ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT
LARRY J. STROBLE
BARNES & THORNBURG
ATTORNEY GENERAL OF INDIANA
ABRAHAM M. STANGER DAVID A. ARTHUR
SARAH E. WILLIAMS DEPUTY ATTORNEY GENERAL
ATTORNEYS AT LAW Indianapolis, IN
New York, NY
INDIANA TAX COURT
MORTON BUILDINGS, INC., )
v. ) Cause No. 49T10-9812-TA-187
INDIANA DEPARTMENT OF )
STATE REVENUE, )
ON APPEAL FROM A FINAL DETERMINATION OF
THE INDIANA DEPARTMENT OF STATE REVENUE
December 13, 2004
Morton Buildings, Inc. (Morton) appeals the final determination
See footnote of the Indiana Department of
State Revenue (Department) denying its claim for refund of use taxes it paid
from January 1, 1993 through September 30, 1998 (the period at issue).
The issue for this Court to decide is whether the raw materials Morton
purchased and used out of state to make building components, that were eventually
assembled into prefabricated buildings in Indiana, are subject to Indiana use tax.
Morton, an Illinois corporation licensed to do business in Indiana, is engaged in
the production, sale, and on-site erection of prefabricated timber-frame, metal-sheathed warehouses and other
buildings for agricultural and industrial use. Morton maintains no factories in Indiana,
only sales offices. At the time this appeal was filed, Morton actively
conducted business in approximately 40 states.
Morton purchases the raw materials used in its business in bulk from vendors
outside Indiana and stores them in its warehouses which are also located outside
Indiana. The principal materials include, among other things, steel and lumber.
These materials are not purchased by Morton for application to any particular customer
order, but rather are purchased on the basis of factory-by-factory projections. The
materials are kept in inventory until they are needed for a particular order.
When Morton receives an order from a customer, the necessary materials are withdrawn
from storage and are fabricated into finished building components and hardware in accordance
with the customers specifications.
See footnote These building components include trusses, lower columns, upper
columns, purlins, metal panels, and overhang rafters. Production of these components takes
place entirely outside of Indiana. After production is complete, the building components
are transported by Morton to the building site in Indiana. All of
the loading, unloading, transportation, and erection of the building is performed by Mortons
employees or, in certain circumstances, by subcontractors hired by Morton. Generally, it
takes Mortons crew less than one week to complete the erection of a
Mortons customers own the real estate on which the buildings are erected.
The erection of a building by Morton constitutes an improvement to real property
for purposes of Indiana sales and use tax. The contract between Morton
and its customers provides for Morton to deliver, erect and affix a completed
building in finished condition to the customers building site at a lump sum
price specified in the contract. Title does not pass until the building
is completed by Morton and turned over to the customer.
During the period at issue, Morton filed monthly Indiana Sales and Use Tax
Returns with the Department and paid all use taxes to the Department in
conjunction with each return. On December 13, 1995, Morton filed a claim
for refund with the Department (the First Claim) requesting a refund of a
portion of the use taxes paid on raw materials from January 1, 1993
through October 31, 1995 (the First Tax Period). On October 29, 1998,
Morton filed another claim for refund with the Department (the Second Claim) requesting
a refund of a portion of the use taxes paid on raw materials
from November 1, 1995 through September 30, 1998 (the Second Tax Period).
Morton received no response to either of these claims.
On December 10, 1998, Morton initiated an original tax appeal contesting the Departments
failure to refund the First Claim.
See footnote On May 18, 2001, the parties
filed a Stipulation of Facts with the Court and requested that in lieu
of a trial, the case be decided on the record. The Court
heard the parties oral arguments on October 24, 2001. Additional facts will
be provided as necessary.
STANDARD OF REVIEW
This Court reviews final determinations of the Department de novo. Ind. Code
Ann. § 6-8.1-5-1(h) (West 2004). Accordingly, it is bound by neither the
evidence nor the issues presented at the administrative level. Snyder v. Indiana
Dept of State Revenue, 723 N.E.2d 487, 488 (Ind. Tax Ct. 2000), review
DISCUSSION AND ANALYSIS
The use tax is [a]n excise tax . . . imposed on the
storage, use, or consumption of tangible personal property in Indiana if the property
was acquired in a retail transaction, regardless of the location of that transaction
or of the retail merchant making that transaction. Ind. Code Ann. §
6-2.5-3-2 (West 1993). Indianas use tax is complementary to its sales tax.
See Ind. Code Ann. § 6-2.5-3-4 (West 1993). This complementary formulation
exists to ensure that the Indiana sales tax may not be avoided by
purchasing products in states where there is no sales tax or where there
is a lower sales tax. See USAir, Inc. v. Indiana Dept of
State Revenue, 623 N.E.2d 466, 469 (Ind. Tax Ct. 1993); Walter Hellerstein
and Jerome R. Hellerstein, State Taxation v. 2, 16.01 (2000). Accordingly, the
use tax bites where the sales tax does not. Morton Bldgs., Inc.
v. Commr of Revenue, 683 N.E.2d 720, 722 (Mass. App. Ct. 1997).
