permit the full facility to be treated as "manufacturing property." Rather, the essence of the department's position is that the ripening activity that goes on in Gagliano's ripening chambers is nonmanufacturing and, therefore, that Gagliano is nothing more than a wholesaler of fresh fruits and vegetables. Thus, we conclude that the proper resolution of this case turns on an analysis of the activity that occurs in the ripening chambers.

[1]

¶ 7. We review the commission's decision, not the circuit court's. Hafner v. DOR, 2000 WI App 216, ¶ 3, 239 Wis. 2d 218, 619 N.W.2d 300. In the discussion that follows, we first summarize the commission's findings of fact. Second, we summarize the commission's analysis and legal conclusion that Gagliano's facility is manufacturing property under WIS. STAT. § 70.995. Third, we determine what standard of review should apply to the commission's legal conclusion. Finally, we apply that standard of review to the commission's conclusion and affirm that conclusion.

Commission's Findings of Fact

¶ 8. The commission's decision included the following findings of fact.

¶ 9. Gagliano is primarily engaged in the purchasing, ripening, storage, and sale of fresh produce, including tomatoes, bananas, and avocados. Tomatoes constitute approximately 80 to 85% of this produce, and bananas constitute approximately 5%. Gagliano sells its produce to chain warehouses, food service suppliers, and produce wholesalers. Gagliano does not sell its produce directly to consumers.

¶ 10. In 1997 or 1998, Gagliano installed twenty state-of-the-art ripening chambers. Each chamber is a self-contained, pressurized, two-level unit made of insulated panels. The walls of the chambers are independent and separate from the walls of Gagliano's building. Each chamber is equipped with "ripening control" equipment, including ceiling-mounted discharge coils, duct systems with ventilating fans and dampers, air deflectors, refrigeration equipment, two pumping stations, heat exchangers, fans, lights, heaters, supports, curbing, racking, and specially designed doors.

¶ 11. In addition, each chamber has a control panel that allows Gagliano to monitor and control the temperature, the levels of ethylene,⁴ carbon dioxide and oxygen, and other atmospheric conditions within the chamber. The control panel has other functions and is connected to a central computer that monitors, records, and controls the performance of each ripening cycle. The control panel in each chamber can also operate independently. In order to accelerate or slow down the ripening process, Gagliano can enter information in either the central computer or an individual control panel.

¶ 12. "Traditional" ripening rooms lack these sophisticated features, but they do involve some temperature control and they do permit the use of ethylene gas.

¶ 13. Gagliano's suppliers harvest tomatoes when they are unripe green tomatoes. In the produce business, these tomatoes are commonly called "mature greens." Mature greens are "stone-hard to the touch, green in color, starchy in taste, `earthy' in aroma." Gagliano places boxes of mature greens in its chambers and enters a computer program called a "ripening recipe" into its central computer, which controls numerous atmospheric conditions. The ripening recipes vary, permitting Gagliano to control ripening in a manner to meet customers' needs in terms of timing, quality, and quantity.

¶ 14. Gagliano's chamber-ripening process transforms mature greens into "ripened, edible tomatoes which are soft and juicy (not stone-hard), orange or red (not green), sweet (not starchy), and pleasantly aromatic (not `earthy')." The ripening process changes the tomatoes' color, texture, taste, size, and weight, thus making them marketable.

¶ 15. Gagliano also ripens bananas, avocados, and other produce in the chambers in the same general manner as tomatoes. As with tomatoes, the process changes the physical and chemical composition, appearance, and marketability of this other produce.

The Framework for Analysis, the Commission's Application of that Framework, and the Commission's Legal Conclusion

¶ 16. The legal framework for analyzing whether property is "manufacturing property" for purposes of WIS. STAT. § 70.995 is set forth in Zip Sort, Inc. v. DOR, 2001 WI App 185, ¶¶ 11-14, 247 Wis. 2d 295, 634 N.W.2d 99. We first ask whether the activity in question fits "perfectly" into any of the categories specifically listed as manufacturing in the STANDARD INDUSTRIAL CLASSIFICATION MANUAL (Executive Office of the President, Office of Management and Budget, 1987 ed.) (SIC Manual) or § 70.995(2). See Zip Sort, 247 Wis. 2d 295,

¶¶ 7, 23.⁵ If it does not, a second question is addressed: Does the activity nonetheless fit the general definition of manufacturing in § 70.995(1)? Zip Sort, 247 Wis. 2d 295, ¶¶ 7, 23. Whether an activity is manufacturing under the general definition in § 70.995(1) may be resolved by reference to three questions set forth in the Wisconsin Property Assessment Manual (the assessment manual), a manual promulgated by the department. Zip Sort, 247 Wis. 2d 295, ¶ 7.⁶

¶ 17. Before the commission, the parties both argued that the commission should apply the three assessment manual questions. Accordingly, the commission turned to the assessment manual questions:

1. Is the activity more similar to those specifically classified manufacturing by law and the SIC Manual, or more similar to those specifically classified nonmanufacturing by law and the SIC Manual?

2. Is the activity more closely aligned with the general description of producing, assembling, fabricating, making or

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