Ziperstein v. Tax Com'r

• Decision Date: 24 July 1979
• Citation: 178 Conn. 493,423 A.2d 129
• Parties: Alan ZIPERSTEIN et al. v. TAX COMMISSIONER of the State of Connecticut.
• Court: Connecticut Supreme Court

Page 129

423 A.2d 129

178 Conn. 493

Alan ZIPERSTEIN et al. v. TAX COMMISSIONER of the State of Connecticut.

Supreme Court of Connecticut.

Argued May 10, 1979.

Decided July 24, 1979.

Robert L. Klein, Asst. Atty. Gen., with whom, on the brief, were Carl R. Ajello, Atty. Gen., and Ralph G. Murphy and Richard K. Greenberg, Asst. Attys. Gen., for appellant (defendant).

Jonathan E. Silbert, New Haven, for appellees (plaintiffs).

Before COTTER, C. J., and LOISELLE, BOGDANSKI, LONGO and PETERS, JJ.

LONGO, Associate Justice.

On December 6, 1974, the state tax commissioner denied a claim for a refund of certain sales taxes paid during the period from 1971 through 1974 filed by the plaintiff Richard Sachter, doing business as Glastonbury Dairy Queen. Following a hearing before the defendant tax commissioner, the claim was again denied. The plaintiff taxpayer, claiming aggrievement, appealed to the Court of Common Pleas. ¹ The trial court sustained the plaintiff's appeal and the tax commissioner has appealed to this court from the judgment rendered.

The uncontested facts are disclosed in the court's finding: The plaintiff owns and operates a Dairy Queen establishment and sells such products as ice milk (in the form of cones, sundaes and milkshakes), soda and icy slush under the brand name of "Mr. Misty." The process of preparing the ice milk for sale consists of taking a commercially prepared liquid mixture of sugar, corn syrup and additives, and, by the use of machinery, whipping air into the mixture and then passing it through refrigerating machinery so that it is frozen and maintained in that condition. The processes involved are powered by electricity. The commissioner of consumer protection issued a retail license to manufacture frozen desserts pursuant to General Statutes § 19-197; all sales made are at retail. The plaintiff's premises contain no seating tables, seating facilities, or sanitary or bathroom facilities for customers. The plaintiff and his employees deliver manufactured products to customers over the counter only. The cost of the products used in the making of desserts constitutes two-thirds of the total cost of materials used in the business. One-third of the building's area is devoted to customers, and the remaining area is devoted to the processing of products which takes more than 50 percent of the personnel's time. The electricity used in the building is used mainly for the production of the plaintiff's products.

From the evidence presented at trial, the court concluded that the plaintiff's establishment is primarily engaged in a process of manufacturing tangible personal property for sale in the regular course of business and is generally recognized as such; accordingly, the plaintiff was, pursuant to statute, entitled to the claimed refund of sales tax imposed upon the electricity used in the preparation and sale of the products sold by the plaintiff. The sole issue on this appeal is whether the electricity used by the plaintiff in the operation of the Dairy Queen outlet is "used and consumed directly in ... an industrial plant in the actual fabrication of the finished product to be sold" and thus exempt from the state sales tax on utility charges during the period pertinent to this appeal under General Statutes § 12-412(r).

Our analysis proceeds initially with the recognition of the settled rule that statutes which grant exemptions from taxation must be strictly construed against the taxpayer and in favor of the taxing authority. Wiegand v. Heffernan, 170 Conn. 567, 582, 368 A.2d 103 (1976); Modugno v. Tax Commissioner, 174 Conn. 419, 421, 389 A.2d 745 (1978); and "no claimant is entitled to an exemption unless he satisfies all the statutory requirements." Renz v. Munroe, 162 Conn. 559, 562, 295 A.2d 558, 560 (1972); see Crescent Beach Assn. v. East Lyme, 170 Conn. 66, 71, 363 A.2d 1045 (1976); Fusco-Amatruda Co. v. Tax Commissioner, 168 Conn. 597, 599, 362 A.2d 847 (1975); McLaughlin v. Poucher, 127 Conn. 441, 444, 17 A.2d 767 (1941); Klein v. Bridgeport, 125 Conn. 129, 131, 3 A.2d 675 (1939); 85 C.J.S. Taxation § 1098. For the purposes of the present case, the statutory requirements for a sales and use tax exemption are set forth in the following manner: General Statutes § 12-412 provides in pertinent part, "EXEMPTIONS. Taxes imposed by this chapter shall not apply to the gross receipts from the sale of ... the following items ... (r) ... fuel or any substitute therefor ... used in production ... which are consumed and used directly ... in an industrial plant in the actual fabrication of the finished product to be sold." ² (Emphasis added.) "(Regs., Conn.State Agencies) Sec. 12-426-11(a). GENERAL STATEMENT OF EXEMPTION. The tax does not apply to sales of and the storage, use or other consumption of ... fuel ... used in production ... which are used and consumed directly in ... an industrial plant in the actual fabrication of tangible personal property to be sold in the regular course of business...."

