ATTORNEY FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
ROSEMARY G. SPALDING JEFFREY A. MODISETT
Spalding & Watson Attorney General of Indiana
ANGELA L. MANSFIELD
Deputy Attorney General
a sales and use tax exemption for certain property purchased or leased during the tax years at
ripen on their own. Rather, the bananas would turn from green to black, instead of green to
yellow. Additionally, the necessary conversion from starch to sugar would not occur, and as a
result, the pulp would never have satisfactory taste or texture.
In nature, the bananas themselves produce the ethylene gas that triggers ripening. However, in order to prevent or delay ripening during banana shipments from remote locations, many banana suppliers grow hybridized bananas that do not produce enough ethylene to trigger ripening. Other suppliers chemically induce a state of dormancy in the bananas to prevent premature ripening. In either situation, ripening can only be triggered by introducing ethylene gas into the booths.
While the bananas are ripening in the ripening booths, they are inspected several times each day. Depending on their condition, the bananas may be moved to different ripening booths. The ripening process lasts from four to eight days. Once the bananas are ripened to the customer's specifications, the bananas are shipped.
ripened, they are either shipped in bulk or further processed by Indianapolis Fruit.
The further processing of some tomatoes is required because some of Indianapolis Fruit's customers order tomatoes packaged by size and ripeness. Indianapolis Fruit washes and dries these tomatoes. They are then sorted by size and ripeness, packaged in styrofoam trays and wrapped in plastic.
Department conducted a hearing and denied a large part of Indianapolis Fruit's claim in a letter of
findings dated November 20, 1996. On February 14, 1997, Indianapolis Fruit filed this original
tax appeal as a small tax case, and on June 27, 1997, the parties tried this cause before this Court.
At issue in this case is Indianapolis Fruit's contention that it is entitled to a refund of sales and use
tax paid on equipment used in the banana and tomato ripening process and the protective clothing
worn by Indianapolis Fruit's employees in the Garden Cut facility.
See Ind. Code Ann. §§ 6-2.5-5-1 to -38.2 (West 1989 & Supp. 1997). Like any
other exemptions, these exemptions are strictly construed against the taxpayer, see Sony Music
Entertainment, Inc. v. State Bd. of Tax Comm'rs, 681 N.E.2d 800, 801 (Ind. Tax Ct. 1997),
review denied, and the taxpayer bears the burden of demonstrating entitlement to the exemption.
See id. However, this Court must avoid reading an exemption provision so grudgingly that the
legislative intent and purpose are thwarted. See Mid-America Energy Resources, 681 N.E.2d at
261; Harlan Sprague Dawley v. Department of State Revenue, 605 N.E.2d 1222, 1225 (Ind. Tax
Indianapolis Fruit contends that it is entitled to the exemptions contained in sections 6-2.5- 5-1 to -3 for its banana and tomato ripening equipment and the protective clothing worn by its employees at the Garden Cut facility. Sections 6-2.5-5-1 and -2 exempt tangible personal property used in agricultural production. Section 6-2.5-5-3 is a more general provision, and is often referred to as the equipment exemption. It exempts manufacturing machinery, tools, and equipment used to produce "other tangible personal property." Ind. Code Ann. § 6-2.5-5-3(b) (West Supp. 1997).
All three exemption provisions require that the taxpayer engage in production before qualifying for the exemption. See Mechanics Laundry & Supply, Inc. v. Department of State Revenue, 650 N.E.2d 1223, 1228-29 (Ind. Tax Ct. 1995) (construing section 6-2.5-5-3 as requiring production); Department of State Revenue v. American Dairy, Inc., 338 N.E.2d 698, 700 (Ind. App. 1975) (construing predecessor statute to sections 6-2.5-5-1 and -2 as requiring
production). Production does not have different meanings under different exemption provisions.
See Citizens Action Coalition, Inc. v. Northern Ind. Pub. Serv. Co., 485 N.E.2d 610, 617 (Ind.
1985); Mechanics Laundry, 650 N.E.2d at 1232 (construing environmental quality exemption,
Ind. Code Ann. § 6-2.5-5-30 (West 1989) (amended 1997), in harmony with the industrial
exemptions); Harlan Sprague Dawley, 605 N.E.2d at 1230 (construing utility exemption, Ind.
