Nandita G. Shepherd
Deputy Attorney General
Attorneys for Appellee
Craig R. Finlayson
Swift & Finlayson
Fort Wayne, IN
Appellant (Defendant below),
INTERSTATE WAREHOUSING, INC. Appellee (Plaintiff below ).
) Supreme Court No.
February 14, 2003
Interstate cools the air in its storage facilities by chilling ammonia to negative
20 degrees Fahrenheit using processes involving electrical energy.
Id. This converts
the ammonia from gas form to a liquid. Id. The liquid
ammonia is then circulated through a closed loop distribution system to lower the
temperature of the air in the storage rooms. Id. When the
temperature of the chilled refrigerant ammonia rises to zero degrees, it is returned
through the same closed loop distribution system to the compressors and condensers of
the central refrigeration system. Id. Upon receiving the warmed ammonia, Interstate
again cools it and recirculates it through the closed loop system. Id.
Interstate charges its customers based on the temperature that is required to be
maintained in the refrigerated storage area and the quantity of perishables that the
From 1993 to 1996, Interstate paid sales and use taxes totaling $91,566.85 for
electricity purchased for its Indianapolis and Lafayette facilities. Claiming that these electricity
purchases were exempt from sales and use tax, Interstate sought a refund.
The Department of State Revenue (Department) denied Interstates refund claim. Interstate appealed
and the Indiana Tax Court held that Interstate was entitled to the refund
of sales and use tax it sought.
Interstate Warehousing, Inc., 764 N.E.2d
It is well established that exemption statutes are strictly construed against a taxpayer
so long as the intent and purpose of the Legislature is not thwarted.
Indiana Dept of State Revenue v. Fort Wayne Natl Corp., 649 N.E.2d
109,113 (Ind. 1995); Monarch Steel Co. v. State Bd. of Tax Commrs, 699
N.E.2d 809, 810 (Ind. Tax Ct. 1998). As such, Interstate had the
burden of establishing its entitlement to the exemption. Indiana Dept of State
Revenue v. Hardware Wholesalers, Inc., 622 N.E.2d 930, 933-34 (Ind. 1993); Sony Music
Entertainment, Inc. v. Indiana State Bd. of Tax Commrs, 681 N.E.2d 800,801 (Ind.
Tax Ct. 1997), review denied, 690 N.E.2d 1182.
We hold that Interstate has failed to demonstrate that it qualifies for the
exemption here in two respects: (1) we do not find that Interstate is
engaged in the production of other tangible personal property; and (2) we do
not find that Interstate is in the business of manufacturing, processing, refining, repairing,
mining, agriculture, horticulture, floriculture, or arboriculture. As the language of the statute
makes clear, it must satisfy both these requirements to qualify for the exemption.
The Tax Court itself has identified the elements of production of other tangible
personal property in a number of cases in recent years. The distinct
marketable good requirement is illustrated by
White River Envtl. Pship v. Department of
State Revenue, 694 N.E.2d 1248, 1252 (Ind. Tax Ct. 1998). In that
case, the taxpayer, an operator of a wastewater treatment facility, claimed the exemption
at issue here for the sales and use taxes it paid on chemicals
and materials consumed during its treatment process. The Tax Court correctly concluded
that byproducts generated by the treatment process clean water, ash and sludge
were not part of a production process "because the 'products' of [the
taxpayer's] treatment process do not satisfy any market
The element of transformation is illustrated by
Mechanics Laundry & Supply, Inc. v.
Indiana Dep't of State Revenue, 650 N.E.2d 1223, 1231 (Ind. Tax Ct. 1995),
and by Faris Mailing, Inc. v. Indiana Dep't of State Revenue, 512 N.E.2d
480, 483 (Ind. Tax Ct. 1987). In Mechanics Laundry, the taxpayer, an
operator of a commercial laundry, claimed the exemption at issue here for the
sales and use taxes it paid on cleaning supplies, water, gas, electricity, and
other products consumed during the laundering of soiled textiles. The Tax Court
correctly concluded that the laundering of soiled textiles did not constitute "production."
Id. at 1229. The taxpayer was not engaged in an overall process
directed to the production of textiles; instead, it was perpetuat[ing] textiles that were
produced by others. Id. at 1229-30.
Faris Mailing, the taxpayer, a business that processed and prepared mailing items
for customers, claimed the exemption at issue here for sales and use taxes
it paid on labels, directories and other similar items. The Tax Court
correctly concluded that the taxpayer was not engaged in the "production of other
tangible personal property." According to the Tax Court, [t]he items used in
[the taxpayers direct mail assembly] process cannot reasonably be assumed to transform the
customer's package into a new product. Id.
