APPEARING FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
DANIEL A. SWARTZSee footnote
JEFFREY A. MODISETT
President, Colonial Brick Corp. Attorney General of Indiana
ANGELA L. MANSFIELD
Deputy Attorney General
INDIANA TAX COURT
COLONIAL BRICK CORP., )
v. ) Case No. 84T10-9609-SC-00117
DEPARTMENT OF STATE REVENUE, )
APPEAL FROM A FINAL DETERMINATION
OF THE DEPARTMENT OF STATE REVENUE
January 14, 1998
NOT FOR PUBLICATION
Colonial Brick Corp. (Colonial Brick) appeals a final determination of the Department of
State Revenue (Department) denying it a refund for sales and use tax paid for the tax years 1990
through 1992. At issue in this case is whether two of Colonial Brick's New Holland loaders are
exempt from sales and use tax.FACTS
Colonial Brick manufactures bricks. Part of its brick manufacturing process is to burn
the bricks in kilns. Colonial Brick uses a mixture of sawdust and coal to fuel the kilns. The
purpose of using the coal and sawdust mixture (as opposed to coal alone) is that the addition of
sawdust provides a better burn for the brick, reduces fuel costs, and makes the coal ash much
easier to remove from the kiln. Colonial Brick uses two New Holland loaders to mix the sawdust
and coal and feed the mixture into the kiln. One loader (New Holland Number 2) mixes the coal
and sawdust;See footnote
the other loader (New Holland Number 3) feeds the mixture into the kilns.
Colonial Brick contends that the two New Holland loaders are exempt from sales and use tax
because they are part of an integrated process that produces tangible personal property, i.e, the
bricks. The Department contends that the mixing of the coal and sawdust and the feeding of the
mixture into the kiln are properly characterized as pre-production activities and therefore, the
equipment used to perform such activities is not exempt from sales and use tax.
The Department assessed Colonial Brick for $16,164.30 in unpaid sales and use taxes for
the years at issue. Colonial Brick did not dispute the majority of this assessment and paid the
tax. Subsequently, Colonial Brick filed a claim for refund for the amount of tax it did dispute.
See Ind. Code Ann. § 6-8.1-9-1(a) (West Supp. 1997). The Department denied the claim, and
Colonial Brick initiated this original tax appeal as a small tax claim on September 20, 1996. In
its appeal, Colonial Brick claims that it is entitled to a refund of $1,749.22 for sales and use tax
paid on the two New Holland loaders. The parties tried this case on October 15, 1997.ANALYSIS AND OPINION
Standard of Review
This Court reviews the Department's final determinations de novo and is bound by
neither the evidence nor the issues raised at the administrative level. See Ind. Code Ann. § 6-
8.1-9-1(d) (West Supp. 1997); ANR Pipeline Co. v. Department of State Revenue, 672 N.E.2d
91, 93 (Ind. Tax Ct. 1996).
Discussion and Analysis
Indiana taxes tangible personal property stored, used, or consumed in this state. See Ind.
Code Ann. § 6-2.5-3-2 (West Supp. 1997); Mid-America Energy Resources, Inc. v. Department
of State Revenue, 681 N.E.2d 259, 261 (Ind. Tax Ct. 1997), review denied. A variety of
exemptions from this tax are available. See Ind. Code Ann. §§ 6-2.5-5-1 to -38.2 (West 1989 &
Supp. 1997). One of these exemptions is the equipment exemption:
Transactions involving manufacturing machinery, tools, and equipment are exempt from
the state gross retail tax if the person acquiring that property acquires it for his direct use
in the direct production, manufacture, fabrication, assembly, extraction, mining,
processing, refining, or finishing of other tangible personal property.
Id. § 6-2.5-5-3(b) (West Supp. 1997).See footnote
Tax exemptions are strictly construed against the taxpayer, and the taxpayer bears the
burden of demonstrating entitlement to the exemption. See Harlan Sprague Dawley, Inc. v.