Morton does not claim an exemption from the use tax; rather, it claims
that the use tax imposition statute, by its own terms, does not apply
to Mortons activity. Consequently, the issue before the Court is one of
statutory interpretation. Because Indiana Code § 6-2.5-3-2 is a tax imposition statute,
it is to be strictly construed against the taxing authority, with any ambiguity
resolved against the state and in favor of the taxpayer. See State
Bd. of Tax Commrs v. Jewell Grain Co., 556 N.E.2d 920, 921 (Ind.
1990); Mynsberge v. Indiana Dept of State Revenue, 716 N.E.2d 629, 633 (Ind.
Tax Ct. 1999).
Section 6-2.5-3-2 establishes two conditions for the imposition of use tax
on tangible personal property:
The tangible personal property at issue must be stor[ed], use[d], or consum[ed] in
The tangible personal property at issue must have been acquired in a retail
See A.I.C. § 6-2.5-3-2. Morton argues that neither of these conditions have
been met with respect to the materials used to manufacture its buildings.
More specifically, Morton contends that the raw materials it acquired in a retail
transaction were used in Mortons factories entirely outside of Indiana to fabricate building
components. Further, the materials Morton did use in Indiana the building
components were not acquired in a retail transaction; rather, they were fabricated
by Morton and have an identity separate and distinct from the raw materials
used to make them. Therefore, Morton argues, the Department cannot tax the
raw materials because they were not used in Indiana and it cannot tax
the building components because they were not purchased in a retail transaction.
The Department counters, however, that Morton has made a false distinction between the
raw materials and the building components. Under the Departments theory, the raw
materials do not lose their identity when they are assembled into building components.
Accordingly, the Department argues that when the building components are used in
Indiana to erect a building, the raw materials are also being used in
Indiana and are therefore subject to the use tax.
Although this is an issue of first impression in Indiana, a number of
other jurisdictions have addressed this same question under use tax statutes analogous to
Indiana Code § 6-2.5-3-2. A majority of those jurisdictions have found in
Mortons favor, holding that the use tax does not apply to the raw
materials because they are not used in the taxing state, nor does it
apply to the building components, because they are not acquired in a retail
See footnote Although these holdings are by no means binding on this Court,
their logic is both instructive and persuasive.
See USAir, Inc., 623 N.E.2d
at 469 n.4.
Manufacturing, by its very nature, results in raw materials losing their identity and
becoming part of a new item of tangible personal property. Although this
is not an exemption case, the following exemption regulation is instructive in showing
what effect manufacturing (or fabrication, the term used in the Stipulation of Facts)
has on tangible personal property:
Direct production, manufacture, fabrication, assembly, or finishing of tangible personal property is performance
as 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, and it must result in a transformation of property into a
different product having a distinctive name, character, and use. Operations such as
compounding, fabricating, or assembling are illustrative of the types of operations which may
qualify under this definition.
Ind. Admin. Code tit. 45, r. 2.2-5-8(k) (1992) (1996). See also Mid-America
Energy Res., Inc. v. Indiana Dept of State Revenue, 681 N.E.2d 259, 263
(Ind. Tax Ct. 1997) (finding that the taxpayer was engaged in the direct
production of other tangible personal property for purposes of the equipment exemption where
the taxpayers production process create[d] a significant change in the properties of the
raw materials and where the tangible personal property produced ha[d] utility and properties
that the [raw materials] previously lacked), review denied.
The Stipulation of Facts reveals that the raw materials go through an extensive
production process in Mortons out-of-state factories before they are brought into Indiana as
building components. The materials are processed through Mortons machinery, cut to size,
and affixed to other materials. For example:
To fabricate the Trusses, the upper chords and lower chords that will form
the Truss are run through a machine which cuts the chords to the
proper lengths and to the proper angles at both ends of each chord.
Lumber webbing, which is attached between the upper and lower chords, is
also cut to length and to correct angles. The Trusses (chords and
webs) are then transferred to a fixture table where they are positioned face-up
and metal gusset plates, themselves fabricated by Morton from rolled steel that it
purchases, are positioned at each joint. The gusset plates are then stitched
into position with a pneumatic gun nailer. The Truss is then repositioned
face-down and additional metal gusset plates are positioned onto the joints on that
side of the Truss. The Truss is then positioned onto a conveyor
and transported through a roller press machine. The roller press machine imbeds
the metal gusset plates into the wooden chords and webs at the pre-selected
(First Stipulation of Facts at 5.) The result of this process is
a building component that has an entirely different appearance, character, and utility than
the raw materials used to fabricate it. In other words, the raw
materials are consumed in the out-of-state production process. What remains are the
building components, which are not taxable when used in Indiana because they were
not acquired in a retail transaction.
