ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
BARTON T. SPRUNGER STEVE CARTER
MARK J. RICHARDS ATTORNEY GENERAL OF INDIANA
ICE MILLER Indianapolis, IN
TED J. HOLADAY
DEPUTY ATTORNEY GENERAL
IN THE INDIANA TAX COURT _____________________________________________________________________
EDGCOMB METALS COMPANY, ) ) Petitioner, ) ) v. ) Cause Nos. 49T10-9811-TA-143 ) 49T10-9710-TA-183 DEPARTMENT OF LOCAL ) 49T10-9610-TA-135 GOVERNMENT FINANCE See footnote, )
(Petr Br. at 7.) Because the standard cut pieces were
stored in inventory as open stock, Edgcombs customers were often able to purchase
these pieces for their immediate use, instead of having a piece of steel
custom cut (for which there was an additional charge).
When Edgcomb filed its 1995, 1996, and 1997 personal property tax returns, it claimed an exemption on the standard cut steel under Indiana Code § 6-1.1-10-29.3 on the grounds that it had merely been repackaged and was ready for transshipment out-of-state. After performing an audit, however, a hearing officer for the State Board determined that the standard cut steel had not been repackaged, but had been further processed to form a saleable good. Consequently, the hearing officer concluded that Edgcombs inventory of standard cut steel was not exempt under Indiana Code § 6-1.1-10-29.3. The State Board affirmed the hearing officers determination and denied the exemption for all three years. See footnote Edgcomb timely filed its notice of intent to appeal with this Court. Additional facts will be supplied as necessary.
is stored in an in-state warehouse for the purpose of transshipment to an
out-of-state destination; and
is ready for transshipment without additional manufacturing or processing, except repackaging.
Ind. Code § 6-1.1-10-29.3 (emphasis added). The State Board does not dispute
that Edgcombs standard cut steel is stored in an in-state warehouse for the
purpose of transshipment to an out-of-state destination. Rather, the issue is whether
Edgcombs cutting of steel into standard cut pieces constitutes more than repackaging.
To resolve the issue, Indiana Code § 6-1.1-10-29.3 must first be read in context with the other interstate commerce exemptions: it stands as an alternative exemption for taxpayers unable to qualify for the original package exemptions provided in Indiana Code §§ 6-1.1-10-29(b)(1) See footnote and 6-1.1-10-30(a), (b), and (c). See footnote Although there are important differences among sections 29(b), 30(a), 30(b), and 30(c), they share the common requirement that the goods in question be stored in their original packages for the purpose of shipment or transshipment out of state. Original package refers to the container in which the goods are shipped to or placed in the storage facility. The regulations define original package as the box, case, bale, skid, bundle, parcel, or aggregation thereof bound together and used by the seller, manufacturer, or packer of shipment. Ind. Admin. Code tit. 50, § 4.2-12-5(d). The emphasis in these provisions is on the fact that the taxpayer has maintained the integrity of the original shipping boxes or cartons.
Indiana Code § 6-1.1-10-29.3 stands for the proposition, however, that all is not necessarily lost if the taxpayer opens the original packages and transfers the goods to other containers. Sony Music Entertainment, Inc. v. State Bd. of Tax Commrs, 681 N.E.2d 800, 803 (Ind. Tax Ct. 1997). Indeed, as this Court previously explained:
Where the goods are shipped into Indiana, the taxpayer may still enjoy an exemption for its property if it does no more than repackage the goods for transshipment out of state. Against the background of the original package exemptions, the term repackage clearly refers, not to packaging in the sense of combining different parts or components of a product for sale, but to repackaging in the sense of transferring to a different container for the purpose of transshipment. This is the meaning given in Websters second definition of the verb package: to enclose in a package or protective covering . . . to put (a commodity) into a protective wrapper or container for shipment or storage. Websters Third New International Dictionary 1618 (1981). This is the meaning intended by the legislature.
Id. (footnote deleted).
Case law also supports this reading of the statute. In Monarch Steel, this Court explained that securing an interstate commerce exemption most often hinges on the distinction between manufacturing or processing on the one hand and packaging or repackaging on the other. Monarch Steel, 611 N.E.2d at 713-714. In that case, the taxpayer, engaged in the business of buying and selling large quantities of steel, was claiming an interstate commerce exemption for its inventory. Id. at 710. In some instances, Monarch made no changes to the steel before shipping it out of state. Id. In other instances, it cut the steel into smaller pieces to facilitate shipment. Id. In still other instances, it cut the steel pursuant to customer specifications. Id. This Court held that the question turns on whether Monarch cut a piece of steel to prepare a product to sell to a customer, or to prepare an already completed product for shipment or storage, id. at 714, explaining:
[u]nder the interstate commerce exemptions, processing is concerned with the alteration of an articles state or form. Packaging, on the other hand, is concerned with transit and storage. Processing, then, refers to the preparation of a final saleable product, while packaging presumes a final saleable product already exists, and all that remains is to prepare it for shipping or storage.
Id. (citations and footnotes omitted). On the facts presented, the Court held
that Monarch processed the steel when it cut the steel to satisfy a
customers order, that is, to create a final saleable product, but that Monarch
packaged the steel when it cut the steel simply and solely to facilitate
shipment or storage[.] Id.