Department of State Revenue, 605 N.E.2d 1222, 1225 (Ind. Tax Ct. 1992). However, [w]hen
construing an exemption, . . . the court must always bear in mind the legislature's intent to avoid
reading the exemption so narrowly its application is defeated in cases rightly falling within its
Colonial Brick argues that it is entitled to the equipment exemption because the New
Holland loaders are an integral part of its manufacture of bricks and therefore part of the
production process. At trial, Colonial Brick referred this Court to Cave Stone, Inc. v.
Department of State Revenue, 457 N.E.2d 520 (Ind. 1983) and Ind. Admin. Code tit. 45, r. 2.2-
In Cave Stone, the Indiana Supreme Court evaluated a predecessor (Ind. Code § 6-2-1-
39(b)(6) (1976) (repealed 1981)) to the current equipment exemption. In Cave Stone, the court
determined that trucks used to haul crude stone to a crusher were exempt from sales and use tax.
The court rejected a narrow construction of the statute and embraced a comprehensive definition
of the exemption provision. Id. at 524. Rather than focusing on whether the particular activity,
such as hauling stone, had a transformational effect on the product, the Cave Stone court asked
whether the activity was an essential and integral part of the production of a final product. Id.
See also Ind. Admin. Code tit. 45, r. 2.2-5-8(e) (property exempt from sales and use tax if an
essential and integral part of an integrated process which produces tangible personal property).
The issue here is whether mixing the sawdust with the coal and subsequently placing the
mixture into the kiln are an integral and essential part of the production of bricks. The
Department's position is that those activities are pre-production activities rather than production
In essence, the Department is asking this Court to find that the production process begins
after the coal and sawdust mixture is placed into the kiln. It is true that many activities can be
characterized as pre-production. For example, in general, the storage of raw materials (as
opposed to the storage of semi-finished goods during the production process) is properly
characterized as pre-production. See Ind. Admin. Code tit. 45, r. 2.2-5-8(e). However, the
mixing of the coal and the sawdust is more than storage; it is an integral and essential part of the
process of making bricks. It sets into motion the whole process by which Colonial Brick burns
its bricks. It lowers fuel costs by giving the bricks a better burn and leaves the ash in a
condition so that it may be easily removed from the kiln.
Colonial Brick's production process, for purposes of the exemption, begins with the
mixing of the coal and the sawdust. To hold otherwise would be requiring the mills of justice to
grind too fine. Cave Stone, 457 N.E.2d at 524 (quoting Cave Stone v. Department of State
Revenue, 409 N.E.2d 690, 699 (Buchanan, J., dissenting)). The exemption provision
circumscribes all of the operations or processes by which the finished product is derived. Id.
For that reason, the exemption is not to be restricted by artificial limitations on when an
integrated process begins. Rather, the exemption is to apply to the whole process by which the
finished product is created. See General Motors Corp. v. Department of State Revenue, 578
N.E.2d 399, 402 (Ind. Tax Ct. 1991), aff'd, 599 N.E.2d 588 (Ind. 1992). Any explanation of how
Colonial Brick makes bricks would be incomplete without a reference to the important steps of
adding sawdust to the coal and subsequently placing the mixture into the kiln. (This is to be
contrasted with the storage of the coal and sawdust.) Similarly, the failure to hold that Colonial
Brick's production process begins with mixing the sawdust and coal would apply the exemption
to less than the whole process. Therefore, Colonial Brick is entitled to the exemption it seeks.CONCLUSION
For the reasons stated above, this Court now enters judgment for Colonial Brick and
against the Department.
Footnote: 1Mr. Swartz, a non-attorney, represented Colonial Brick. See Ind. Small Claims R.
8(C); Ind. Tax Ct. R. 16.
Footnote: 2New Holland loader Number 2 also mixes the ash from the kiln with raw clay. This
mixture is turned into bricks.
Footnote: 3The gross retail tax exemptions in chapter 6-2.5-5 of the Indiana Code apply to the tax
imposed by section 6-2.5-3-2. See Ind. Code Ann. § 6-2.5-3-4(a)(2) (West 1989).
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