Code Ann. § 6-2.5-4-5(c) (West 1989) (amended 1993), in harmony with the industrial
exemptions). Consequently, as a practical matter, there is little difference between analyzing
Indianapolis Fruit's operation under the agricultural exemptions and section 6-2.5-5-3.See footnote
Indianapolis Fruit's exemption claims raise two distinct issues. With respect to the banana and the tomato ripening process, the issue is whether Indianapolis Fruit's activities constitute production. With respect to the protective clothing worn at the Garden Cut facility, it is indisputable that the Garden Cut facility is engaged in production. The issue is whether the protective clothing is an integral and essential part of that production. See Ind. Admin. Code tit. 45, r. 2.2-5-8(c)(2)(F) (1996). Consequently, this Court will analyze these issues separately.
situations." Rotation Prods. Corp. v. Department of State Revenue, No. 49T10-9508-TA-00081,
slip. op. at 6 (Ind. Tax Ct. Jan. 30, 1997). As a result, mathematical precision in the application
of these exemptions cannot be expected, see id., and any evaluation of whether production is
occurring depends on the factual circumstances of the case. However, there is one iron-clad rule:
without production there can be no exemption. See id., slip. op. at 10 (focusing on whether
taxpayer's operation produces other tangible personal property); Mid-America Energy Resources,
681 N.E.2d at 263 ("[W]hen goods are not 'produced' and a service is provided, the exemption is
properly denied."); Mechanics Laundry, 650 N.E.2d at 1228-29; Indiana Waste Sys. v.
Department of State Revenue, 633 N.E.2d 359, 363 (Ind. Tax Ct. 1994); Faris Mailing, Inc. v.
Department of State Revenue, 512 N.E.2d 480, 483 (Ind. Tax Ct. 1987). See also Sony Music,
681 N.E.2d at 805 (focus under the industrial exemptions is on whether taxpayer produces some
form of tangible personal property or merely provides a service).
The inquiry does not end once it has been determined that production is taking place. Taxpayers must demonstrate that the items they claim are exempt are integral and essential to that production. See Cave Stone, 457 N.E.2d at 524. See also Ind. Admin. Code tit. 45, r. 2.2-5- 8(c) (1996). Often, this determination is made by identifying the points where production begins and where it ends. See, e.g., General Motors Corp., 578 N.E.2d 399, 404 (Ind. Tax Ct. 1991) (determining that production ended when taxpayer placed products in their most marketable form), aff'd, 599 N.E.2d 588 (Ind. 1992); Ind. Admin. Code tit. 45, r. 2.2-5-8(c)(1) (identifying beginning and end of integrated production process).
A finding that production is taking place will often lead to a taxpayer receiving an exemption for activity that, standing alone, does not constitute production. As the Indiana
Supreme Court pointed out in Cave Stone, the item itself does not have to have a
transformational effect on the good being produced in order to be exempt from sales and use tax.
It is enough that the item "play[s] an integral part of the ongoing process of transformation." Id.
at 524. See also Ind. Admin. Code tit. 45, r. 2.2-5-8(c)(2) (fact that equipment does not cause a
change in the product is not determinative). For example, a taxpayer who manufactures clay pipe
will receive a sales and use tax exemption for the forklifts that transport unfired pipe from the
machine in which it is molded to the kiln in which it is fired. See Ind. Admin. Code tit. 45, r.
2.2-5-8(f) example 1 (1996). The transportation, in and of itself, does not constitute production,
see Cave Stone, 457 N.E.2d at 524; however, it is enough that the transportation is an essential
and integral part of the production process.
This approach reflects economic reality. Modern integrated production processes require the use of a host of items that in and of themselves do not have a transformational effect on the good being produced. To disallow the exemptions on that basis would frustrate the legislative purpose behind exempting tangible personal property "closely connected with the production of goods." General Motors Corp., 578 N.E.2d at 404 (quoting Department of State Revenue v. Indiana Harbor Belt R.R., 460 N.E.2d 170, 175 (Ind. Ct. App. 1984)). All parts of an integrated production process are "closely connected with the production of goods" and should therefore qualify for the exemption. With these principles in mind, this Court turns to the facts of the present case.
never satisfactorily ripen on their own and points to the significant transformational effect of the
ripening booths. Indianapolis Fruit also argues that changing unripe non-marketable bananas into
ripened marketable products constitutes production within the meaning of the exemptions. The
Department counters by arguing that Indianapolis Fruit does not produce bananas, but "merely
controlled the[ir] ripeness before distribution." (Resp't Br. at 4). Moreover, according to the
Department, Indianapolis Fruit does not place the bananas in a "form, composition, or character
substantially different from that in which [they] w[ere] acquired." Ind. Admin. Code tit. 45, r.