One final example is particularly helpful. In
Indianapolis Fruit Co. v. Department
of State Revenue, 691 N.E.2d 1379, 1383 (Ind. Tax Ct. 1998), the taxpayer,
a wholesaler of fruits and vegetables, claimed that it was engaged in production
(under different exemptions than the one at issue here) for sales and use
taxes it paid on its banana and tomato ripening equipment. The Tax
Court noted that the taxpayer actively ripened the bananas by introducing ethylene gas
into the banana ripening booth but allowed the tomatoes to ripen by merely
placing them in a tomato processing unit. Id. at 1382, 1385-86. The
court held that the taxpayer was engaged in production with respect to the
bananas because the taxpayer had physically and chemically transformed the bananas from unmarketable
bananas to marketable ones. Id. at 1381, 1385. The Court, however,
found that the taxpayer's tomato ripening process did not constitute production because the
taxpayer did not trigger the ripening process but merely passively allowed it to
occur. Id. at 1381, 1385-86
The common thread in all of these cases is that where the taxpayer did not transform property into a distinct marketable product for customer consumption, the Tax Court held that the taxpayer was not engaged in the production of other tangible personal property. We agree with the Tax Courts analysis in those cases. Applying the same analysis to the facts here, we find that Interstates liquification of ammonia within the closed loop of its warehouses refrigeration systems may meet the transformation requirement but, because the liquefied ammonia is not purchased by Interstates Warehouse customers, the distinct marketable good requirement is not met. Interstate is not engaged in the production of other tangible personal property. See footnote
Processing or refining is defined as the performance by a business of an
integrated series of operations which places tangible personal property in a form, composition,
or character different from that in which it was acquired. The change in
form, composition, or character must be a substantial change. Operations such as distilling,
brewing, pasteurizing, electroplating, galvanizing, anodizing, impregnating, cooking, heat treating, and slaughtering of animals
for meal or meal products are illustrative of the types of operations which
constitute processing or refining, although any operation which has such a result may
be processing or refining. A processed or refined end product, however, must be
substantially different from the component materials used.
Ind. Admin. Code tit. 45 r. 2.2-5-10(k). Interstate argues that it is
engaged in processing because it processes chilled ammonia to produce conditioned air and
sells the cooled, dehydrated and conditioned air that it processes. Petrs Mem.,
App. at 90. But we think the Department has the better part
of the argument: Interstate [does not] perform an integrated series of operations resulting
in a transformed end product to Interstates customer.
air merely maintains the customers previously manufactured goods. There is no substantial
change in form, composition, or character to those goods. The cold air
is only incidental to the service of storing previously manufactured goods. Mem.
in Supp. of Resp. to Mot. For Summ. J. and Cross-Mot. For Summ.
J., App. at 76. We hold that Interstate is not engaged in
the business of
The taxpayer in Mid-America was an Indiana corporation that provided chilled water for
air conditioning to downtown Indianapolis businesses.
Mid-America, 681 N.E.2d at 260.
Mid-America operated a central processing plant where it chilled and chemically treated water
before distributing the water to its customers through an underground, closed loop, distribution
system. Id. When the water became too warm to
purpose, it was returned to the central plant through the closed loop and
the process was repeated. Id. Mid-America charged its customers based on
the quantity of water delivered and the temperature differences in the water that
returned. Id. It collected sales tax on the sales made, remitting
sales taxes collected from non-exempt customers to the appropriate authorities. Id.
The Tax Court correctly found that Mid-America was entitled to the exemption at
issue in this case on chemicals it purchased because its operation of chilling
and treating water for the purpose of conditioning air in its customers buildings
constituted production of other tangible personal property.
Id. at 264. Mid-America
chilled and treated water that its customers purchased and used to condition the
air in their respective buildings.
In its opinion in this case, the Tax Court compared the factual background
Mid-America but focused only on the chilling processes used by the respective
companies. Certainly, Interstates process for chilling and distributing ammonia is similar to
the process Mid-America used for the cooling and distribution of water. We
also agree with the Tax Court that both companies distributed their coolants through
a closed loop system with similar types of machinery. See Interstate Warehouse,
Inc., 764 N.E.2d at 316-317.
However, as discussed in Part I,
supra, we conclude that the Tax Court
failed to apply the distinct marketable good requirement. Interstate primarily provides the
service of storing frozen goods. A necessary component of this service is
a climate-controlled environment. Interstates customers did not purchase the processed ammonia
just like White Rivers customers did not purchase distinct marketable products. In
contrast, Mid-Americas customers bought and paid sales tax on a distinct
marketable product: chilled water. The process Interstate uses to achieve an air
conditioned environment is incidental to the service of providing storage for frozen goods.
Its customers are neither purchasing, nor paying sales or use taxes on
the goods used to provide the service.
SHEPARD, C.J., and DICKSON, BOEHM, and RUCKER, JJ., concur.