ATTORNEY FOR PETITIONER:
JOHN H. BROOKE
BROOKE & CLOYD
ATTORNEYS FOR RESPONDENT:
ATTORNEY GENERAL OF INDIANA
LINDA I. VILLEGAS
DEPUTY ATTORNEY GENERAL
INDIANA TAX COURT
NORTH CENTRAL INDUSTRIES, INC., )
COMPANY, Successor in Merger with
v. ) Cause No. 49T10-9907-TA-158
INDIANA DEPARTMENT OF )
STATE REVENUE, )
ON APPEAL FROM A FINAL DETERMINATION
OF THE INDIANA DEPARTMENT OF STATE REVENUE
June 20, 2003
North Central Industries, Inc. (North Central) appeals from the Indiana Department of State
Revenues (Department) denial of its request for a refund of $1,988.15 in use
tax for 1994. North Central claims that the Department failed to grant
it an exemption under Indiana Code Section 6-2.5-5-3 on the machine it used
to shrink-wrap fireworks. The sole issue before the Court is whether, under
Indiana Code Section 6-2.5-5-3, North Central directly used its shrink-wrap machine in the
direct production of other tangible personal property.
FACTS AND PROCEDURAL HISTORY
North Central is an Indiana corporation in Muncie that purchases fireworks in bulk
from vendors outside the United States. North Central then arranges the fireworks
into various fireworks assortments and places them into boxes. Afterwards, each individual
box is shrink-wrapped to protect the fireworks from moisture and theft. The
shrink-wrapped boxes of fireworks are then sold to fireworks retailers.
North Central purchased its shrink-wrap machine in 1994. After an audit in
1997 revealed that North Central had not paid sales tax on the purchase
of the machine, the Department assessed North Central use tax
See footnote and penalties in
the sum of $1,988.15. North Central paid the assessment and on April
24, 1999, requested a refund of $1,988.15 plus interest, which the Department denied
on April 28, 1999.
On July 7, 1999, North Central initiated an original tax appeal. The
parties filed cross-motions for summary judgment, and on October 19, 2000, the Court
held one hearing on both motions. Additional facts will be supplied as
ANALYSIS AND OPINION
Standard of Review
This Court hears appeals from denials of refunds by the Department de novo.
Ind. Code § 6-8.1-9-1(d) (1998). Consequently, the Court is not
bound by the evidence or the issues raised at the administrative level.
Hall v. Indiana Dept of State Revenue, 720 N.E.2d 1287, 1289 (Ind. Tax
A motion for summary judgment is appropriate only when there are no genuine
issues of material fact and the moving party is entitled to judgment as
a matter of law. Ind. Trial Rule 56(C).
Cross-motions for summary
judgment do not alter this standard. Salin Bancshares, Inc. v. Indiana Dept
of State Revenue, 744 N.E.2d 588, 591 (Ind. Tax Ct. 2000).
The sole issue is whether North Central is entitled to the exemption (known
as the equipment exemption) provided in Indiana Code Section 6-2.5-5-3(b). That statute
states that [t]ransactions involving manufacturing machinery, tools, and equipment are exempt from the
state gross retail tax if the person acquiring that property acquires it for
direct use in the direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining,
or finishing of other tangible personal property. Ind. Code § 6-2.5-5-3(b) (1998)
(emphasis added). North Central contends that its shrink-wrap machine is exempt from
See footnote because it was acquired for direct use in the direct production
of its fireworks assortments. The Department, on the other hand, argues that
North Central is not entitled to the exemption because it does not produce
other tangible personal property, but rather provides a packaging service.
When a taxpayer claims entitlement to a tax exemption, the taxpayer bears the
burden of showing that the terms of the exemption are met.
Energy Resources, Inc. v. Indiana Dept of State Revenue, 681 N.E.2d 259, 261
(Ind. Tax Ct. 1997), review denied. This Court strictly construes an exemption
against the taxpayer, although the Court will not read it so narrowly as
to defeat its application to cases rightly within its ambit. Id.; Rotation
Prod. Corp. v. Dept of State Revenue, 690 N.E.2d 795, 798 (Ind. Tax
To qualify for the equipment exemption, North Central must show, in
part, that it is engaged in the direct production or manufacture of other
tangible personal property. See Gen. Motors Corp. v. Indiana Dept of State
Revenue, 578 N.E.2d 399, 401 (Ind. Tax Ct. 1991), affd. If it
satisfies this element, North Central must then show that the equipment for which
it seeks an exemption is directly used in the production of the tangible
personal property. See id.
Although [t]here are innumerable ways to produce other tangible personal property, [Indiana Code
Section 6-2.5-5-3] cannot be expected to give a precise answer to each factual
situation that arises. Rotation Prod., 690 N.E.2d at 798. Nevertheless, the
Departments rules make clear that production must entail a substantial change or transformation
that places tangible personal property in a form, composition, or character different from
that in which it was acquired. Ind. Admin. Code tit. 45, r.
2.2-5-8(k) (2001). Moreover, production must increase the number of scarce economic goods,
i.e., it must create a new, marketable product. Harlan Sprague Dawley, Inc.
v. Indiana Dept of State Revenue, 605 N.E.2d 1222, 1226 (Ind. Tax Ct.