2.2-5-10(k) (1996). In the Department's eyes, "a banana remains a banana even though its
ripening has been controlled." (Resp't Br. at 6).
Despite the Department's contention, this Court finds that the bananas undergo substantial change as they ripen.See footnote 3 The pulp changes chemically from starch to sugar, and the banana peels turn from green to yellow.See footnote 4 Cf. Mid-America Energy Resources, 681 N.E.2d at 263 & n.4 (describing changes in the properties of water). Although the ripened bananas are still bananas, they have been placed in a "form, composition, or character substantially different from that in which [they] w[ere] acquired." Ind. Admin. Code tit. 45, r. 2.2-5-10(k). They have been transformed both physically and chemically, and this transformation makes a marketable banana from an unmarketable one. Indianapolis Fruit's banana ripening process actively induced this
transformation by exposing the bananas to ethylene gas. This is sufficient to constitute
Indianapolis Fruit is entitled to a sales and use tax exemption for all items integral and essential to the production of the ripened bananas. The evidence in this case shows that the production process begins with the placement of the bananas in the ripening booths for exposure to the ethylene gas. The production process ends when the bananas are at their optimal ripeness and have been packaged for shipment. See Ind. Admin. Code tit. 45, r. 2.2-5-8(d) (1996) (Production "begins at the point of the first operation or activity constituting part of the integrated production process and ends at the point that the production has altered the item to its completed form, including packaging, if required."). Accordingly, Indianapolis Fruit is entitled to a sales and use tax exemption for all items used from the beginning to the end of this integrated production process.
marketable) in a "tightly controlled environment" leads to the conclusion that production is taking
place. The Department simply repeats the arguments it made with respect to the bananas.
This Court finds that the tomato ripening does not constitute production within the
meaning of any of the exemption provisions. It is indisputable that, like the bananas, the tomatoes
have undergone a substantial physical and chemical change while ripening. Although this
transformation undoubtedly made the tomatoes far more marketable, the transformation was not
triggered by Indianapolis Fruit. Instead, it passively awaited the ripening of the tomatoes. The
ripening was not actively induced by Indianapolis Fruit and was merely incidental to the proper
storage of the tomatoes.
To give Indianapolis Fruit the exemption for its tomato ripening equipment would allow Indianapolis Fruit to reap where it has not sown. It would be getting an exemption by virtue of the fact that tomatoes' marketability improved during its possession of them. Undoubtedly, the use of the ripening rooms facilitated the tomatoes' ripening, but this does not alter the conclusion that Indianapolis Fruit's operation with respect to the tomato ripening was essentially passive in nature. It cannot be said that Indianapolis Fruit triggered the tomato ripening. That is the critical distinction between the banana ripening and the tomato ripening.See footnote 6 With respect to the bananas, Indianapolis Fruit actively induced the ripening; it did no such thing with respect to the tomatoes. In other words, the difference is that, with respect to the bananas, Indianapolis Fruit made
something happen; with respect to the tomatoes, Indianapolis Fruit let something happen.See footnote
Likewise, Indianapolis Fruit's tomato packaging does not constitute production. Putting
something in a package may be an integral and essential part of an integrated production process.
See, e.g., General Motors Corp., 578 N.E.2d at 404; Ind. Admin. Code tit. 45, r. 2.2-5-8(d)(1).
This, however, does not lead to the conclusion that, in and of itself, packaging constitutes
production. In this case, the packaging has not changed the "form, composition, or character" of
the tomatoes. Ind. Admin. Code tit. 45, r. 2.2-5-8(k). Because there is no production preceding
the tomato packaging, the packaging is not an integral and essential part of an integrated
production process. Consequently, Indianapolis Fruit is not entitled to the exemption on this
This Court determines that Indianapolis Fruit is entitled to the exemption for the
protective clothing. The evidence presented at trial demonstrated that not all of the Garden Cut
facility employees were required to wear the protective clothing because not all of them had direct
contact with the processed food. (Trial Tr. at 42). Mr. Neff may have observed employees who
were not required to wear the protective clothing. He made no inquiries concerning the duties of
the employees who were not wearing the protective clothing. Consequently, this Court has no
reason to disbelieve the testimony of Indianapolis Fruit representatives who stated that the items
of protective clothing were necessary to prevent contamination and that the items were purchased
with the intention of preventing contamination.
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