In applying the Sony/Monarch Steel standard to the facts of this case, Edgcomb did nothing more than repackage its steel to facilitate storage and shipment. As Edgcomb explains:
[We] purchase sheet steel from mills in bulk, which is shipped to [us] in an original package consisting of a coil encircled by a band. [We] unpackage the sheet steel by unwinding it from the coil and leveling it. After it is leveled it is identical in form and composition to its form and composition at the mill . . . .
[We] then cut the sheet steel into manageable, standard sized sheets for ease
of storage and shipment and store the sheets on shelving until they are
pulled, packaged, and shipped. The cutting, of course, is no different in
purpose or effect than any distribution centers activity in breaking down product received
in bulk into smaller quantities for purposes of shipment to customers.
[We] do not combine the sheet steel with other property as a component
to make a different final saleable product. The sheet steel is [the]
commodity, which is not changed in form or substance . . . in
any way other than cut into standard sized sheets for ease of storage
and shipment. It is not cut to customer specifications, it is placed
in open inventory. When ordered, it is pulled, put into a new
package, and shipped to the customer.
(Petr Br. at 15-16, footnote omitted.) In other words, Edgcomb cuts the
steel into standard-sized pieces to facilitate storage and handling.
Nevertheless, the State Board argues otherwise. First, it contends that Edgcombs leveling of the steel alters the steels form. Second, the State Board argues that a standard cut piece of steel, in and of itself, constitutes a final saleable product. Specifically, the State Board argues:
Edgcomb makes products that its customers will buy, regardless of whether it makes the product for a special, specific customer order, or it makes standard products in anticipation of what customers will order in the future. To make its products, Edgcomb changes the form of the material. It is not merely breaking large quantities into small quantities. Both the Custom Cut Steel and the Standard Cut Steel must be leveled and cut in order to be prepared for market or to be rendered in a condition for sale. This process of leveling and cutting is done in order to produce a product in a condition required by customers.
(Respt Br. at 11.) The State Boards argument is nothing more than
smoke and mirrors.
First, when Edgcomb purchases sheet steel from the mills, the sheets are approximately 100 feet long. Too cumbersome to transport in that fashion, the mills wrap the sheet steel on large coils and fasten with metal bands. These coils constitute the original packages. Edgcombs process of rolling the steel off the coil and through the leveler is the equivalent of unpacking the steel from its original package. See Monarch Steel, 611 N.E.2d at 714. Cutting the steel in basic standard cut pieces is nothing more than breaking large quantities into small quantities repackaging. Id. This repackaging is not done pursuant to customer specifications or request, but merely to increase storage capacity in Edgcombs warehouse as well as to allow easier shipping and handling. Indeed, pieces of flat sheet steel require less floor space than steel wrapped on huge coils.
Second, the State Boards claim that the standard cut piece of steel constitutes a final saleable product misses the mark. The sheet steel is the final saleable product. It has always been the final saleable product. It just happens that some customers are able to utilize pieces of standard cut steel for their purposes when they place their orders. It was no different in the Monarch case.
Personal property owned by a manufacturer or processor is exempt from property taxation
if the owner is able to show by adequate records that the property
is stored and remains in its original package in an in-state warehouse for
the purpose of shipment, without further processing, to an out-of-state destination[.]
Ind. Code § 6-1.1-10-29(b)(1).
(a) Subject to the limitation contained in subsection (d) of this section, personal
property is exempt from taxation if:
(1) the property is owned by a nonresident of this state;
(2) the owner is able to show by adequate records that the property
has been shipped into this state and placed in its original package in
a public or private warehouse for the purpose of transshipment to an out-of-state
(3) the property remains in its original package and in the public or
For purposes of this subsection, a nonresident is a taxpayer who places goods
in the original package and into the stream of commerce from outside the
state of Indiana.
(b) Subject to the limitation contained in subsection (d) of this section, personal property is exempt from taxation if:
(1) the property has been placed in its original package in a public
or private warehouse for the purpose of shipment to an out-of-state destination;
(2) the property remains in the original package and in the public or private warehouse; and
(3) the property had been ordered and is ready for shipment in interstate
commerce to a specific known destination to which the property is subsequently shipped.
If a property tax exemption is claimed under this subsection for property which
is not shipped to a specific known destination as required under subdivision (3),
the taxpayer shall file an amended personal property tax return for the year
for which the exemption for that property was claimed.
(c) Subject to the limitation contained in subsection (d) of this section, personal
property is exempt from property taxation if:
(1) the property has been placed in its original package in a public warehouse;
(2) the property was transported to that public warehouse by a common, contract, or private carrier;
(3) the owner is able to show by adequate records that the property is held in the public warehouse for purposes of transshipment to an out-of-state destination and is labeled to show that purpose; and
(4) the property remains in its original package and in the public warehouse.
However, no personal property is exempt from property taxation under this subsection if the property is owned by the same person who owns or leases the public warehouse where the property is held.
(d) An exemption provided by this section applies only to the extent that the property is exempt from taxation under the commerce clause of the Constitution of the United States.
Ind. Code § 6-1.1-10-30.