1992) (quoting Borden Co. v. Borella, 325 U.S. 679 (1945)).
North Central argues that by placing fireworks into boxes, it is placing tangible
personal property in a composition and character substantially different from that in which
it [was] received, because it . . . give[s] the various fireworks new
combinations different from [the] imported individualized fireworks items and produce[s] fireworks assortments that
are distinct from other fireworks assortments. (Petr Br. at 8, 10.)
North Central also argues that placing different labels and trademarks on the boxes
constitutes the production of fireworks assortments because it produc[es] a different product having
a distinctive name and character.
See footnote (Petr Br. at 9.) Thus,
North Central contends that it is entitled to the equipment exemption because shrink-wrapping
is an integral part of this production process. (Petr Br. at 10.)
North Central relies on
General Motors to support its reasoning. In General
Motors, this Court reversed the Departments determination that packing materials used to protect
manufactured automobile parts were not exempt from sales tax. Gen. Motors, 578
N.E.2d at 402. In that case, however, the taxpayer created the items
that it packed, which were later used to build new automobiles. Id.
4023. Accordingly, the Court found that the packing material was an essential
and integral part of the production process that resulted in the creation of
other tangible personal propertynew automobiles. Id. at 403. In this case,
however, North Central does not create the fireworks that it packages; thus, its
reliance on General Motors is misplaced.
Instead, the facts in this case are analogous to the facts in Faris
Mailing, Inc. v. Indiana Dept of State Revenue, 512 N.E.2d 480 (Ind. Tax
Ct. 1987). In Faris Mailing, the Court affirmed the Departments determination that
a taxpayer who packed and assembled items for mailing was not entitled to
the equipment exemption. In that case, the taxpayer characterized its end product
as an assemblage of the package, which consisted of items the taxpayers customers
wished to mail. Faris Mailing, 512 N.E.2d at 483 (internal quotation marks
omitted). The process of assemblage included sorting the items into packages for
customers, labeling the packages, and bundling the packages according to postal regulations.
North Central contends that by sorting, labeling, and packing its fireworks according to
various local ordinances, it produces a new, marketable good. Nevertheless, in Faris
Mailing this Court held that merely assembling items into a package could not
reasonably be assumed to transform the . . . package into a new
product. Id. Moreover, this Court has indicated that mere packaging does
not constitute production where the items being packaged by the taxpayer have not
themselves been fashioned into new, marketable goods. Indianapolis Fruit Co. v. Dept
of State Revenue, 691 N.E.2d 1379, 1386 (Ind. Tax Ct. 1998). Cf.
Gen. Motors, 578 N.E.2d at 402.
North Central does not create a new, marketable product; it merely packages existing
fireworks into boxes, then labels and shrink-wraps them. This is not the
sort of substantial change or transformation that places the fireworks in a form,
composition, or character different from that in which [they were] acquired. 45
IAC 2.2-5-8(k). See also Indianapolis Fruit, 691 N.E.2d at 1386; Mechanics Laundry
& Supplies, Inc. v. Indiana Dept of State Revenue, 650 N.E.2d 1223, 1229
(Ind. Tax Ct. 1995) (holding that producing a good is not merely perpetuating
already existing goods); Harlan Sprague Dawley, 605 N.E.2d at 1229; Faris Mailing, 512
N.E.2d at 483. Nor does North Centrals process increase the number of
scarce economic goods, see Harlan Sprague Dawley, 605 N.E.2d at 1225, because the
same number of fireworks are sold regardless of the way they are packaged.
Consequently, North Centrals activities do not constitute the direct production or manufacture
of other tangible personal property. See 45 IAC 2.2-5-8(k); Indianapolis Fruit, 691
N.E.2d at 1386; Mechanics Laundry, 650 N.E.2d at 1229; Harlan Sprague Dawley, 605
N.E.2d at 1229; Faris Mailing, 512 N.E.2d at 483. Because North Centrals
activities do not constitute the direct production or manufacture of other tangible personal
property, it is not entitled to the exemption as provided in Indiana Code
Section 6-2.2-3-5. See General Motors, 578 N.E.2d at 401.
For the reasons stated, the Court DENIES North Centrals motion for summary judgment
and GRANTS the Departments motion for summary judgment.
Indiana imposes sales tax on retail transactions made in Indiana.
Code § 6-2.5-2-1(a) (1998). Under Article 2.5 of the tax code, Indiana
also imposes a use taxwhich is the functional equivalent of sales taxon the
acquisition of certain non-exempt tangible personal property that escapes sales tax, usually because
the property was acquired in a transaction that occurred outside of Indiana and
sales tax was not imposed. See Rhoade v. Indiana Dept of State
Revenue, 774 N.E.2d 1044, 104748 (Ind. Tax Ct. 2002).
Exemptions from the sales tax are made applicable to the use tax
by Indiana Code Section 6-2.5-3-4(a)(2).
Ind. Code § 6-2.5-3-4(a)(2) (1998).
The ordinances regulating the labeling and packaging of fireworks differ from jurisdiction
to jurisdiction. Because North Central sells fireworks assortments to fireworks retailers in
various jurisdictions, it affixes labels, trademarks, and bar codes to the assortments according
to local ordinance in each jurisdiction.