The Departments theory, in effect, asks the Court to find that raw materials
retain their original identity and character up until the moment the finished product
is completed. However, such a holding would fail to appreciate the gradual
transformation that raw materials undergo throughout the entire manufacturing process. It is
not necessary for this Court to define the precise point during that process
at which raw materials lose their original identity; this question must be decided
on a case-by-case basis. The raw materials at issue in this case
underwent a substantial transformation when they were fabricated into building components at Mortons
out-of-state factories. That transformation is sufficient to render the building components different
from the raw materials used to fabricate them. Accordingly, no use tax
can be imposed on either the raw materials or the building components.
It is true, as the Department argues, that Morton has simply exposed and
taken advantage of a loophole in the use tax imposition statute. (See
Respt Br. at 4, 12.) In addition, the Court recognizes that this
holding gives an advantage to companies doing business like Morton. However, it
is for the legislature, not this Court, to correct the loophole in the
See Weger v. Lawrence, 575 N.E.2d 659, 663 (Ind. Ct. App.
1991), review denied. See also Indiana Dept of State Revenue v. Endress
& Hauser, Inc., 404 N.E.2d 1173, 1178 (Ind. Ct. App. 1980) ([L]egislatures make
the tax statutes and courts enforce them as written, not as departments of
revenue may wish they had been written).
The raw materials Morton purchased at retail were consumed in the out-of-state production
process and, therefore, never used in Indiana. Furthermore, the materials that were
used in Indianathe building componentswere not acquired at retail but were instead fabricated
by Morton. Accordingly, Indiana Code § 6-2.5-3-2 does not apply and Morton
is not subject to the use tax. The Departments final determination is,
therefore, REVERSED and the Department is ordered to refund Morton the use taxes
paid during the period at issue.
Morton filed two claims for refund with the Department and received no
response to either claim. (Second Am. Pet. for Refund of Use Taxes
at 3; First Stipulation of Facts at 2-3.) Accordingly, both claims were
See Ziegler v. Indiana Dept of State Revenue, 797 N.E.2d
881, 884 n.2 (Ind. Tax Ct. 2003). For ease of reference throughout
this opinion, the Court will refer to that denial as the Departments final
The overall style of the buildings made by Morton is uniform, but
various features such as doors, windows and skylights may be specially ordered and
the dimensions of the building itself may be varied to suit the purchasers
Footnote: On April 4, 2001, Morton filed an amended petition to which it
added its claims regarding the Departments failure to refund the Second Claim.
See Morton Bldgs., Inc. v. Bannon, 607 A.2d 424 (Conn. 1992); Morton
Bldgs., Inc. v. Commr of Revenue, 683 N.E.2d 720 (Mass. App. Ct. 1997);
Morton Bldgs., Inc. v. Chu, 510 N.Y.S.2d 320 (N.Y. App. Div. 1987), affd,
513 N.E.2d 1304 (N.Y. 1987); Sharp v. Morton Bldgs., Inc., 953 S.W.2d 300
(Tex. App. 1997); In re Morton Bldgs., Inc., Final Determination (DD-554) of the
Executive Director, Department of Revenue, State of Colorado (Jan. 7, 1999); Morton Bldgs.,
Inc. v. Director of Revenue, No. 88-001879RZ, 1989 WL 153531 (Mo. Admin. Hrg.
Com. Dec. 8, 1989); Morton Bldgs., Inc. v. Wisconsin Dept of Revenue, No.
89-S-438, 1991 WL 155249 (Wis. Tax. App. Com. July 26, 1991), affd, No.
91-CV-3124 (Wis. Dane County Cir. Ct. Feb. 10, 1992). But see Morton
Bldgs., Inc. v. Revenue Cabinet, No. 2002-CA-001787-MR, 2003 WL 21714920 (Ky. Ct. App.
July 25, 2003), review denied; Morton Bldgs., Inc. v. Commr of Revenue, 488
N.W.2d 254 (Minn. 1992); Morton Bldgs., Inc. v. Vermont Dept of Taxes, 705
A.2d 1384 (Vt. 1997) (all holding that Morton was required to pay use
tax on the raw materials because those materials are used in the taxing
state in the form of building components).
Indeed, legislatures in a number of states have amended their use tax
statutes in order to close the loophole exposed by Morton.
N.Y. Tax Law § 1110(a) (McKinney 1987) (amended 1989); Conn. Gen. Stat. Ann.
§ 12-411(1) (West 1992) (amended 1992); Wis. Stat. Ann. § 77.53(1) (West 1991)
(amended 1993); Mass. Gen. Laws Ann. ch. 641, § 2 (West 1997)
(amended 2004); Minn. Stat. Ann. § 297A.14 (West 1990) (amended 1992).
The same remedy is available to our legislature.