A review of the statute and regulations makes clear that in order to be entitled to an exemption, the plaintiff's business must constitute an "industrial plant." Thus, under Sec. 12-426-11(g) of the state agency tax department regulations, ³ which regulation defines that term and carries the force and effect of law; Hartford Electric Light Co. v. Sullivan, 161 Conn. 145, 154, 285 A.2d 352 (1971); the plaintiff was required to show that his business is (1) "primarily engaged" in a (2) "process of manufacturing" (3) tangible personal property in a business which is (4) "generally recognized" as a business described in the regulation.

The defendant's argument is posited in relation to regulation Sec. 12-426-11(g), and is three-pronged; the defendant claims that the plaintiff's business is not an "industrial plant" entitled to an exemption under General Statutes § 12-412(r) because: (1) the plaintiff is not engaged in a "process of manufacturing"; (2) even if some aspects of the plaintiff's business constitute a "process of manufacturing," the plaintiff is not "primarily engaged" in such a process; and (3) the plaintiff's business is not "generally recognized" as an industrial plant engaging in a manufacturing process. We cannot agree.

Although the tax department regulations define the term "actual fabrication," ⁴ the regulations do not define the term "process of manufacturing" as used in Sec. 12-426-11(g) of the regulations defining "industrial plant." The term "manufacturer," however, has been variously defined in broad terms as one who processes raw material; Sayles Biltmore Bleacheries, Inc. v. Johnson, 266 N.C. 692, 694, 147 S.E.2d 177 (1966); and one "who prepares the original substance for use in different forms"; State v. American Creosote Works, 163 La. 547, 548, 112 So. 412 (1927). Webster defines the word "manufacture" as: "Something made from raw materials by hand or by machinery; ... the process or operation of making wares or other material products by hand or by machinery; ... a productive industry using mechanical power and machinery; ... the act or process of making, inventing, devising, or fashioning." "Manufacturing" is defined as: "(1) to make (as raw material) into a product suitable for use (the wood ... is manufactured into fine cabinet work) (2) to make from raw materials by hand or machinery." "Manufacturer" is defined as: "an employer of workers in manufacturing ... one who changes the form of a commodity, or who creates a new commodity." Other lexicographers agree with the Webster definitions. Ballantine, Law Dictionary (3d Ed. 1969) p. 773; Bouvier, Law Dictionary (Rawle 3d Rev., 8th Ed. 1914) p. 2086; 55 C.J.S., Manufactures, § 1, p. 672; see also Sayles Biltmore Bleacheries, Inc. v. Johnson, supra, 266 N.C. 694, 147 S.E.2d 177; annots., 34 A.L.R. 535, 544; 10 A.L.R. 1273, 1276. In order to constitute a "process of manufacturing," there must be some form of procedure whereby original material is transformed, converted, fashioned, or reduced, either by action of human hands or by machinery, or it may be a chemical or assembly process devised or directed by human hands. See Assessors of Boston v. Commissioner of Corporations and Taxation, 323 Mass. 730, 84 N.E.2d 129 (1949); Commonwealth v. Peerless Paper Specialty, Inc., 344 Pa. 283, 25 A.2d 323 (1942); 55 C.J.S. Manufactures § 3c(1), p. 682. Numerous cases have held that where there is a finished product materially different from an original material in substance, general condition or quality, which change has been brought by human or artificial labor such that the article is enhanced in its value and use, the evolution constitutes a "process of manufacturing," and that the person or corporation which works the change is a manufacturer. See 71 Am.Jur.2d, State and Local Taxation, §§ 193, 355-359; 34 Am.Jur.2d, Federal Taxation, §§ 8875-8906; annot., "What Constitutes Manufacturing and Who is a Manufacturer under Tax Laws," 17 A.L.R.3d 7, §§ 3, 6, pp. 22-30.

Applying these principles to the present case, we are of the opinion that the process resulting in the production of the plaintiff's products involves a "process of manufacturing" within Sec. 12-426-11(g) of the state tax department regulations. The plaintiff's ice milk is produced by taking a commercially prepared liquid mixture of sugar, corn syrup and other items, and whipping air into the mixture and passing it through refrigerating machinery so that it is frozen and maintained in that state. The plaintiff's "slush" or "Mr. Misty" drink is made by mixing water, sugar, flavoring and chemical additives in a walk-in cooler where the product is stored until pumped from a machine. In each case, raw materials are transformed from an intrinsically valueless state into a finished product which has an enhanced value and use; the ice milk product thus produced is clearly a new and different product from the raw product. Where a statute or...